Europe faces an enduring crisis of energy and geopolitics: The Economist

Europe faces an enduring crisis of energy and geopolitics, which will weaken the continent and threaten its global position, The Economist said in an analysis.

“A brutal economic squeeze will pose a test of Europe’s resilience in 2023 and beyond,” the British weekly newspaper wrote.

There is a growing fear that the shifting of the global energy system, US economic populism and geopolitical rifts threaten the long-run competitiveness of the European Union and non-members, including Britain, according to the analysis.

Despite the good news from Europe in the past few weeks, including lower energy prices compared to the summer, the energy crisis still poses dangers.

Gas prices are six times higher than their long-run average. On November 22nd, Russia threatened to throttle the last operational pipeline to Europe, even as missile attacks caused emergency power cuts across Ukraine. Europe’s gas storage will need to be refilled once again in 2023, this time without any piped Russian gas whatsoever.

The Economist’s modelling suggests that, in a normal winter, a 10% rise in real energy prices is associated with a 0.6% increase in deaths.

The war in Ukraine is also creating financial vulnerabilities. Energy inflation is spilling over into the rest of Europe’s economy, creating an acute dilemma for the European Central Bank. It needs to raise interest rates to control prices. But if it goes too far it could destabilise the euro zone’s weaker members, not least indebted Italy.

Even as the energy crisis rages, the war has exposed a vulnerability in Europe’s business model. Too many of Europe’s industrial firms, especially German ones, have relied on abundant energy inputs from Russia.

Plenty of companies have also become more dependent on China as an end market. The prospect of severed relations with Russia, structurally higher costs and a decoupling of the West and China has meant a reckoning in many boardrooms.

That fear has been amplified by America’s economic nationalism which threatens to draw activity across the Atlantic in a whirlwind of subsidies and protectionism. President Joe Biden’s Inflation Reduction Act involves $400bn of handouts for energy, manufacturing and transport and includes make-in-America provisions. In many ways the scheme resembles the industrial policies that China has pursued for decades.

As the other two pillars of the world economy become more interventionist and protectionist, Europe, with its quaint insistence on upholding World Trade Organisation rules on free trade, looks like a sucker.

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