Europe is struggling to survive and the winter is yet to come

a cold one for the EURO

Europe’s economy is at the brink of recession. Record high inflation fueled by the high energy prices and raging war in Ukraine is severely damaging Europe’s economy, while at the same time the European Union is becoming increasingly politically divided.

Economic damage

Europe is experiencing tough times that are likely to worsen as the winter approaches. This is largely due to self inflicted pain caused by the sanctions on Russia and fatal dependence on Russian gas. Euro-zone inflation continues rising (currently at 10.7%) in spite of ECB increasing interest rates.

Energy crisis is beginning to have a catastrophic effect on the Euro-zone economy. In Germany, Europe’s largest economy, businesses are going insolvent as a result of escalating energy costs and record high inflation.

Europe is starting to lose industries, especially energy intensive industries find it extremely difficult to continue operations in Europe. Besides the escalating operating costs, tight regulations regarding the ambitious climate goals are destroying Europe's industrial competitiveness.

Yet, it can get much worse. Russian aluminum is currently not sanctioned in the US and across Europe. Alcoa Corp, the largest US aluminum producer, has been lobbying for measures against the metal and the White House is considering a ban on aluminum imports from Russian producer, Rusal.With Russian aluminum sanctioned, Europe’s economy would become crippled with thousands of companies being put out of business.

Energy crisis

Major problem for Europe today is the uncertainty about the energy supply needed to get through the winter. Although the EU gas storage has been filled to 93% of its capacity, which covers about 28% of its annual gas consumption, it might not be enough in case of an extreme winter. To make things worse the energy supply options for Europe are becoming very limited.

As the Russian oil and gas are sanctioned, USA and China have stepped in and supplied Europe with LNG. China can’t afford sending more gas to Europe, which they need for themselves during the winter.

Political fracture

The economic strain, skyrocketing energy prices and record high inflation are also encouraging divisions across the political lines. The European Union is becoming increasingly fragmented as the nations are struggling to survive and prepare for the winter.

As usual, in the time of crisis populism is on the rise, like the recent Italian elections have shown. Is this ultra-nationalist lady going to promote European solidarity? Or will Italy prefer to take control of its own destiny, maybe even outside of the EU?

Hungary is opposing the sanctions on Russia. Break-lines in the European Union are widening as the nations disagree about the direction.

How divided the EU will become is yet to be seen when the winter comes. Will Europe manage to stay united in these tough times or is it now everyone for themselves?

To conclude

The Euro-zone economic outlook is quite negative and the situation can only worsen during the winter. As the available gas reserves are being rationed between the industry and households, the extent of economic damage now depends on how severe the winter is going to be. Furthermore, internal political divisions within the European Union don't make it easier to find solutions in these difficult times.

As the energy intensive industries are planning to leave Europe, economic stagnation is ensured. If this is going to have long term negative consequences on Europe’s economy depends on what the European planners have in mind. Maybe the departure of dirty industry is desirable so that Europe can focus on growing a future-proof green industry.The era of affordable energy in Europe is over and there’s no going back. Sanctions on Russian oil and gas will boost Asian economy, as Asia will now benefit from the cheap Russian energy, just as Europe did in the past several decades.Potential catalysts to watch are:

  • further escalation of the war in Ukraine

  • sanctions on Russian aluminum

  • another production cut by OPEC