Recession behind the scenes as the EU struggles

European Union flags fly in front of the headquarters of the European Commission. [Photo/Agencies]

Economists see souring outlook with energy at heart of bloc woes

Six months after the start of the Russian-Ukrainian conflict, the European Union is haunted by an energy crisis, high inflation and a looming recession, economists say.

Russian energy giant Gazprom’s announcement on Monday that it would close the Nord Stream 1 gas pipeline for three days of maintenance from August 31 sent gas and electricity prices to new highs. European natural gas prices are around 15 times higher than average summer prices.

Following the news, Belgian Prime Minister Alexander De Croo warned that the “next five to 10 winters will be difficult” for Europe. “The development of the situation is very difficult throughout Europe,” he said on Monday.

However, De Croo said Belgium can endure the crisis ‘if we support each other in these difficult times’.

Tim McPhie, the European Commission’s spokesman for climate action and energy, said on Tuesday that the EU expected energy prices to remain high for the rest of the year and into in the winters of 2024 and 2025, when prices could be stabilized thanks to measures that take effect.

He ruled out the EU triggering a bloc-wide alert over the three-day supply disruption to Nord Stream 1. “But we are monitoring the situation closely,” he said .

News of the temporary closure comes as EU member states struggle to fill underground storage facilities with natural gas to provide home heating over the coming winter.

The German Federal Network Agency, a market regulator for gas and electricity in particular, said on Tuesday that businesses and private consumers should expect a considerable increase in gas prices.

While warning that the situation is tense and that a further worsening of the situation cannot be ruled out, the agency said that the gas supply in Germany is currently stable.

The total storage level in Germany, Europe’s largest economy, is 80.14% while the Nord Stream 1 is operating at 20% capacity, according to the bureau.

German Economic Affairs and Climate Action Minister Robert Habeck, who is accompanying Chancellor Olaf Scholz on a three-day trip to Canada, said “we still have a very critical winter ahead of us.”

“We have to expect (Vladimir) Putin to cut the gas more,” he said.

The latest data shows that inflation in the 19-member eurozone is sinking deeper into record territory, hitting 8.9% in July, down from 8.6% in June and 8.1% in May.

Joachim Nagel, president of Deutsche Bundesbank, Germany’s central bank, told the Rheinische Post that soaring energy prices caused by gas supply cuts from Russia were likely to drive up German inflation above 10% this fall and to maintain it at a high level next year.

High inflation

“The inflation problem will not go away in 2023,” he said, adding that “supply bottlenecks and geopolitical tensions are likely to continue.”

Reflecting the tensions, the euro fell below parity with the US dollar at $0.9928 on Monday. This is the lowest level for the single currency in nearly 20 years and lower than the two-decade low of $0.9952 set in July.

ING economists Bert Colijn and Carsten Brzeski said on Tuesday that supply shocks continued to plague the euro zone economy, causing inflation to show few signs of slowing in the near term.

“Current natural gas prices make a double-digit spike in inflation realistic, and there is little the European Central Bank can do about it,” they wrote in an analysis on the bank’s website.

Robin Brooks, chief economist at the Institute of International Finance, said in a tweet on Tuesday that “we’ve had recessionary calls for the Eurozone since March” because the Russia-Ukraine conflict is a “low body for Germany” and “it is now aggravated by drought and low water levels in major European rivers”.

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