The world is now staggering through a growing confrontation of nuclear-armed sworn enemies. The humanity’s survival is in the hands of military officials working their emergency communication channels to prevent fatal errors and miscalculations.

None of the main actors is backing down or calling for a negotiated and peaceful modus vivendi. All we hear is that bitter adversaries might cooperate in narrow areas where their interests could coincide – but all the rest is fair game for competitive and systemic clashes.

That’s the environment where households and businesses have to make their existential decisions to spend, save and invest in order to preserve and maximize their real incomes.

And in all that, the rate of change of costs and prices will be the key – exogenous -- variables determining their survival and ability to produce value creation.

The stakes are so high that the U.S. passed last August an Inflation Reduction Act (IRA) pledging nearly half a trillion dollars in trade violating subsidies to local manufacturing.

Europeans are hopelessly divided

Predictably, the European trading bloc (the E.U.) is outraged. France and Germany are daring to ask how their closest friend and ally in an epochal fight for a “rules-based international order” could rig the trans-Atlantic trading regime to ruin their economies. And they are threatening to respond with a “Buy European Act” of reciprocal measures to even out the playing field, and then some – unless radical changes are made by the U.S. before the IRA takes effect on January 1, 2023.

Europeans are asking too much. The U.S. manufacturing subsidies are at the heart of the IRA. They are designed to re-shore the production of American companies, and to reinforce that policy change by offering favorable conditions for incoming foreign direct investments.

Apart from that, energy prices are an even bigger problem. Europeans are complaining that they are paying for American gas four times the prices charged on U.S. markets. That means that the energy-driven inflation will crash their economies, and that the bloc’s industries will have to move out to places – including the U.S. – with lower costs of doing business.

The official Washington is responding that it has nothing to do with energy prices. Those are given by demand and supply on world markets, with some hints that the European intermediaries may also be overcharging for their services.

Europeans are in a tight spot.

Having burned all the bridges with the Russian Federation (R.F.), the E.U. lost 40% of their cheap and abundant energy supplies. They now have to deal on an ad hoc basis with much more expensive sources of oil and gas.

Under those circumstances, the probability that the Europeans will succeed in changing the IRA’s comprehensive system of manufacturing subsidies is zero. And the probability that France and Germany will get a consensus of 27 trade bloc countries for retaliatory measures against the IRA – which would mean a trade war with the U.S. – is also zero.

Build a European security architecture

All that means that the Europeans have no way out of this predicament, mainly because compromising the sacrosanct trans-Atlantic unity would also lead to a breakup of their customs and monetary unions – the pillars of the bloc’s peace and prosperity and the stepping stones to the European economic and political union.

The central issue here is a centuries old quest for an acceptable and sustainable world order. In Europe, the constant expansion of the world’s largest military alliance (NATO) has been taken by the R.F. as an existential threat – a danger denied by the U.S. and its European allies. Similarly, the West wants to prevent China’s rapid economic development from becoming a foundation of Beijing’s global power projections.

R.F.’s failed attempt late last year to negotiate security arrangements with the West led to its current military confrontation with NATO in Ukraine. Extensive economic sanctions against Moscow and boycott of its energy supplies are part of ongoing hostilities.

That is driving E.U.’s energy and (unprocessed) food prices at respective annual rates of 40% and 14%, directly accounting for one-half of the trading bloc’s 10% inflation in November.

The solution for the E.U. – an economic system representing 18% of world GDP -- would be to stop the war with the R.F., restore food and energy supplies and follow the French (and German?) idea of negotiating a new European security architecture.

Instead of that, the Europeans want to fight an energy-driven inflation with rising interest rates and a long and deep recession. That is a suicidal policy in an economy where real wages are currently falling at an annual rate of 6% (nominal wage increases of 4% minus a consumer price inflation of 10%).

It now seems that the only thing falling faster than E.U.’s real wages are opinion polls of French and German leaders. The French President Macron’s latest approval rating is down to 32%, while only 25% of Germans think favorably of Chancellor Scholz’s performance.