With winter approaching, Europe’s energy crisis is starting to bite. Consumers are worried about staying warm. Surveys show that businesses are being increasingly affected by soaring energy costs and weakening demand. The suspected sabotage of gas pipelines in the Baltic Sea, probably by Russia, has shown just how vulnerable Europe’s energy supplies remain. All this spells trouble for the economy.
The direct impact of potential gas and power shortages could force energy-intensive industries, including chemical plants and heavy industry, to temporarily shut down. Countries with insufficient import capacities for liquefied natural gas, such as Germany, and landlocked countries that previously relied heavily on piped gas from Russia, such as the Czech Republic and Slovakia, will be the hardest hit (see maps). Countries that typically rely on imports to meet electricity demand could also be at risk if power shortages in Europe spread across borders.
The secondary effect of tight energy supplies will spread the pain further. Global gas supplies will be constrained well into 2024, pushing prices higher. That will hit household incomes, lowering demand in the economy. Businesses may choose to reduce output to cut energy costs, which would then spread along supply chains to other sectors and countries. For example, a slowdown in Germany, Europe’s industrial heartland, would be felt by its suppliers in central and eastern Europe, too.
European leaders have been quick to react to the crisis, but they risk doing more harm than good. By introducing price caps and bailouts, politicians are trying to shield citizens and firms from the full impact of high-energy prices. But if the design of the policies reduces incentives to save energy, the outcome may well be higher energy prices for all, and increased risk of shortages. However one looks at it, the economic outlook for Europe is bleak.