Gas embargo: threatens the biggest economic crisis since World War II

If Russian gas does not reach Germany, there is a risk of a more dramatic than previously anticipated. Tom Krebs of the University of Mannheim is now calculating this for the first time. If there is a sudden shortage of natural gas, the industry will be so paralyzed that the entire economic output will collapse by as much as eight percent within a year. In addition, higher energy prices caused the Germans to buy less. This means that the severe recession that occurred during the Corona outbreak in 2020 or after the 2008 financial crisis should be frightening. But Krebs warns that things are worse: “It could lead to an economic crisis not seen in the Federal Republic since World War II.”

Professor Mannheim has made a name for himself with expert opinions on the labor market, climate and energy issues. And he is now engaged in the most intense debate among German economists currently: What would happen if Europe boycotted Russian gas – or if President Vladimir Putin turned off the tap? Krebs expects more serious damage than his peers.

Shortly after the Russian attack on Ukraine, a research team led by Moritz Schularek and Rüdiger Bachmann analyzed that a Western gas embargo on Putin was possible. Gross domestic product will only fall by about 0.5 to three percent. That would be, at most, half the equivalent of Corona or the financial crisis. The researchers used the analysis to call for a gas embargo as a manageable punishment against Putin’s terrible war of aggression.

But Sebastian Dolean of the Institute for Macroeconomics and Business Cycle Research soon estimated that the halt in gas supplies would shrink the German economy by six percent. That would be a little more than it was in corona or financial crisis. Leading economic institutions put the recessions in 2022 and 2023 together at a similarly high value if gas stays away in the short term.

The Tom Krebs study, funded by the union-affiliated Hans Böckler Institute, is even more pessimistic. A recession in industry alone costs three to eight percent of the growth. In addition, he fears more insecurity and less consumption because citizens lack money because of more expensive energy: reducing GDP by 2 to 4 percent. If worst comes to worst, the economy will collapse into the double digits – the Federal Republic hasn’t seen this since 1945.

If the steel and glass industries stop their production, other manufacturers will lack materials

Krebs’ dramatic discovery also comes from the indication that the gas shock will reverberate throughout the economy. First, it harms energy-intensive industries such as chemicals, glass, paper and steel, which have to stop production. As a result, other sectors also lack important primary products – automobile manufacturers, for example, plastics produced by the chemical industry.

It is difficult to quantify the effects of this second round, because such extreme cases as the freezing of Russian gas rarely occur in a war. A weakness of other studies is that Krebs consider these effects only partially. For example, use the consequences of the nuclear disaster at the Japanese nuclear power plant Fukushima-Daichi in 2011 to calculate production losses in Germany. In general, he sees that his results are in line with the studies presented by the leading economic institutes or the Bundesbank.

Tom Krebs warns that the social consequences of an economic crisis after a gas crash will be more serious than a corona or a financial crisis: “German companies are already under pressure due to two years of epidemics, delivery problems and pressure for climate-induced change.” Therefore, there was a significant risk of bankruptcy, emigration and unemployment. In addition, the government will be less able to take countermeasures because it has already spent a lot of money on the Corona crisis. Given inflation, the European Central Bank, as usual, cannot boost the economy by lowering interest rates. In addition, energy and food price shocks primarily affect low- and middle-income groups, according to Krebs: “Social tensions will exacerbate as a result.”

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