Europe is heading for recession. How bad will it be?

Every single warning light is flashing red. Russia’s war on Ukraine, an uneven recovery from the covid-19 pandemic and a drought across much of the continent have conspired to create a severe energy crunch, high inflation, low growth—and enormous uncertainty about Europe’s economic future. Governments are rushing to try to help the most vulnerable. And amid the nervous confusion, there is broad agreement on one thing: a recession is coming.

Quite how bad the downturn will be depends on how the energy shock plays out, and how policymakers respond to it. This week energy prices reached once-unimaginable heights: more than €290 ($340) per megawatt hour (mwh) for benchmark gas to be delivered in the fourth quarter of the year (the usual pre-pandemic price was around €30); and more than €1,200 per mwh for daytime electricity for the same quarter in Germany (up from around €60). Because gas is the marginal fuel in most European electricity markets, it sets the price for…

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This article was written by and originally published on www.economist.com