Written by 8:50 pm Europe Economy

EU, UK paying for overusing sanctions. India’s free of those problems. But total govt debt needs a look

Europe woke up to the Nord Stream shock yesterday when gas prices surged 30%. This came on the back of an increase of over 400% in gas prices over the last year. Nord Stream is a 1,200 km pipeline under the Baltic Sea that transports Russian gas to Germany. Russia shut it indefinitely last week, ostensibly for maintenance. Europe’s predicament isn’t a surprise. It’s the consequence of refusing to heed the lessons of history.

Economic sanctions have repeatedly failed to achieve their aims while inflicting collateral damage. Yet, the US, UK and EU rushed headlong into sanctioning Russia, only the 11th largest economy but a global heavyweight in commodity exports and a dominant source of gas supply to Europe. The last time sanctions were applied on a country of similar size was when Italy invaded Ethiopia in 1935, but then energy exports weren’t in play. The collateral damage of gas market disruptions has rippled out as far as Bangladesh. Given energy’s criticality to modern society, the problems will multiply. To illustrate, Germany just unveiled the year’s third energy crisis relief package. The rest of the EU and UK will follow suit to cushion households. The consequence will be spiralling debt and economic recession.

The US, UK and EU extended generous fiscal packages to tide over the pandemic’s first stage. US government debt to GDP was 103% in June 2019. A year later it was 136%. All governments began to pare debt ratios in 2021. For example, EU’s debt to GDP ratio which was 92% in March 2021 was rolled back to 88% a year later. However, the energy shock and looming recession is set to worsen the situation once again. Britain’s incoming PM Liz Truss faces a formidable economic challenge with a debt to GDP ratio of 99.6% in March and an economic contraction forecast in the coming months.

The last year has brought back the fiscal impact on inflation and its spillover to macroeconomic stability and growth into the limelight. The cliché that there’s no free lunch in an economy remains a time-tested principle. It’s something India’s political executives and legislatures must heed. The aggregate government debt to GDP ratio is in the vicinity of 85%, with GoI accounting for about 60%. Two decades ago political consensus emerged to legislate FRBM at both levels of government. That spirit needs to be revived.



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This piece appeared as an editorial opinion in the print edition of The Times of India.



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