"New Iron Curtain" as a realistic scenario

Politically speaking, this currently seems to be a realistic scenario for the "new" relationship between the West and Russia. But it could also be a fitting metaphor in economic terms. Trade flows between the two economic areas would be largely cut off; the only question is whether we import raw materials, especially gas, from Russia, as we did in the 1970s - which is the current situation - or whether we (have to) largely do without them, as we did in the 1960s.

If Europe continues to source gas and oil primarily from Russia, as the German government currently wants, the short-term economic consequences are likely to be manageable. Growth, which is still recovering as a result of the coronavirus crisis, would be dampened somewhat. The additional surge in inflation, driven by the price increases on the international commodity markets, would probably be in the region of 1% to 2%. However, even without this additional effect, we are already assuming an inflation rate of around 4% in 2022. At 5% to 6%, inflation would therefore once again be noticeably higher than last year. This would therefore be the price for the "new iron curtain" without the energy embargo.

In the longer term, over five to ten years, the economic costs of such a boycott for Germany or most countries in Europe would be easily compensated. In the shorter term, however, a boycott of gas supplies in particular would be very expensive for the economy, as there are no alternative options for industry and consumers. Initial macroeconomic forecasts suggest that such an energy embargo would put a damper on our gross domestic product in the region of minus three, perhaps minus five percent.

However, politicians are currently much more cautious or risk-averse here. This is because the risk in such a boycott scenario lies not only in possible supply bottlenecks, but above all in further price escapades on the commodity markets. Here, prices have recently reached new historic highs, especially for gas. If these developments continue, there could be even more pronounced inflationary spikes and economic slumps. However, the German government is clearly not willing to accept this scenario of an abrupt embargo and the other risks involved.

Such a boycott scenario is not currently priced into the financial markets. The energy prices that have fallen again in recent days also tend to reflect an "iron curtain" of energy trading in the 1970s.