MNI: Oil Embargo To Lower EU Growth Outlook - Officials

The European Union’s planned embargo on Russian oil will push up energy prices and send the bloc’s economy closer to the adverse scenario included in the European Commission’s Spring forecasts, which foresee growth this year of around 1.5%, EU sources told MNI.

In the adverse scenario, annual GDP growth rates for 2022 and 2023 are estimated to be 1¼ and ½ percentage points below the baseline forecasts for 2.7% and 2.3% growth in 2022 and 2023 respectively. Inflation is estimated to stand ¾ and ½ pps above the forecast baseline of 6.1% in 2022 and 2.7% in 2023.

The precise impact of the embargo set to take effect by the end of the year is hard to quantify, but “replacement costs and the impact on inflation will be substantial, particularly if the embargo is implemented with little lead-time,” Markus Ferber, a centre-right German European Parliament's Committee on Economic and Monetary Affairs, told MNI. A former senior Eurosystem official said the embargo increased the threat of stagflation, although the source felt that the gradual monetary tightening signalled by European Central Bank President Christine Lagarde continued to make sense.

RISK TO GAS

The oil embargo also increases the risk that Russia could cut off all gas supplies to Europe, said Simone Tagliapietra, an energy expert from the Bruegel think tank.

“A strong coordination is needed at the EU level to prepare for a potential interruption of all Russian gas supplies to Europe,” Tagliapietra told MNI.

A gas shutdown would make the Commission’s severe scenario, which foresees an increase in energy prices of more than 25%, more likely. This envisaged growth at just 0.2% this year and 1.3% in 2023, while inflation would rise to over 9% in 2022 and to almost 4% in 2023.

While the oil embargo will eventually have a big impact on Russia, which receives EUR23 billion a month for its oil exports to Europe, its effects may initially be muted, Tagliapietra said.

“The major weakness of the deal is timing. This will really be effective by end-2022, while we would need to cut Russian energy rent ASAP to weaken its economy and its military potential,” he said.