The Federal Reserve has embarked on an aggressive campaign to raise interest rates as it tries to tame the most rapid inflation in decades, an effort the central bank sees as necessary to restore price stability in the United States.
But what the Fed does at home reverberates across the globe, and its actions are raising the risks of a global recession while causing economic and financial pain in many developing countries.
Other central banks in advanced economies, from Australia to the eurozone, are also lifting rates rapidly to fight their inflation. And as the Fed’s higher interest rates attract money to the United States — pumping up the value of the dollar — emerging-market economies are being forced to raise their own borrowing costs to try to stabilize their currencies to the extent possible.
Altogether, it is a worldwide push toward more expensive money unlike anything seen before in the 21st century, one that is likely to have serious ramifications.
warned the damage could be particularly acute in poorer nations. Developing economies had already been dealing with a cost-of-living crisis because of soaring food and fuel prices, and now their American imports are growing steadily more expensive as the dollar marches higher.
The Fed’s moves have spurred market volatility and worries about financial stability, as higher rates elevate the value of the U.S. dollar, making it harder for emerging-market borrowers to pay back their dollar-denominated debt.
It is a recipe for globe-spanning turmoil and even recession. Despite that, the Fed is poised to continue raising interest rates. That’s because the Fed, like central banks around the world, is in charge of domestic economy goals: It’s supposed to keep inflation slow and steady while fostering maximum employment. While occasionally called “central banker to the world” because of the dollar’s foremost position, the Fed goes about its day-to-day business with its eye squarely on America.
loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
The threat facing the global economy — including the Fed’s role in it — is expected to dominate the conversation next week as economists and government officials convene in Washington for the annual meeting of the International Monetary Fund and World Bank.
In a speech at Georgetown University on Thursday, Kristalina Georgieva, the managing director of the I.M.F., offered a grim assessment of the world economy and the tightrope that central banks are walking.
“Not tightening enough would cause inflation to become de-anchored and entrenched — which would require future interest rates to be much higher and more sustained, causing massive harm on growth and massive harm on people,” Ms. Georgieva said. “On the other hand, tightening monetary policy too much and too fast — and doing so in a synchronized manner across countries — could push many economies into prolonged recession.”
Noting that inflation remains stubbornly high and broad-based, she added: “Central banks have to continue to respond.”
The World Bank warned last month that simultaneous interest-rate increases around the world could trigger a global recession next year, causing financial crises in developing economies. It urged central banks in advanced economies to be mindful of the cross-border “spillover effects.”
“To achieve low inflation rates, currency stability and faster growth, policymakers could shift their focus from reducing consumption to boosting production,” David Malpass, the World Bank president, said.
Trade and Development Report said.
So far, major central banks have shown little appetite for stopping their inflation-busting campaigns. The Fed, which has made five rate increases this year, has signaled that it plans to raise borrowing costs even higher. Most officials expect to increase rates by at least another 1.25 percentage points this year, taking the policy rate to a range of 4.25 to 4.5 percent from the current 3 to 3.25 percent.
Even economies that are facing a pronounced slowdown have been lifting borrowing costs. The European Central Bank raised rates three-quarters of a point last month, even though the continent is approaching a dark winter of slowing growth and crushing energy costs.
according to the World Bank. Food costs in particular have driven millions further into extreme poverty, exacerbating hunger and malnutrition. As the dollar surge makes a range of imports pricier for emerging markets, that situation could worsen, even as the possibility of financial upheaval increases.
“Low-income developing countries in particular face serious risks from food insecurity and debt distress,” Ngozi Okonjo-Iweala, director-general of the World Trade Organization, said during a news conference this week.
Understand Inflation and How It Affects You
In Africa, officials have been urging the I.M.F. and Group of 20 nations to provide more emergency assistance and debt relief amid inflation and rising interest rates.
“This unprecedented shock further destabilizes the weakest economies and makes their need for liquidity even more pressing, to mitigate the effects of widespread inflation and to support the most vulnerable households and social strata, especially young people and women,” Macky Sall, chairman of the African Union, told leaders at the United Nations General Assembly in September.
To be sure, central bankers in big developed economies like the United States are aware that they are barreling over other economies with their policies. And although they are focused on domestic goals, a severe weakening abroad could pave the way for less aggressive policy because of its implications for their own economic outlooks.
Waning demand from abroad could ease pressure on supply chains and reduce prices. If central bankers decide that such a chain reaction is likely to weigh on their own business activity and inflation, it may give them more room to slow their policy changes.
“The global tightening cycle is something that the Fed has to take into account,” said Megan Greene, global chief economist for the Kroll consulting firm. “They’re interested in what is going on in the rest of the world, inasmuch as it affects their ability to achieve their targets.”
his statement.
But many global economic officials — including those at the Fed — remain focused on very high inflation. Investors expect them to make another large rate increase when they meet on Nov. 1-2.
“We’re very attentive” to international spillovers to both emerging markets and advanced economies, Lisa D. Cook, a Fed governor, said during a question-and-answer session on Thursday. “But our mandate is domestic. So we’re very focused on inflation as it evolves in this country.”
Raghuram Rajan, a former head of India’s central bank and now an economist at the University of Chicago, has in the past pushed the Fed to take foreign conditions into account as it sets policy. He still thinks that measures like bond-buying should be pursued with an eye on global spillovers.
But amid high inflation, he said, central banks are required to pay attention to their own mandates to achieve price stability — even if that makes for a stronger dollar, weaker currencies and more pain abroad.
