Traffic travels past a sign displaying current gas prices in San Diego, California, U.S., February 28, 2022. REUTERS/Mike Blake/LONDON, March 7 - Sanctions designed to hurt Russia for its invasion of Ukraine will also harm the world economy. Just the prospect of a ban on Western imports of Russian oil catapulted the price of a barrel of Brent crude to $139 on Monday, its highest since 2008. Surging energy and commodity costs mean high inflation is inevitable.
The euro zone is particularly dependent on Russian energy and is therefore the most exposed to stagflation risks, though the United States isn't immune. Goldman Sachs analysts estimate a sustained $20 rise in oil prices would erode euro zone GDP growth by 0.6 percentage points this year. If Russian natural gas stopped flowing, an additional 2.2 percentage points would be lopped off, they say.
There’s also a cost to doing nothing: lower growth and rising unemployment would mean more people in economic distress and higher welfare outlays. Meanwhile, governments would pay a political price in forthcoming elections for high fuel prices if they do nothing, though more borrowing may also be unwelcome. Resisting economic stagnation means accepting yet more Big Government.