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Surging energy prices slam Europe amid war concerns

Gases are released from a flare stack at an oil refinery operated by Rosneft in Germany this month. (Krisztian Bocsi/Bloomberg)
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PARIS — Surging energy prices are posing a growing problem for Europeans economies, as new figures showed on Friday that inflation in the euro zone increased to 7.5 percent this month, the highest level on record, while economic growth weakened to 0.2 percent.

Inflation was a key concern in Europe even before the war in Ukraine, as its economies struggled to weather supply chain disruptions and the impact of coronavirus restrictions. Recent European sanctions against Russia and rising tensions over fossil fuel imports have further amplified the concerns by sending energy prices spiraling upward.

“Higher energy prices are becoming clearly unsustainable,” said Simone Tagliapietra, a senior fellow at Bruegel, a think tank based in Brussels. “It is a main driver of inflation in Europe.”

Pressure is unlikely to fade. On Wednesday, Russia effectively shut off the supply of natural gas to Poland and Bulgaria, as the Kremlin warned that other countries could face the same fate.

Such threats, combined with a worsening economic outlook, could force European leaders to adopt less risky sanctions against Russia going forward. Inflation is now substantially higher than the European Central Bank target of about 2 percent.

Why has Russia halted gas supplies to Bulgaria and Poland?

The latest figures compound concerns over “stagflation,” which is a stalling of economic growth that is accompanied by rising prices. Consumer confidence has tanked in Europe, as wages have not kept pace with the rapid rise in prices.

According to Eurostat, the E.U. statistical office, the adjusted GDP in the euro zone was only 0.2 percent higher in the first quarter of this year than over the previous quarter. E.U. growth was slightly higher, at 0.4 percent, but also down from last quarter.

The euro zone is composed of 19 countries that share the euro as their currency. It is distinct from the European Union, a bloc of 27 member states. Among the major E.U. economies, Italy was particularly impacted, with its economy contracting in the first quarter. Growth stalled in France, while Germany did slightly better.

But the data only captured the initial period of the war, while surging energy prices are expected to hit Germany, the largest economy in the European Union, particularly hard in the coming months.

“These are huge increases in people’s bills, which are going to absolutely have an impact on their standard of living, and it is going to hit poorer households much more heavily than wealthier households,” said Andrew Kenningham, chief Europe economist at Capital Economics. “Western Europe is going to suffer quite a lot from the higher energy prices,” he added.

In the recent French presidential election, the right wing gained substantial traction with promises to soften the blow of inflation and to weaken sanctions against Russia, even though it failed to win the vote last weekend.

American economy shrinks during first three months of year

For now, the European Union appears committed to weaning itself from Russian energy, with a coal embargo already in place. An oil embargo is still under debate, and Berlin signaled this week that it might back such a move.

But some analysts expect the bloc to try to avoid a total immediate ban and to instead opt for measures that would be easier and quicker to implement. For instance, the European Union could impose tariffs or a price ceiling on Russian oil, which could help to deflect the negative economic repercussions onto Russia. “Tariffs would be ultimately paid by the Russians, not by the Europeans,” said Tagliapietra.

Europe is not the only region where economic growth is hampered by the effects of the pandemic and concerns over the fallout of the war in Ukraine. In the United States, the economy unexpectedly shrank 1.4 percent in the first three months of 2022 after more than a year of rapid growth, according to the Bureau of Economic Analysis.

The was the first slowdown in the United States since the spring of 2020, marking a reversal from the torrid pace that followed intense fiscal and monetary stimulus in the wake of the coronavirus. Last year, the U.S. economy grew 5.7 percent, the fastest annual clip since 1984. European economies were estimated to have grown 5.2 percent last year.

Abha Bhattarai contributed to this report.