EconPol Europe: Stopping Russian Energy Imports Could Cost Germany 3 Percent of Annual Economic Output

In the short term, a halt to Russian energy imports could cost Germany up to 3 percent of its gross domestic product. This is the result of estimates by the EconPol Europe network calculated with a simulation model. Oil and coal could be replaced by imports from other countries, but it is harder to find replacements for gas, the authors write. “Germany should take quick and decisive action to reduce its dependence on Russian gas. Without appropriate measures today, we run the risk of being vulnerable to blackmail this winter,” says Prof. Karen Pittel, member of the EconPol network and Director of the ifo Center for Energy, Climate, and Resources.

“The cost of stopping energy imports would be significant, considering that the coronavirus pandemic cost about 4.5 percent of economic output,” says Andreas Peichl, EconPol network member and Director of the ifo Center for Macroeconomics and Surveys.

Major economic slumps and upheaval cannot be ruled out either, as the strength of the potential shock injects a high degree of uncertainty into the simulation. Peichl added that large parts of industry have not yet recovered from the effects of the pandemic, and that must also be taken into account. Moreover, it is not clear from the simulated decline in overall gross domestic product that some branches of industry, as well as upstream and downstream sectors, may be much more severely affected.

Replacing Russian gas imports is complicated, the study states. Gas could be imported from countries other than Russia, coal and nuclear energy could be used instead of gas in power generation, and gas reserves could be replenished over the summer. However, these measures would only partially offset the deficit in gas consumption over the next 12 months.

First and foremost, policies should aim to increase incentives for substituting and conserving fossil fuels as quickly as possible, even if an embargo is not imminent.

“Taking action now means we don’t have to make even tougher adjustments this year or next when push comes to shove. Since such a move would drive prices up even further, targeted support measures would have to be taken for industries and social groups that have been especially hard-hit,” Pittel says.

Authors of this paper are Rüdiger Bachmann (University of Notre Dame), David Baqaee (University of California), Christian Bayer (University of Bonn), Moritz Kuhn (University of Bonn and ECONtribute), Andreas Löschel (Ruhr University Bochum), Benjamin Mol (London School of Economics), Andreas Peichl and Karen Pittel (ifo Institute for Economic Research, University of Munich), and Moritz Schularick (Sciences Po Paris, University of Bonn, and ECONtribute).