Russia-Ukraine war: Europe’s energy policy is an act of self harm
Between contradictory energy policies, the Ukraine war and political disarray, the EU appears on a mission to harm itself
Better late than never, the old motto states. This should be the conclusion after reading last week’s Economist’s latest lead article on how Europe is “frozen out”.
The magazine’s concern is that the continent “faces an enduring crisis of energy and geopolitics [that] will weaken it and threaten its global position”, while the “brutal economic squeeze will pose a test of Europe’s resilience in 2023 and beyond”.
This perspective was already evident months ago, but only with an incoming, freezing winter is it making its way to one of the flagships of western mainstream media.
The magazine also emphasises the “fear that the recasting of the global energy system, American economic populism and geopolitical rifts threaten the long-run competitiveness of the European Union and non-members, including Britain”, noting: “It is not just the continent’s prosperity that is at risk, the health of the transatlantic alliance is, too.”
Effectively, the high price that the US charges Europe for its liquefied natural gas (LNG) supplies, the Federal Reserve’s policies on interest rates that are propping up the dollar, and the Biden administration’s $369bn package of green subsidies under the auspices of the Inflation Reduction Act, have all heightened tensions between the two shores of the Atlantic. In such conditions, the European economy’s competitiveness risks being compromised.
The energy crisis remains Europe’s top priority. The latest OECD Economic Outlook notes that the share of members’ GDP spent on end-use energy is almost 18 percent, double what it was in 2020. The outlook also warns of a substantial risk that gas reserves in Europe will be smaller next winter than this one.
According to the Economist’s own modelling, “in a normal winter, a 10 percent rise in real energy prices is associated with a 0.6 percent increase in deaths. Hence the energy crunch this year could cause over 100,000 extra deaths of elderly people across Europe.” To give an idea of the scale, the UN human rights agency has estimated the number of civilian deaths in Ukraine after nine months of war at around 6,600.
Foolishness and dysfunction
Luckily, Europe has been able to fill its gas stores for this coming winter almost to full capacity. But this target has been accomplished through an increase of more than 40 percent in imports of Russian (yes, Russian) LNG between January and October, compared with the same period last year. It is difficult to find a word better than “tragicomic” to describe such a situation.
This data exemplifies both EU foolishness and the dysfunction of its institutions. Geopolitical reasons have pushed Europe to diversify its energy supplies away from Russian gas, in order to avoid relying on an autocratic and dangerous country. EU decision-makers should now explain the logic behind giving up the cheapest supply option, pipe-delivered gas, to opt for the most expensive one, seaborne-delivered LNG, from the same supplier.
If the situation compels Europe to continue relying on Russian gas, why pick the most expensive option? The situation is so absurd that it leads me to ask: between the EU and Russia, who is really sanctioning whom?
— The Economist (@TheEconomist) November 24, 2022
The EU’s apparent drive towards self-harm could get a further boost from the price cap on Russian oil that Brussels is expected to adopt by 5 December. The aim is to reduce Russia’s revenues, but the situation could turn against Europe. No one really knows the possible impacts of such a measure on oil supply and price. The Biden administration has apparently lobbied the EU to relax its sanctions policy, because further measures could completely disrupt oil markets and intensify the energy crunch.
This marks a further tragicomic situation: the US – which with regards to Iran has claimed universal jurisdiction by applying its secondary sanctions against everybody, including EU members – is now pressuring the EU to avoid walking the same path over Ukraine.
As a consequence, while transatlantic political relations have been reinvigorated by a strong cohesive position against Russia, economic relations could come under severe stress if the burden-sharing on the Ukraine war’s economic costs continues to be unequal. This is the message that French President Emmanuel Macron should deliver during his state visit to Washington this week.
German Chancellor Olaf Scholz has already conveyed a far more assertive message to Washington by visiting Beijing accompanied by top businessmen. Regardless of US pressure, and even contrary to the Brussels bureaucracy’s own recommendations, Germany has no intention to decouple from China, seeming far more aware than the US that – in the words of its own chancellor – “new centres of powers are emerging in a multipolar world, and we aim to establish and expand partnerships with all of them”.
In other words, Scholz’s message to Biden is the following: “If I have felt compelled to painfully sever my energy relationship with Russia due to the war in Ukraine, do not think for a moment that I will feel compelled to do the same for my trade relationship with China.”
US economic policies and the energy crunch are damaging European economies to the point that even the Economist recognises that the continent is “at risk of mass deindustrialisation”.
Brussels decision-makers are apparently unaware that they are running towards a cliff. The Biden administration might show more wisdom and common sense. After all, what advantage would the US get in reinforcing the transatlantic bond if the price could ultimately be the economic destruction of the EU in the Eurasian continent?
It is already evident that in the Ukrainian conflict, Europe is the biggest external loser – but its anxieties do not end there. According to the European Central Bank’s estimates, from now up until 2030, the EU should spend more than five trillion euros ($5 trillion) to move ahead with its green transition, diversify energy supplies, bridge the digital gap, and reach the Nato military expenditure target of two percent of GDP – roughly equivalent to the cost of the post-Covid EU recovery plan every year, until the end of the decade.
It is difficult to imagine how Europe will be able to accomplish such a tremendous task in an era of polycrisis, described by former US treasury secretary Larry Summers as “the most complex, disparate and cross-cutting set of challenges” we have faced in four decades.
It is even more difficult to imagine, considering the current trio leading the EU. The presidents of the European Council and European Commission are apparently not on speaking terms after an April 2021 protocol arrangement placed the first on an armchair and the second on a sofa; while the third, the EU foreign policy chief, cultivates sophisticated visions of international politics such as “Europe is a garden … [and] most of the rest of the world is a jungle”.
Indeed, Europe’s drive for self-harm is running at full speed.