Olaf Scholz warns immediate Russian energy ban would trigger recession in Europe

Chancellor Olaf Scholz has stood firm on Germany’s resistance to an immediate embargo of Russian fossil fuels and warned it would trigger a recession, as economists slashed growth forecasts for Europe’s largest economy.

Scholz told the Bundestag on Wednesday that immediately cutting Russian energy imports would trigger an economic crisis. Other European states and the US are pushing for the EU to impose tougher sanctions on Russian energy, but Germany has resisted because more than half of the gas and coal that it imports comes from Russia as does a third of its oil.

“To do that from one day to the next would mean plunging our country and the whole of Europe into a recession,” the German chancellor warned ahead of meetings with other EU leaders and a G7 meeting with US President Joe Biden in Brussels this week. “Hundreds of thousands of jobs would be at risk,” he said. “Entire branches of industry are on the brink.”

Scholz was backed by BDI, Germany’s main business lobby group, which warned that cutting off Russian gas supplies to the EU would have “incalculable consequences” and cause “production disruptions, employment losses and, in some cases, massive damage to production facilities”. .

“The EU is not prepared for a short-term, comprehensive energy embargo,” said BDI President Siegfried Russwurm, adding that “it would jeopardise [EU] unity and [its] ability to act economically and politically ”.

The BDI, which represents more than 100,000 German companies, said it supported the sanctions imposed so far, but that a boycott of Russian gas threatened to “tear the EU apart”.

“Sanctions must not hit European states harder than Russian leadership,” Scholz said, adding that restrictions on trade were already hurting German citizens, not only with higher fuel prices but also with warning factors they may have to suspend work.

His comments came as economists cut their growth forecasts for Europe’s largest economy, warning that soaring energy and food prices will erode confidence and spending by German consumers and businesses.

The Ifo Institute, a Munich-based think tank, cut its forecast for German gross domestic product growth this year to between 2.2 per cent and 3.1 per cent, down from an earlier prediction of 3.7 per cent. It said higher prices would erode consumer purchasing power by € 6bn in the first quarter.

“The Russian onslaught is slowing the economy through a combination of significantly higher commodity prices, sanctions, increasing supply of bottles for raw materials and intermediate products, and increased economic uncertainty,” said Timo Wollmershäuser, head of forecasts at Ifo.

German GDP expanded 2.9 per cent last year and despite a contraction in the final three months of 2021, growth had been expected to accelerate this year, boosted by lifting restrictions to control coronavirus and an easing of supply bottlenecks in the industry.

However, Germany’s reliance on Russian energy imports has left it exposed to soaring oil and gas prices, while its large industrial sector is being hit by disruption to supplies of key materials from Russia and Ukraine.

Ifo said its most pessimistic scenario was based on oil prices hitting € 140 a barrel by May and staying above € 120 a barrel by the end of the year, while natural gas prices would hit € 200 per MWh by May and stay above € 160 per MWh over the rest of the year.

Daily data collected by research company Morning Consult showed German consumer confidence had plummeted since Russia’s invasion of Ukraine, falling to 65 on March 23, down from 80 in early February. Any figure below 100 indicates a higher proportion of consumers with negative views of their personal and general economic situation than those with positive views.

Almost 40 per cent of German consumers reported a deteriorating personal financial situation and they expected it to worsen further this year, according to Morning Consult. More than a quarter said this was a bad time to make large purchases.

The steady recovery in visits to German retail and entertainment venues this year stalled in March, according to Google Mobility data, indicating that rising prices are already stifling consumer spending.

German consumer prices rose 5.5 per cent from a year earlier in February and economists expect them to keep rising. Christian Ossig, head of the German banking association, said on Wednesday it expected inflation to rise above 7 per cent in the coming months.

“The sharp rise in energy prices and the worsening supply of bottlenecks are the main brakes on the economy,” said Ossig, forecasting German growth would slow to 2.2 per cent this year if Ukraine’s war did not escalate further. “However, half of this growth is based on statistical effects from the previous year,” he added.

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