Cost of conflict: Who is paying for Europe's Russian gas gamble

As the Israel–Iran conflict dominates global headlines, another war—now over 1,200 days old—continues to quietly erode Europe’s economic resilience. The prolonged Russia–Ukraine war, once considered a distant geopolitical challenge, has morphed into a domestic economic burden for major European economies.

Germany, long the industrial powerhouse of the continent, is now grappling with the fallout of cutting its energy ties with Moscow.

According to data cited by Reuters, Germany’s GDP grew just 0.4 per cent in the first quarter of 2025, while industrial production declined 0.2 per cent in March year-on-year, and energy-intensive industries shrank 2.3 per cent. Germany’s annual GDP forecast for 2025 stands at 0.0 per cent, with a modest recovery to 0.7 per cent in 2026, as per projections from the country’s Federal Statistical Office.

The gas that powered Germany’s factories

While Russia’s President Vladimir Putin has claimed that “the German economy is on the brink of recession,” as quoted by Reuters, the statement—though politically loaded—touches on an underlying truth. Europe’s competitiveness for decades had leaned heavily on cheap Russian pipeline gas. That is no longer an option.

Since the Ukraine war began, Europe has rapidly shifted to alternate supplies, notably liquefied natural gas (LNG) from the United States and Qatar. However, LNG has proven costlier, especially for small and medium-sized enterprises (SMEs), which lack the financial muscle to secure long-term supply contracts, as reported by Reuters and Bloomberg.

Lawmakers in Germany have repeatedly warned that SMEs—considered the backbone of the nation’s economy—face disproportionately higher risks from sustained energy inflation.

Energy shock beyond Germany

The strain isn’t limited to Germany. Bloomberg reports that Austria, Hungary and Slovakia, which were heavily reliant on Russian crude and gas, are now facing bottlenecks in energy supply and manufacturing. All three nations have seen a decline in industrial activity since early 2023, based on EU-wide trade and production data.

To respond, the European Central Bank has reduced borrowing costs to support economic activity, especially in energy-intensive sectors, as noted in a recent ECB policy brief reviewed by Reuters.

Chemical, metal and auto sectors under strain

Industries heavily dependent on a consistent energy supply, such as chemicals, metals and automobiles, are the hardest hit. German automaker Volkswagen has reportedly scaled down operations in certain facilities, citing high energy costs, as per Reuters.

However, the ripple effect is deeper in the supply chain. Component manufacturers and mid-sized suppliers—often family-owned and operating on tight margins—are facing existential threats, according to analysis by the IFO Institute for Economic Research.

Green energy goals face headwinds

Europe’s long-term plan to pivot towards renewable energy is also encountering challenges. The green transition—while a strategic necessity—is proving expensive and politically difficult.

As quoted by Bloomberg, analysts say delayed infrastructure, limited private investment, and regulatory uncertainty have slowed momentum. This is weakening the EU’s position against energy-rich and manufacturing-competitive economies like the United States and China.

Strategic de-industrialisation?

Economists now warn of a larger trend: a slow but steady de-industrialisation of Europe. As per a recent Reuters analysis, energy-intensive sectors are relocating production or downsizing operations, risking long-term competitiveness.

A warning from Ukraine’s frontlines

The economic fallout from the Ukraine war illustrates a global truth: regional conflicts can reshape global trade, disrupt domestic industry, and upend national economic models.

For Europe, the decision to wean itself off Russian gas was a moral and strategic necessity. But more than three years on, the costs—economic, industrial and political—are mounting.

(With inputs from the agencies)