Europe is under greater pressure than at any time since World War II. An energy crisis precipitated by Russia’s war on Ukraine has turned into a wider economic calamity with implications for decades to come. The great experience of European solidarity is put to the test.
The most immediate threat is the energy crisis. The European Union’s bold and courageous sanctions against Russia, following its invasion of Ukraine in February, have become increasingly punitive within the EU. Europe has banned coal imports and announced a phasing out of Russian oil imports. In response, Russia shut down its main gas pipeline, with flows to Europe now at a fifth of pre-war levels. Of course, the sanctions work. After recording a record budget surplus, due to soaring energy prices, Russian revenues have collapsed with the virtual closure of its main export market.
The cost for Europe is nevertheless immense. Petrol prices have increased tenfold, pushing inflation to 40-year highs, pushing European economies to the brink of recession and driving consumer and business confidence to record highs. Germany, the economic engine of Europe, has seen its huge heavy industries threatened because they were built on an umbilical reliance on cheap Russian gas.
As winter approaches, sustained energy price inflation is expected to drive ever-higher interest rates, slowing already sluggish growth and putting intense downward pressure on the euro.
To control inflation, the European Central Bank, like the Federal Reserve, tries to slow down growth by successive increases in interest rates, at the risk of provoking a recession. However, as is the case in the United States and the rest of the world, raising interest rates is proving to be an unnecessarily brutal tool. The cause of inflation is external to national economies and caused by tight supply on energy and food price increases in Russia. The main way higher interest rates will reduce inflation is by cutting wages sharply.
The result should be an unprecedented decline in inflation-adjusted incomes around the world, surpassing the collapse that followed the oil price hikes of the 1970s and the US-led interest rate hikes in early 1980s, or the financial crisis of 2008-09.
As workers around the world see their standard of living eroded while elites enjoy rising incomes and lower taxes, their anger is likely to mount, as will their belief that the system is rigged against them. This populist revolt helped propel President Trump into the White House, backed Brexit in Britain and led to the rise of far-right and left-wing populist parties across Europe.
Economic crises and growing inequalities undermine social cohesion, with lasting political consequences. In Italy, voters are likely on September 1. 25 to reject the competent technocratic government of Mario Draghi, the former head of the European Central Bank, with a coalition of right-wing parties united in their opposition to the European Union. This is despite the fact that the EU has given huge transfers to Italy and is actually guaranteeing Italian debt. The crisis is also likely to strengthen Poland’s ruling Law and Justice party, which is stoking anti-EU and anti-German sentiment.
Russia’s invasion of Ukraine compounds the deeper challenges facing Europe. With remarkably low fertility of 1.5 births on average for adult women, well below replacement level by about 2 years, and a life expectancy of over 80 years, increasing numbers of older people depend on a shrinking working-age population.
The rapidly rising burden of social security, pensions and elderly care costs fall on governments that, even before COVID-19 and the current crisis, were ill-prepared to resist such change. The pandemic has left a gaping hole in government budgets, which is now being hollowed out by the current crisis. As the pressures to care for an aging population mount and mounting debt is an increasingly risky option, higher taxes are needed, as are reforms to boost productivity. These, however, are anathema to populist politicians dependent on fragile coalitions.
Many of the forces besetting Europe are compounding each other: an energy crisis, inflation, economic inequality, a slowly changing demographic imbalance, fractured politics.
Even so, when you consider how the union reacted, there is more reason for optimism than despair.
On the energy front, Russia’s invasion of Ukraine accelerated the shift away from fossil fuels and reinforced Europe’s commitment to halving its carbon emissions by 2030 and reaching net zero. by 2050. It has forced the European Union into a long-awaited Energy Union, doubled its investment in solar and wind power, and diversified its supplies outside Russia.
The fact that Europe has stood up to Russia despite the costs speaks to its maturity – despite political and economic growth difficulties. COVID-19 has led to renewed efforts to create a fiscal union and has significantly strengthened the powers of the European Commission. Russia’s invasion of Ukraine is proving to be an increasingly difficult political and economic test, which Europe has so far passed.
Born out of a desperate desire to stop the perpetual cycle of wars between Germany and France, the European Union turned out to be one of the most successful experiments of the 20th century. The voluntary integration of 27 European countries, so that people, goods, capital and services can circulate freely, and the surrender of sovereign power to collective authority in matters of defence, human rights and Other previously inviolate national prerogatives increase Europe’s collective economic strength and political power. It is getting closer to the United States and China, which none of its member states could have done individually.
Europe has shown itself to be remarkably resilient and determined. Citizens’ commitment to the principles of democracy and human rights remains a benchmark. Even as they endure acute sacrifices and dwindling incomes, Europeans appreciate the story arc and know that they themselves and the world need their great experience to succeed.