“The basic problem is that the world of monetary policy dances to the Fed’s tune,” Mr. Rajan said, later adding: “This is a problem with no easy solutions.”
The Federal Reserve’s determination to crush inflation at home by raising interest rates is inflicting profound pain in other countries — pushing up prices, ballooning the size of debt payments and increasing the risk of a deep recession.
Those interest rate increases are pumping up the value of the dollar — the go-to currency for much of the world’s trade and transactions — and causing economic turmoil in both rich and poor nations. In Britain and across much of the European continent, the dollar’s acceleration is helping feed stinging inflation.
On Monday, the British pound touched a record low against the dollar as investors balked at a government tax cut and spending plan. And China, which tightly controls its currency, fixed the renminbi at its lowest level in two years while taking steps to manage its decline.
Somalia, where the risk of starvation already lurks, the strong dollar is pushing up the price of imported food, fuel and medicine. The strong dollar is nudging debt-ridden Argentina, Egypt and Kenya closer to default and threatening to discourage foreign investment in emerging markets like India and South Korea.
the International Monetary Fund.
Japanese yen has reached a decades-long high. The euro, used by 19 nations across Europe, reached 1-to-1 parity with the dollar in June for the first time since 2002. The dollar is clobbering other currencies as well, including the Brazilian real, the South Korean won and the Tunisian dinar.
the economic outlook in the United States, however cloudy, is still better than in most other regions.
loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
A fragile currency can sometimes work as “a buffering mechanism,” causing nations to import less and export more, Mr. Prasad said. But today, many “are not seeing the benefits of stronger growth.”
Still, they must pay more for essential imports like oil, wheat or pharmaceuticals as well as for loan bills due from billion-dollar debts.
debt crisis in Latin America in the 1980s.
The situation is particularly fraught because so many countries ran up above-average debts to deal with the fallout from the pandemic. And now they are facing renewed pressure to offer public support as food and energy prices soar.
Indonesia this month, thousands of protesters, angry over a 30 percent price increase on subsidized fuel, clashed with the police. In Tunisia, a shortage of subsidized food items like sugar, coffee, flour and eggs has shuttered cafes and emptied market shelves.
New research on the impact of a strong dollar on emerging nations found that it drags down economic progress across the board.
“You can see these very pronounced negative effects of a stronger dollar,” said Maurice Obstfeld, an economics professor at the University of California, Berkeley, and an author of the study.
central banks feel pressure to raise interest rates to bolster their currencies and prevent import prices from skyrocketing. Last week, Argentina, the Philippines, Brazil, Indonesia, South Africa, the United Arab Emirates, Sweden, Switzerland, Saudi Arabia, Britain and Norway raised interest rates.
World Bank warned this month that simultaneous interest rate increases are pushing the world toward a recession and developing nations toward a string of financial crises that would inflict “lasting harm.”
Clearly, the Fed’s mandate is to look after the American economy, but some economists and foreign policymakers argue it should pay more attention to the fallout its decisions have on the rest of the world.
In 1998, Alan Greenspan, a five-term Fed chair, argued that “it is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress.”
The United States is now facing a slowing economy, but the essential dilemma is the same.
“Central banks have purely domestic mandates,” said Mr. Obstfeld, the U.C. Berkeley economist, but financial and trade globalization have made economies more interdependent than they have ever been and so closer cooperation is needed. “I don’t think central banks can have the luxury of not thinking about what’s happening abroad.”
Flávia Milhorance contributed reporting from Rio de Janeiro.
Russia’s invasion of Ukraine and the continuing effects of the pandemic have hobbled countries around the globe, but the relentless series of crises has hit Europe the hardest, causing the steepest jump in energy prices, some of the highest inflation rates and the biggest risk of recession.
The fallout from the war is menacing the continent with what some fear could become its most challenging economic and financial crisis in decades.
While growth is slowing worldwide, “in Europe it’s altogether more serious because it’s driven by a more fundamental deterioration,” said Neil Shearing, group chief economist at Capital Economics. Real incomes and living standards are falling, he added. “Europe and Britain are just worse off.”
eightfold increase in natural gas prices since the war began presents a historic threat to Europe’s industrial might, living standards, and social peace and cohesion. Plans for factory closings, rolling blackouts and rationing are being drawn up in case of severe shortages this winter.
China, a powerful engine of global growth and a major market for European exports like cars, machinery and food, is facing its own set of problems. Beijing’s policy of continuing to freeze all activity during Covid-19 outbreaks has repeatedly paralyzed large swaths of the economy and added to worldwide supply chain disruptions. In the last few weeks alone, dozens of cities and more than 300 million people have been under full or partial lockdowns. Extreme heat and drought have hamstrung hydropower generation, forcing additional factory closings and rolling blackouts.
refusing to pay their mortgages because they have lost confidence that developers will ever deliver their unfinished housing units. Trade with the rest of the world took a hit in August, and overall economic growth, although likely to outrun rates in the United States and Europe, looks as if it will slip to its slowest pace in a decade this year. The prospect has prompted China’s central bank to cut interest rates in hopes of stimulating the economy.
“The global economy is undoubtedly slowing,” said Gregory Daco, chief economist at the global consulting firm EY- Parthenon,but it’s “happening at different speeds.”
In other parts of the world, countries that are able to supply vital materials and goods — particularly energy producers in the Middle East and North Africa — are seeing windfall gains.
