How the German economy would be hit by Russian gas stop

Halting Russian gas supplies to Germany would cost Europe's largest economy 1.5 percent of its GDP in 2022, the International Monetary Fund said Wednesday, as concerns mount that Moscow will further squeeze supply.

A gas flame on a stove.
A gas flame on a stove. Germany is struggling with a huge energy crisis. Photo: picture alliance/dpa | Marijan Murat

This year’s loss would be followed by a negative impact of 2.7 percent in 2023 and a 0.4-percent reduction in 2024, according to an IMF forecast where gas deliveries were assumed to have stopped on June 1.

A potential shutoff “could cause sizeable reductions in German economic activity and increases in inflation”, the IMF said in a statement.

Supplies to Germany from Russia are currently at zero as the Nord Stream pipeline undergoes maintenance, after Moscow initially slashed deliveries by 60 percent in mid-June citing a delayed gas turbine repair.

Berlin has rejected Gazprom’s turbine explanation and believes Russia is squeezing supplies in retaliation for Western sanctions on Moscow over its invasion of Ukraine.

Works on the pipeline are due to finish Thursday, with officials watching closely to see if and at what levels supplies resume.

The risks for the economy from a complete shutdown, as well as a weak global economy and widespread supply bottlenecks “loom large”, the IMF said.

READ ALSO: Putin ‘threatens Germany with further gas reductions’

The same headwinds meant that German “growth is likely to be muted in the coming quarters”, it said.

In its standard forecast, the IMF sees the German economy growing by 1.2 percent in 2022 and just 0.8 percent in 2023.

Meanwhile, the rising price of energy associated with the gas supply reductions already seen also meant that inflation is “likely to remain elevated in the next two years”, the IMF said.

The IMF forecast inflation in Germany to sit at 7.7 percent in 2022 and 4.8 percent in 2023.

A complete Russian gas shut-off could potentially increase those figures by up to two percentage points in 2022 and 3.5 percentage points in 2023 in an “extreme” scenario where Europe struggles to source alternative supplies, it said.

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Germany plans to slash VAT on gas bills to seven percent

The EU Commission has blocked plans to dispense with VAT on gas bills. Instead, Germany will drop the tax rate from 19 to just seven percent.

Germany plans to slash VAT on gas bills to seven percent

Following the EU Commission’s rejection of a simple VAT exemption for the new gas levy, the German government has announced plans to slash the VAT rate to seven percent to ease the pressure of rising energy costs on households. 

The step will relieve gas customers significantly more than they were burdened by the state gas levy, Chancellor Olaf Scholz said on Thursday.

The SPD politician said he expected the companies to pass the tax reduction on to consumers directly. “This is another step towards relieving the burden,” he added.

He also reiterated a pledge to deliver further relief measures for households in autumn. 

“The question of social justice is decisive in order for the country to remain united in this crisis,” Scholz said.

To ease the weight of the forthcoming gas levy, the government had originally wanted to remove the obligation to pay 19 percent VAT entirely.

However, Brussels confirmed that scrapping VAT completely would be impossible under the EU’s strict competition laws.

“In principle, there is no possibility of an exemption from this tax,” Commission spokesman Danny Ferry told Tagesschau on Wednesday. “We are in very close contact with the German government to find solutions here that will benefit people in Germany and have the same effect in the end.”

READ ALSO: What is Germany’s new gas ‘tax’ and who will pay it?

Earlier in the week, Trading Hub Europe had revealed that the gas levy would be set at 2.419 cents per kilowatt hour of energy. According to initial estimates, a one-person household with an annual consumption of 5,000 kilowatt hours would see their bills rise by €121 euros without VAT due to the levy.

For a family household with an annual consumption of 20,000 kilowatt hours, the additional costs without VAT would be around €484 per year.

With the full amount of VAT included, the real cost of the levy would have risen to 2.879 per kilowatt hour of energy.

The tax cut will run until the end of March 2024, the same time the gas levy is due to expire.

Criticism of the levy

The levy is intended to compensate gas suppliers for their additional costs in light of Russia’s war on Ukraine and subsequent weaponisation of the energy crisis.

So far this year, German gas giant Uniper has posted around €12.3 billion in losses due to the scarcity of cheap Russian gas and the need to top up gas supplies elsewhere at a premium.

The gas levy is part of a rescue package for these struggling energy companies, but the plan has been criticised for not spreading the burden more evenly across society.

READ ALSO: EXPLAINED: How much will Germany’s gas levy cost you?

According to Professor Martin Booms, director of the Academy for Social Ethics and Public Culture in Bonn, a fairer way to bail out the gas firms would be through taxation.

The levy is intended to prevent the “systemic collapse of the gas supply”, Booms told WDR. This concerns the whole of society – not just gas customers “who happen to be unlucky enough to be in a rented flat that is heated with gas”.

For this reason, Booms considers taxation to be a more just solution.

“If everyone participates – namely by paying taxes – the burden is lower for each individual,” he said. “That is a very big advantage. Especially for those who are hit the hardest.”