By Nicola Stoev
The West had to repay one day its frivolity for the historically low interest rates maintained by it in the entire decade after the debt crisis around 2008. It did not gain any significant global vantages during this decade of generous money supply and nowadays is struggling with an inflation against which it seems to have only one useful move – to invest in technological projects with a clear competitive impact as well as in some logistic chains disrupting. It needs also to support abundantly Ukraine to win its liberating war against Russia as quickly as possible, but the Western countries are not, to say the least, wholehearted about it. Then no wonder that the soaring fuel prices and the war sparkle the inflation further even when the Central banks in the same countries rise their interest rates.
Well, but the de-globalization runs as a high fever all over the world. It comes from geopolitics and threatened national security to end up as inflation. Is the EU current inflation only a consequence of the de-globalization, however?
Europe suffers significantly of a structural inflation. Besides the former Central banks money supply policy, the key causes for it are as follows:
- a modest self-reliance capacity (e.g., the suspended fossil fuels import from Russia). The European continent is the one that has most extensively gone into globalization, very widely opening its borders. Between 1999 and 2019, the share of trade in European GDP rose from 31% to 54%. In the USA, over the same period, the proportion was stable, from 23% to 26%;
- Europe has less than superbly competitive industry and technologies (e.g., it has a strongly negative trade balance with China as well as it is dependent on China in more than one logistic chain);
- the EU is spending for innovations also a smaller part of its GDP than it is done by the USA and China;
- the EU is not quite self-reliant in the agriculture, either. It possesses more than twice as less agricultural land as the USA (174 million hectares versus 360 million).
The EU will yet stand up against physical deficit of energy resources in the winter of 2022/2023, after Russia’s fossil fuels deliveries cut down. At latest, the first new price concussion in this respect will take place in the spring and the early summer of 2023 when the replenishing of the gas depository facilities for the next winter should begin with more expensive LNG supplies. Even so, the American and other supplies of LNG will not suffice, because there are no enough terminals in Europe for the LNG storing. A similar problem exists with the US ports and their delivery infrastructure. The situation with the European terminals capacities for crude oil is also uneasy. The projects for construction of new terminals have return on investments within 10–20 years. It is difficult to assume, that numerous investors are going to be interested in such projects when the interest rates will go or stay up for a long time and the traditional fuels will be phased out at the expense of energy renewable resources. Therefore, often the urgent necessity for construction of new terminals will imply a direct funding by state or municipal budgets. The EU of course should work persistently on projects based on renewable resources as per its Green Deal strategy and it is undoubtedly a sustainable approach, but it will not address the problems with the energy supplies and the structural inflation in 2023.
Within an ambience of sparkled structural inflation, the EU needs to re-consider its policy on the subsidies extension. It can hardly be an anti-inflationary or a self-reliance affirming measure to extend, among others, regular subsidies to Hungarian and Bulgarian oligarchs (on pre-accession terms to Serbian ones too) under various programmes, only to ensure their formal geopolitical loyalty. Neither makes much sense if the German state is ready to pay 65 billion euro for costs compensations in the winter of 2022/2023, due to the high-energy prices in the country. Against it, the military budget of Russia was just $61.7 billion in 2021 and the German support for the Ukrainian army amounted to less than 3 billion euro prior to October. After all, it is the horse who draws the cart and not vice versa.
Even if the de-globalization turns up as high fever for the living cost worldwide, it is also a technological issue and contributes to the introduction of innovations, as the cobalt free batteries or the US nanochips, conceived out of the US-Chinese rivalry in the global logistic chains restructuring. Similar innovations make the world economy more sustainable and it acquires transparent logistic chains.
But the EU economy obviously gets closer to a recession burdened by its structural inflation, instead of being boosted by some forthcoming disrupting innovations. And it is not only the inflation, which outlines recession expectations related still to the first quarter of 2023, but yet:
- the post COVID impulses for increased consumption and the summer tourists will not be available anymore;
- the interests rates will continue to grow and pull down the economy, which will augment the unemployment;
- the fossil fuels prices will never be as low as in 2021 or a few years earlier;
- the uncertainty on the global commodity markets will not disappear rapidly, if the US and the Chinese economies will be close to stagnation or mark a modest growth;
- the US and EU capital markets are not expected to recover right away;
- the war in Ukraine will not be over.
Most vulnerable to the recession would be the low income people and some groups of the middle classes, quite as it was at the beginning of 21th century, during the accelerated advancing of the globalization in Europe. However, then instead of being clung into recession, the continental economy was growing.
Perhaps, the only recession counteracting short-term move for the EU is to undertake a much stronger military backing of Ukraine and swap it for a US harder stance towards Saudi Arabian policy of reduced crude oil export. However, this swap seems a bit wishful, when neither the EU nor the USA are prepared to pay its bills and prioritise instead separately from each other their own trade relations with China. The so adopted approach underestimates the prospective investments in the Ukrainian post war economic recovery (estimated at over $350 billion) boosting potential as well as the issues coming from the weakening of Mr. Putin’s positions in Russia.
Nicola Stoev is a Sofia-based Bulgarian economist who has been a foreign investors’ consultant in Bulgaria for more than 15 years and in a period of five and half years, a chief expert at the Bulgarian Ministry of Finance, where he wrote among others, analyses about the Bulgarian and global economy, sent to IMF, EIB and the World Bank.