And India and Indonesia are growing at unexpectedly fast paces as domestic demand increases and multinational companies look to vary their supply chains. Vietnam, too, is benefiting as manufacturers switch operations to its shores.
head-spinning energy bills this winter ratcheted up this week after Gazprom, Russia’s state-owned energy company, declared it would not resume the flow of natural gas through its Nord Stream 1 pipeline until Europe lifted Ukraine-related sanctions.
Daily average electricity prices in Western Europe have reached record levels, according to Rystad Energy, surging past 600 euros ($599) per megawatt-hour in Germany and €700 in France, with peak-hour rates as high as €1,500.
In the Czech Republic, roughly 70,000 angry protesters, many with links to far-right groups, gathered in Wenceslas Square in Prague this past weekend to demonstrate against soaring energy bills.
The German, French and Finnish governments have already stepped in to save domestic power companies from bankruptcy. Even so, Uniper, which is based in Germany and one of Europe’s largest natural gas buyers and suppliers, said last week that it was losing more than €100 million a day because of the rise in prices.
International Monetary Fund this week to issue a proposal to reform the European Union’s framework for government public spending and deficits.
caps blunt the incentive to reduce energy consumption — the chief goal in a world of shortages.
Central banks in the West are expected to keep raising interest rates to make borrowing more expensive and force down inflation. On Thursday, the European Central Bank raised interest rates by three-quarters of a point, matching its biggest increase ever. The U.S. Federal Reserve is likely to do the same when it meets this month. The Bank of England has taken a similar position.
The worry is that the vigorous push to bring down prices will plunge economies into recessions. Higher interest rates alone won’t bring down the price of oil and gas — except by crashing economies so much that demand is severely reduced. Many analysts are already predicting a recession in Germany, Italy and the rest of the eurozone before the end of the year. For poor and emerging countries, higher interest rates mean more debt and less money to spend on the most vulnerable.
“I think we’re living through the biggest development disaster in history, with more people being pushed more quickly into dire poverty than has every happened before,” said Mr. Goldin, the Oxford professor. “It’s a particularly perilous time for the world economy.”
At the Saku beer factory in Estonia, the mammoth copper brew kettles sit side by side like household sink plungers stored on a shelf in a manor house for giants. The brewery has been around for 200 years, but this is the first time in memory that the company has planned two price rises — of 10 percent each — in a single year.
And even that double-barreled increase won’t be enough to cover the brewery’s skyrocketing costs, said Jaan Harms, a board member at Saku.
“We are in an environment of increasing inflation, and, of course, energy is by far the main driver,” Mr. Harms said. When its energy contracts run out at the end of the summer, the company’s gas costs will rise 400 percent and the electricity bills will double, he said. And because the providers of every product and service they buy are also dealing with soaring fuel prices, those costs are rising as well.
estimates released Wednesday by the European Commission’s statistical office.
3 percent — a level that at the time set off alarms for reaching a decade-long high, but that would now be greeted with relief.
European Central Bank is scheduled to meet, is likely to reinforce the view that interest rates need to be raised again to curb inflation, despite the risk of recession.
Speaking at an economic summit near Jackson, Wyo., over the weekend, Isabel Schnabel, a member of the bank’s executive board, warned that inflation was more persistent than expected and said the bank needed to act “forcefully.”
“Inflation volatility has surged beyond the levels seen during the 1970s,” Ms. Schnabel said, a result of the coronavirus pandemic, the war in Ukraine and climate change that is causing widespread drought, wildfires and other extreme weather.
nearly double in October, making it difficult for millions of people to heat their homes this winter.
inflation hit 8.5 percent in July, still high but a decline from the 9.1 percent registered in June as prices for gas, airfares, used cars and hotel rooms fell.
agreement with the European Union to temporarily cap electricity prices at €40 per megawatt-hour. Professors at the Instituto Superior de Engenharia in Lisbon and at Complutense University in Madrid calculated that prices were 15 to 18 percent lower than they would have been without the cap.
Elsewhere in Europe, prices for electricity in August set eye-popping records, according to Rystad Energy, a consultancy in Norway, with an average price of €547 per megawatt-hour.
glass bottles from its Russian supplier after the outbreak of the war in Ukraine. Since then, wholesale bottle prices have shot up 20 to 80 percent.
solar panels atop its warehouses and brewery this summer, and it now boasts the country’s largest industrial rooftop solar park. In addition, the thermostats in offices will be lowered by 2 degrees this winter.
The energy crisis has also spurred the brewery to reconsider a proposal it had shelved as too expensive: the construction of a water treatment plant. The energy savings previously were not large enough to justify the cost. “But we are now thinking of doing this because the rules of the game have changed so much,” Mr. Harms said.
Saku’s initial price increase has gone through, but so far, there has not been a drop in sales. Summer vacation is prime season, Mr. Harms said, and when the weather is warm in this northern European country, people spend and drink.
But like the rest of Europe, Estonia is preparing for a dark winter.
In the 19 countries using the euro currency, inflation rose 0.2% from a record high 8.9% in July, according to the EU statistics agency Eurostat.
Inflation in the European countries using the euro currency hit another record in August, fueled by soaring energy prices mainly driven by Russia’s war in Ukraine.
Annual inflation in the eurozone’s 19 countries rose to 9.1%, up from 8.9% in July, according to the latest figures released Wednesday by the European Union statistics agency Eurostat.
Inflation is at the highest levels since record-keeping for the euro began in 1997. The latest figures add pressure on European Central Bank officials to continue raising interest rates, which can tame inflation, but also stifle economic growth.
