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Tyler Cowen

A Crisis Is Coming in Europe. The Only Question Is, Which Kind?

European governments may be tempted to fend off an energy crisis by risking a fiscal crisis, but both options are costly.

A coal-fired power station on the Rhine River.

A coal-fired power station on the Rhine River.

Photographer: Ying Tang/NurPhoto

European governments are facing a choice of which kind of crisis to have: an energy crisis or a fiscal crisis. The global economy may hang in the balance.

Estimates of the size of the energy price shock vary, but one plausible assessment runs in the range of 6% to 8% of GDP for Europe. One response to this shock would be to let energy prices rise and allow the private sector to adjust. This would mean higher costs for manufacturing, higher home heating bills, and lower disposable income to spend on other goods and services. In broad terms, it would be like the energy price shock of 1979 and the following recession.