Grandstand. What would be the fall in the gross domestic product (GDP) of the countries of the European Union (EU), and more particularly of Germany, if energy imports from Russia were to suddenly stop?
Using a “state of the art” model, a group of economists recently tried to answer this crucial question (“What if? The Economic Effects for Germany of a Stop of Energy Imports from Russia »Rüdiger Bachmann, David Baqaee, Christian Bayer, Moritz Kuhn, Andreas Löschel, Benjamin Moll, Andreas Peichl, Karen Pittel and Moritz Schularick, ECONtribute, “Policy Brief”, n° 28, 2021).
Their study concludes that such a shock would lead to a ridiculous drop of 0.3% in German GDP, in other words 120 euros per year and per inhabitant. For France, the figure would be even lower: 54 euros, according to economists Francois Langot and Fabien Tripier. The use of a more rudimentary model and a gas shock of -30% leads to a larger, but still manageable, decline of 2.2% for Germany.
The problem with these figures is that they are based on the assumption that the economies are always in equilibrium, even if the authors carefully take into account a much lower gas substitutability in the short term than in the long term.
“Street lamp syndrome”
The model nevertheless assumes that, after a shock of such magnitude, the economy manages to quickly return to a new state of equilibrium, whose total output is, for example, 0.3% lower compared to the previous state.
But what do we mean by “quickly”? Is it a few weeks, a few months or a few years? And, in the meantime, what would be the magnitude of the (supposedly transitory) decline in GDP? Could it in fact be much higher than 2%?
In reality, even the most sophisticated macroeconomic models have absolutely nothing to say about the speed at which equilibrium is reached. The “out of balance” dynamic is simply neglected, but it is in fact a consequence of the “street lamp syndrome”: we only look for where there is light.
As no one knows exactly how to model this non-equilibrium dynamic, we do not model it. While there is a consensus among economists on how to construct equilibrium models, which rely on the assumption of rational firms that maximize their profits and ensure the perfect balance between supply and demand, the description off-equilibrium savings is still very fragmented and subject to controversy.
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