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Prices are rising in many other countries as Russia’s war in Ukraine grinds on, triggering unprecedented increases for energy and food that are squeezing household finances. Disruptions to global manufacturing supply chains caused by the coronavirus pandemic have also played a role in pushing up prices. This summer has seen a wave of protests and strikes around the world by workers pushing for higher wages and people fed up with the high cost of living.
Inflation in Britain, Denmark and Norway, which have their own currencies, is also surging, according to official data released earlier this month. U.K. residents face an 80% jump in annual household energy bills, regulators warned last week.
Inflation is also high in the U.S., adding urgency for the Fed to keep raising interest rates. Prices were up 8.5% in July compared with a year earlier, thought that was lower than 9.1% in June.
In the eurozone, energy prices surged 38.3%, though the rate was slightly lower than the previous month, while food prices rose at a faster pace of 10.6%, according to Eurostat’s preliminary estimate. The agency’s final report, released about two weeks later, is usually unchanged.
Russia, a major energy producer, has been reducing the flow of gas to European countries that have sided with Ukraine in the war, a move that’s wreaked havoc with prices.
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At the same time, nearly half of Europe has been afflicted by an unprecedented drought that’s hurting farm economies, crimping production of staple crops like corn, and driving up food prices.
Price rises for manufactured goods like clothing, appliances, cars, computers and books accelerated to 5%, and the cost of services rose 3.8%. The euro’s weakness is another factor keeping prices high.
The currency has slipped below parity with the dollar, which can make imported goods more costly, particularly oil, which is priced in dollars.
Energy prices in the eurozone surged by 39.7% this month, while prices for food, alcohol and tobacco rose by 9.8%.
Inflation in the European countries using the euro currency shot up to another record in July, pushed by higher energy prices fueled by Russia’s war in Ukraine, but the economy managed better-than-expected, if meager, growth in the second quarter.
Annual inflation in the eurozone’s 19 countries rose to 8.9% in July, an increase from 8.6% in June, according to numbers published Friday by the European Union statistics agency.
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For months, inflation has been running at its highest levels since 1997, when record-keeping for the euro began, leading the European Central Bank to raise interest rates last week for the first time in 11 years to tamp down prices.
The euro-area economy managed to expand by 0.7% from April through July over the previous quarter, contrasting with the contraction in the United States, where fears are growing of a recession. The outlook is just as gloomy for Europe.
Analysts say the economic growth tied to a rebound in tourism could be the last glimmer of upbeat news, with inflation, rising interest rates and a worsening energy crisis fueled by the war expected to push the euro area into recession later this year.
“This is as likely to be as good as it will get for the eurozone for the foreseeable future,” Andrew Kenningham, chief Europe economist for Capital Economics, wrote in an analyst note.
Growth already has stagnated in Germany, Europe’s traditional economic engine, after being hit with a series of cuts in Russian natural gas used for industry. France avoided fears of a recession by posting modest 0.5% growth in the second quarter, while Italy and Spain exceeded expectations with 1% and 1.1% expansions, respectively.
Energy prices, meanwhile, surged in the eurozone by 39.7% this month, only slightly lower than June due to gas supply concerns. Prices for food, alcohol and tobacco rose by 9.8%, faster than the increase posted last month because of higher transport costs, shortages and uncertainty around Ukrainian supply.
“Another ugly inflation reading for July,” said Bert Colijn, senior eurozone economist for ING bank, adding that there was “no imminent sign of relief.”
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The U.S. is also facing high inflation, clocking in at 40-year highs, but unlike Europe, has already seen its economy shrink for two straight quarters. At the same time, the job market is stronger than before the COVID-19 pandemic, and most economists, including Federal Reserve Chair Jerome Powell, have said they don’t think the economy is in recession.
Many, however, increasingly expect an economic downturn in the U.S. to begin later this year or next, much like in Europe.
Europe’s risk is largely tied to its reliance on Russian energy, with Moscow throttling down flows of natural gas that power factories, generate electricity and heat homes in the winter.
More reductions this week through a major pipeline to Germany, Nord Stream 1, have heightened fears that the Kremlin may cut off supplies completely. That would force rationing for energy-intensive industries and spike already record-high levels of inflation driven by soaring energy prices, threatening to plunge the 27-nation bloc into recession.
While European Union governments approved a measure this week to reduce gas use by 15% and have passed tax cuts and subsidies to ease a cost-of-living crisis, Europe is at the mercy of Russia and the weather.
A cold winter, when natural gas demand soars, could draw down storage levels that governments are now scrambling to fill but has been made infinitely harder by Russia’s cuts.
While the European Central Bank has begun raising rates to cool inflation and expects another bump in September, it had trailed other central banks like the Fed and the Bank of England in making credit more expensive, fearing the outsize impact of soaring energy prices tied to the war.
Pipe systems of the Nord Stream 1 Baltic Sea pipeline in Lubmin, Germany.Credit…Jens Buettner/DPA, via Associated Press
Russia’s decision to restart the flow of natural gas through a vital pipeline on Thursday brought a moment of relief to Germany, which uses the fuel to power its most important industries and heat half its homes. But it is unlikely to be much more than that.
President Vladimir V. Putin of Russia has made clear that he intends to use his country’s energy exports as a cudgel, and even a weapon, to punish and divide European leaders — loosening or tightening the taps as it suits him and his war aims in Ukraine.
He is counting on that uncertainty to impose heavy economic and political costs on European leaders. Those elected officials are under growing pressure to bring down energy prices and avoid gas rationing that might force factories and government buildings to close and require people to lower thermostats in winter. Leaders in some nations, like Spain and Greece, are already chafing at a European Union plan to have every member country cut its gas use, arguing that they are already much less reliant on Russia than Germany.
