The harbinger of the European recession to come: Family businesses shocked by unaffordable energy bills

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Rome’s Testaccio neighbourhood has been associated with food for two millenniums. In ancient times, it was filled with warehouses that stored the grains, wines and oils brought up by river barges from the cargo ships that docked at Rome’s Mediterranean port. In the late 1800s, it became a working-class area anchored by the mattatoio, one of Europe’s biggest slaughterhouses.

Today, the slaughterhouse is a modern art gallery but many of the restaurants that fed off it remain in place, making Testaccio a must-go destination for lovers of authentic Roman cuisine. One of those restaurants is Da Bucatino. It opened in the 1880s, survived two world wars, various recessions, the 2008 financial crisis and (barely) the pandemic that began in early 2020 and forced it to close for about a year.

The owners of Da Bucatino wonder whether the beloved trattoria, and others nearby, will survive the latest assault on their livelihood – the energy crisis, triggered by Russia’s invasion of Ukraine.

Paolo Di Stefano, 55, whose family bought the restaurant in 1979, showed me the latest electricity bill when I visited the medium-sized restaurant, with a dozen employees, on Thursday evening. In July, their electricity bill alone was €8,072 (the equivalent of almost $11,000). The same one a year earlier was €2,387. Arrivederci, profits. “We stay open just to keep our employees working,” he said. “We aren’t making any money.”

He expects a similar 300- to 400-per-cent rise in his gas bill. Some of the food items he buys at the local markets, like pecorino cheese, which is made from ewes’ milk, have almost doubled in price since the war started in February.

I ask why he can’t just raise the menu prices. He hasn’t, at least not yet, for fear of losing customers, many of them unrich locals who are also struggling themselves to pay outrageous electricity and gas bills. Virtually every retailer, every restaurant, across Rome faces a similar predicament and Mr. Di Stefano fears that many of them, weary from the pandemic, will soon call it quits. “They are all afraid of having to close,” he said.

All the numbers suggest that Italy, and the rest of Europe, will soon be in recession as the war of attrition grinds on, with neither side showing any inclination to sue for peace.

Both sides have used the war to weaponize energy. Europe wants to take Russian oil off the market and has imposed a partial embargo on Russian crude oil and petroleum products – oil is up 30 per cent in the past year. The region also wants to wean itself off pipeline gas from Russia, the single biggest source of the fuel for much of Western Europe, especially Germany and Italy. In retaliation, Russia has eliminated or substantially reduced the supply of gas to 13 European Union countries, driving up wholesale prices tenfold. In recent days, Russia has supplied zero gas to Germany through the Nord Stream 1 pipeline, Germany’s main source of Russian gas.

In Italy and other European countries, painful energy costs – and the near double-digit inflation rates that go with them – are propelling economies toward recession just as they were reaching their prepandemic economic strength. In a note about Italy published Thursday, ING Economics said “The expanding negative energy shock is likely to initiate a recession from the third quarter and we’re likely to see a GDP contraction. Rising natural gas prices are also keeping inflation higher for longer.”

Terrified retailers across Europe, some of them already shutting their doors, are the harbinger of hard times to come. In Britain, brewers and pub owners are warning that thousands of pubs will close this year as energy costs become unaffordable. The energy price cap that applies to British households does not apply to businesses, making them totally exposed to rising costs. Rystad Energy, a Norwegian energy research firm, said that August was the most expensive month on record for European power prices.

There is no easy way to bring down energy costs for businesses or households, and politicians up for re-election are getting nervous that voters facing energy poverty will use the ballot box to retaliate.

Mario Draghi, who steps down as Prime Minister after the Italian election on Sept. 25, has floated the idea of a “cartel of buyers” – big energy consumers working in unison to negotiate prices. He and U.S. President Joe Biden have discussed the idea of placing a cap on wholesale gas prices, but the European Commission is not in favour of the idea, arguing the cap would discourage conservation and slow the drive to renewable energy.

Other ideas include a windfall tax on oil and gas companies, with the proceeds going to subsidize gas bills, and even nationalizing energy companies, with the profits they make used to help cut consumers’ bills.

As long as prices remain at relentlessly high levels, three things will happen. Small businesses will go bankrupt in potentially vast numbers, the recession will be deeper and longer and support for Ukraine’s fight against Russia will fade away for fear that the longer the war lasts, the longer atrocious energy prices will remain. “No more war, please,” Mr. Di Stefano said.