Prophets of doom are wrong to underestimate the European economy

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“Not even a recession.” That’s the verdict on how Germany reacted when it suddenly had to go without Russian energy supplies last year – a dependency that had been cultivated by every German government over the past half century, for both commercial and political reasons.

The phrase is the title of a new study by economists Benjamin Moll, Moritz Schularick and Georg Zachmann, who compare the result for the German economy with forecasts made just after Vladimir Putin’s full-scale assault on Ukraine. The invasion has sparked what they call “the great German gas debate” between groups of disagreeing economists, with business lobbies and unions weighing whether the economic cost of ending Russian gas imports would be sustainable.

As Moll and her colleagues remind us, some of these predictions were apocalyptic: up to 12 percent loss of economic output and millions of people losing their jobs. Those who argued that the losses would be much smaller were rebuked by Chancellor Olaf Scholz himself for “irresponsible” theorizing.

Politically, the debate has been won by the doomsayers. The impressive speed with which Berlin has found replacement sources of gas and built emergency infrastructure makes it easy to forget that Germany has not chosen to do without Russian gas. This was a decision made by Putin limiting gas supplies before cutting them off altogether late last summer. And the EU as a whole has taken too long to agree on its still incomplete restrictions on energy imports from Russia.

But the truth was on the side of the optimists. (I had a dog in this fight: I discussed a week after the start of the war, Europe could and should go cold turkey on Russian gas imports). There hasn’t been a “cascade” of output cuts, bankruptcies and layoffs from the more energy-intensive industries to the broader economy. Despite a drop in March, manufacturing output remains higher than a year earlier.

The authors even point out that, according to German meteorological data, temperatures were no higher than the multi-year trend: if so, the idea that Germany was saved from a warm winter appears to be a myth. Gas left in storage by the end of the heating season means Germany never needed the Russian gas it bought before Putin turned off the taps. Cold turkey would have been perfectly doable.

The resilience of the German economy is something to celebrate. More important is to learn the right lesson. Why did the balance of opinion wrongly oppose a morally and geostrategically just policy for being prohibitively expensive?

The unforgivable response is the wish of some in corporate Germany that there would be no economic cost of resisting Putin. The most understandable answer, even if disappointing, involves intellectual errors. There is a general lack of appreciation in continental Europe – because this goes beyond Germany – of how adaptable market economies are. It is reinforced by mistaking challenges to existing businesses for threats to the economy at large, when in reality the creative destruction of non-adaptable firms is what makes market economies grow. Furthermore, European leaders have long internalized an outdated critique of the European economy as particularly inflexible and “sclerotic”.

The great German gas debate is just the most striking example of how Europeans underestimate their own economic adaptability. There are others. Few expected the post-pandemic recovery to drive employment rates to record highs, in stark contrast to lagging US and UK job markets. The EU’s taboo recovery fund is fueling growth in countries many had written off as perennial basket cases.

Unless we draw the right lessons from such examples, we will persist in an overly timid understanding of what European economies can offer. The political risks from such misdiagnosis are all around us, reinforced by the self-declaration of corporate incumbents.

Brussels was forced to do it slow down the pace of its decarbonisation policies. Germany AND France they both mounted rearguard actions against important laws. French President Emmanuel Macron has required a “regulatory breach”. German automakers want to delay the EU-UK trade deal penalizing electric cars with batteries manufactured outside Europe.

In all of these examples, the argument is that too much change is too hard. But as the German gas debate demonstrates, an economy is more flexible than the sum of its parts. While some companies are unwilling to change, dynamic markets make room for those that are willing and able to adapt. European economic policy should reinforce these market pressures, not protect them.

martin.sandbu@ft.com