Many questions remain about the stability of the gas supplies that began flowing again on the pipeline, the Nord Stream 1, which directly connects Russia and Germany. But, analysts said, it is clear that Europe, and Germany in particular, could remain on edge for months about whether there will be enough energy.
In the weeks leading up to the 10-day shutdown for planned maintenance that just ended, Gazprom, Russia’s state-owned energy monopoly, had already reduced flows through the pipeline to 40 percent of its capacity. Analysts have warned that such levels will not be enough to prevent an energy crisis next winter.
“The resumed gas supplies from Russia via Nord Stream 1 are no reason to give the all clear,” said Siegfried Russwurm, president of the Federation of German Industries. “It remains to be seen whether gas will actually flow in the long term and in the amount contractually agreed.”
He added, “Germany and Europe must not become the plaything of blackmailing Russian politics.”
On Wednesday, Ursula von der Leyen, president of the European Commission, who previously held senior positions in the German government, introduced a proposal for European Union members to reduce their gas consumption 15 percent to prepare for uncertain and possibly unsteady supply before the winter.
Before Russian forces invaded Ukraine in late February, Germany got 55 percent of its natural gas from Russia. Few E.U. countries come close to that level of dependence — a fact that is starting to fracture European unity on Russia and energy policy.
Many Europeans already think Germany, the bloc’s largest economy, is a wealthy neighbor that is not always eager to help weaker countries. That characteristic was most recently highlighted by the country’s attitude toward helping Greece, Spain and other countries that use the euro when they were struggling financially about a decade ago.
Now, some of those very same countries are signaling that they are unwilling to make their businesses and people endure more suffering when energy prices are soaring to help bail Germany out of its dependence on Russia.
The Spanish energy minister, Teresa Ribera, said on Thursday that her country would encourage but not require its citizens to cut gas use. “Unlike other countries, we Spaniards have not lived beyond our means from an energy point of view,” she told El País newspaper, echoing the description some German ministers used during the eurozone crisis.
The Greek government has also pushed back against the European Union’s call for a 15 percent cut in gas use. Although Greece relies on Russia to meet 40 percent of its gas needs, its supplies have not been cut.
Stoking such divisions is at the heart of Mr. Putin’s strategy of cutting off gas deliveries through pipelines that cross Ukraine and Poland while limiting the volume of natural gas flowing under the Baltic Sea through the 760-mile Nord Stream 1 pipeline.
“The entire European energy system is going through a crisis, and even with today’s restart of Nord Stream 1, the region is in a tight position,” Rystad Energy, a research firm, wrote in a market note on Thursday.
Mr. Putin appears to be drawing out the uncertainty about whether and for how long the gas will keep flowing to Germany to try to maximize his leverage as long as he can.
Hours before the flow of gas resumed on Thursday, Gazprom said in a statement that it still had not received documents from Siemens for a turbine that was sent to Canada for repairs. The papers are necessary for the part to be returned, the company said, adding that the engine, and others like it, had “a direct influence on the operational safety of the Nord Stream pipeline.”
Robert Habeck, Germany’s economy minister and vice chancellor, rejected a statement from Gazprom earlier in the day that the resumption of gas through the pipeline was proof that the Russian company was a “guarantor” of energy security in Europe.
“The opposite is the case,” Mr. Habeck said. “It is proving to be a factor of uncertainty.”
The German government has already activated the second of three steps of its gas emergency plan. Included was the swapping of gas-fired power plants with ones that burn coal, which releases many more greenhouse gases into the atmosphere than burning gas. The third and final step would allow the government to ration supplies.
Ursula von der Leyen, the European Commission president, introduced a proposal on Wednesday for European Union members to reduce gas consumption.Credit…Virginia Mayo/Associated Press
On Thursday, Mr. Habeck announced additional measures aimed at increasing the country’s gas reserves, like conservation incentives that include more ambitious targets for the storage facilities and reactivating power plants that burn lignite — the dirtiest fossil fuel.
He said the government was also weighing strict limits on how people could use gas. For example, the government might forbid people to heat private swimming pools with gas. When pressed on how such measures would be enforced, Mr. Habeck drew a parallel to bans on holding private gatherings during the initial lockdowns of the coronavirus pandemic, which were rarely enforced — unless neighbors alerted the authorities.
“I do not think that the police will visit every homeowner. That is not our intention and not the country I want to live in,” Mr. Habeck said. “But if it was pointed out that someone is not going along with it, then we would certainly look into that.”
Whether Germans, who were among the Europeans most willing to follow public health rules in 2020 when the pandemic started only to rebel months later, will be willing to sacrifice their comfort in solidarity with Ukraine has yet to be fully put to the test.
The German government is facing what Janis Kluge, an analyst on Russia with the German Institute for International and Security Affairs in Berlin, called “a very delicate balance” in how it communicates with the public.
“On the one hand, they have to mobilize everybody to save energy, to save gas and tell everybody that there could be an energy emergency in the winter, while at the same time avoiding that this turns into criticism about the sanctions policy and support for Ukraine,” he said.
“This is exactly what Putin wants to achieve,” Mr. Kluge added. “That when we make the next decision about arms deliveries to Ukraine, that somewhere in the back of our heads, there is this thought, well, what is this going to do to our gas deliveries?”
