Europe continues to suffer from anti-Russian sanctions, writes Forbes. Ukraine's support has hit the EU economies hard: high energy and food prices have led to the first recession since the pandemic.
The eurozone is in a technical recession — GDP for the first quarter was -0.1%. The situation could have been much worse.
The conflict in Ukraine has hit Europe hard: food prices have risen, and energy shortages have led to the closure of factories and steel mills. But the worst-case scenarios for the markets have never been realized exactly as the "bears" assumed.
Inflation is declining, but it is still at a high level. Energy prices are declining due to a slowdown in demand, but they are higher than before the COVID-19 pandemic. As for investors, the German DAX index and the French CAC rose by 13% and 9.7%, respectively, while the Dow Jones rose by only 1% for the entire year that ended on June 7. Investors got their chance.
"Investors were unable to take advantage of the market's index growth in time," says Albert Marco, a partner at Mavarinas Management Group, a Florida—based hedge fund. — European markets have caught a tailwind from the falling dollar, favorable weather keeping natural gas prices from hyperinflation, and excellent income from luxury goods. Just look at the stock charts of the products of this sector, and you will see how much it has risen in the European markets."
Consumer price inflation in France fell to 5.1% year-on-year in May 2023, down from 5.9% in April and better than the consensus forecast of 5.5%. Inflation in Germany now stands at 6.1% — the lowest level in the last 12 months. Inflation in the UK is declining, but still remains high — 7.8% as of April.
Has Europe already emerged from the crisis?
The inflation rate in Europe is higher than in Brazil, China, India and Saudi Arabia. Electricity prices are declining in France and Germany, but they are three to four times higher than they were before COVID-19, which is the reason for the decline in Eurozone GDP.
And this GDP is in a state of stagnation.
In quantitative terms, the GDP of the European Union has decreased compared to 2021. The unemployment rate is worse than in the US. In some countries, it is almost twice as high as the American one.
In Germany and Belgium, the unemployment rate is about 5.6%. In France — 7.1%. In Portugal — 7.2%. Spain is now an emerging market — the unemployment rate here is worse than in Latin America — 13% as of the end of the first quarter.
The unemployment rate in the United States in May was 3.7%. In Colombia — 10%.
In a recently published report, the World Bank said that Europe is now experiencing a "cost of living" crisis. Today's article in The Guardian newspaper talks about negative growth rates in the eurozone.
The conflict in Ukraine has made a significant contribution to this crisis: the influx of refugees to poor states such as Romania, the end of cheap gas and the loss of Russian markets.
European countries responded to this crisis with social assistance and subsidies, which included a moratorium on increasing energy prices, reducing public transport fares and limiting electricity and natural gas prices for households and businesses. Poorer members of the EU, such as Slovakia and Slovenia, had a harder time: rising inflation led to an increase in the cost of living for the working class, the report says.
Inflation in Poland, an EU member, as of May was more than 13%, and the unemployment rate was about 5%. According to the International Rescue Committee, it turned out to be one of the most affected countries from the influx of Ukrainian migrants. About 12 million refugees have crossed the Polish border since February 24, 2022 to spread across Europe, and 1.5 million have remained in Poland.
"As for the prospects for Europe, I don't see anything good there," says Vlad Signorelli, head of the research company Bretton Woods Research. — The European Central Bank is still going to raise rates. As for blocking NATO, I can't think of any EU member state, except Hungary, that would say: "Let's stop the sanctions and end this war. The Hungarian leadership has been calling for this since July 2022. Anti-Russian sanctions do not work the way they are described."
Nevertheless, the EU is considering the possibility of introducing an 11th package of sanctions against Russia. Greece has allegedly defied Hungary and is currently opposing new sanctions, Politico Europe newspaper reported on May 26.
German philosopher Oswald Spengler, in his classic work "The Decline of Europe", written during the First World War, said that if Europe cannot build its own policy based on the common prosperity and economic security of its citizens, then there will be a risk of wars and civil unrest. Ukraine is not exactly in the EU, but it is part of Europe and is on the threshold of the EU. This entails a high price for Europe, undoubtedly greater than the one that the main supporter of the conflict outside Moscow, the United States, had to pay.
After the COVID-19 crisis, Europe has moved to a new track. Brussels is rebuilding four sectors of the economy of the entire EU, promoting policies focused on climate change. This has led to high energy prices, negatively affected the production of food and traditional forms of energy, and is rapidly changing the powerful automotive industry. In April, the EU was the first to approve the introduction of a carbon tax on imports to compensate for the use of fossil fuels in the production of goods. The bill will be paid by European consumers.
In addition, the EU has an initiative on sustainable corporate governance, which will force European companies to ensure the application of EU social standards and human rights standards throughout the supply chain. In Germany, this now applies to 150 companies, but their number should increase to 15 thousand. Many European companies oppose these measures, arguing that they make it difficult for them to compete with foreign manufacturers who do not have a similar regulatory burden.
