The Ukrainian crisis continues to backfire on the European economy (in depth observation)

Core Reading

The Financial Times recently reported that since the comprehensive escalation of the Ukraine crisis last year, large European companies have suffered direct losses of at least 100 billion euros in their operations in Russia. At the same time, the United States is constantly seeking significant political and economic benefits from it.

European intellectuals believe that Europe has followed the United States in implementing multiple rounds of sanctions against Russia, causing its own economy to continue to suffer from backlash, soaring energy prices, high inflation, huge losses for businesses, shrinking real wages for the people, and increasing pressure on people's livelihoods.

Inflation remains stubborn

Preliminary statistical data released by the Eurostat recently showed that food and alcohol prices in the Eurozone increased by 9.8% year-on-year in August, prices of non energy industrial products increased by 4.8%, and service prices increased by 5.5%. The core inflation rate for the month, excluding energy, food, and tobacco and alcohol prices, was 5.3%. The latest released inflation data is higher than market expectations, exacerbating persistent concerns about inflation and causing people to suffer from rising prices.

In early August, workers from Chevron and Woodside Energy Group's Australian factories went on strike, directly affecting the European natural gas market. The price of natural gas in Europe has surged by 40%, marking the largest increase since March 2022 and breaking through the price of 40 euros per megawatt hour for the first time since June this year, highlighting the market's tense sentiment towards energy supply. Many experts believe that Europe's resilience to global energy market fluctuations is declining, and as winter approaches, a new energy crisis may once again impact European economic confidence.

In many European countries, due to the rising prices of raw materials such as wheat and high labor costs, the production cost of bread has skyrocketed, and many bakeries are facing closure. A Hungarian bakery owner, Voido Joseph, said that the cost expenditure of various bread products in the store has almost doubled compared to three years ago, but the number of customers coming to buy is decreasing, and the per capita consumption has also decreased. In Italy, the price of noodles has increased by nearly 17% compared to the previous year; In Germany, the price of cheese has increased by nearly 40% compared to a year ago, and the price of potatoes has increased by 14%... Many European people complain that real wages have hardly increased since the beginning of this year, but the cost of living is getting higher and higher. "This is very abnormal, we have had enough of these days.".

At a time when many people in Europe were struggling, American food giants were making a lot of money. Taking Bangui Company in the United States as an example, after the comprehensive escalation of the Ukraine crisis, the company's 2022 full year profit forecast has been raised by at least 21%, with a full year revenue of $67.2 billion. From January to August this year, the overall stock price of Bangui rose by about 15%.

The weak economic growth affects the purchasing power of European society. According to data from the Organization for Economic Cooperation and Development, the current consumption expenditure of the European Union accounts for approximately 18% of global consumption expenditure, while the United States accounts for 28%; Fifteen years ago, the European Union and the United States each accounted for about a quarter of global consumer spending. The Chief Economist of the Bank of England, Hugh Peel, stated that Europe "faces different combinations of shocks", with European Central Bank policymakers facing more difficulties than the Federal Reserve, and inflation in Europe appearing more sticky.

Manufacturing industry hit hard

Against the backdrop of the United States constantly stirring up geopolitical chess, leveraging energy leverage, and implementing protectionist measures, the foundation of European manufacturing has been weakened, and industrial exports have also been affected.

A report from the United Nations Department of Economic and Social Affairs shows that high energy prices have weakened the competitiveness of high energy consuming industries in Europe, including automotive manufacturing, resulting in a loss of market share. According to the Purchasing Managers Index released by financial analysis firm S&P Global on September 1st, the Eurozone's manufacturing PMI for August was 43.5, lower than previously expected.

In order to reduce operating costs, multiple aluminum and zinc smelters in Europe have been forced to close, leaving a large amount of crude steel production capacity idle and hitting the manufacturing industry. The German economy has shown negative growth for two consecutive quarters, with a GDP growth rate of approximately -0.3% and industrial output declining for two consecutive quarters. The report from the German credit agency "Credit Reform" shows that due to the heavy cost burden, the number of bankrupt companies in Germany increased by 16.2% year-on-year in the first half of 2023. "In Europe, high energy prices continue to bring pressure and trouble to the manufacturing industry," said Maxim Darmet, an economist at Allianz Trading in Germany, in an interview with the French newspaper Le Monde

The United States has introduced the Inflation Reduction Act, which promotes the production and application of electric vehicles and other green technologies in the United States through measures such as high subsidies. "We are shocked that these subsidies are protectionism, and the Americans have stabbed us in the back," said Olivier Joris, the EU Affairs Director of the Belgian Enterprise Federation

European media has noticed that under the influence of multiple factors, some investments and high-end technical talents are being lost from various European countries. In March of this year, Volkswagen Group of Germany launched a $2 billion project in the United States to build a new electric SUV factory in South Carolina. German Deputy Prime Minister and Minister of Economy and Climate Protection Robert Habeck angrily accused the United States, "This is like declaring war."

High pressure for energy transformation

The ongoing crisis in Ukraine has disrupted Europe's established energy transition plan, forcing Europe to seek alternatives on a global scale. According to Kepler, a commodity data analysis company, in 2022, the European Union imported 41% of its total imports of liquefied natural gas from the United States, an increase of 154% from the previous year. According to Eurostat data, the EU's imports from the United States increased by 53.5% in 2022, mainly due to increased energy trade and skyrocketing energy prices. French President Macron has repeatedly criticized the "double standards" of energy prices in the United States, pointing out that the price of liquefied natural gas in the United States to Europe is several times higher than that in the US market.

Russex, Executive Director of S&P Global Commodity Insight, said, "The Ukraine crisis has brought pain to Europe and changed Europe's energy policy." In multiple European countries, restarting coal-fired power, suspending nuclear power withdrawals, and increasing natural gas reserves have become important emergency measures. The Sunday Times recently reported on Germany's restart of brown coal power plants, stating that the return of coal is a "painful moment" and that "the Ukrainian crisis has led to unexpected consequences.". The non-governmental organization "European Climate Action Network" believes that the Ukrainian crisis is reshaping Europe's energy reality, and some European countries have hastily chosen the wrong solution.

In the first half of this year, the European Commission launched the Clean Zero Industry Act again, aiming to enhance the competitiveness of EU clean energy technologies and achieve the goal of clean energy transformation. The bill requires that by 2030, at least 40% of the EU's clean technology products, including wind turbines, batteries, heat pumps, solar panels, renewable hydrogen, etc., be manufactured domestically in Europe. The US Politburo reported that the EU's move is a direct response to the US Inflation Reduction Act, in order to prevent US protection policies from impacting the European renewable energy industry chain and emptying the EU economy.

Benjamin Pogosyn, Director of the Armenian Center for Political, Economic and Strategic Studies, analyzed that the Ukrainian crisis has caused the rupture of Russia Europe relations and seems to have made the path of European strategic autonomy even more bumpy. On the one hand, the United States is intensifying its projection of influence in fossil energy distribution areas, attempting to further control the dominance of energy geopolitics; On the other hand, the United States is accelerating its occupation of the clean energy market, hoping to dominate the supply chain and exert dual pressure on Europe in terms of energy security and energy transformation. "Following the United States will not bring any benefits to Europe," Pogo emphasized. Europe needs to understand that in the new world order, doing so is not in Europe's best interest.