Daniel Gros is director of the Institute for European Policymaking at Bocconi University, Milan.
Global Chains

Underperforming and Under Attack, Europe’s Economy Needs to Boost Performance

The continent’s economy is under pressure from the US and China. Instead of shielding it from competition, policymakers need to focus on strengthening output.

Arecent headline in The Economist proclaimed “Europe’s economy is under attack from all sides.” The subtitle then clarifies who the attackers are: “First Putin, now Xi. Next Trump?” But this view of the economy is false. The European economy is not being besieged. On the contrary, some of the so-called attacks represent opportunities, and the last thing Europe should do is to adopt the measures that the US and China are allegedly using against our continent.

Let us be clear. Vladimir Putin did attack the European economy using natural gas as a weapon to exploit Europe’s energy dependence on Moscow. And with some success, at first. The gas market went into panic mode in the summer of 2022. But by the end of the year, European natural gas prices already started to fall, and one year later, they were back to the level before Russia’s full-scale invasion of Ukraine.

„The net impact of the Inflation Reduction Act on European industry has probably
been positive. “

Daniel Gros

This successful defence of the European economy was due mostly to two factors. First of all, Europe’s industrial sector reduced their consumption of natural gas by about one-fifth as prices rose. Then came the availability of global supplies of LNG. By the summer of 2022, some LNG tankers en route to Asia were turning around mid-way and heading for Europe instead. The price mechanism worked. Natural gas is a fungible commodity and, after the initial panic period, a relatively small increase in LNG prices was sufficient to redirect enough global supply to Europe to offset the loss of Russian pipeline gas.

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