Berlin has been scrambling to buy more gas from the Netherlands, Norway and the United States. The government has set aside 2.94 billion euros, about $3 billion, to lease four floating terminals in the hopes that they will be operating by midwinter to help ward off a crisis that threatens a recession.
For years, Germany ignored warnings from its neighbors and allies that it was making itself vulnerable by becoming increasingly dependent on Russia for its energy needs.
“Germany will become totally dependent on Russian energy if it does not immediately change course,” President Donald J. Trump said at the United Nations in 2018.
In response, the German delegation, which included the country’s foreign minister, Heiko Maas, laughed.
The move by President Sergio Mattarella comes following the resignation of Premier Mario Draghi. A new election must be held within 70 days.
Italian Premier Mario Draghi resigned Thursday after his ruling coalition fell apart, and the country’s president dissolved Parliament, which paves the way for new elections although no date was set.
The moves dealt a destabilizing blow to Italy and Europe at a time of inflation and economic uncertainty brought on by the coronavirus pandemic and Russia’s war in Ukraine.
President Sergio Mattarella said the new election must be held within 70 days under Italy’s Constitution. He said he took the step because the lack of support for Draghi also indicated there was “no possibility” of forming another government that could carry a majority of lawmakers.
Parliament’s five-year-term would have expired in March 2023.
Draghi tendered his resignation to Mattarella during a morning meeting at the Quirinale Palace. Mattarella, who rejected a similar resignation offer from the premier last week, asked Draghi’s government to remain on in a caretaker capacity, the president’s office said.
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The turmoil couldn’t have come at a worse time for the eurozone’s third-largest economy. Like many countries, Italy is facing soaring prices for everything from food to household utilities as a result of Moscow’s invasion. On top of that, it is also suffering through a prolonged drought that is threatening crops and struggling to implement its EU-financed pandemic recovery program.
Any instability in Italy could ripple out to the rest of Europe, also facing economic trouble, and deprive the EU of a respected statesman as it seeks to keep up a united front against Russia.
Draghi, who is not a politician but a former central banker, was brought in 17 months ago to navigate the economic downturn caused by COVID-19. But his government of national unity imploded Wednesday after members of his uneasy coalition of right, left and populists rebuffed his appeal to band back together to finish the Parliament’s natural term.
Instead, the center-right Forza Italia and League parties and the populist 5-Star Movement boycotted a confidence vote in the Senate, a clear sign they were done with Draghi.
“Thank you for all the work done together in this period,” Draghi told the lower Chamber of Deputies on Thursday morning before going to see Mattarella. Clearly moved by the applause he received there, he repeated a quip that even central bank chiefs have hearts.
Dubbed “Super Mario” for helping to lead the eurozone out of its debt crisis when he was head of the European Central Bank, Draghi played a similar calming role in Italy in recent months. His very presence helped reassure financial markets about the debt-laden nation’s public finances, and he managed to keep the country on track with economic reforms that the EU made a condition of its 200 billion-euro pandemic recovery package.
He was a staunch supporter of Ukraine and became a leading voice in Europe’s response to Russia’s invasion — one of the issues that contributed to his downfall since the 5-Stars rankled at Italian military help for Ukraine.
Domestic concerns also played a role. The 5-Stars, the biggest vote-getter in the 2018 national election, chafed for months that their priorities of a basic income and minimum salary, among others, were ignored. The final straw? A decision to give Rome’s mayor extraordinary powers to manage the capital’s garbage crisis — powers that had been denied the party’s Virginia Raggi when she was mayor.
While he could not keep his fractious coalition together, Draghi appeared to still have broad support among the Italian public, many of whom have taken to the streets or signed open letters in recent weeks to plead with him to stay on.
Italian newspapers on Thursday were united in their outrage at the surreal outcome, given the difficult moment that Italy and Europe are navigating.
“Shame,” headlined La Stampa on the front page. “Italy Betrayed,” said La Repubblica.
Mattarella had tapped Draghi to pull Italy out of the pandemic last year. But last week, the 5-Stars boycotted a confidence vote tied to a bill aimed at helping Italians endure the cost-of-living crisis, prompting Draghi to offer to resign a first time.
Mattarella rejected that offer and asked Draghi to return to Parliament to brief lawmakers on the situation. The premier did so on Wednesday, appealing to party leaders to listen to the calls for unity from ordinary Italians.
“You don’t have to give the answer to me. You have to give it to all Italians,” he told lawmakers.
Opinion polls have indicated the center-left Democratic Party and the right-wing Brothers of Italy party, which had remained in the opposition, are neck-and-neck.
The Brothers of Italy has long been allied with the center-right Forza Italia of ex-Premier Silvio Berlusconi and the League of Matteo Salvini, suggesting that a center-right alliance would likely prevail in any election and could propel Brothers’ leader Giorgia Meloni to become Italy’s first female premier.
Some commentators noted that Draghi’s government, which has been among Europe’s strongest supporters of Ukraine, collapsed in large part thanks to political leaders who previously had ties with Russian President Vladimir Putin.
Berlusconi has vacationed with Putin and considered him a friend; Salvini opposed EU sanctions against Russia after its 2014 annexation of the Crimean Peninsula; and then there’s 5-Star leader Giuseppe Conte’s opposition to Italian military aid to Ukraine.
After 5-Star senators boycotted last week’s vote, Italian Foreign Minister Luigi Di Maio accused Conte of giving Putin a gift.
Russian natural gas has fired the furnaces that create molten stainless steel at Clemens Schmees’s family foundry since 1961, when his father set up shop in a garage in the western part of Germany.
