“Do we want to destroy our national economy with our eyes wide open?”
That’s the question asked by Martin Brudermüller, the CEO of BASF, a German owned world’s largest chemical company. His interview was prominently displayed for five consecutive days by Germany’s most influential center-right daily.
The answer by the governing Green Party seems to be a resounding “yes.” The German Greens successfully led the fight to kill coal and nuclear power plants. They now want to finish the job with a complete ban on Russian energy supplies -- in addition to a new round of sanctions against Moscow to sever all the remaining economic and political ties.
How far the Greens are likely to take Germany’s ban on energy imports from Russia remains to be seen, but an opinion poll by Civey, released at this writing (Monday, April 4), shows that 56% of large German companies expect very serious problems.
Mercifully, German businesses won’t have to wait long to see what they will have to deal with. The bill for Russian oil and gas, supplied to Germany since April 1, will come due in the second half of this month or in early May. If Germany refuses to open accounts at Russia’s Gazprombank to pay in rubles, Moscow will shut down the pipelines.
So, let’s see what happens in the next few weeks.
But one vitally important issue is already very clear: A half of the euro area’s soaring inflation is entirely driven by energy supply shortages and exploding oil and gas prices.
EU cannot manage energy-driven inflation
It is therefore easy to see what would happen if Moscow’s payment conditions were not met in a market where 40% of energy consumption depends on Russian supplies.
Inflation would quickly hit double digits, causing huge losses of households’ purchasing power and triggering a collapse of private consumption and business investments.
Germans have anticipated such a scenario – but that was before Berlin began to consider a total halt to energy imports from Russia. German government’s economic advisers cut their GDP growth forecast for this year to 1.8% in a drastic downward revision from 4.6% estimated last November. They will now have another go at their forecasting exercise to show a much deeper and a more widening decline of German economy.
The German Greens are standing firm, though. They don’t seem to care much about bringing into question the viability of the governing coalition, and the social cohesion of a country that prides itself on a sacrosanct post-WWII stability.
The rest of the major EU countries are having similar difficulties. Spain and Italy are experiencing growing protests about rising living costs and economic hardships. The declining living standards are also at the center of the French next Sunday’s election.
The key problem here is that the EU has no viable demand management instruments to respond to inflation-induced losses of jobs and incomes.
On the fiscal side, no major country has any room for tax cuts and/or rising government spending. The euro area’s budget deficit currently runs at more than 7% of GDP -- with Germany’s 5% deficit at the lower end of the range and Italy’s 9.4% at the top.
The euro area’s public debt of 121% of GDP is an even more binding policy constraint.
EU’s endangered trade and investment flows
The currency bloc’s monetary policy is totally paralyzed. At a time of soaring inflation, credit conditions have to lean against rising costs and prices. But this inflation is an external energy shock the European Central Bank (ECB) cannot control. Under those circumstances, any move toward credit restraint would only further depress the economic activity.
Inflation data over the last few months have invalidated the ECB’s earlier forecast of stabilizing and reversing inflation pressures. Things are now getting worse, because the political drive to stop Russian energy supplies will keep oil and gas prices out of control for the foreseeable future. And that will leave the ECB with no effective policy instruments to manage an energy-driven inflation.
The EU is therefore facing an economic problem stemming from a deep political hostility with Russia verging on a devastating military confrontation.
Sadly, Russia and the EU have destroyed their relations to the point where they are unlikely to come to an acceptable modus vivendi for a long time to come – if ever.
Ruptured trade and financial ties with the entire Eurasian community will therefore require a substantial restructuring of EU’s current flows of commerce and finance. That will most probably also involve relations with China, Iran and India. Similarly, EU’s economic ties with Brazil and South Africa could be at risk as the BRICS countries implement programs to align their trade, investment and security policies.