Sep 7, 2022 - Economy

R.I.P. Europe's energy system

Animated illustration of the EU symbol gradually going dark.

Illustration: Shoshana Gordon/Axios

In what would have been an unimaginable scenario just a few months ago, Russia has halted all natural gas flows to Europe through its Nord Stream pipeline — plunging the continent into a new era of uncertainty that's reverberating across markets.

Why it matters: The gas cut-off bodes incredibly poorly for economic growth in Europe, as a range of industries dependent on abundant Russian gas are being forced to slash production.

What they're saying: "This broad and long-term industrial and energy strategy that the government — but also huge parts of the energy intensive industries —have pursued for decades, building entire sectors like the chemical industry around very cheap Russian gas, has collapsed," Lion Hirth, a professor of energy policy at Berlin-based Hertie School of Governance, tells Axios.

The impact: The euro just plunged to a new 20-year low against the dollar.

  • The British pound dove to its lowest against the greenback since 1985.
  • Yields on European government bonds — which determine costs of borrowing for national governments — have risen as investors factor in the risk of large amounts of new borrowing to finance crisis responses.

Catch up fast: Russia — which supposedly closed the pipeline for maintenance on Friday — surprised no one by announcing that it wouldn't restart gas flows.

Zoom out: For decades, Europe — especially the largest European economy, Germany — relied on Russian natural gas for heat and electricity.

  • Now, Europe is being forced to rebuild its energy system on the fly, using an untested and expensive mix of price caps, rationing and bailouts to make it through the next few months.

Between the lines: Analysts believe Russia wants to inflict economic and financial pain this winter as a means of eroding Europe's solidarity and support for Ukraine, which has been crucial to the country's repulsion of the Russian invasion.

The latest: In recent days, countries across the continent have raced to shore up their energy systems in the face of spiraling costs for consumers and companies.

What we're watching: Economists' expectations for growth in the E.U. and U.K., which are dropping fast.

Data: FactSet; Chart: Axios Visuals

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