It never crossed Clemens’s mind that this energy flow could one day become unaffordable or cease altogether. Now Mr. Schmees, like thousands of other chieftains at companies across Germany, is scrambling to prepare for the possibility that his operations could face stringent rationing this winter if Russia turns off the gas.
“We’ve had many crises,” he said, sitting in the company’s branch office in the eastern city of Pirna, overlooking the Elbe River valley. “But we have never before had such instability and uncertainty, all at once.”
Nord Stream 1, the direct gas pipeline between Russia and Europe, was shut down for 10 days of scheduled maintenance.
“gas crisis” and triggered an emergency energy plan. Already landlords, schools and municipalities have begun to lower thermostats, ration hot water, close swimming pools, turn off air-conditioners, dim streetlights and exhort the benefits of cold showers. Analysts predict that a recession in Germany is “imminent.” Government officials are racing to bail out the largest importer of Russian gas, a company called Uniper. And political leaders warn that Germany’s “social peace” could unravel.
The crisis has not only set off a frantic clamber to manage a potentially painful crunch this winter. It has also prompted a reassessment of the economic model that turned Germany into a global powerhouse and produced enormous wealth for decades.
Jacob Kirkegaard, a senior fellow at the German Marshall Fund in Brussels.
The Russia-Ukraine War and the Global Economy
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A far-reaching conflict. Russia’s invasion on Ukraine has had a ripple effect across the globe, adding to the stock market’s woes. The conflict has caused dizzying spikes in gas prices and product shortages, and has pushed Europe to reconsider its reliance on Russian energy sources.
Russia’s economy faces slowdown. Though pro-Ukraine countries continue to adopt sanctions against the Kremlin in response to its aggression, the Russian economy has avoided a crippling collapse for now thanks to capital controls and interest rate increases. But Russia’s central bank chief warned that the country is likely to face a steep economic downturn as its inventory of imported goods and parts runs low.
Trade barriers go up. The invasion of Ukraine has also unleashed a wave of protectionism as governments, desperate to secure goods for their citizens amid shortages and rising prices, erect new barriers to stop exports. But the restrictions are making the products more expensive and even harder to come by.
Prices of essential metals soar. The price of palladium, used in automotive exhaust systems and mobile phones, has been soaring amid fears that Russia, the world’s largest exporter of the metal, could be cut off from global markets. The price of nickel, another key Russian export, has also been rising.
More than any other economy in the region, Germany’s is built on industrial giants — mighty chemical, auto, glass and steel producers — that consume enormous amounts of fuel, two-thirds of it imported. The chemical and pharmaceutical industries alone use 27 percent of the country’s gas supply.
Most of it came from Russia. Before Mr. Putin invaded Ukraine five months ago and set off retaliatory sanctions from Europe, the United States and their allies, Russia delivered 40 percent of Germany’s imported oil and more than 55 percent of its imported gas.
Gazprom, Russia’s gas monopoly, cut deliveries in June, and if they are reduced further, German industries may soon confront fuel shortages that will compel them to scale back production, Mr. Kirkegaard said. “I don’t think there are that many other European countries that have to do that,” he said.
Over the next five to eight years, until more of an ongoing transition to renewable energy is completed, the country will be “under acute pressure,” he added. “That is the time period when Germany’s economy is still basically going to be fueled by fossil fuels.”
China, Germany’s biggest trading partner, is expected to see substantially slower growth than in the previous decade, reporting on Friday that the economy expanded just 0.4 percent in the second quarter. That slowdown is likely to ripple through other emerging nations in Asia, dragging down their growth as well.
security risks of globalized trade?
Some economists have argued that the German business models were partly based on an erroneous assumption and that cheap Russian gas wasn’t as cheap as it looked.
The economist Joseph Stiglitz, a Nobel laureate, said the market failed to accurately price in the risk — however unlikely it may have seemed at the time — that Russia could decide to reduce or withhold gas to apply political pressure.
It would be like figuring the costs of building a ship without including the cost of lifeboats.
“They didn’t take into account what could happen,” Mr. Stiglitz said.
Inflation last month was 7.6 percent. Investor confidence in Germany has dropped to its lowest point in a decade.
in February.)
Households, hospitals and essential services will be considered priorities if gas rationing becomes unavoidable, but industrial representatives have been pleading their cases in Berlin.
as much as 12 percent once ripple effects on industries beyond energy and consumers were taken into account.
Looking ahead to the winter, Mr. Krebs said much depended on the temperature and Russian gas delivery levels.
“The best case is stagnation with high inflation,” he said. But over the longer term, he argued, Germany could come out more competitive if it manages the energy transition well and provides speedy and significant public investment to create the requisite infrastructure.
Marcel Fratzscher, president of the German Institute for Economic Research, agreed. Germany’s industrial success is based on added value more than cheap energy, he said. Most German exports, he said, are “highly specialized products — that gives them an advantage and makes them competitive.”
Labor policy, too, will have an impact.
Wage negotiations for the industrial sector are scheduled to begin in September. The powerful I.G. Metall union will seek an 8 percent wage increase for its 3.9 million members. And starting Oct. 1, a new minimum wage law will establish for the first time a single national rate — 12 euros an hour.
For now, supply chain breakdowns are still causing headaches, and businesses that were only beginning to recover from the Covid-19 pandemic are busy devising contingency plans for gas shortages.
Beiersdorf, maker of skin care products including Nivea, has had a crisis team in place since May to draw up backup plans — including readying diesel generators — to ensure production keeps running.
