The ongoing consequences of the epidemic and Russia’s invasion of Ukraine have crippled nations all over the world, but Europe has been hit the hardest by the unrelenting string of economic crises, with the highest energy costs, some of the worst inflation rates, and the greatest chance of a recession.
On Thursday, the severity of the situation was forcefully illustrated. The European Central Bank, which oversees economic policy for the 19 nations that use the euro, took a risky step to combat inflation by raising interest rates by three-quarters of a percentage point, matching its highest level ever. It gave a dismal growth forecast while also acknowledging the major impacts of the energy crisis. It’s a fairly grim negative probability, ECB President Christine Lagarde said at a press conference.
Ministers from the European Union will meet on Friday to debate a plan to intervene in the energy markets to regulate prices. They will discuss a variety of strategies, including price caps and mandated energy consumption reductions.
Numerous countries have come to rely heavily on Russian energy, especially Germany, the region’s largest economy. Natural gas prices have increased eight-fold as a result of the conflict, posing a historically large threat to Europe’s economic strength, the standard of living, and social cohesion. There are plans in place for rolling blackouts, rationing, and industrial closures should there be serious shortages this winter.
Ian Goldin, an Oxford University professor of globalization and development, warned that the possibility of declining wages, increasing inequality, and rising social tensions might “not just lead to a split nation but a fragmented planet.” “This is a situation we haven’t encountered since the 1970s, and it’s not going away anytime soon.” Although some of the reasons for and prospects for other parts of the world are different, they are also under pressure.
Intensified use of higher interest rates to control inflation is slowing the UK economy’s growth and consumer spending. Nevertheless, the UK job market is still robust, and the economy is growing. China, a key driver of the global economy and a significant market for goods exported from Europe, including food, equipment, and automobiles, is struggling with a unique combination of issues.
Beijing’s continued practice of halting all operations during COVID-19 outbreaks has frequently immobilized major portions of the economy and contributed to supply chain disruptions throughout the world. Over 300 million individuals and dozens of cities have been in complete or partial lockdown just in the last few weeks. Drought and extreme heat have hampered hydropower production, resulting in further industrial closures and rolling blackouts.
The Chinese economy is currently unstable due to a shaky real estate sector. Due to their lack of faith in developers to ever deliver their unfinished housing units, hundreds of thousands of consumers are refusing to make mortgage payments. Trade with the rest of the world suffered in August, and overall economic growth this year appears to be slowing to its lowest level in ten years, possibly outpacing rates in the US and Europe. The possibility has led China’s central bank to lower interest rates to boost the country’s economy.
Gregory Daco, the chief economist of the multinational consultancy company EY-Parthenon, asserted that although the global economy is weakening, it is “happening at various paces.” Countries that can offer essential products and minerals, notably energy producers in the Middle East and North Africa, are benefiting greatly in other regions of the world.
India and Indonesia are also increasing at surprisingly fast rates due to rising local demand and efforts by multinational firms to diversify their supply chains. Vietnam benefits as manufacturers relocate their operations there. Even still, China, the Eurozone, and the United States collectively account for nearly two-thirds of global economic activity, making it challenging for any country to escape the impacts of a downturn in three economic behemoths. Those who are less fortunate suffer the most since they must spend a higher portion of their money on food and energy.
The state-owned energy company of Russia, Gazprom, announced this week that it would not resume the flow of natural gas through its Nord Stream 1 pipeline until Europe lifted its sanctions related to Ukraine. This week, concerns in Europe about chilly living rooms, shut-down production lines, and staggering energy bills this winter increased.
More and more European officials are certain that Russia’s attempts to use its gas supplies as leverage will yield decreasing results. The EU countries have been actively looking for alternate energy sources, making progress in lowering their dependency on Russia and building up their reserves to get through the winter. But few think that the economy will escape harm.
According to Rystad Energy, daily average power costs in Western Europe have risen to record highs, surpassing 600 euros ($599) per megawatt-hour in Germany and 700 euros in France, with peak-hour rates reaching as high as 1,500 euros.
About 70,000 irate Czech demonstrators, many of whom had ties to far-right organizations, converged on Wenceslas Square in Prague last weekend to protest skyrocketing energy costs. The governments of Germany, France, and Finland have previously intervened to prevent the collapse of local power providers. However, Germany-based Uniper, one of Europe’s top importers and suppliers of natural gas, said last week that the price increase was costing them more than 100 million euros every day.
Germany, Sweden, France, and Britain all recently launched extensive billion-dollar relief packages, along with rationing and conservation strategies, to lessen the burden on people and companies. All of these actions would be extremely expensive at a time when the level of public debt is already mind-boggling. The International Monetary Fund released a proposal this week to change the rules for government public expenditure and deficits in the European Union as a result of concerns over dangerously high debt.
Still, the absence of affordable energy for nations continues to be a pitiless and relentless reality. The amount of steel, timber, microchips, glass, cotton, plastic, chemicals, and power needed to make the food, home heating, garage doors, bicycles, infant formula, wine glasses, and other items that customers demand is just insufficient at the current price.
The shortage’s origins go back to before the conflict in Ukraine. According to Sven Smit, a senior partner at the consultancy company McKinsey & Co., commodity prices began to rise in 2020 as nations started to come out of pandemic constraints. Based on consumer spending trends before the coronavirus’s arrival, consumers in the United States alone were purchasing $1 trillion worth of more items than anticipated.
The issue was made worse by a dramatic shift in expenditure toward items like new cars and kitchen tiles and away from leisure and dining-out-related expenses. These things need more energy and resources to produce than services do. According to Smit, there is a “reduced supply chain” rather than a destroyed one, and “this is a physical crisis as opposed to a psychological one.”
According to Smit, it used to be that “you felt terrified of something, you stopped spending, and then you grew more comfortable, and spending came back.” “That is not what is taking place at this time.” We must restore supplies if we are to crack this conundrum. The requirement to provide energy that is not only readily available but also affordable complicates that conundrum.
This problem is further complicated by the need to generate energy that will not only be easily and inexpensively accessible but also won’t exacerbate the catastrophic climate change that is now destroying the whole world. It will take years to achieve that goal, not months.
Energy price restrictions may provide short-term comfort to suffering people and companies, but economists are worried that they would weaken the motivation to cut energy usage, which is the main objective in a world of shortages. Western central banks are expected to maintain higher interest rates to increase the cost of borrowing and control inflation.
The U.S. Federal Reserve is probably going to raise interest rates when it meets this month in response to the European Central Bank’s decision to do so on Thursday. A similar stance has been taken by the Bank of England.
The concern is that the aggressive effort to lower prices may cause recessions in economies. Higher interest rates alone won’t lower the price of oil and gas until the economy crashes severe enough to drastically cut demand. Many economists have already forecast a recession in Germany, Italy, and the rest of the Eurozone before the end of the year. Higher interest rates result in increased debt and less money available for spending on the most vulnerable in poor and growing countries.
Edited by Prakriti Arora