Euro area faces energy security and fiscal sustainability challenges – The Peninsula

Euro area faces energy security and fiscal sustainability challenges – The Peninsula

Doha: As a global recession becomes increasingly likely, we turn our attention to two key challenges facing the Euro area (EA).

First, energy security is challenged because of Europe’s dependence on Russian gas, with gas flows cut drastically due to the impact the Russo-Ukraine war and its resulting sanctions on Russia. Consequently, EA governments need to handle skyrocketing energy prices with direct fiscal transfers to vulnerable households and failing industries to assist them through the winter.

Second, government debt levels were already high in a number of countries before the war and following the pandemic with some of them having never recovered from the Euro area sovereign debt crisis.

This week, we analyse the implications for selected EA countries with regards to their level of gross government debt as well as the dependence on Russian gas. This allows us to separate countries into three groups, based on their vulnerability: high, moderate and low. The most vulnerable countries have a high dependence on Russian gas as well as a high government debt to GDP ratio.

High vulnerability: Greece and Italy are particularly vulnerable as they are highly exposed to the energy crisis and their governments have limited resources to fund alternatives, provide support for citizens