CONTRIBUTORS

Europeans are headed for a painful chapter, but they are resilient

Ian Goldin
Los Angeles Times (TNS)
A man walks a dog across the snow-covered lawn in front of the Reichstag on Dec. 10, 2021, in Berlin. Germans usually rely on Russian natural gas not only to power their industries but also to heat their homes. For this coming winter, the supply is scarce because of European sanctions and Russian backlash against them. (Sean Gallup/Getty Images/TNS)

Europe is under greater pressure than at any time since World War II. An energy crisis precipitated by Russia’s war on Ukraine has morphed into a broader economic calamity with implications for decades to come. The grand experiment of European solidarity is being tested.

The most immediate threat is the energy crisis. The bold and brave European Union sanctions on Russia, following its invasion of Ukraine in February, have become ever more punishing within the EU. Europe has banned imports of coal and announced a phaseout of Russian oil imports. In response Russia has closed its main gas pipeline, with its flows to Europe now at one-fifth of the prewar levels. To be sure, the sanctions are working. After recording a record budget surplus, due to energy prices spiking, Russian revenues have collapsed along with the virtual closure of its main export market.

The cost to Europe is nevertheless immense. Gas prices have increased tenfold, propelling inflation to 40-year highs, pushing European economies to the brink of recession, and dragging consumer and business confidence to record lows. Germany, which is the economic engine of Europe, has seen its massive heavy industrial industries threatened as they have been built on an umbilical dependence on cheap Russian gas.

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With the approach of winter, sustained energy price inflation is likely to lead to ever-higher interest rates, slowing already tepid growth and placing intense downward pressure on the euro.

To tame inflation, the European Central Bank, like the Federal Reserve, is trying to slow growth through successive interest rate hikes, at the risk of provoking a recession. However, as is the case in the U.S. and the rest of the world, higher interest rates are proving to be an unhelpfully blunt tool. The cause of inflation is external to national economies and caused by the supply squeeze on Russian energy and food price increases. The primary way higher interest rates will reduce inflation is by sharply reducing wages.

The result is likely to be an unprecedented inflation-adjusted fall in incomes globally, exceeding the collapse that followed the 1970s oil price hikes and the U.S.-led interest rate hikes in the early ’80s, or the financial crisis of 2008-09.

As working people around the world see their living standards eroded while the elites are enjoying soaring earnings and benefiting from lower taxes, their anger is likely to rise, as is their belief that the system is rigged against them. This populist revolt helped propel President Donald Trump into the White House, provided support for Brexit in Britain, and led to the rise of populist parties of the extreme right and left throughout Europe.

Economic crises and growing inequality undermine social cohesion, with lasting political consequences. In Italy, voters are likely on Sept. 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 despite the fact that the EU has given Italy huge transfers, and in effect is underwriting 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 fertility at a remarkably low 1.5 births on average per adult women, well beneath the replacement level of around 2, and life expectancy at more than 80 years, a growing number of elderly people depend on a contracting working-age population.

The rapidly rising burden of social security, pensions and elderly care costs is falling on governments that even before COVID-19 and the current crisis were ill-prepared to withstand such a shift. The pandemic left a gaping hole in government budgets, which now is being deepened by the current crisis. As the pressures of taking care of an aging population grow, and raising more debt is an increasingly risky option, higher taxes are needed, as are reforms to raise productivity. These, however, are anathema for populist politicians depending on fragile coalitions.

Many of the forces besetting Europe are compounding one another: an energy crisis, inflation, economic inequality, a slow-moving demographic imbalance, fractious politics.

Even so, when one considers how the union has responded, there are more reasons for optimism than despair.

On the energy front, the Russian invasion of Ukraine has accelerated the transition away from fossil fuels and reinforced Europe’s commitment to halve its carbon emissions by 2030 and achieve net zero by 2050. It has forced the European Union into a long-overdue energy union, doubled investments in solar and wind, and diversified supplies away from Russia.

That Europe has stood up to Russia despite the costs is a testament to its coming of age — despite the political and economic growing pains. COVID-19 led to the redoubling of efforts to create a fiscal union and greatly strengthened the European Commission’s powers. Russia’s invasion of Ukraine is proving to be an ever stiffer political and economic test, which so far Europe is passing.

Born out of a desperate desire to stop the perpetual cycle of wars between Germany and France, the European Union is proving to be among the most successful experiments of the 20th century. The voluntary integration of 27 European countries, so that people, goods, capital and services can move freely, and the giving up of sovereign power to a collective authority on defense, human rights and other previously inviolate national prerogatives is increasing the collective economic strength and political power of Europe. It is approaching par with the U.S. and China, which none of its member states could have done individually.

Europe has proved remarkably resilient and determined. Citizens’ commitment to the principles of democracy and human rights remains a lodestar. Even as they endure acute sacrifices and falling incomes, Europeans appreciate the arc of history and know they and the world need their grand experiment to succeed.

— Ian Goldin, a professor of globalization and development at Oxford University, is the author of “Rescue: From Global Crisis to a Better World.”