The Nord Stream 2 offshore pipeline, the $11 billion project designed to double the flow of gas between Russia and Germany, is now unused and abandoned. Germany halted certification of the pipeline altogether after Russia officially recognized two pro-Russian regions in eastern Ukraine, setting a pretext for the invasion that would ensue.
Axel Schmidt | Nord Stream 2 | via Reuters
German economists are forecasting a recession in Europe’s largest economy if Russian gas supplies were to stop, and the effects could spread through the continent.
In their biannual Joint Economic Forecast, published Wednesday, Germany’s five biggest economic institutions sharply reduced their gross domestic product forecasts as the war in Ukraine slows the recovery from Covid-19.
The RWI in Essen, the DIW in Berlin, the Ifo Institute in Munich, the IfW in Kiel and the IWH in Halle now expect German GDP to grow by 2.7% in 2022 and 3.1% in 2023, assuming that there is no further economic escalation related to the war in Ukraine and gas flows to Europe from Russia continue. The institutes had previously projected growth of 4.8% in 2022.
Ukrainian President Volodymyr Zelenskyy and the European Parliament have called for the European Union to impose a total embargo on Russian oil, gas and coal imports in light of atrocities against civilians by Russian forces in Ukraine.
The EU plans to ban Russian coal imports and is working on sanctions against Russian oil as it looks to ostracize the Kremlin from the global economy, while Russian President Vladimir Putin has also on numerous occasions threatened to cut off the gas supply to Europe.
However, such a move is expected to have dire economic consequences for both sides. Germany bought 58.9% of its natural gas from Russia in 2020, according to the European statistics agency.
The Nord Stream 2 pipeline, the $11 billion project designed to double the flow of gas between Russia and Germany, is now unused and abandoned. Germany halted certification of the pipeline altogether after Russia officially recognized two pro-Russian regions in eastern Ukraine, setting a pretext for the invasion that would ensue.
In the event of a total stoppage of the Russian energy supply, the German institutes predicted a cumulative loss this year and next of roughly 220 billion euros ($238 billion), equivalent to over 6.5% of annual economic output. This would result in growth of just 1.9% this year and a contraction of 2.2% in 2023.
Inflation headache
“If gas supplies were to be cut off, the German economy would undergo a sharp recession. In terms of economic policy, it would then be important to support marketable production structures without halting structural change,” said Stefan Kooths, vice president and research director for business cycles and growth at the Kiel Institute.
“This change will accelerate for gas-intensive industries even without a boycott, as
dependence on Russian supplies, which have been available at favorable prices up to now, is to be overcome quickly anyway.”
Kooths advised governments to avoid providing “poorly targeted transfers” in order to cushion higher energy prices.
“If such support schemes are handed out on a wide front, it…
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