Europe is undergoing an energy crisis. The war in Ukraine lies behind the crisis. The crisis triggers thoughts on the following topics: a possible recession in Europe, inflation, monetary policies, fiscal policies, and the climate crisis.
Recent Developments which has added new dimension to the energy crisis:
The G7 countries decided on September 2, 2022 to impose a price ceiling on natural gas supplied by Russia. The aim is to weaken Russia’s most important source of income. The next day, Russia stopped the natural gas flow to Germany through the Nord Stream 1 pipeline, citing “technical reasons”. Russia’s decision was not technical but “political.”
Unless the European embargo on Russia is withdrawn, the Nord Stream 1 pipeline is not going to be reactivated. Russia’s natural gas sales to China and India strengthen Russia’s stance towards Europe as far as sources of income is concerned.
As of September 5, 2022, natural gas prices increased by 30% in the Amsterdam TTF market. Compared to September 2021, natural gas prices have increased 10 times.
The interruption of natural gas flow from Russia to Europe has effects at different levels in each country in Europe. The worst affected country is obviously Germany. Inflation in developed economies has been breaking historical records. The rise in energy prices plays the leading role behind these records. As of August, inflation is 9.1% in the Eurozone and 8% in Germany.
Inflationary conditions aggravated by rising energy prices have begun to cause social turmoil in European societies. Germany announced an economic support package of €65 billion at the end of a 22-hour meeting after Russia stopped the flow of gas. The aim is to provide assistance to low-income groups. The figure corresponds to 1.8% of the size of the German economy. Support packages were also put into use by Sweden, the Czech Republic, France and Italy. Russia is testing how strongly unified Europe is.
It is certainly not possible for Europe to establish the infrastructure in order to tap the energy resources of the Americas and Asia in the short term. Uncertainties about the energy supply in the future forces European countries to take savings measures although there are high energy storage levels. The steel, chemical and glass industries are the industries which have to use the most energy resources. Some firms in these industries have had to stop production temporarily. Therefore, it has become necessary to reopen coal and nuclear power plants that were abandoned in the past.
Europe’s energy crisis has two important consequences. First, the likelihood of a recession has been strengthened. Second, Europe has had to turn to energy sources that are much more harmful to the environment than natural gas.
Strengthening likelihood of a recession in Europe and monetary policies:
Another important reason for a potential recession in Europe is monetary policies. The European Central Bank (ECB) emphasizes that it is committed to achieve the 2% inflation target. To this end, it decided to increase interest rates by 0.75 percentage points at its meeting on 8 September. The impact of monetary policies on the supply-side causes of inflation will be indirect and weak. The ECB’s interest rate was 0% against 9.1% inflation and it was not in line with the monetary policy technique. More normalization is absolutely needed in the ECB’s journey to reach the rate of inflation of 2%. The energy crisis is a problem that lies in the middle of both inflation and a possible recession. Decision-making in monetary policy becomes increasingly difficult under the increasingly delicate economic balances.
Fed chairman Powell said the economy “will not work for anyone” without price stability. Apart from the ECB, the Fed’s fight against inflation will also be an important cause of a possible recession in Europe.
Direction of fiscal policies in the new inflationary world:
After the Global Financial Crisis, the level of global indebtedness increased significantly. Public budgets had to shoulder additional burdens throughout the Covid-19 crisis. A presentation drawing attention to fiscal policies was made at the meetings in Jackson Hall, Wyo. The study by Francesco Bianchi of Johns Hopkins University and Leonardo Melosi of Chicago Fed has a striking finding. It is stated that the $1.9 trillion support package introduced by the Biden administration in the USA in 2021 due the Covid-19 crisis contributed 4 percentage points to the current 8.5% of inflation. This finding for the USA has a message and importance for Europe as well.
While the ECB raises the interest rate against inflation, the fiscal policy cannot remain indifferent to the tightening monetary policy. In other words, while monetary policy is contractionary, fiscal policy cannot and should not be expansionary. As Bianchi and Melosi pointed out, while monetary policy is trying to reduce inflation, economic support packages cannot bring into play the elements that will keep inflation up or increase it. Otherwise, the effectiveness of both monetary policy and fiscal policy will weaken. However, there is no fiscal union in Europe!
Under the pressure of social support obligations, inflation, and a potential recession, the decision-making processes of economic policies become extraordinarily delicate. As far as I know, politicians don’t make decisions based on the findings of econometric models.
Although monetary policy was expansionary following the Global Financial Crisis, inflation did not rise. Therefore, there was no harm implementing expansionary fiscal policies within the framework of the concept of “policy effectiveness and coherence.”
The post-Covid-19 world presents extremely complex economic developments. Understanding the changing structural dynamics of inflation is crucial for devising correct policy solutions. The issue is not just about the developments in energy and food prices.
Climate crisis, market and freedoms:
Let’s come to the most important issue: the climate crisis. The economic and political crises humanity faces today has been worsening with the climate crisis. The greenhouse gas emission targets put forward by supra-state organizations contain insufficient measures against the disaster scenarios of natural sciences. I will cover the details of this subject in another article. The climate crisis and the economy are in no way separable. The economy is the cause of the climate crisis.
There are many academic articles which analyze the relationships between growth, development and democracy and look at these relationships from a historical perspective. The capitalist understanding which took its roots in the 1980s and has become prevalent ignores the importance of social and economic justice.
Capitalizing on the concept of “globalization” with the slogan of “freedom”, capitalism was based on the assumption that the “market” could solve any social problem. The climate crisis is part of this “any social problem”. The new capitalist understanding interpreted the principle of “laissez faire, laissez passer” as “no rules” and “deregulation” processes took place. These processes have resulted in the growth of disadvantaged social classes and increasing inequalities especially in western economies.
Developing conditions brought along the shift of societies to political preferences that care about localness. While defending freedom through the market mechanism, capitalism created a world in which tyrants and fascists came to power one after the other with populist rhetoric or could come very close to power. Similar political preferences have emerged in developing countries as well. Although they benefited for a while from the crisis originated in the developed economies, they later started suffering due to their “dependence” on the developed ones. Freedom and democracy have taken significant damage on a global scale.
While it was thought that democracy would provide economic prosperity by contributing to capitalism through the concept of freedom, the market fetishist perspectives of capitalism hit democracy badly.
It would be insufficient to look at the damaged democracy only from the point of view of economic inequalities. However, there is no doubt that inequalities play a very important role.
The climate crisis causes the problem of climate refugees. The increase in climate refugees is going to create a world in which the concept of nationalism is going to be more on the agenda. Those heavily affected by the climate crisis will be able to migrate to less affected countries.
Lack of water, agricultural products that cannot be obtained due to drought, together with the increasing migration problem, may cause additional damage to democracy.
Capitalism, which left everything to the market experienced a regime change to a certain extent based mainly on inequalities. The liberal environment capitalism desired and initially thought it had created was damaged. With the climate crisis, it seems inevitable that this process will extend to another level. Capitalism will lose the concept of “freedom” with the order it imposes. This means that capitalism in its current form is self-contradictory and can lead to autocratic orders. If the idea of capitalist freedom were sincere, the richest people in the world wouldn’t be chasing the drilling of new energy sources that have emerged as a result of melting glaciers in the Arctic.
Europe is suffering from scorching drought, California is burning, Salt Lake has suffered heavy water loss, one-third of Pakistan is inundated by floods, sea levels are rising, etc. There are models and studies that have predicted these disasters.
3.5 billion people live around the 40,000-kilometer equator line. Imagine that a large number of these people have become climate refugees. Say “laissez faire, laissez passer” if you can.
