Shockwaves ripple as Europe’s economy reels from energy fallout
(Bloomberg) – Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.
Bloomberg’s Most Read
Two weeks after Russia began Europe’s biggest conflict since World War II, businesses across the continent are already in various stages of desperation over the impact on livelihoods.
A crisis of human suffering in Ukraine, whose wider economic impact prompted European Central Bank officials to accelerate their withdrawal from the stimulus this week, is affecting the prosperity of Spanish farmland in Germany’s euro zone manufacturing heartland. and in France.
Soaring energy costs are the main complaint, although disrupted supply chains, sanctions and worries about an impending drop in demand are also weighing on businesses. The brutal shock of the nearby war, combined with widespread effects and an uncertain duration, will put pressure on governments to soften the blow and test their resolve to confront Russia.
“I don’t know what to do if the war in Ukraine goes on for much longer,” Spanish pig farmer Lorenzo Rivera said in an interview this week. “I either have to stop production or shut down the business for good.”
Rivera, whose 200 sows outnumber the people of Peleas de Arriba, the colony in northern Spain where he lives, suffered cost increases for a time – first electricity, then fuel , then animal feed. Everything was manageable until war broke out on the other side of the continent.
The root of the difficulty is the European Union’s dependence on Ukraine for more than half of its supply of maize, a key source of feed for pigs. With farmers unable to access fields, analysts are slashing crop and export prospects by a third, sending prices to their highest in about a decade.
Other economic disruptions are inflicted by the geography of the crisis. In Germany, the heart of the eurozone economy, Porsche AG has halted production of its Taycan electric car in Stuttgart because it runs out of Ukrainian-made cable trees. Meanwhile, its parent company, Volkswagen AG, halted exports to Russia and halted production at a car plant in Kaluga, near Moscow.
The heaviest is the energy impact. If current prices persist, the additional cost of importing gas and oil will represent an income shock of 550 billion euros ($605 billion) or 4.5% of annual gross domestic product, according to the economist by JPMorgan Greg Fuzesi. Goldman Sachs now estimates that inflation will reach 8% and that the euro zone will suffer a contraction in the second quarter.
For many eurozone companies, this pinch was immediately crippling. Just in December, Manuel Rodriguez’s Kramer Group took over a century-old porcelain factory in eastern France called Jurassienne de Céramique Française. He has now made the painful decision to put it into hibernation.
“If we were to pay a gas bill multiplied by 10, we would hit the wall,” he said. “We would have no choice but to file for bankruptcy and close the plant.”
Heading south along the Italian coast, soaring fuel prices have also kept many trawlers out of the sea and sparked a week-long fishing boat strike. Carlo Lista, owner of a fish shop in the Roman quarter of Monteverde, says the effect has been dramatic.
“About 80% of fishing boats have stopped due to soaring fuel prices,” he said. “You go over there, and it might be a boat, and one guy bids, then another guy, and the price just goes up – whoever bids the most gets the fish. and soar.
Grumpy fishermen are calling on the Italian government to do something beyond the 16 billion euros already spent to protect consumers and businesses from rising energy costs.
This is a plea that echoes across the continent. In Spain, Prime Minister Pedro Sanchez has already extended a series of energy tax breaks until the end of June. Portugal will reduce fuel taxes from Friday, and other counterparts are likely to take similar steps.
With the EU also under pressure to act, leaders discuss the crisis in Versailles on Friday. One measure the bloc could consider would be to temporarily lift the import ban on GM grains from the United States and South America to help farmers struggling with supply disruptions, according to the Spanish minister. of Agriculture, Luis Planas.
What Bloomberg Economics says…
“If the gas supply is cut off, Germany and Eastern Europe will almost certainly face a production hit, pushing the Eurozone into recession.”
–Maeva Cousin and Jamie Rush. For the full report, click here
The political impact of the cost-of-living squeeze is likely to test the continent’s resolve to continue to confront Russia at a time when its President, Vladimir Putin, is threatening to cut gas supplies representing about a third of EU consumption.
“It’s a sword of Damocles,” said Yves Dubief, whose grandfather founded textile weaver Tenthorey, an employer of 50 in northeastern France that produces 5 million meters of fabric a year. . Under such circumstances, the business leader says the state should reinvigorate the measures used during Covid to need help with fixed costs and furloughed workers. “If there is an embargo and we have to reduce our production, regardless of the price of gas, it will be a question of whether we are compensated by the public authorities.
While such challenges are likely to focus governments in the coming weeks, the more immediate task of dealing with the economic fallout has been left to ECB President Christine Lagarde. Officials accelerated the withdrawal of the stimulus on Thursday by releasing forecasts showing inflation to average 5.1% this year. The war presents “substantial upside risk” to prices, she said.
Rodriguez, the French ceramics entrepreneur, looks at this threat with dread. He warns that the problems he finds are likely to ripple throughout global manufacturing.
“There is a domino effect,” he said. “All the big industrial companies on the planet have the same problem. In the more or less long term, we will all be confronted with this problem of overpriced gas.
Bloomberg Businessweek’s Most Read
©2022 Bloomberg LP