Europe’s Economy Hanging on a Knife’s Edge -Will it in turn Cause America’s Inflation to Soar?
Europe’s economy was on the verge of rebounding. But then Russia declared war on Ukraine, and now Europe’s economy tethers on a knife’s edge between economic growth and economic recession.
Europe was set to have economic growth post-pandemic. In January, Europe’s industrial production and retail trade recovered. Sentiment in the economic markets in Europe also improved.
The data in Europe showed only a mild softening of demand and limited disruptions to supply. This signal doesn’t resemble the collapse Europe experienced during 2020-21 pandemic lockdowns.
Europe along with the United States are two of the 37 countries that are a part of the OECD. OECD stands for “Organization for Economic Co-operation and Development.” OECD is an international organization consisting of 37 countries that that work together to shape policies that foster prosperity, equality, opportunity and well-being for all.
According to the OECD’s weekly tracker of economic activity, Europe is experiencing only a mild slowdown. Box office receipts are holding stable. Restaurant receipts are holding stable. Data from the navigation service TomTom doesn’t indicate much decline in mobility-related activity.
But war and energy in Europe is causing a different impact. The European Central Bank, in response to Russia’s war and its impact on energy, has downgraded its forecast for eurozone growth in 2022 from 4.3% to somewhere in the 2.3% to 3.7% range. The decrease is dependent on what happens to oil and gas prices. But ECB has played with various scenario possibilities and even its “severe scenario” of sustained high oil and gas prices will not impact Europe’s above-trend growth in 2022.
As long as Russia’s gas continues to flow even at higher costs, Europe will maintain mild growth despite the negative energy impact. Europe can avoid a recession despite OECD Data showing energy price inflation hitting 26.6% in February and food price inflation reaching 8.6%.
But what about the possible scenario if Russia’s stops supplying gas to Europe, and Europe starts to ration gas to its businesses and citizens to ensure it has enough gas to last until Russia stops this war with Ukraine?
Unlike America, certain parts of Europe don’t have access to natural gas terminals. Specifically, Germany doesn’t. Germany needs all of 2022 to try and install its first floating LNG terminal — a converted supertanker. In the meantime, German’s gas consumption will fall by 30%-40%. Even if monetary and fiscal authorities respond forcefully to prevent second-round business-cycle effects, this gas issue could drive Germany’s growth in 2022 from 1.8% into negative, recessionary territory.
And here’s the knife’s edge: Europe has no control over whether gas supplies will be suspended. Russia is in total control of this possibility. Gas supplies have already been suspended with Poland and Bulgaria.
Putin could decide to suspend shipments in retaliation against Western sanctions. Despite Putin needing revenue, he might let anger and pride trump his economic logic. And if America doesn’t make payment to Gazprombank but instead into escrow accounts, Putin will possibly lose his last remaining incentive to keep the gas flowing in Europe. If those funds are placed in escrow accounts, Putin then knows that those monies will ultimately be used to finance Ukrainian reconstruction rather than payments into Russian government coffers.
America and other parts of Europe will continue to unite against Russia if Putin continues this war on Ukraine.
America has an advantage that Europe doesn’t. America has access to natural gas from Texas and the Dakotas but Europe doesn’t. Some countries like Japan feel its easy for America to say that Europe should endure a possible rescission just to ratchet up pressure on Putin to stop the war when America has other access to natural gas. But the people of Europe won’t be able to heat their homes if Putin turns the gas supply off. Remember Russia has already suspended gas supplies to certain countries.
And even though Europe is closest to Ukraine and should led the reconstruction postwar, who pays the cost, especially if Europe has to endure a recession before war ends? If President Joe Biden’s administration and the U.S. Congress think it is crucial to intensify the pressure on Russia, then Japan and other countries are saying America should make it worth Europe’s time. Meaning, Europe should take the lead to reconstruct Ukraine postwar but America should pay the bulk of the cost of the reconstruction.
But gas prices, house prices and food prices are running high in America too. And Americans are feeling economic pinch too.
Is America’s economy stable enough to take on the bulk cost of Ukraine’s reconstruction postwar without causing a subsequent recession in its own country?
ABOUT THE BLOGGER
La Shon Y. Fleming Bruce a/k/a SHONSPEAKS is a blogger, futurist, certified brain health specialist, speaker, and lead creator of freeyourthinkingmind.com. I am also a lawyer and managing member of The Fleming-Bruce Law Firm, P.L.L.C. If you want to check out more of my writings that may not be released on this site, go over to my website at freeyourthinkingmind.com
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