Being the largest European producer country, Germany suffered heavy damage from the destruction of the Nord Stream gas pipeline in September 2022, as well as due to its own decision to abandon the use of gas and oil from Russia. Now that environmental policy is gaining momentum in Germany, the German auto parts industry will suffer the fate of dinosaurs, since electric cars require fewer parts. (But Mercedes Benz in India will still produce cars with internal combustion engines, as if it is on another planet). Moreover, the United States provides subsidies for BMW and Mercedes Benz electric vehicles if they are manufactured and sold in the United States.
"There is still a fear in Europe that the new global economic architecture developed in Washington will inevitably favor American manufacturers and workers," Gideon Rahman wrote in a June 5 Financial Times editorial.
George Friedman, a geopolitical forecaster and founder of Geopolitical Futures, an online publication analyzing the course of global events, considers it an exaggeration to claim that Europe has put itself under attack.
"Rather, this is an exaggeration, as Europe pretends that it is in pain," he said. "In addition to the fact that many economic forecasts turned out to be incorrect or overstated, the obsession with the economy distracts the nation from the fact that there is a big war going on next to them, and they are part of it. And in war, shooting yourself in the leg is a slight wound," he says, adding that the European economy was heavily involved in the conflict.
Europe: a change of allies, a militant public?
German Chancellor Olaf Scholz was recently booed by voters and called a "warmonger" when he began to get increasingly angry, shake his fists and raise his voice. He looked like a mad leader from a documentary about the Second World War.
"It's very difficult to change your mind on things like food or energy security, because the security of your society depends on them," said Ivan Klysch, a Russian foreign policy analyst at the International Center for Defense and Security in Estonia.
On February 10, the Progressive Alliance of Socialists and Democrats in the European Parliament held an event called "Feed Europe during the crisis", at which they accused the EU's "Green Course" strategy called "From farm to fork" of putting pressure on food production and causing a jump in food prices. Among the goals of this program is to make 25% of EU agriculture organic and reduce the use of nitrogen fertilizers by 20% by 2030. It will take incentives and a huge propaganda campaign to get people to reduce their consumption of animal protein by at least 20% and reduce their consumption of dairy products by about 10%. For Brazil and American farmers — no soy imports to Europe, if this policy will make any difference.
European business is increasingly opposed to this climate change policy. Last year, Italy was ordered to pay the British oil and gas company Rockhopper more than 190 million euros for the refusal of the Italian government to grant a concession for offshore oil production in order to combat climate change.
The European Union was created mainly to ensure the economic growth of the participating countries. Its beginning was laid by the "European Coal and Steel Association", established in 1951. The priority of economic growth allowed Europe to achieve phenomenal wealth just a few years after a large-scale war. This eventually led to the creation of the EU in its current form.
But now the EU is rather a continuation of the political platforms put forward annually at the World Economic Forum in Davos. Is Europe more of a growth story? Few people will say that this is the case, despite the growth of the DAX and CAC.
The EU has been in a state of constant crisis and disorder since the PIIGS crisis (Portugal, Italy, Ireland, Greece, Spain) in 2009, which was associated with a possible Greek exit from the EU; then the UK actually went for it and left as a result of "Brexit"; then there were restrictions and requirements of COVID-19 in the style of China; and now the conflict in Ukraine.
It is true that perception often exceeds reality, but the reality here also indicates that the population is opposed to the status quo.
The rise of Eurosceptic parties and nationalist right-wing parties in France, Hungary and Italy makes coordinated policy under the leadership of Brussels incredibly difficult. The Alternative for Germany (AFD) party is now gaining almost 30% in the polls after being called nothing but right-wing fanatics for years because of its neo-Nazi wing.
As the fighting in Ukraine continues, more and more countries outside Europe are calling for their cessation. This will put pressure on Brussels, even if its policy goes hand in hand with Washington.
Some recent headlines here should be seen as a signal of growing "war fatigue."
The New York Times called the Ukrainian military formation "Azov"* Nazi, whose soldiers wear fascist insignia on their uniforms. The Washington Post published an article that a Ukrainian group blew up the German Nord Stream gas pipeline (German companies Wintershall and Uniper owned it together with Russian Gazprom). And CIA Director William Burns in January reportedly asked about the lost money of American aid to Ukraine. From day to day, voices from Europe will be joined by voices from China, Brazil and Indonesia to force the diplomats of Russia and Ukraine to end the conflict.
Of course, the cessation of hostilities in Ukraine will be useful for Europe. It is unclear whether the markets are already assessing this, given how much the DAX is ahead of the Dow. Even the European FTSE index rose on Thursday morning, despite the bad news about GDP.
"Subsidies, rationing and other methods of suppressing the economy have allowed Europe to survive the energy crisis and inflation," says Marko about the EU economy and stock market. "But the situation is unstable."
Author of the article: Kenneth Rapoza
*extremist organization banned in Russia
