Larry Summers warns of stagnant inflation and recession in Europe

The US economy may not look like it’s in great shape, but at least it’s not Europe.

The United States has now seen GDP fell for two consecutive quarters, Consumer spending starts to skyrocketand most economists says a recession is likely to come next year.

“My best guess is that we will have a recession in the United States,” said US Treasury Secretary Larry Summers. speak on Thursday at Harvard University’s Institute of Politics as part of the Boston GlobeSummit 2022.

But as bad as things are going in the US, it’s nothing compared to what’s to come for Europe, Summers said, forecasting that inflation stagnates – a toxic combination of economic growth slow and persistent inflation – for that continent.

The responsibility for the coming crisis rests largely on the shoulders of Russian President Vladimir Putin and the energy crisis he has created for Europe, and European leaders, for leaving them so dependent. he.

“I am much more confident that there will be a recession and an element of stagnant inflation in Europe, as a result of what is to come, and as a result of the incredible hole they have created. out for themselves,” Summers said.

‘Vulnerability and uncertainty’

Despite the growing threat of a U.S. recession, Summers said he “would rather take America’s hand” than any other country’s, largely because of energy self-sufficiency. relative amount of the United States.

America has gradually reduce the amount of energy the country has imported since peaking in 2005. In 2019, the United States became net energy exporter, sells more energy abroad than it buys. Before the invasion of Ukraine, Russian oil only provided 8% petroleum imports from the United States, and with the protection of the country’s security strategic petroleum reserveThe United States could have been relatively easy completely banned Russia’s oil imports last March.

But Europe has never had that kind of security.

Russian imports account for about a quarter in the total energy use of the European Union by 2020, according to the World Economic Forum, and last year calculated 40% of the continent’s natural gas. Some individual countries are even more dependent on Russian energy, such as Germany, which before the war was dependent on Russia for 55% natural gas It is used to generate electricity and heat houses.

“Europe is completely dependent on fossil fuel imports,” Summers said, adding that the decision of some countries to become dependent on Putin and Russia for energy was “a hassle.”

“In a decision that in retrospect seems inexplicable, Germany has decided to make itself completely dependent on natural gas as the basis of its industry and the basis for heating its homes. , and then it decided to completely depend on Russia as a supplier of natural gas. gas,” he said.

That kind of dependency doesn’t exist in the US, Summers said, and could prove to be the difference between a severe recession and a mild recession.

“That’s a level of vulnerability and uncertainty that we don’t feel in the United States,” he added.

Inflation in Europe

Polls show some countries are more vulnerable in Europe, including Germanycould have been in a technical recession, with the whole euro area able to follow.

Despite increased uncertainty, European Central Bank analysts say they don’t expect Extreme stagnation inflation to hit the continent. But one return to 1970s-style stagflation—That economic growth slows significantly or even flattens out while prices continue to rise — would be a much worse scenario, and observers say that is increasingly likely. .

Last June, analysts from the Swiss investment bank UBS warned that Europe was on collision course for stagnant inflation, citing rising inflation and record interest rate hikes by the European Central Bank. And last month, The Wall Street JournalOur editorial board ran an opinion article titled “Europe ranks first in terms of inflation“The euro citation fell, industrial output slowed and energy prices rose.

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