Last Thursday, the European monetary authority raised its key lending rate by 50 basis points to 2.75% in a belated effort to tame an energy-driven inflation rate of 10%.
Further rate hikes were also announced to nearly halve the inflation next year, and then bring it close to its medium-term target of price stability (about 2%) in 2024.
Those are pollyannish forecasts that could only be justified by an improbable scenario of collapsing energy prices.
In the same vein, the trading bloc’s secretariat (aka the E.U. Commission) is announcing a short and mild growth slowdown – a technical recession -- in the first half of next year, followed by a swift recovery and a rebounding GDP growth of 1.6% in 2024.
Fairy tales indeed.
But, sad to say, those are part of wartime manipulations pledging to “destroy” the enemy’s (i.e., Russian Federation’s) economy and to settle the war in Ukraine by R.F.’s “defeat.”
Let’s look at E.U.’s inflation first.
Energy and unprocessed food accounted for one-half of E.U.’s 10.1% price inflation last month. The question is: What assumptions allow the E.U. economic forecasters to anticipate that over the next 12 months energy and food prices would literally collapse to reduce inflation to 6%, and then to 3% in 2024?
R.F. cannot be dislodged
The R.F. is the E.U.’s main energy supplier: 29% oil, 54% coal and 43% gas. The R.F., however, is a relatively minor E.U. supplier of cereals and fertilizers. In the first ten months of this year, E.U. imports from R.F. rose 43% from the same period of 2021, and the trade bloc’s deficit with Moscow nearly tripled from €54.1 billion to €134.6 billion.
Most alternatives to R.F. supplies are relatively small and much more expensive. As things now stand, that won’t change much, if at all, over the near term. Transition to renewable energy sources will take much longer.
It, therefore, seems that the assumption of readily available alternative energy suppliers can be safely discarded.
With that possibility out of the way, some E.U. hotheads apparently expect that the NATO-led forces will defeat the R.F. in Ukraine, change the regime, and get new people in Moscow that they can do business with. More on that below.
Meanwhile, and more seriously, it’s a safe conclusion that high and rising energy and food prices will worsen the E.U.’s unfolding downturn. A prolonged period of tight credit conditions, job losses, erosions of households’ purchasing power and declining business investment outlays do not support assumptions of a short and mild dip of economic activity -- followed by a quick rebound of demand and output.
That’s not how a substantially restrictive monetary policy works in cases where it is expected to halve inflation in less than a year.
From duplicity to proxy war
The E.U. economy is facing serious losses of jobs and incomes. Conversely, there is no evidence for the E.U. forecast that the war in Ukraine and debilitating trade sanctions are destroying the R.F.’s economy and its military forces.
Unfortunately, destructions of human lives and infrastructure in Ukraine are part of huge losses to Europe and the rest of the world. A credible architecture of European peace, security and economic development is lost, because trust has been lost among centuries old European enmities and hatreds.
Here is a recent reminder of that. Former German Chancellor Merkel’s public admission, in an interview published on December 7, 2022, that she and the former French President Hollande agreed – presumably with Washington’s blessing and guidance -- to Minsk peace accords only to give Ukraine and NATO more time to prepare to fight the R.F.
Moscow probably suspected that duplicity. And Kremlin understood some time ago that Ukraine has been set up as a security risk it must wipe out for good.
That’s what is going on now. Kremlin apparently won’t relent with its military operations until that objective is fully met.
European leaders running around with “peace ideas,” while copiously insulting their R.F. counterparts and supplying arms and “instructors” to Ukraine are just firing up a proxy war.
Not a reassuring picture of what Indians derisively call a destructive “Eurocentric worldview.” A small diplomatic lapse of a country that is on a 7% economic growth path toward a part of political universe they see punching way above its weight in world affairs.
But who knows, maybe the E.U.’s 70 plus years old work-in-progress will crumble under its own weight of errors and contradictions. Italians, beating Germany on economic growth, but paying double the German yields on their 10-year bonds are bristling against E.U.’s rising interest rates. Germans are responding that Italians just want “cheap money” and European “support purchases” of their humongous public debt of 150% of GDP, compared to Germany’s 67.2% of GDP.
The E.U. economy is part of an internally feuding polity, losing trade positions and dangerously escalating military confrontations.