Will Europe select an power disaster or a funds disaster?

It’s the topic of my newest Bloomberg columnright here is an excerpt:

Estimates of the magnitude of the power value shock range, however one believable ingredient Analysis fluctuates between 6% and eight% of GDP for Europe. One response to this shock could be to let power costs rise and permit the personal sector to regulate. This could imply greater manufacturing prices, greater house heating payments, and fewer disposable revenue to spend on different items and companies. Principally, it could be just like the power value shock of 1979 and the recession that adopted…

That sounds grim, however it’s vital to appreciate that there’s a totally different however equally grim path: Governments might take this power value shock and switch it right into a fiscal shock as an alternative…

If a authorities coated the entire extra power prices, it could price between 6 and eight% of GDP – and this price must be incurred yearly that power costs stay excessive. This could require extra authorities borrowing, greater taxes, more cash printing, or some mixture of those choices.

The excellent news is that turning an power disaster right into a fiscal disaster doesn’t propagate excessive power prices all through the economic system. The unhealthy information is twofold: first, conserving power costs low does nothing to encourage conservation. Second, and extra importantly, a fiscal disaster continues to be a disaster. Even when a authorities avoids extra borrowing, what’s the leeway to lift taxes, given financial and political constraints?

Really useful, and with a nod to Arnold Kling.