The EU’s latest hare-brained gambit is likely to put further downward pressure on economic activity while exerting further upward pressure on inflation, making stagflation all but inevitable.
Official inflation reached new record highs in the Euro Area in the month of May, clocking in at 8.1%, well above the consensus estimate of 7.7%. In six of the 19 Euro Area countries the “harmonized” (calculated the same way for all countries) inflation rate was in double digits: Estonia (20.1%), Lithuania (18.5%), Latvia (16.4%), Slovakia (11.8%), Greece (10.7%) and Netherlands (10.2%). The three Baltic States, Estonia, Latvia and Lithuania, were the first EU Member States to stop all imports of Russian oil and gas, which they did in early April.
These record-high rates of inflation were all registered before the EU decided (in Yves’ words) “to shoot itself in the foot” by banning shipments of oil from Russia, its biggest oil provider. As such, inflation is likely to rise even higher in the coming months, especially given the central role energy prices have played in driving inflation in Europe. In the last month alone energy prices in the currency bloc have risen by 39%.
At the same time, the European economy is de facto stagnating, according to European Central Bank executive board member Fabio Panetta told Italian daily La Stampa at the beginning of May:
Growth in the first quarter was 0.2%, and would have essentially been zero without what may have partly been one-off spikes in growth in certain countries. The major economies are suffering – GDP growth has slowed in Spain, halted in France and contracted in Italy. In Germany growth momentum is low and has been weakening since the end of February, which is the point when everything changed.
Making Matters Worse
Now, Europe’s political leaders have decided to make matters even worse by further exacerbating its largely self-inflicted energy crisis. As part of its sixth sanctions package against Russia, the EU’s 27 Member States have agreed to ban all seaborne Russian oil, with a temporary exemption for pipeline oil. As a result, roughly two thirds of the oil EU Member States buy from Russia will no longer be available — at least not officially. The Council of the EU said that by the end of the year 90% of Russian oil will be banned.
As Yves said in her piece yesterday, “if you believe the EU really, truly, will have cut its imports of Russian oil by 90% in a few months,” she has a bridge she’d like to sell you. She also pointed out that an “EU ban on oil shipped by tanker still allows for Russian oil to come to Europe via out and out laundering through cut-outs and mixing with non-Russian source product, albeit at a higher cost.” In other words, there is whole lot a lot of puff, bluff and bluster to the EU’s latest escalation.
But that is not to say it won’t cause yet more economic hurt and hardship to the citizens of EU member states that depend heavily on Russian oil to meet their basic energy needs. Before Monday night Russia supplied around a quarter of the EU’s oil. Given tight — and thanks to the EU’s latest hare-brained gambit, tightening — global supplies of oil, Europe will probably struggle to replenish their supplies without resorting to laundering Russian oil through cut outs.
Even then, prices are likely to rise much higher in the coming months. And that is going to put further downward pressure on economic activity while exerting further upward pressure on inflation, which is already at or around decades-highs in many jurisdictions, including the EU.
The impact on Germany, which depends on Russia to meet around 12% of its oil needs, is likely to be pronounced. Yet its government is one of the most vocal supporters of the partial oil embargo. Judging by recent comments from members of the Scholz government, it is perfectly aware of the economic harm the embargo is likely to exact on consumers not only in German but across Europe. But as the FT reported last week, it believes it is a price worth paying:
Europe was prepared to bear the strain of cutting its use of Russian crude, said Robert Habeck, Germany’s economy minister and deputy chancellor. But he said the move should be properly prepared and should consider the high dependency of some EU countries on Russian supplies.
“We will be harming ourselves, that much is clear,” he said ahead of an emergency meeting of EU energy ministers that is debating an embargo on Russian oil.
“It’s inconceivable that sanctions won’t have consequences for our own economy and for prices in our countries,” he said. “We as Europeans are prepared to bear [the economic strain] in order to help Ukraine. But there’s no way this won’t come at a cost to us.”
The Worst of All Worlds
That cost is likely to be stagflation, which is bad news for all EU citizens, particularly those on the lower rungs of the economic ladder…
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