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German and Italian industry will struggle to recover from loss of Russian gas, warns Barclays

Europe’s economies face a permanent blow from higher energy costs as the Continent weans itself off cheap Russian energy, Barclays’ chief economist for the region has warned.

Silvia Ardagna at the bank said the bloc’s push for “independence from Russian gas” will pull down growth, push up inflation and drag down the euro.

“Costlier sources of energy will likely have an impact on eurozone competitiveness,” Ms Ardagna said.

Industrial powerhouses Germany and Italy have built positions in global markets in part because of plentiful oil and gas from Moscow’s pipelines. But they now face losing access to those resources as Russia threatens to cut off supplies, and European powers seek to end purchases from the aggressive dictatorship.

The shift has already led to a sharp slump in the economies of Germany and Italy as their powerful manufacturing sectors, which were suffering from pandemic-induced supply problems even before the energy crisis, struggle with higher power costs.

In contrast with Europe, American industry is likely to be a winner as the country is awash with locally-produced hydrocarbons. Some of these can be exported to Europe, which is trying to expand its capacity to import liquefied natural gas (LNG), but the gap in prices may be so large as to push manufacturing out of the eurozone and into the States.

“Domestic producers may be able to respond to high prices by increasing energy extraction and expanding LNG capacity. And if gaps in energy costs between the US and the rest of the world persist, some manufacturing industries may well relocate to the US,” said Ms Ardagna.

“One implication of higher domestic manufacturing production would be a stronger dollar.”

This comes after a surge in the dollar on the back of rising interest rates, which has pushed down other currencies including the euro and sterling this year.

SOURCE: https://www.telegraph.co.uk/business/2022/09/19/german-italian-industry-will-struggle-recover-loss-russian-gas/

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