Study puts cost of halting Russian gas supply at 12% of German GDP

Germany’s economy faces losing around 12 per cent of its annual output — some €429bn — if Russian natural gas supplies stopped abruptly, according to a new study by an adviser to the government.

The study by Tom Krebs, an economics professor at the University of Mannheim who advises the finance ministry in Berlin on economic policy, is more pessimistic than most previous estimates and is likely to stiffen the government’s resolve in resisting calls for an immediate EU embargo on all Russian energy imports.

It is also likely to fuel an often-fraught debate between German economists over whether the country could handle the economic impact of a ban on natural gas.

The estimate comes as Brussels is preparing to step up its sanctions on Moscow over its invasion of Ukraine by phasing in a ban on oil imports from Russia, adding to an earlier coal embargo, while Germany is searching for ways to reduce its heavy reliance on Russian gas.

“An instant and complete stop of Russian natural gas imports would, in combination with the already agreed coal embargo and the forthcoming oil embargo, probably amount to an economic slump comparable to the decline in GDP during the 2009 financial crisis or the 2020 Corona crisis,” said Krebs.

Other estimates have put the impact of a sudden halt to Russian gas imports at between 0.2 and 6.5 per cent of German GDP.

Germany, which until the war received 55 per cent of its imported gas from Russia, reduced this to 35 per cent in April by increasing alternative supplies and aims to lower it to 30 per cent by the end of the year. However, the economy ministry said recently it would take until 2024 to reduce the share of gas imports coming from Russia to 10 per cent and industry leaders worry that a sudden gas shut-off could still paralyse large parts of the country’s manufacturing sector. 

Some economists support the government’s gradual approach, warning a sudden, continent-wide supply cut-off could permanently damage the competitiveness of Europe’s economy and even fuel social unrest. But others say ending Russian energy imports would be “manageable” for the German economy. Rüdiger Bachmann, an economics professor at the University of Notre Dame, who co-wrote a report that suggested the maximum hit was just 3 per cent of GDP, told the FT an embargo would only lead to a “temporary crisis”. He added: “Germany has the fiscal capacity to pay for this.”

Krebs’ study analysed the “second-round effects” of gas shortages that would force key industries to stop production, including in the automotive, chemicals, metals, food, glass, ceramics, machinery and paper sectors. 

Drawing on earlier studies of the impact on Japanese industrial production after the Fukushima nuclear disaster, Krebs concluded there would be a fivefold magnifying effect of the initial impact of lower production in gas-intensive industries.

Krebs presented two scenarios, one in which Germany could not easily replace much of the Russian gas it imports and another where this is more successful than expected. 

In the first scenario, he assumed a drop in production that wipes out between 3.2 and 8 per cent, or between €114bn and €286bn, of German GDP. On top of that he predicted a hit to demand caused by higher prices equal to between 2 and 4 per cent of GDP. In total, the loss of GDP in the year after an abrupt ending of Russian energy imports would be between 5.2 and 12 per cent.

In the milder scenario, the hit to production would be between 1.2 and 3 per cent of GDP, so the overall loss of GDP would be between 3.2 and 7 per cent.

“When it comes to natural gas, there is a significant difference between a one-year adjustment period and a three-year adjustment period,” wrote Krebs, whose study was funded by the Macroeconomic Policy Institute in Düsseldorf, which is part of the trade union-affiliated Hans Böckler Foundation.

Last month, Russia cut off gas supplies to Poland and Bulgaria after they refused to change the way they pay Moscow for gas to enable the Kremlin to access the cash it receives for energy exports. But officials in Germany — and official technical guidance from the EU — indicate they believe a sanctions-compliant payment method is still possible.