Researcher at the FNRS, Aurélien Goutsmedt is an economic historian. A specialist in the history of macroeconomics and questions of stagflation, he studies various economic policies since the stagflation of the 1970s.
Can the current energy crisis be placed in a broader historical perspective? Can it be compared, for example, to the oil shocks of 1973 and 1979?
The parallel is justified by the very fact that the question is being asked. Of course, there are differences and commonalities. But there are two major questions that we are currently rediscovering. First of all, the issue of energy dependence and the crucial role that energy plays in our economies. This question became less important in the 1980s and 1990s, but we can see that it is making a comeback today. Energy occupies a huge place in our economies and can have profound and systemic impacts, even if it represents a relatively minor part of our expenditures. Next, we are rediscovering that energy (and therefore inflation) is both a political and a geo-political issue. The economy always ends up being overtaken by non-economic issues. The 1970s were marked by the Cold War, by tensions between Arab countries and Western countries, etc.
Stagflation is associated with the 1970s.
Is this when we first speak of stagflation?
Stagflation is associated with the 70s. The term emerged in the context of the late 1960s, in the United Kingdom, to describe a phenomenon affecting developed countries. Today, we find the same dilemma, in terms of economic policies, as in the 1970s. We are facing a negative supply shock, ie a slowdown in growth and an increase in prices. This is what can lead to stagflation. Inflation is rising and so is unemployment, which is not the case in “normal” times. In terms of economic policy, this means that we have to play with two variables which usually evolve in opposite directions. Which means you have to arbitrate. If we seek to offset inflation, we risk increasing unemployment; if we promote recovery, we risk increasing inflation.
The 1974 recession is the biggest recession since 29 in many countries.
What lessons can we draw from the economic policies implemented during the 1970s to deal with stagflation?
First of all, it must be recognized, in the 1970s, there was great trial and error in the macro-economic policies put in place. The first reaction of governments and central banks was to conduct a restrictive policy in order to curb inflation. But this answer fails in most countries. Monetary tightening does not make it possible to slow down inflation when it comes from a rise in costs (of raw materials or foodstuffs, for example). The 1974 recession is thus the biggest recession since 29 in many countries. But, following the second oil shock in 1979, we nevertheless end up legitimizing the idea that we must favor the fall in inflation. Lower inflation and price stability were thus prioritized, before dealing with unemployment.: this is the plan adopted in Germany, the United States and the United Kingdom. In the last two, the consequence will be a terrible recession and social crisis, with a very high unemployment rate accompanied by a deterioration in the standard of living of workers. These are the Reagan and Thatcher years.
For the moment, Europe is in a simpler situation from a macro-economic point of view, whereas it is in a more complicated situation from a geo-political and energy point of view.
This solution is unrealistic today?
No one is ready to implement the same policy today. On this point, Europe must be distinguished from the United States. For the moment, Europe is in a simpler situation from a macro-economic point of view, whereas it is in a more complicated situation from a geo-political and energy point of view. The reason is simple: the economic recovery in 2021 in Europe has been weaker than in the United States. In the United States, the economy revived very quickly following the pandemic. Unemployment has fallen there and there has been a significant increase in the consumption of goods. Inflation was already high before the conflict in Ukraine. In Europe, unemployment fell less, inflationary pressures were weaker andt the ECB therefore has greater leeway.
The biggest risk is that inflation is structurally transmitted to the economy.
And if the situation persists? What longer-term impact on the economy?
The biggest risk is that inflation is structurally transmitted to the economy. This is what central banks are watching carefully today. The longer this increase in the prices of energy (and other raw materials) persists, the greater the risk of a lasting and general increase in the prices of goods. This is called “second-best effects”. And the more companies anticipate price increases, the more they increase their prices themselves…
The big challenge is above all to restore energy freedom to the EU by becoming independent of Russian gas by 2030.
The European Union announces that it wants to stop imports of Russian coal. Can we go even further? Is it realistic to stop imports of gas and oil as well?
If we completely stop imports, what do we do? This will have a cost, but can we fully anticipate it? It is difficult to arbitrate and economists disagree on the subject. It is not for nothing that the first measure taken by the EU concerns coal. Coal circulates better than gas. To circulate the gas, a series of infrastructures are needed: gas pipelines, storage structures, etc. For example, there is no gas pipeline between Italy and France. Italy is therefore dependent on the East for its gas supply. Moreover, substitution by calling on other producers takes time and works only very partially. There remains another solution: energy saving… But the big challenge is above all to restore energy freedom to the EU by becoming independent of Russian gas by 2030. For many European experts, this will have to go through a major investment in heat pumps and in energy saving measures. ‘energy saving such as increasing the thermal insulation of buildings.
Europe spends around a billion dollars a day to buy Russian energy. Russia therefore continues to obtain foreign currency, which allows it to finance its imports and limit the fall of the rouble.
Would cutting off gas and oil signal the collapse of the Russian economy? This would be the economic solution to end the war?
It is certain that this decision would have rather rapid consequences on the Russian economy. Europe spends around a billion dollars a day to buy Russian energy. Russia therefore continues to obtain foreign currency, which allows it to finance its imports and limit the fall of the rouble, which ultimately did not fall that much… The day when the flow of these currencies stops, it means difficulties in importing certain goods, high imported inflation and multiple economic and social consequences. But the question is also: what will we do next? As long as we are not independent of Russian gas, this relationship will continue to exist.
If we stop our gas imports, Russia cannot export its gas to China or India, because the necessary infrastructure is lacking.
For its part, can Russia do without Europe and turn to China and India?
The problem is similar in Russia. If we stop our gas imports, it cannot export its gas to China or India, because the necessary infrastructure is lacking. But the difference is that the capacity to invest in this kind of infrastructure will be very weak and will rest almost entirely on China and India. In the medium term, one can think that Russia will not be able to do without Europe as a client.
Faced with this situation, an emergency solution can be found to mobilize substitute suppliers at higher prices or to use this moment to accelerate the energy transition.
This energy question arises as a new alarming IPCC report has just been released. Is this the right time to talk about the energy transition?
Faced with this situation, an emergency solution can be found to mobilize substitute suppliers at higher prices or to use this moment to accelerate the energy transition. In France, the debate on the exploitation of shale gas is resurfacing. Nuclear power is also making a comeback. At the level of European institutions, however, it is believed that this crisis could constitute a springboard for accelerating investments in the energy transition. The Covid-19 pandemic has broken down taboos. The takeover plan has made it possible to pool debt at European level. The EU can now take on debt in its own name and distribute the money to member countries. It’s an absolute novelty. We could envisage the same thing for the energy transition, namely designing a major European debt plan to invest in the transition. This opportunity, we did not seize it during the 70s, it is the occasion to do it. We could also consider that the purchase of energy is done at European level and no longer at national level. Europe currently buys 10% of the world’s gas. We would thus have a much greater bargaining power.