Familiar Eurozone fault lines are starting to re-surface
It has been nearly six months since Putin launched his invasion of Ukraine, but for Europe, the worst is yet to come. Already companies are contemplating shutting down production, including aluminium smelters in Slovakia and fertilizer producers in the UK. Corporations need to plan long term, and forward contracts for electricity (which are supposed to lock in energy costs) are at all-time highs for 2023 and 2024.
For the foreseeable future, high energy costs will be the new normal, making the production of everything from food to paper to chemicals more expensive. Furthermore, it is not at all clear to what extent hot water, electricity, and heating will be available in countries like Germany, Austria, Italy, or Hungary – or how the population will react if there should be real shortages in these areas.
Not all countries, however, depend on Russia to the same extent which is becoming the newest point of contention within the EU. Ideally the 27 member states would present a unified front, attempting to face the ongoing energy crisis together. Yet none of this is actually happening, and one way or another everyone is fending for themselves. Hungary went even so far to send their foreign secretary to Moscow in order to ask for continued gas flows, while solidarity between member states is starting to wear thin.
The proposition by the European Commission to reduce gas consumption by 15% as soon as possible was met with fierce resistance by Portugal, Spain, Greece, Italy, and others who depend less on Russian gas and feel that they are being forced to compensate for the mistakes of others, especially Germany. But given that the agreement is based on a voluntary reduction in gas consumption until next spring, the announcement is basically meaningless.
The idea that any European government will “voluntarily” inflict even more of an energy crunch on its electorate than absolutely necessary is unrealistic. The EU and its members do not have the best track record when it comes to respecting binding rules (just remember the no-bailout clause for states’ sovereign debt during the Global Financial Crisis in 2008 to 2010), so it is even less likely that a voluntary agreement will be very effective.
With rampant inflation in the Eurozone the ECB will be forced to raise interest rates, which will create similar conditions to 2010 and could plunge southern Europe into a new sovereign debt crisis. And once again it will most likely be Germany that will have to take the lead in keeping the Eurozone together. The question is, however: will Berlin still have the resources to do so if its own economy is in a recession?
German economic power is waning, and with its industrial base getting weaker and its population poorer, the willingness to support other members of the Eurozone will be more limited. This is not a recipe for stability, and it seems more likely than not that European solidarity is already past its high point.