The fund predicted that if liquefied natural gas was not shared and prices were artificially held down, any action by Russia to cut off supplies to Europe would trigger economic contractions of more than 5% next year in the Czech Republic, Hungary, Slovakia and Italy. Forty-two percent of EU gas imports come from Russia, according to the IMF. Russian flows provide more than 50 percent of natural gas imports for eight EU countries. A Russian gas embargo is increasingly likely after its invasion of Ukraine. Moscow has cut deliveries through the Nord Stream 1 pipeline, which runs from Russia under the Baltic Sea to Germany, by 60 percent in June. Fears are mounting that it will not switch supplies back on this Thursday after scheduled maintenance. European gas consumption has already fallen by 9 percent this year, shedding 0.2 percentage points from EU GDP, according to the IMF, but its simulations warned that without mitigation, the pain could get much worse in winter . Brussels is next week to tell member states to cut consumption “immediately”. The IMF model suggested that the European economy could manage with Russia cutting supplies by 70%, but there would be shortfalls if there was a full embargo on exports. The hardest-hit European countries will only have access to supplies between 15 and 40 percent below their needs. Hungary, Slovakia and the Czech Republic had very high use of Russian gas, while Italy is vulnerable due to high gas use in electricity generation, the fund said. The worst effects would occur if natural gas were not shared between European countries, both because of natural bottlenecks in supply and storage by individual nations and if households were protected from price increases by governments and thus their use was not limited during during the winter for heating. The fund recommended that if governments wanted to protect vulnerable households from rising costs, they should offer them flat subsidies or income increases. This would keep people motivated to cut back on gas use. If Europe showed solidarity among nations and integrated its market into global supplies of liquid natural gas, or LNG, Russia could not push the EU into a severe recession this winter. In the most optimistic scenario, a Russian gas embargo would reduce EU GDP by just 0.4 percent with only Hungary suffering a contraction of more than 1 percent. “If EU markets remain integrated both internally and with the rest of the world, ours [modelling] suggests that the global LNG market would help offset the economic impact,” according to IMF economists from its European and commodity directorates. “This is a moment for Europe to build on the decisive action and solidarity shown during the pandemic to face the challenging moment it faces today.” The European Commission will next week provide countries with voluntary gas reduction targets amid fears that the necessary solidarity among member states is lacking. The worry is that countries like Germany will be faced with the choice of shutting down much of its industry or allowing households in neighboring countries to freeze this winter. The IMF’s modeling is designed to highlight the benefits of taking action now to share supplies.