At Schmees, high costs have already forced the shutdown of one furnace, cutting into the foundry’s ability to meet deadlines. Customers waiting for deliveries of stainless steel include companies that run massive turbines used in icebreaker ships and artists who use it in their sculptures.
Mr. Schmees, an energetic man who prides himself on having nurtured a strong company culture, is planning to ask his employees to work a six-day week through the end of the year, to ensure that he can fill all of the firm’s orders by December. That is how long he’s betting that Germany’s natural gas supplies will hold if Russia cuts off the flow entirely.
“The tragedy,” Mr. Schmees said, “is that we have only now realized what we’ve gambled away with this cheap gas from Russia.”
Katrin Bennhold contributed reporting from Berlin.
The price increases bedeviling consumers, businesses and policymakers worldwide have prompted a heated debate in Washington about how much of today’s rapid inflation is a result of policy choices in the United States and how much stems from global factors tied to the pandemic, like snarled supply chains.
At a moment when stubbornly rapid price gains are weighing on consumer confidence and creating a political liability for President Biden, White House officials have repeatedly blamed international forces for high inflation, including factory shutdowns in Asia and overtaxed shipping routes that are causing shortages and pushing up prices everywhere. The officials increasingly cite high inflation in places including the euro area, where prices are climbing at the fastest pace on record, as a sign that the world is experiencing a shared moment of price pain, deflecting the blame away from U.S. policy.
But a chorus of economists point to government policies as a big part of the reason U.S. inflation is at a 40-year high. While they agree that prices are rising as a result of shutdowns and supply chain woes, they say that America’s decision to flood the economy with stimulus money helped to send consumer spending into overdrive, exacerbating those global trends.
The world’s trade machine is producing, shipping and delivering more goods to American consumers than it ever has, as people flush with cash buy couches, cars and home office equipment, but supply chains just haven’t been able to keep up with that supercharged demand.
by 7 percent in the year through December, its fastest pace since 1982. But in recent months, it has also moved up sharply across many countries, a fact administration officials have emphasized.
“The inflation has everything to do with the supply chain,” President Biden said during a news conference on Wednesday. “While there are differences country by country, this is a global phenomenon and driven by these global issues,” Jen Psaki, the White House press secretary, said after the latest inflation data were released.
the euro area. Data released in the United Kingdom and in Canada on Wednesday showed prices accelerating at their fastest rate in 30 years in both countries. Inflation in the eurozone, which is measured differently from how the U.S. calculates it, climbed to an annual rate of 5 percent in December, according to an initial estimate by the European Union statistics office.
“The U.S. is hardly an island amidst this storm of supply disruptions and rising demand, especially for goods and commodities,” said Eswar Prasad, a professor of trade policy at Cornell University and a senior fellow at the Brookings Institution.
But some economists point out that even as inflation proves pervasive around the globe, it has been more pronounced in America than elsewhere.
“The United States has had much more inflation than almost any other advanced economy in the world,” said Jason Furman, an economist at Harvard University and former Obama administration economic adviser, who used comparable methodologies to look across areas and concluded that U.S. price increases have been consistently faster.
The difference, he said, comes because “the United States’ stimulus is in a category of its own.”
White House officials have argued that differences in “core” inflation — which excludes food and fuel — have been small between the United States and other major economies over the past six months. And the gaps all but disappear if you strip out car prices, which are up sharply and have a bigger impact in the United States, where consumers buy more automobiles. (Mr. Furman argued that people who didn’t buy cars would have spent their money on something else and that simply eliminating them from the U.S. consumption basket is not fair.)
Administration officials have also noted that the United States has seen a robust rebound in economic growth. The International Monetary Fund said in October that it expected U.S. output to climb by 6 percent in 2021 and 5.2 percent in 2022, compared with 5 percent growth last year in the euro area and 4.3 percent growth projected for this year.
“To the extent that we got more heat, we got a lot more growth for it,” said Jared Bernstein, a member of the White House Council of Economic Advisers.
$5 trillion in spending in 2020 and 2021. That outstripped the response in other major economies as a share of the nation’s output, according to data compiled by the International Monetary Fund.
Many economists supported protecting workers and businesses early in the pandemic, but some took issue with the size of the $1.9 trillion package last March under the Biden administration. They argued that sending households another round of stimulus, including $1,400 checks, further fueled demand when the economy was already healing.
Consumer spending seemed to react: Retail sales, for instance, jumped after the checks went out.
loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation costs and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains could also lead to higher wages and job growth.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
Americans found themselves with a lot of money in the bank, and as they spent that money on goods, demand collided with a global supply chain that was too fragile to catch up.
Virus outbreaks shut down factories, ports faced backlogs and a dearth of truckers roiled transit routes. Americans still managed to buy more goods than ever before in 2021, and foreign factories sent a record sum of products to U.S. shops and doorsteps. But all that shopping wasn’t enough to satisfy consumer demand.
stop spending at the start of the pandemic helped to swell savings stockpiles.
And the Federal Reserve’s interest rates are at rock bottom, which has bolstered demand for big purchases made on credit, from houses and cars to business investments like machinery and computers. Families have been taking on more housing and auto debt, data from the Federal Reserve Bank of New York shows, helping to pump up those sectors.
But if stimulus-driven demand is fueling inflation, the diagnosis could come with a silver lining. It may be easier to temper consumer spending than to rapidly reorient tangled supply lines.
People may naturally begin to buy less as government help fades. Spending could shift away from goods and back toward services if the pandemic abates. And the Fed’s policies work on demand — not supply.
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