Jul 21, 2022 - Economy

Europe’s energy woes are another drag on U.S. growth

Illustration of EU stars pinning a hundred dollar bill

Illustration: Sarah Grillo/Axios

Europeans didn’t need another reminder that they’re living through an energy crisis — but, boy, did they get one.

Driving the news: The historic heat wave pummeling the continent this week sent power prices to new record highs; in France and Italy, average weekly prices have more than tripled over the last five weeks, according to Rystad Energy.

Why it matters: The strains on Europe’s ability to power its economy will not only hurt its growth but could also drag on economic partners like the U.S.

The big picture: Russian natural gas flows to Europe have already fallen to below one-third of their level a year ago, according to Eurasia Group.

  • German chemicals giant BASF, among others, has warned that it has “no short-term solution” for replacing Russian gas as a power source if it gets entirely cut off.

State of play: The International Monetary Fund now projects that the worst-case scenario — a complete cutoff of Russian gas — could shave more than 2% off the EU’s gross domestic product.

  • Some countries would be worse off than others: Hungary, the Slovak Republic and the Czech Republic could see GDP impacts of up to 6%, the IMF estimates.

A total cutoff hasn't happened — yet. But analysts at Goldman Sachs already forecast heightened odds of an EU economic downturn, including a full-on recession in Germany, due to the deteriorating outlook for Russian gas supply.

  • "A sustained decline in these vital energy inputs would significantly weigh on European manufacturing production, particularly for energy-intensive industries like chemicals, machinery, and food and beverages," Goldman wrote in a recent research note.
  • "The spike in home heating costs will weigh on European consumption, as higher inflation crowds out consumer purchases of non-energy goods and services," the analysts wrote.

Reality check: Goldman sees a risk of a substantial spillover into the stateside economy since 28% of U.S. exports find their way to Europe — representing 3% of U.S. GDP.

What to watch: Russia on Thursday resumed sending natural gas at a reduced volume via the key Nord Stream pipeline to Europe after a weekslong shutdown for maintenance — but that could prove fleeting, the WSJ reported.

  • Bracing for the worst, the European Commission on Wednesday took the extraordinary step of asking member countries to voluntarily reduce their gas consumption by 15%.

The bottom line: Europe's heavy reliance on external energy supplies, and the lack of alternatives — problems that have been flagged for years — are about to come home to roost in a big way.

  • And the growing possibility of a real energy crunch later this year may be felt way beyond its borders.
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