Skip to main content

The European economy is facing a perfect storm: rise in the prices of raw materials and hydrocarbons, added to the highest inflation in Europe for three decades, the fall in the supply of raw materials and cereals due to the Russian attack on Ukraine and the boomerang effect sanctions approved in an attempt to bring the Russian economy to its knees.

the fall of the euro at its lowest level with the dollar for almost a decade and is close to parity as European Commission estimates suggest that the war, due to the reduction in the supply of raw materials, may add one point inflation and reduce GDP growth by one point.

The basics to go on the path of stagflation, inflation without growth unheard of in Europe since the oil shocks of the 1970s.

Gasoline prices on an electronic board at a gas station in Geneva. Photo: EFE

Geography and geopolitics impose themselves on the economy. Energy prices in Europe are soaring, with the megawatt hour exceeding the 300 euro on the Dutch market, the reference in Europe, whereas in normal times it did not reach 50 euros.

This increase in energy, added to that of raw materials and basic food products (which has almost tripled in two years), is driving up all prices and reducing growth, which will also slow further due to the effects of the war, sanctions and uncertainty that it generates

The crisis of the 70s

Europe in the late 1970s even rationed fuel sales and introduced daylight saving time to try to use less electricity.

In many countries it was forbidden to turn on the lights stores at night, energy consumption in industries was limited and TV stations were even ordered to stop broadcasting after a certain time so that citizens at home could turn off the TV (consuming less electricity). electricity) and, if possible, go to bed.

Europe in the late 1970s even rationed fuel sales and introduced daylight saving time to try to use less electricity.  Photo: EFE

Europe in the late 1970s even rationed fuel sales and introduced daylight saving time to try to use less electricity. Photo: EFE

Inflation reached 15% in France, exceeded 20% in Spain, Italy or the United Kingdom, putting the economies into recession. In those years, countries that had not done so regulated the price of bread to ensure that everyone had access to food.

This regulation lasted in Belgium until 2005, when all bakeries were obliged to offer a basic type of bread of a minimum weight at a certain price. During these years, the British Iain Macleod coined the word. Stagflation is bornstagnation and inflation.

European economies do not have the same structure and they no longer import almost all the energy they consume. Nuclear, hydroelectric and renewable power plants have partially reduced this dependency.

But the war can cause a similar shock, by launching this Monday morning a barrel of oil at nearly 130 euros, its highest level in 12 years, twice as many as a year earlier and 25% more since the war broke out. The IMF said on Saturday that “the ongoing war and sanctions are going to have a severe impact on the global economy” and that Europe is expected to be the hardest hit continent.

The European Commission won’t release its fullest economic forecast for this year and the next two until early May, but its estimate of nearly 4.0% growth this year now looks like a bad joke.

A 3.0% would already be excellent news. At the end of February, inflation in the euro zone reached 5.8% and at the end of this month it could exceed 7%. This is an average, in some countries it is already more than 10%. Meanwhile, salaries are not keeping up with inflation and the collective increases agreed so far do not reach 2% per year.

What households pay for energy is skyrocketing. A household paid €130 per month for electricity and heating gas in Belgium a year ago pay now almost 250 euros. In Germany, the average bill for a household can be around 300 euros per month, in France and the United Kingdom it will exceed 250 euros.

Record rates which, combined with generalized inflation, will in particular scratch the pockets of the population, reducing demand. In some countries, there is even a date on which invoices are updated. The British already know that on April 1, their bill will increase by 54%. Six months later, on October 1, it will go up again.

Electricity production in Europe has hardly increased in cost, but this rise in prices is explained by the system for setting electricity prices, which the European Commission could modify under pressure from governments.

Electricity prices in Europe are set by a system that encourages efficiency in normal times but it’s a bomb watchmaking in times of crisis.

Imagine that a country, to produce electricity, uses 30% renewable energies at 50 euros per megawatt hour, 23% nuclear energy at 40 euros, 20% hydropower also at 40 euros and 20% gas natural at 300 euros.

Instead of averaging the cost of each system to form prices, EU regulations require all electricity to be billed at the price of the most expensive energy, natural gas. Thus, electricity companies charge 300 euros per megawatt hour even if they only produce electricity from renewable sources at a cost of 50 euros per megawatt hour.

Brussels, special for Clarin