Russian threat to gas supply combines with rising interest rates to endanger the EU’s economies
The Lichterfelde combined heat and power plant in Berlin. FILIP SINGER/EPA/Shutterstock
By
Stephen Fidler and
Kim Mackrael
July 22, 2022 12:19 pm ET
This past week brought home the double-headed crisis testing the European Union’s resilience.
Russia is trying to break its unity
by curbing supplies of natural gas to the bloc. At the same time, rising inflation is ending an era of negative interest rates and increasing the risk of a fracturing eurozone economy.
Sanctions on Russia have hit the bloc harder than other Western countries, because its economies are more intertwined than others in the West. According to EU officials, Moscow’s ambition in manipulating gas supplies is to split the bloc’s steadfast unity in support of Ukraine and reverse sanctions that are harming Russia’s economy.
The battle will
come to a head this winter, with the bleak possibility that large swaths of European industry are forced to close from shortages of energy and, in the worst case, rolling blackouts for consumers.
Russia’s efforts are fueling the already-high inflation that prompted the European Central Bank on Thursday to
raise its interest rates by half a percentage point, albeit only to zero.
Worried that the end of negative interest rates would increase stresses between the weaker and stronger economies, the ECB also announced a new policy tool
aimed at shielding the bloc’s most heavily indebted members, mainly in the south, from spiraling borrowing costs.
But the instrument isn’t designed to protect countries from interest-rate pressures arising from political risks inside those nations. In Italy—the second-most-indebted country in the bloc after Greece—Prime Minister Mario Draghi, regarded as a bulwark of stability amid Italy’s fractious politics,
handed in his resignation on Thursday. Italian bond spreads, the gap between Italian bond yields and those of low-risk Germany, have widened significantly in recent days.
All this is happening as new data on Friday
suggested Europe could be on the brink of a recession.
The EU has surmounted successive crises before. Greece’s debt problems in 2010 transmuted into a test of survival of the entire eurozone that took years to resolve. In the middle of the last decade, a surge of immigration mainly from the Middle East and Africa tested the bloc’s solidarity as governments sought to spread the burden more evenly between south and north.
More recently, the pandemic also threatened to hit poorer countries harder than the richer ones, until Germany and others buried their past resistance to subsidizing less-well-off neighbors and set up a €750 billion fund of loans and grants to help them.
Unlike in some past crises, the EU has some advantages. In the first place, in the energy crisis it has identified the dangers, which it was slow to do after Greece defaulted on its debts in 2010.
“Whether it’s a partial cut-off of Russian gas or a total cut-off of Russian gas, Europe needs to be ready,” said European Commission President Ursula von der Leyen as she unveiled a package of measures on Wednesday.
European Commission President Ursula von der Leyen has proposed that EU members voluntarily reduce their consumption of natural gas. Photo: STEPHANIE LECOCQ/EPA/Shutterstock
The
proposals include a voluntary 15% cut in natural-gas consumption that could be made mandatory if the voluntary measures don’t succeed. Energy ministers are due to discuss the proposal at a meeting on Tuesday. The plan requires approval from at least 15 of the bloc’s 27 member states, representing at least 65% of the EU population.
“Our worst enemy is fragmentation,” Ms. von der Leyen said. In such a case, governments could block transfers of energy to other nations, leading to a big disparity of economic outcomes and validating Mr. Putin’s apparent strategy to turn European governments against each other and diminish support for Ukraine and the sanctions.
Counteracting this threat is continued widespread European support for Ukraine and the conviction that the crisis is entirely created by the Kremlin, a conviction that would intensify if Russia completely cut off natural-gas supplies.
“I think all the evidence is that the consensus is holding remarkably well: This is something which has to be resisted, that Ukraine has to be supported, and that we cannot make shoddy compromises with Putin,” said David O’Sullivan, director general of the Dublin-based Institute of International and European Affairs and a former EU ambassador to the U.S. The only exception to that, he said, could be Hungary, whose foreign minister was in Moscow on Thursday trying to buy more natural gas.
Another factor on the EU’s side is time. Mr. Putin is “well aware that his leverage is short-lasting. Russia loses influence if Mr. Putin suddenly shuts down his European exports…but Russia’s influence also goes away if Putin sits on his hands and waits for the Germans [and] Europeans to diversify,” said Ian Bremmer, president of the Eurasia Group consultancy.
Germany is the country most exposed to an energy crunch, and its vulnerability is a direct result of policies carried out over two decades. Germany sought to keep Mr. Putin close by increasing energy dependence on Moscow (until reversing its policy earlier this year) and closing down other sources of energy, including nuclear plants.
Critical to European outcomes will be how much natural gas Germany, a major transhipment and storage center for gas, keeps for itself. Economists at
Deutsche Bank say re-exports of gas from Germany are a decisive factor, and whether it runs out of gas will, depending on how much gas Russia ships, be “balanced on a knife edge.” The Berlin government may find itself in the tough position of deciding whether to sustain its own industries or to ship on the gas to needy neighbors.
Southern European governments like Spain, Portugal and Greece, repeatedly lectured by Berlin during the eurozone crisis for their supposed profligacy, have been quick to point out they are now being asked to pay the price for Germany’s energy-policy choices—and have
indicated they will resist the voluntary consumption cuts. Poland has also said it opposes the commission’s plan.
"Germany, now, finds itself one of the most exposed countries to the changed situation. I’m not all surprised there’s a certain amount of Schadenfreude in some of the comments from people who are were on the receiving end of sermonizing from Berlin during the financial crisis,” said Mr. O’Sullivan. He said he doubted this would ultimately get in the way of a common EU solution.
Ms. von der Leyen’s plan to cut natural gas use by 15% has run into sharp skepticism in Spain and Portugal. Above, the Enagás regasification plant in Barcelona. Photo: EMILIO MORENATTI/ASSOCIATED PRESS
One factor in favor of a common solution to the energy crisis is the importance of Germany to other economies in the bloc. If German industry crashes because of a shortage of gas, the ripple effects would be felt through the bloc and farther afield.
Frans Timmermans, executive vice president of the European Commission, said Wednesday that if gas shortages occur, “they will affect every single member state because they will have serious consequences on our economy, and nobody can escape that consequence.”
The commission said that a full cutoff of Russian gas during an average winter could reduce the bloc’s gross domestic product by 0.6% to 1% if no action is taken in advance to conserve energy. In a cold winter, a cutoff without preparation could lower GDP by an average of 0.9% to 1.5%, the commission said.
