Making sense of a self-induced recession in Europe


Higher energy prices in times of economic slowdown raise consumer prices and make production more costly and less competitive. At first sight, the EU’s decision to enter the Ukraine war and pay higher energy prices at a time of stagflation appears irrational; but is it really?

  • An attempt at making sense of a self-induced recession in the Eurozone

The Eurozone entering recession was no surprise to anyone. The slowdown was anticipated as soon as the first Russia sanctions came into effect with Russia gaining back control over Crimea. Back then, the EU had enforced several sanctions targeting specific entities and individuals linked to the Russian State. Although limited in scope, these sanctions showed clear signs that relations between the EU and Russia were treading on a fine line.

What is certain however is that the conditions for non-belligerence between Russia and Europe never existed on account of structural power rifts. Russia is too big to handle and must come apart for the EU/US constellation to maintain global hegemony. The current lineup of European states against Russia is reminiscent of many such instances in history.

Of late, Chancellor Angela Merkel’s point that the Minsk Agreement was a cover-up to arm Ukraine, or her remark that “the Cold War never really ended,” are points on a historical continuum. The impoverishment of Ukraine and its deployment as a mercenary against Russia is an investment for some dollars, which will bear fruit once Russia implodes. The West grows by aggression and the current events are merely the fruits born out of the long-standing contradictions that history has so far failed to solve.

In a 2014 report titled “The EU’s Energy Security Made Urgent by the Crimean Crisis,” the EU Parliament outlined the challenges that lay ahead of enforcing sanctions on Russia. An interesting aspect of this report conveys salient aspects of the bloc’s decision-making. By contrasting both the short-term and long-term implications of anti-Russian sanctions on the bloc’s economy, we may discern the rationale for the EU’s decision: in the short-term, the EU would be faced with “several obstacles” linked to the construction of new import terminals, the conversion of electric plants to other energy sources, the substitution of Russian gas imports with those from Norway, Algeria, and Qatar which would result in external shocks and “recession effects” to the EU economy, while in the long-term, the sanctions promise to strengthen Europe’s security, forging trade alliances with “new countries,” increasing renewable energy production, and other means of reducing energy dependency to Russia.

The point remains that Europe restructures power balances by forcing countries into submission and drawing future resources for cheap costs. The principle governing the EU’s decision-making is that the temporary erosion of European welfare – the current security of Europe’s working classes — is meant to strengthen the bloc’s autonomy and boost European working class and capital security in the long run. The European working class continues to partner with capital since its colonial wars and it benefits from the power generated imperialist dividends. That rationale is the very same one being applied in the context of the Ukrainian conflict — that the temporary contraction of the Eurozone is meant to enhance Europe’s security and economy in the long run. 

The German Renewable Energy Act 2023 is one instance of such a rationale – a program widely condemned for overlooking Germany’s most pressing needs in terms of solving inflation, restoring purchasing power, and answering manufacturers energy demands. Earlier in January this year, just a month after the amendment got approved by the EU in December 2022, Chancellor Scholz told Bloomberg that he was “absolutely convinced” Germany would not head into a recession. But once the numbers were released and the damage was made obvious: the country’s manufacturing power, which the economy has so relied on cheap Russian energy for the past 20 years, fell.

Prior to the start of the Ukrainian conflict, Russian oil had enabled the German economy to boom, fostering job creation, and growth in various sectors, and contributing to trade surpluses that further stimulated the business cycles. When sanctions on Russia were enforced and Nord Stream was blown up, Germany’s manufacturing PMI, which measures the performance of the manufacturing sector, fell to its lowest levels recorded since 2020, with an index of 40.6 in June 2023 dropping from 44.5 in April.

France has been more careful to manage its spending as it seeks to revamp its nuclear reactors and build pipelines stretching from Algeria to Spain. But the government has also faced some serious backlash over its pension reform scheme, another strategy aimed at averting a crisis of confidence in the French economy due to the energy issue. By raising the age of retirement from 62 to 64, workers are required to work two additional years and pay more contributions to the pension scheme, thus making younger people work for older ones and making the working classes bear full responsibility for the very existence of the pension scheme. In February this year, labor minister Olivier Dussopt said that it was necessary to start the reforms as soon as possible, because if not now then France will inevitably have to do it later. “Deficit does not take any breaks,” he said, adding that “If we want a reform, a more gradual entry into force, we have to do it very quickly, that’s what we are doing.”

