Editors' note: This column is part of the Vox debate on the economic consequences of war.
Western policymakers were taken by surprise by the full-fledged Russian invasion of Ukraine. Policy responses from NATO allies were also more forceful than most had anticipated, with wide-ranging sanctions,1 and military and humanitarian aid2 to Ukraine in the tens of billions of euros. Sanctions have already hurt the Russian economy, with the IMF predicting an 8.5% decline in Russia’s GDP this year.3 Some commentators have urged Western allies to do more to support Ukraine, and Germany in particular has been in the spotlight as a country with substantial leverage. Fossil fuel exports accounted for more than a third of Russia’s total budget,4 with half that sum5 coming from Europe, primarily Germany. A German ban on Russian oil and gas imports could have a material economic impact on the Russian economy, as argued by Oleg Itskhoki and Sergei Guriev.6 Chepeliev et al. (2022), Langot et al. (2022), and Mahlstein et al. (2022) find that sanctioning Russian energy exports would likely cause significant damage to the Russian economy, with much smaller relative impacts on countries imposing these sanctions, such as the EU. Others, including Ricardo Hausman, have argued for a less extreme tax on Russian oil,7 but this column focuses on the effects of a full embargo.
Is a German ban of Russian oil feasible? Currently, about up to 55% of Germany’s gas imports and 14% of its total energy imports come from Russia.8 Gas is seen as comparatively harder to substitute than coal and oil. Indeed, industry leaders from sectors ranging from chemicals to confectionaries have issued stern warnings that a sudden import ban would “cause irreversible damage” to the German economy and “destroy what has been built in decades,” in the words of the CEO of German chemicals giant BASF.9 German economy minister Robert Habeck argues that disruptions to the production of basic inputs such as chemicals would cause a ripple effect across value chains, which would in fact lower Germany’s capability to support Ukraine with weaponry. The key problem as identified by opponents of an import embargo is the insufficient time to adapt production processes, which according to Mr. Habeck10 would lead to mass unemployment, poverty (perhaps suggesting a Great Depression-type scenario), and cold homes. Similarly, the Association of the German Industry (BDI), warns against “playing with fire” and harming the EU more than Russia,11 a claim echoed by German Chancellor Scholz during a TV interview.
The IMK, an economic think tank close to trade unions, published a study that estimates the economic impact of a gas import ban to be at least 6% of German GDP in 2022 alone. For comparison, the recession due to the Covid-19 pandemic caused German GDP to fall by 4.6% in 2020.12 The Bundesbank estimates that the ban would lead to a drop of 5.1% in German GDP this year, and additional drops of 1.5% in the two upcoming years.13
Other studies, however, point to a smaller impact of an import ban. Bachmann et al. (2022) use the Baqaee-Farhi (2021) model and estimate the cost to the German economy of merely 0.5 – 3% of German GDP. This takes into account some fiscal measures taken by the German government and monetary measures by the European Central Bank to contain further spread of the economic damage. A study published by the German Institute for Economic Research DIW obtains a similar estimate of 3%.14 Finally, a joint study of five German economic research institutes and think tanks estimates GDP deviations relative to a no-import-stop baseline of -0.8% in 2022 and -5.3% in 2023 (so 3.05% on average across the two years) and year-to-year GDP changes of +1.9% in 2022 (i.e. a growing economy) and -2.2% in 2023.15 A paper by the German Council of Economic Experts (Berger et al. 2022) warns that each estimate is based on different aspects of the damages to the German economy, so that the deductions to GDP resulting from the different scenarios could be additive. If so, the cumulative effect on GDP could be 3% to 6%.
Short-run substitutability across energy sources and other (intermediate) production inputs is one of the key issues that leads to divergent opinions among economists. Bachmann et al. (2022) are much more optimistic about the substitutability of Russian gas than those who estimate major economic damages, in particular because they evaluate substitution from a macroeconomic perspective across the entire value chain.16 A recent Vox column by Lafrogne-Joussier et al. (2022) takes a look at some micro-evidence from Covid-19-induced supply shocks, where results suggest that affected firms do substitute even in the short run. Further, heterogeneity across firms in a sector may affect the aggregate response.
The IMF forecasts German real economic growth to be 2.1% in 2022, down from its 4.3% forecast before the war, and 2.7% in 2023. Forecasts for the euro area are 2.8% in 2022, down from 5.2% previously, and 2.3% in 2023. These forecasts are under current policies, which don’t include a ban on Russian oil and gas.
The April 2022 CfM survey asked members of its European panel to assess the effects of an embargo on Russian gas on the German and EU economies. The panel were asked to estimate the impact of a full, immediate ban on the importation of Russian gas. In the first two questions, the panel were asked about the effect on Germany, but under the assumption that all EU countries, but no non-EU countries, ban Russian gas. In other words, the questions assume a unilateral, but EU-wide, ban on Russian gas. In Question 2, the question is modified by asking how the ban would affect the economy with well-targeted fiscal policy. The panellists could use the comments to suggest which fiscal actions, if any, could mitigate the social and/or economic costs of the ban on Russian oil. In Question 3, the panel were asked about the effect of a ban on the EU as a whole, returning to the scenario that no additional fiscal actions are taken. The baseline scenario is the panel’s current expectations of the severity and duration of the war, and current policies.
Question 1: By how much would an immediate EU-wide import ban on Russian gas reduce German GDP growth per annum in 2022-3, in percentage points (pp), absent other policies?
