Luis Garicano is vice president and economics spokesman of Renew Europe and head of Spain’s Ciudadanos delegation in the European Parliament.
Since Russian President Vladimir Putin began his invasion of a Western democracy, Europe has paid Russia around €20 billion for energy imports — enabling atrocities such as those that were uncovered in Bucha this weekend.
These apparent war crimes are an existential threat to Europe’s values. And yet, in their wake, the recent sanctions proposed by European Commission President Ursula von der Leyen still only cover coal — even though Russian exports of gas and oil since the war’s start are now worth 25 times more.
Opponents of an energy embargo ask us to “leave moralizing aside” and consider the potential economic and social impact of such a measure. Yet contrary to their claims, an embargo doesn’t just align with our values, it serves our interests too.
The embargo-skeptics are led by German Chancellor Olaf Scholz, who claims an immediate ban would be both ineffective and too costly. But the research is clear and contradicts the chancellor’s claims: A ban would be highly effective in damaging the Russian war economy, and the harm to Europe would be manageable.
In fact, a ban on gas exports could prove fatal to Putin. Thus far, our payments have helped Russia stabilize the ruble. After initially collapsing by 70 percent, it has now recovered its pre-war value. But a ban would prevent the Central Bank of Russia from obtaining the hard currency it needs to avoid a financial crisis. An added benefit would be closing the current loopholes in the SWIFT ban, which has large exemptions to enable energy exports.
An embargo would also make it impossible for Putin to pay for the war. To quote the late Senator John McCain, Russia is “a gas station masquerading as a country,” and Europe accounts for 49 percent of its oil and 74 percent of its gas exports. A model developed by the Institute of International Finance suggests that the losses under full embargo would equal 40 percent of Russia’s pre-war GDP. The state would be hurt too, as 40 percent of its budget is directly financed through energy exports.
And the cost to Europe would be bearable.
The German Council of Economic Experts’ review of existing research on an embargo’s impact on Germany projected GDP losses between 0.2 and 2.2 percent. The most authoritative study, carried out by a group of top German economists led by Rudi Bachmann, placed the impact between 0.5 and 3.5 percent. This is a price Europe can pay. The eurozone was set to grow by 3.7 percent in 2022 — the embargo would mean a lost year of growth.
It’s a puzzle why German Economy Minister Robert Habeck still speaks of an embargo leading to mass poverty in Germany, when even the simplest calculations are sufficient to show this is untrue. Gas— 40 percent of which is Russian — represents 1.2 percent of German GDP.
Bruegel’s Georg Zachmann expects half of the shortage can be replaced by LNG and other imports, the remaining shortfall accounting for just over 0.2 percent of GDP. The multiplier effect of gas inputs needed for that tiny loss to create mass poverty is beyond implausible.
Moreover, Europe has specific tools to cushion an embargo’s impact on unemployment and income. A deficit-financed support mechanism that would prevent any second-order effects after a 3 percent hit to GDP (in a pessimistic case) would raise debt-to-GDP ratios by just three percentage points.
Most crucially, we also must consider the costs of the alternative. Russian forces on Europe’s borders create uncertainty, lowering investment. As the war drags on, the risk of spill-over effects increases — not to speak of the costs of war in Ukraine itself. And remaining hooked on Russian gas leaves us at Putin’s mercy. He can always simply choose to cut supplies himself when we are unprepared and the damage would be highest.
But if this is all so obvious, then why does Mr. Habeck speak of mass poverty?
The truth is that a significant segment of the German industry has thrived on ultra-low-cost, subsidized fossil energy from Russia. As CEO of chemical giant BASF Michael Heinz said on March 31, “cheap Russian energy has been the basis of our industry’s competitiveness.”
Industrial users face just 10 percent of the household gas price, and Germany has specialized in energy-intensive production. Just like the banks asking for bailouts before them, industry lobbyists try to convince governments that a catastrophe is around the corner; they are doing their job, and doing it well. But that doesn’t mean we need to follow their advice.
Instead, Europe can learn to live without Russian fossil fuels.
Different countries have different strengths: Spain has LNG terminals; an emergency pipeline must be built to bring gas to Germany and the rest of Central Europe. If needed, Europe can even temporarily return to using its significant fossil-fuel capacity. The Netherlands has one of the largest natural gas fields in the world. Now closed, it can easily be reopened.
We must use an embargo to defend our values, serving our own interests in the process. And we must do it together.
