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War in Ukraine: Europe’s economy faces a perfect storm

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

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

The bases to go on the way to stagflation, inflation without growth that has not been seen in Europe since the oil crises of the 1970s.

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

Geography and geopolitics are imposed on the economy. Energy prices in Europe soar with the megawatt hour exceeding the 300 euros in the Dutch market, the reference in Europe, when in normal times it did not reach 50 euros.

This rise in energy, added to that of raw materials and basic food products (which has almost tripled in two years), pushes all prices up and reduces growth, which will also slow down more due to the effects of the war , of the sanctions and uncertainty that it generates

The crisis of the ’70s

The Europe of the late 1970s even rationed fuel sales and introduced summer time to try to use less electricity.

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

The Europe of the late 1970s even rationed fuel sales and introduced summer time to try to use less electricity.  Photo: EFE

The Europe of the late 1970s even rationed fuel sales and introduced summer time to try to use less electricity. Photo: EFE

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

This regulation lasted in Belgium until 2005, where all bakeries were obliged to offer a basic type of bread of a minimum weight at a certain price. In those years the British Iain Macleod invented the word. The “stagflation” was 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 that dependence.

But the war can provoke a similar shock, launching a barrel of oil this Monday morning at almost 130 euros, its highest level in 12 years, twice as much 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 world economy” and Europe should be the hardest hit continent.

The European Commission won’t publish its most comprehensive economic forecasts 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 great news. At the end of February, inflation in the Eurozone reached 5.8% and at the end of this month it could go above 7%. It is an average, in some countries it is already over 10%. Meanwhile, salaries do not follow inflation and the collective increases agreed for now do not reach 2% per year.

What households pay for energy skyrockets. A household paying €130 a month for electricity and heating gas in Belgium a year ago pay now almost 250 euros. In Germany the average household bill may be close to 300 euros per month, in France and the United Kingdom it will exceed 250 euros.

Record rates that, together with generalized inflation, will notably 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, she will go back up.

Electricity generation in Europe has hardly increased in cost, but this price increase is explained by the electricity price formation system, which the European Commission could change due to pressure from governments.

Electricity prices in Europe are formed with a system that encourages efficiency in normal times but it’s a bomb clockwork in times of crisis.

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

Instead of averaging the cost of each system to form prices, European 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 Clarín

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