Economic crisis in the European Union
The European Union (EU) plus the UK in terms of economic mass practically represents Europe. Therefore, the EU and Europe is used interchangeably in this article. The EU now has a population of 448 million with 27 member countries down by 12.8 per cent with 512 million when the UK was also a member. The EU economy is the third largest economy in the world in nominal terms only after the US and China. The EU's GDP was estimated at US$17.9 trillion in 2020, representing about one sixth of the global economy. The Euro is the common currency of 19 member countries out of 27 members. The euro is the second largest reserve currency and second most traded currency in the world after the US dollar.
The EU economy will thus continue to remain an important element of the global economy, but the same cannot be said of its individual member countries. One factor that has been persistently present in the European integration process under the auspices of the EU is the feeling of crisis. The EU is indeed in deep crisis, it has been experiencing near economic stagnation for close to two decades.
In fact, the EU has been buffeted by a range of crises since its inception, especially since 2007 the EU has been significantly troubled by the economic and financial crisis. One most significant manifestation of economic malaise coupled with the political crisis was the exit of the UK from the EU. As crises deepen, intra-European bickering grows. And that reignites the old stereotypes that existed for long time between the north and the south in Europe further adding to creating tensions.
Europe is a geopolitical space that since the 16th century has lived off the resources of countries in the Global South directly or indirectly through unequal exchange. But with the emergence of the US as the dominant economic power in the early 20th century, Europe has been relegated to secondary position as a backup force for the US, especially since the end of the WW II as reflected in their power relationships in the global arena.
Therefore, Europe's ability to extract wealth from the Global South on unequal terms has diminished if not totally disappeared and that has added a very important new dimension to the feeling of crisis. The subservience of the EU to US diktats is also reflected in comments by many observers of Trans--Atlantic relationship where they describe Ursula von der Leyen, the President of the European Commission as the Deputy Defence Secretary of the US in the current context of the US led NATO proxy war against Russia in Ukraine.
The EU's economic crisis has been further compounded by the introduction of the single currency the "euro". Joseph Stiglitz in his book titled "The Euro and its Threat to the Future of Europe" pointed out that the euro has failed to achieve both of its principal goals of economic prosperity and political integration. He further argues that the euro was flawed at birth. The structure of the Eurozone - the rules, regulation and institutions that govern it - is to blame for the poor performance of the region, including multiple crises.
Meanwhile, the ongoing Ukrainian crisis triggered by the US led and the EU supported NATO's five rounds of expansion eastward in Europe led to the armed conflict between Ukraine and Russia in late February this year. The US, supported by the EU, has immediately turned that localised conflict into a US led NATO proxy war against Russia. What makes this war so dangerous is simply because there is no sign of its ending. It is becoming similar to the US engineered wars in Syria, Somalia, Yemen and Libya.
NATO, comprising 30 member countries is a transatlantic military alliance. 21 member countries (soon to be 23 with Sweden and Finland joining NATO) of the EU out of 27 and the UK are members of NATO. Therefore, the borderline between the EU and NATO is very thin. In fact, the EU is an essential partner of NATO as the two organisations share majority of the members from each organisation and share similar objectives.
Over the last two decades or so NATO has conducted military aggressions against militarily weak countries in the Global South like Afghanistan, Iraq, Libya and Somalia. The US and NATO forces have laid to waste entire societies in the Middle East and North Africa, and care less about how many tens or hundreds of thousands of Ukrainians and Russians will die in this war.
The EU is now deeply involved in the US led NATO proxy war against Russia in Ukraine. The EU and the UK not only supply arms to Ukraine but have also imposed tough economic sanctions on Russia. As the winter is approaching, Europe is already feeling the effects of its own actions.
Now most governments in Europe have come under growing pressure from their people over the perceived domestic costs of waging the war against Russia. Hungarian Foreign Minister Peter Szijjarto recently warned that Western Europe's policy of rejecting Russian energy, even in the absence of suitable alternatives, could lead to systemic collapse when the public is left without heating this winter.
From the Russian strategic perspective, such growing dissatisfaction in Europe works in favour of Russia and also supports the Russian perspective that time and economics are on Russia's side since sanctions are damaging European consumers more than Russia's. Polish Prime Minister Mateusz Morawiecki during his recent visit (August 29) to France indicated to Le Figaro newspaper that a burgeoning divide within the EU on the Ukraine conflict could implode the bloc.
It is not to suggest that Russia is not also suffering from the sanctions imposed by the US and EU as reflected in economic slowdown but Russia is weathering much better than its European counterparts as indicated by recently available data. Russia's current account balance achieved a record US$167 billion surplus in the second quarter of this year helped by rising oil and gas prices, swelling export revenue, while American-European sanctions led to fall in imports.
Now the ongoing Ukraine crisis in the post pandemic EU has made the EU economy particularly vulnerable to developments in energy markets due its high reliance on Russian fossil fuels, and weakening global growth detracts from external demand. The EU is now also grappling with rising inflation, drought and emerging political crises in many member countries.
Economists are warning that a recession is very much on the cards for late this year or early next year. Now there is a fear that what is being described as "inflationary recession" or otherwise termed as stagflation in the EU will have ripple effects on the other side of the Atlantic. A third of US exports go to the EU and relies on the EU for a quarter of its imports.
The EU's biggest concern is now access to energy as fears of gas supply cuts by Russia is increasingly gaining ground as Russia's energy giant Gazprom has announced its decision to an upcoming shutdown due to maintenance needs. European gas and power futures contracts rocketed to record highs a couple of weeks ago, with prices reaching around ten times above the levels where they were a year ago.
It now looks Europe could face gas shortages for several winters as a result of the Russian gas supply cut. Annual inflation jumped to 9.6 per cent in the EU in June and 8.6 per cent for the Eurozone. GDP grew by 0.6 per cent for the EU and 0.7 per cent for the Eurozone during the second quarter of this year. It is energy prices that are fuelling inflation. Energy inflation was estimated at 42 per cent in June. Food and beverage prices went up by 9.8 per cent during the same period. This price surges do not reflect excess aggregate demand (AD) in the EU. In fact, the EU like the US is moving from deficient aggregate demand to deficient aggregate supply (AS).
Europe's largest economy Germany (accounting for 21 per cent of EU GDP) is in the centre of the storm and that could spell disaster for the whole continent. In May this year, for the first time in more than three decades, Germany recorded a trade deficit largely due to more expensive imported natural gas and falling demand in China. Soaring inflation, falling domestic consumer demand, a looming energy crisis, declining export demand is leaving a dent on its manufacturing base and now only an economic miracle can save the country from falling into a recession.
The European Central Bank (ECB) is now considering to increase interest rates to cap price increases but given negative interests rates prevailing for almost close to a decade, it will start with a very low base to jack up interest rates which may not be sufficient enough to contain rising inflation. Furthermore, the ECB is also constrained in its efforts to raise interest rates because of rising borrowing cost that will be incurred by of highly indebted Eurozone countries such as Italy, Spain and Greece fuelling worries about their ability to keep paying their debts.
The shortage of gas supply and rising inflation in Europe is likely to tip the region into a recession in the winter of 2022-23 and that is also the view of the EIU. And that may force the ECB to stop hiking interest rates jeopardising its ability to fight inflation.
Even with wages rising at a moderate pace, real incomes have been severely impacted by rising prices leading to depressing consumption and consumer confidence. Leading indicators of business confidence are deteriorating in the EU, and growth outlook is being progressively revised downwards. Clearly a new economic order has emerged in Europe due to the war in Ukraine and that poses new challenges in crafting monetary policy.