Although not part of the Eurozone, the UK is also having its fair share of tough times as it faces a combination of inflation and a mortgage crisis that are likely to lead the country into a recession by the end of the year. Since last year, the Bank of England has been hiking interest rates in a bid to combat energy-crisis-induced inflation. But it has so far failed to stabilize price markets — prompting consumers to spend more on food and shelter yet receive less than pre-crisis levels. And worse, the country is now facing the prospects of a housing crisis as interest rates are nearing a 6 percent mark — a level that was last seen in 2008 when the housing crisis engulfed the economy.

Over the past decade and half, the UK has enjoyed near-zero interest rates, encouraging consumers to borrow money at low-interest rates. But that is soon to fire back on borrowers as the central bank has to keep hiking its rates, a process that is likely to affect the housing market and cause businesses to slow down even further. 

Read more: The Ukraine war: A spark for de-globalization?

Knowing well the consequences that bear upon its economy, namely the decoupling from Russian gas and Russian investments, it is instinctive to assume that the EU has beaten a new record for the most irrational decision-making. But arithmetic imposed on processes is misleading and considering the dynamic picture, more power garnered by Europe will resituate it at the helm of the international order. Once in power, Europe dictates to the world its terms of trade. When we consider the social aspects involved in the price formation of commodities — which in this particular context involves the sale of Russian gas for cheap prices, a decapitated Russia will sell its future gas for prices even lower than they were prior to the outbreak of the Ukraine conflict. 

This is important to consider because price formation is relative to the structures of power, which emanates from the resultant of social or power relations. Market powers provide the social context in which people come to relate to one another, and thus, how the terms of exchange are legitimized. As a matter of fact, the reason why Russian gas became so cheap after the Soviet Union collapsed is owed to the ideological defeat of the Soviet ideology. The establishment of the petrodollar system in 1973 was a turning point in history which saw the US consolidate the dollar as the dominant global reserve currency, causing a severe drop in the Soviet Union’s income and affecting the bloc’s ability to sustain itself as a autonomous economy.  

The history of Europe provides context to how the European working class relates to the capitalists of Europe. To a large extent, the working class of Europe has always been the soldiers of the Empire. By committing crimes against humanity, colonizing peoples, pillaging their resources, and carrying out genocides and ethnocides of immeasurable scale, the European working class reproduces itself by war just as capital does.

The EU has done well at washing the blood off its hands from centuries of looting and pillaging the South as it continues to vaunt its image of moral and cultural superiority and has done so by masterfully subjugating the discourse on human rights to serve its own ends. So much of Europe’s wealth was in fact generated by the relation of looting the South. The European working class makes a living out of killing by increasing its power and partnership with capital. But the presence of a strong Russia has always posed a threat to Western interests, especially as it holds sway over Eurasia. 

With the ideological defeat of the Soviet Union and the ongoing expansion of NATO, this pattern continues to take hold in the 21st century. But with the US bearing a leadership role within the alliance, many come to view the EU as being dragged into a war that is not theirs. Whether the US is exerting pressure on the EU or not, it is a certainty that whatever decisions being made are meant to safeguard the rules-based order — an order characterized by the primacy of Western culture and civilization over that of the South, which in turn pays dividends to the European working class itself. 

Simply put, it would be far off the mark to assume that the US bears full responsibility for a conflict that the EU has supposedly nothing to do with. Not only the Western alliance is all one and the same, but the imperialism-based order renders war as the only viable option against an autonomous Russia. Rivaling the primacy of the rules-based order is rivaling the terms of exchange as defined by the West, and rivaling the terms of exchange is rivaling US-EU military superiority.

The same applies in the context of waging a trade war with China. Reports have claimed that the US has been pressuring the EU to decouple from China. But neither the EU nor the US has thus far dared to initiate such a move. It is an indisputable certainty that doing so would wreak havoc on Western businesses that rely on Chinese supply chains and manufacturing power. But it is precisely this overreliance on China that the West is aiming to overturn.

Nevertheless, with resistance enacted by Russia and other global players, the prospects for a world where development would break off from waste accumulation — the production sphere of global industries that drive the destruction of the Global South — seem to be coming further in sight. 

Read more: Saudi security versus petrodollar

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