RUSSIA STOPS SUPPLYING GAS TO EUROPE. WHAT CAN EUROPE DO?

September 7, 2022

Linh Truong

NEWS

Source: CNBC

Europe faced the biggest energy crisis for decades since Russia halts natural gas supplies as retaliation for Western economic sanctions against Moscow. Due to Kremlin spokesman Dmitry Peskov, Russia would resume gas supplies when Europe lifted or relaxed the sanctions or three-day maintenance work due to an oil leak in one of the turbines of the Nord Stream 1 - the biggest gas pipeline between Russia and Europe - would be extended forever.

The European Union and the United States both accused the intentional act of Russia of using energy for revenge and winter was coming so European states needed gas for heating.

Energy prices escalated at the rate of 30% so European countries had to make great efforts to find alternatives to Russian gas. The President of France, Emmanuel Macron, urged that the EU start to utilize renewable energy in production and reform its electricity market. Meanwhile, Germany actively searched for alternatives to energy resources. The German government announced that two nuclear plants were kept on standby beyond the end of the year despite having abandoned nuclear energy in 2011.

ANALYSIS

What did European countries have to face after the halt of Russian gas?

Currency fall:

The euro’s value against the U.S. dollar plummeted to $0.99 and reached a record-low value in two decades. Correspondingly, the pound against the U.S. dollar shrank to $1.444, which translated to a 0.5% drop.

Shortage of gas:

The severe winter is coming and European countries are in need of gas to run heating systems. Russia is the biggest gas supplier for Europe and the halt of resources put Europe at risk of a shortage of energy.

Europe has to face enormous difficulty in finding alternatives to Russian gas since other suppliers can't be able to increase their outputs in such a short amount of time and diverted gas resource from Asia is rationed since Japan and South Korea are in economic crisis and face energy shock so they also have to cap gas prices for households.

Escalating energy prices:

Following the reduction of natural gas, energy prices quickly increased. When European countries faced the suspension of gas, they had to search for other energy alternatives. The suppliers of other energy caught the opportunity to augment the costs since they knew that the EU couldn't buy any gas from Russia and they were in dire need of energy when winter was coming. The mounting energy costs accumulated the prices Europe had to pay as they were still struggling with the runaway inflation and economic spiral.

Likelihood of galloping inflation:

The fall in currency value and the shortage of energy are the contributing factors to the likely inflation in European countries. The shortage of energy boosts the demand for energy so suppliers will raise the energy price. Europe has to pay more money to gain energy while suffering from the decline in currency value against the U.S dollar. This fact will cause a depression in Europe.

Reduction in production:

The higher costs of essential energy caused many producers to slow down or stop their production process because of tight budgets.

What did the administrations of Europe do to accelerate the spiral?

Information source: Aljazeera

Most countries in Europe considered monetary subsidies to relieve the effect of rising prices.

The French government capped the electricity and gas prices.

In Germany, Chancellor Olaf Scholz introduced a package of $65bn to support households and firms to ease the impact of galloping prices.

The Italian government passed a budget for $17bn aid and package to support households and firms during the crisis of soaring energy costs and augmenting prices. This budget was an addition to the $35bn budget in January to accelerate the energy shock from sky-high electricity and gas to galloping petrol costs. Under the package, Rome expanded the length of measures to the fourth quarter to curb electricity and gas bills for low-income families and to reduce system costs.

Other countries like Finland and Sweden also planned to budget billions of dollars to help energy firms.

The capping measures though helped households with soaring prices, it should be a temporary policy only and shouldn't extend longer. Offering monetary subsidies while the economy is depreciated could intensify the severity of the impact that inflation brings. Aids and packages could not be sustainable economic policy. The budget for aid should be rationed since households won't cut down on their usages of electricity and gas if they are able to use the same amount of energy at the same price, especially in the cold winter. If the government sticks to providing monetary subsidies, the country has to face galloping inflation and debts. Raising energy taxes might expand the money supply to fight off the economic crisis. However, the government could invest in renewable energy to supply the country with energy in the long term.