MNI INTERVIEW: Russia Gas Flow Key To EZ Recession Fear

The euro zone will avoid a full-on recession so long as Russia maintains even a reduced rate of gas supply to EU countries, according to Gerhard Huemer, Economic Policy Director at EU small business organisation SMEunited.

“If there is a total shutdown of Russian gas, we will see a recession from the fourth quarter of this year,” Huemer told MNI.

So far, small and medium enterprises (SMEs) across the euro zone seem hopeful that the worst scenarios can be avoided this winter. The group will publish its new EU SME Barometer survey in October, but so far feedback from small businesses is that things may indeed be getting worse - but not dramatically so.

“With part of the Russian gas supply coming in, there is no need to ration gas and we will not see a recession. But if there is no gas coming in and there is rationing, there will be a recession is for sure,” Huemer said, accepting there was still a great deal of uncertainty.

“I don’t know if it’s confidence or just hope, but they are not expecting the worst scenario,” he said.

BUSINESSES BLOCKED

But the resilient attitude among SMEs belies the serious problems they face in diversifying their energy supplies. Some have moved from gas to oil and while there has been strong demand from SMEs to adopt solar power, higher material costs and labour availability issues have stalled a switch to that sector.

“The people able to install solar are in such demand that there is not as much happening as there should be,” Heumer noted.

Many firms were unable to pass on rising energy and raw material costs, having entered long-term contracts with their customers. Businesses across the eurozone were pushing for energy price caps and compensation for energy price rises at the national level in order to mitigate inflation and stave off recession.

“They used to have clauses inserted into long-term contracts to allow price rises if the cost of raw materials went up, but over the past ten years (of very low inflation) such clauses have disappeared,” he said.

MIXED WAGE PICTURE

According to Huemer, his contacts with trade unions suggest that they are sensitive to wider economic developments and hopes they will behave responsibly in upcoming wage negotiations. Unions and business are also showing an appetite for flexibility, some proposing one-off payments to help workers through the winter, payments which will not be repeated next year.

But he warns that there is a divide between trade unions, particularly those acting in sectors exposed to international competition, and the public sector unions, which are pushing for much fuller compensation against inflation.