The effects of the energy crisis will spread over the years

European politicians, consumers and businesses are naturally focused on how to get through a difficult winter. But let no one be fooled into thinking that the gas crisis on the continent will end in the spring. The energy shortage is a problem that will last for several years and will make Europe poorer and less competitive, as well as carrying more public debt. If this issue is addressed at the same time as high inflation, it will cause disorder that will spread over the years.

Energy crises often trigger traumas that last for many years, as Helen Thompson points out in her book Disorder: Hard Times in the 21st Century (Disorder: Hard Times in the 21st Century). For example, the Suez Canal crisis of 1956, when Britain, France and Israel aborted their invasion of Egypt after US opposition. This helped convince many European countries that they should turn to the USSR for hydrocarbon supplies. whose consequences we see today.

Or take the Yom Kippur War in 1973 as an example. It led to a huge spike in oil prices, fueling rampant inflation that was only ended by harsh monetary medicine and terrible recessions on both sides of the Atlantic in the early 1990s. eighty. The invasion of Ukraine is likely to cause similar lasting trauma. Europe is especially exposed.

One way to quantify the hit is to see how much energy bills will go up, based on gas futures. Goldman Sachs estimates that customers will have to pay €1.3 trillion more in 2022 than in 2021, even if prices are capped at a level that prevents generators from making excessive profits.

Of course, other parts of the world have been hurt. Japan relies on liquefied natural gas and developing countries are being squeezed out of the gas market as they face rising coal. But the US and China are doing better. The US is a big winner because it is filling the gap left by Russia, supplying Europe with shale gas at sky-high prices.

China does not produce much oil or gas in its country. But it is better placed than Europe, says Alastair Syme, global head of energy research at Citigroup. It has reduced some gas imports and filled the gap with domestically mined coal. In addition, it has bought Russian crude at a discount to the world market price. In the future he should be able to get deep discounts on gas too, since the Kremlin will have no other big buyers to turn to.

Europe was always going to pay a heavy price for stopping consuming Russian gas, having ignored the warning signs: the invasion of Georgia in 2008 and the annexation of Crimea in 2014. The desperate struggle to find alternative supplies has pushed prices to stratospheric levels. .

It’s not just short-term prices that are soaring. The price of gas this winter is around 215 euros per megawatt hour (MWh), seven times more than a year ago. But for next winter it still costs close to 200. In addition, to convince suppliers in North Africa, for example, to increase their production, Europe will have to sign long-term contracts at high prices and build gas pipelines and other expensive infrastructure. .

Of course, European leaders will speed up the deployment of green energy, which is now an even more attractive investment proposition. But as the US and China are also growing in renewables, building wind farms and solar panels will not be as cheap as before.

All this will erode Europe’s competitiveness. The euro zone, which previously had a large trade surplus with the rest of the world, has turned into a deficit. The drop in exchange rates may partially offset this situation: the euro and the pound have fallen by 10% and 13%, respectively, against the dollar so far this year. But devaluation impoverishes Europe and will not by itself save energy-intensive industries such as steel, chemicals and paper, which have already cut output.

According to the textbooks, market forces would help reduce gas demand to match supply, and heavy industry would move to parts of the world with cheaper energy. Governments would focus on helping the poorest get through the harsh winter and retraining workers in industries that are no longer competitive.

But politicians are being much more interventionist because they fear that voters will refuse to pay their bills or turn to extremist politicians. The UK last week announced a two-year consumer price freeze package that credit analysts at DBRS Morningstar forecast will cost €170bn, or 6% of national income.

The EU is also working on a huge package. Part of the plan will be to break the link between gas and electricity prices. It’s sensible. But there are two problems with blanket subsidies. First, they don’t do enough to contain demand. The result is that prices are higher than necessary and will remain so for longer. Second, the cost of the mega-subsidies will add to the government’s debt, which had already risen from the pandemic bailouts. With wholesale gas prices looking set to remain high, it may not be politically feasible to end these relief packages.

The role of governments is to ask for loans to help society overcome a crisis. But additional debt comes at a cost. It will be necessary to raise taxes, or reduce spending, or inflate the debt, at the expense of savers. Europe already faces high inflation, while rates rise. The days when governments could rely on central banks to buy their debt – effectively giving them interest-free credit cards – are over. As governments loosen fiscal policy, the ECB and the Bank of England could tighten monetary policy further.

Economic difficulties could poison politics. Governments could adopt more reckless policies in the short term, extremist politicians could find it easier to gain power and solidarity between EU countries could start to crack. Difficult times are ahead, and not just this winter.