Most panellists agree that an immediate EU ban on Russian gas would cause German GDP to fall, absent other policies, with roughly a third of the panel expecting a significant but contained decline of one to three percentage points per year and slightly more than a third (41%) anticipating a more serious downturn of three to five percentage points. A smaller percentage (13%) expect a major recession of five to ten percentage points. None of the respondents expects a decline of more than ten percentage points.
Panellists that expected lower damages of around one to three percentage points per annum in 2022-23 referred to the Bachmann et al (2022) study. Ben Moll (London School of Economics) summarises this view: “The supply-chain model estimates the damage to be around 1%. Considering pessimistic parameterisations and safety margins for Keynesian mechanisms yields 3%, a number backed up by later studies that take additional such channels into account – although some are in the 3–5% range.” Richard Portes (London Business School and CEPR) adds that the Baqaee-Farhi model, the model framework that Bachmann et al. (2022) build upon, is currently “the best supported estimate”.
Others, who viewed the damages as larger, pointed to Germany’s great reliance on Russian oil and gas and that such damages come on top of already strained supply chains. As Jumana Saleheen (Vanguard Asset Management) puts it: “Germany is known to have a larger manufacturing sector than its EU counterparts. A shortage of gas supply is likely to lower manufacturing output and exacerbate an already disrupted global supply chain.” Volker Wieland (Goethe University Frankfurt, IMFS) notes that “German GDP is already roughly 2% below GDP of 2019 pre-corona crisis… At the same time inflation has been rising a lot, and an embargo could push inflation near two-digit levels.” Others argued that the great uncertainties surrounding current circumstances called for a conservative (large) estimate of the damages. Ramon Marimon (EUI, UPG-BSE) attributes his lack of confidence to vastly different outcomes depending on the implementation timeline. In his view, a cold turkey embargo would have significant costs but calls for a “clear commitment to a path towards a full ban”. Philip Jung (University of Dortmund) points to the chosen rationing mechanism as another critical factor, with a strategy that uses the price mechanism rather than rationing leading to smaller costs.
Question 2: By how much would an immediate EU-wide import ban on Russian gas reduce German GDP growth per annum in 2022-3, in percentage points (pp), if the government offset the costs with a well-targeted fiscal policy?
The inclusion of well-targeted fiscal policy induced a marked shift towards lower expected damage to German GDP growth and greater agreement among the panellists: about 60% of respondents anticipate an embargo-induced downturn of one to three percentage points under such policies. The remaining panellists are roughly evenly split between those expecting a larger impact of three to five percentage points (18% of respondents) and a smaller effect of less than one percentage point (13%).
The majority view is summarised by Eran Yashiv (Tel Aviv University, CfM) who states that “fiscal policy could compensate for some of the downfall”. Jumana Saleheen (Vanguard Asset Management) agrees that the effects of an embargo “could prompt a large fiscal package which could offset most, but not all of the fall in output”.
Others believe that fiscal policy can do little in face of a gas ban. Volker Wieland (Goethe University Frankfurt, IMFS) writes that “demand side policies cannot fix this. It's not a liquidity problem that needs to be managed with loans from the ECB or the government. A major long-term re-organisation of industrial production is necessary and some companies will drop out and gas dependent sectors decline. This takes time.” He also warns of monetarising debt: “Large increases in debt monetized by the ECB would simply further raise inflation on top of the cost-push shock. This is quite different from the Corona shock, which was disinflationary.” Benjamin Moll (LSE) thinks that “well-targeted fiscal policy could arguably undo some of the Keynesian aggregate demand amplification discussed there. At the same time, this is still fundamentally a negative shock to aggregate supply so fiscal policy would not be able to *undo* the shock and reduce GDP losses below the 1% to 3% range. I would argue that GDP losses with well-targeted fiscal policy would likely lie somewhere in the 1% to 2.5% range.”
Question 3: By how much would an immediate EU-wide import ban on Russian gas reduce EU GDP growth per annum in 2022-3, in percentage points (pp), absent other policies?
A majority of the panel (63%) put the damages to the EU in the one to three percentage point range, with the remainder of the panel nearly evenly split between larger and smaller estimates. There was general agreement that a gas import ban would affect other EU members less than Germany.
Bachman, R, D Baqaee, C Bayer, M Kuhn, A Löschel, B Moll, A Peichl, K Pittel and M Schularick (2022), “What if? The Economic Effects for Germany of a Stop of Energy Imports from Russia”, ECONtribute policy brief no. 028.
Baqaee, D and E Farhi (2021), “Networks, Barriers, and Trade”, working paper.
Berger, E, S Bialek, N Garnadt, V Grimm, L Other, L Salzmann, M Schnitzer, A Truger and V Wieland (2022), “A potential sudden stop of energy imports from Russia: Effects on energy security and economic output in Germany and the EU”, German Council of Economic Experts working paper 01/2022.
Chepeliev, M, T Hertel and D van der Mensbrugghe (2022), “Cutting Russia’s fossil fuel exports: Short-term pain for long-term gain”, VoxEU.org, 09 March.
Lafrogne-Joussier, R, A Levchenko, J Martin and I Mejean (2022), “Beyond macro: Firm-level effects of cutting off Russian energy”, VoxEU.org, 24 April.
Langot, F, F Malherbet, R Norbiato and F Tripier (2022), “Strength in unity: The economic cost of trade restrictions on Russia”, VoxEU.org, 22 April.
Mahlstein, K, C McDaniel, S Schropp and M Tsigas (2022), “Potential economic effects of sanctions on Russia: An Allied trade embargo”, VoxEU.org, 06 May.
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