Europe’s war economy will last beyond winter
It’s the dream, anyway. But the economic reality facing Europe as Russia escalates its war in Ukraine is very different. A multi-year shock to living standards is looming in countries like Spain, Italy, France and especially Germany, as real wages fall faster than their American counterparts, where life will seem smoother. Europeans will have to deal with less energy, less production, less disposable income, more inflation and higher import costs. Social unrest is a real risk.
As Europe scrambles to resolve a German dependence on cheap Russian gas, hopes are fading that the economic pain will be over by spring. Despite an admirable effort to combat Vladimir Putin’s gas cuts by building up supplies for the winter, most could run out by March. High energy prices and scarcity of supply will persist. Economists at Deutsche Bank AG and Barclays Plc predict the euro zone’s economic contraction of 2.2% and 1.1% respectively next year.
Europe’s record in controlling inequalities is also under severe strain. Energy and food represent a much larger share of the expenditures of the poorest 20% than of the richest 20%. According to think tank Bruegel, European governments have earmarked around 500 billion euros ($496 billion) to cushion the impact of rising prices on consumers and businesses, but that figure could be only a beginning. The UK, whose Brexit headaches hurt openness to trade even before the tanks arrived in Donetsk, will also have to spend heavily to protect its people.
Hence why some European companies now dream of an American quality of life. Stable gas prices in the United States and government support for manufacturers have seen companies such as Volkswagen AG move production there, while Tesla Inc. suspends German investment plans, according to the Wall Street Journal. Soaring energy costs have seen one in 10 German companies cut or halt production, according to a survey by an industry association. This will ripple through the supply chains of trading partners inside and outside Europe, including in China – another place where the EU is reducing its dependency.
Of course, the United States has seen inflation increase, but it also has the advantage of being a net exporter of energy; two-thirds of its LNG exports through June went to Europe. The fall in the euro and the pound shows just how much Europe’s import bills are rising, from more expensive energy to price hikes at Apple Inc. As French President Emmanuel Macron gravely tells his people that the era of “abundance” is over, Americans are spending more as gas prices fall. Those who travel to Paris have found luxury to be significantly more affordable.
As apocalyptic as it sounds, the EU has experienced recessions before. There is still hope that governments will realize that the best way to defend their citizens is through unity, sharing energy and financial resources in a way similar to Covid.
But getting there will be tortuous. Governments around the world have run into debt during the pandemic, supported by loose monetary conditions that are now rapidly tightening. Even countries that avoided Germany’s energy mistakes – like France with nuclear or Spain with renewables – are grappling with their own problems of underinvestment and high debt. Rekindling solidarity will be difficult.
There are worse places than Malaga in a crisis like this. But Europe’s soft power advantage is likely to be less about quality of life and more about building coalitions abroad and managing a wartime economy at home. Whatever the weather, Europe’s dolce vita is about to get a whole lot less sweet.
More from Bloomberg Opinion:
The harsh reality of winter is finally setting in for European leaders: Lionel Laurent
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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.
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