EU 'Disappearing' as Global Economic Player Due to High Energy Costs

Boycotting Russia's cheap pipeline gas after the beginning of Moscow's special operation in Ukraine came at a price for Europe, given that pipelines are the most cost-effective way to transport the commodity and are difficult to quickly replace.

However, a mild last winter allowed the Old Continent to avoid a critical energy crisis, despite gas prices going through the roof. Is the European economy out of danger now?

"Regarding what happened in the winter of 2022, it is true that European countries didn't have the capacity to replace all the Russian gas by liquefied natural gas (LNG) because the number of LNG stations, also known as regasification stations, in different harbors of European countries, was just not enough to replace the whole Russian gas," Sapir told Sputnik.

"But Russian gas didn't stop at once. It decreased progressively and even now there is still a small amount of Russian gas going to Europe. So, the necessity to substitute gas with LNG and to build new stations for regasification - also to build new ships to transport this liquid gas, and these ships are taking time to be built - this has not been a major problem this past winter for just one reason: This winter has been particularly mild. But if the next winter, if winter 2024 is harsh, then there will be a serious problem, because the complete substitution of Russian gas by LNG will take around three to four years," he continued.

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Europe had grown reliant on Russian gas since the 1960s. In 1967, the Brotherhood gas pipeline running from the USSR was connected with the gas infrastructure of Czechoslovakia. In 1968, the Soviet Union began supplies to Western Europe following the striking of a contract with Austria's OMV.

Over time, cheap Russian energy become a driver for Europe's economies, especially for Germany which decided to close its nuclear power stations and replace them mostly by gas.

Western energy sanctions against Russia shook the whole energy model of European countries to the roots and the simple fact of having to substitute Russian gas with LNG made costs hover by 20 to 30% higher, per Sapir. A report from the Bruegel Institute indicates that EU countries had to spend about €800 billion in 2022 to protect households and consumers from rising energy prices.

"We don't know, but I think it's quite crucial to say that it will not be a problem of cost," the French economist said. "If the EU has to spend €700 or €800 billion again for next winter and again for the winter after that, it will do that. The European Central Bank will probably provide this money. Of course, we will have a huge problem afterwards for public spending, for budgets, the level of debt will be high, but I think that this kind of shielding households and enterprises from the consequences of sanctions could be done for the next two years. That is not the problem. The problem is how to restore, how to rebuild European competitiveness in ten years because the entry costs are much higher now, especially for oil and gas. With other countries like China and India buying oil at a much-reduced price from Russia, the problem of competitiveness will be a very, very serious one (…) This long-term question of how to rebuild European competitiveness will be the major issue for the next five or ten years."

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Europe as a global economic player began to lose its clout compared to the United States, China, and other players even before the Ukraine crisis: the Old Continent's global share of gross domestic product was about 36%, while by 2020 it had contracted to 15%.

As per Sapir, the actual decline of Europe started in the 2010s and was linked to industrial choices made by different countries, and also by the fact that Germany "has pumped up consumption" and "imposed on these countries some quite radical measures on budget adjustment," which led to a series of crises in Greece, Spain and Italy.

Another problem was the shock of COVID-19 on European economies which hurt them harsher than the US or China. Now, even EU longtime flagship Germany has found itself between a rock and a hard place. The country has entered a technical recession with GDP -0.5% for the last quarter of 2022 and -0.3% for the first quarter of this year.

"Coming on top of this long-term problem, having a new energy problem in Europe, is now confronting European politicians with some very, very hard decisions: How to restore the competitiveness of their countries; how to do so without shaking considerably the structure of the European Union. We can't know the solutions to these problems, but they have to be found in the next five or next ten years or the European Union will progressively disappear as a major actor in the global economy," Sapir concluded.

For more of Jacques Sapir's exclusive analysis on the EU economy's dilemmas, check out the full episode of the New Rules podcast.