Energy shock should spur diversification

Dr Adam Tooze, the Kathryn and Shelby Cullom Davis Professor of History at Columbia University, presents an optimistic view of the worldwide economic disruption caused by the energy crisis and the rise in prices, and believes that it does not constitute a crisis. On the contrary, he forecasts that current inflation levels will likely moderate in the next 12 months.

He even sees a benefit in accelerating the energy transition and eventually weaning Europe off “unreliable and unappetizing providers” of fossil fuels. Besides, he is not worried about a new debt crisis in the eurozone, adopting a good scenario despite the political developments in Italy. Tooze also believes that markets are an ally that so far have not been gripped by panic.

However, he appears worried about Greece, which is called upon to respond to the extraordinary financial needs created by inflation, despite its considerable debt. That is why he draws attention to the quick implementation of any outstanding reforms, but also taking advantage of a distinct opportunity for Greece to become a hub for Europe’s transition to renewable energy sources.

You are among the economists who consider that the current situation does not constitute a crisis in the classical sense. What is your reasoning and what is your prediction for the scenario of a recession?

A crisis is a moment of fundamental challenge, a moment of decision. In geopolitical terms we clearly confront a crisis as a result of Russia’s attack on Ukraine. But in broader terms the world economy does not face crisis conditions. The strength of the recovery in 2021 and early 2022 was considerable. We now face the prospect of a mild recession. Hopefully the shock to global energy markets – above all to the gas market – will lead key consumers, notably Europe, to diversify sources of supply and accelerate the energy transition.

Where do you detect the solutions for taming the energy and wider inflationary crisis?

The solutions for handling the energy crisis lie in short-term economy measures, price increases targeted at consumers that can bear them and, in extremis, rationing. In the medium term, Europe must look to diversify sources of supply, and in the slightly longer term it must push forward the renewable energy transition so that we reduce reliance on unreliable and unappetizing providers of fossil fuels. It is an exaggeration to speak of an inflationary crisis. Europe is facing a shock to prices above all from energy and food. That shock will likely moderate in the next 12 months. The looming recession will further reduce inflationary pressure. I remain committed to team transitory. By 2023 I expect the inflationary surge to have moderated considerably.

‘The looming recession will further reduce inflationary pressure. I remain committed to team transitory. By 2023 I expect the inflationary surge to have moderated considerably’

Are you worried about the developments in the fiscal sector?

Whether or not fiscal pressures become a real issue in Europe depends on the way in which the ECB is or is not permitted to manage bond markets. Given Europe’s overall fiscal position there are no immediate grounds for concern. Obviously there are a number of individual countries which are in a fragile situation. Italy is strategic. But with sensible politics in national capitals, cooperative action at the European level and clear leadership from the ECB there really are no grounds to fear a repeat of the eurozone crisis.

How do you “read” the attitude of the markets in today’s conditions, including rising interest rates?

Obviously markets are nervous and we have seen how rapidly they will react to bad news in driving spreads up. But so far we have seen no panic. Markets continue to price in a considerable slowdown in inflation next year. They are not priced for a eurozone debt crisis. After many years of experience the de facto assumption is that whatever stresses emerge can and will be handled. That seems realistic.

Italy is too big to fail. Do you think that the political developments in the country constitute a risk point for a new debt crisis in the eurozone?

Clearly they do. But the Italian right wing is not currently in the euroskeptic mood of a few years ago. In 2018 we saw how the Italian and European political system absorbs a bona fide populist breakthrough. The powers of the Italian president, the survival instincts of Italy’s political class and the diplomacy of the Commission all worked together to defuse the situation. In two of the right-wing parties – the Lega and Forza Italia – there is a considerable weight of very mainstream business opinion that will demand to be heard and will not support a confrontation. Two things could upset this relatively sanguine assessment. First would be a new crisis e.g. a surge in refugees and a failure by the EU to act in solidarity with Italy. Secondly, a provocatively hardline stance by other European countries. Accommodation by Berlin was a key element in the 2018 stabilization. One would hope to see that again.

How do you assess the performance of the Greek economy? Are there more positive or negative risks in the case of Greece?

For Greece the outlook must be worrying. It is heavily dependent on energy imports, inflation is surging and the prospects are for a slowdown in the rest of the European economy in the second half of 2022 and into 2023. This creates painful dilemmas for fiscal policy, which is still constrained by Greece’s debt issues but which since 2020 has been required to respond to the emergencies of the moment. To increase the rate of growth in the long term, the agenda of reform is well known and has been debated for more than a decade. Much remains to be done. But the key new challenge, in a world of inflation running at more than 10 percent, the key priority must be to protect the standard of living of those who are worst off. After all, 30 percent of the population remains at risk of poverty. Protecting them has to be the key short-term priority. Longer-term, it must surely be an ambition of Greek policy to take a far more prominent role as a hub for Europe’s renewable energy transition.