Shouting fire in theatre is something not done lightly, unless there actually is a fire in the theatre. For Europe’s economy, I think it is time to shout. What we are about to see this autumn and winter is not your standard recession, but the kind of shock that will shape our memories and narratives for the rest of the century.
Last week, I saw a projection of a 5% GDP shock for Germany, based on energy futures prices. In case of an ongoing stop to gas flows and a cold winter, the recession could be worse. Gazprom already announced an indefinite stop of flows through Nord Stream 1, apparently because of an oil leak.
The main quality of the ongoing recession is not so much its measured impact on GDP – though it will probably be substantial. It is the fact that we have exhausted our policy options. Monetary policy in the last decade went way overboard with large-scale quantitative easing and its subsequent refusal to reverse it. The west reacted to the pandemic with the biggest fiscal stimulus package in history.
Economists keep on telling us that we need fiscal expansion in a recession. I agree with that. But what is different this century from the previous one is that we keep on doubling down with stimulus and monetary easing. And we never grow out of the debt.
In my latest column, I write about why Germany's recession is not only unusually severe, but different in kind.https://t.co/miKRJoRpN8
— Wolfgang Munchau (@EuroBriefing) September 5, 2022