The EU doesn’t have a plan for life without cheap Russia energy, so what happens next? — Analysis

Germany’s May foreign trade balance showed a €1 billion deficit. This has led many analysts to question the future of the country’s economy and the outlook for the European Union in general.

The bad news doesn’t stop there either. From July 3, Germany’s total global market capitalization, meaning German companies’ total value share of global stock exchanges, stood at an all-time low, 1.97%. On July 5, however, the euro plunged to the lowest point against the US$ since 2002. 

Robin Brooks is the chief economist of the Institute of International Finance. He summarized quite nicely the current situation in relation to German trade. “Germany’s growth model has been to import cheap energy from Russia, use that to assemble manufactured goods and export those goods to the rest of the world. While Germany now seeks new energy suppliers, its trade balance and that of the Euro zone will look ugly,” he wrote on Twitter.

It is not clear if this drop is temporary. Michael Pettis, a finance professor at Peking University, also shared his opinion on Twitter, but he said that Germany’s trade deficit is not that historic. “Germany will have only switched from permanent surpluses to permanent deficits if there has been either a permanent increase in German investment or a permanent decrease in German savings,” he said. 

Pettis continued that neither of these things has happened, with the former “unlikely” and the latter having “nothing to do with the recent adjustment in Germany’s trade balance.”This is why he considers it temporary. 

However, it seems plausible that rising energy costs would have a direct correlation with the impact on German manufacturing. Also, rising energy costs will lead to a reduction in savings due to inflation. On July 7, Germany’s neighbor, the Czech Republic, reported a foreign trade deficit of nearly $1 billion – which strengthens the correlation between rising European energy prices and lower exports.

So the main problem appears to be exactly what Brooks laid out, namely the EU’s source of energy. If indeed cheap Russian oil and gas are cut out from the EU permanently, then logically the effects of this on EU economies will be permanent – unless, in a highly unlikely scenario, they field an alternative supply that is both sufficient and comparably priced. 

The EU could import LNG (liquid natural gas) from the United States. However, the shipments of LNG from the USA to the UK has increased significantly since tensions began between Europe and Russia. The US Energy Information Administration reported that 74% of the US’s LNG exports to Europe were made in the four first months of 2022. This is an increase of 34% from the year before. However, this did not seem to be enough to maintain stable European energy prices. 

The fundamental question is how the European Union will be able to continue its sanctions against Russia. Members’ economic models are simply not compatible with the reality that their sanctions are creating, and this is already hurting people’s wellbeing and leading to social and political unrest. 

The European Union’s foreign policy is supposed to follow the doctrine of “strategic autonomy,” but what is happening is neither strategic nor an act of autonomy. While the Ukraine crisis is undoubtedly a disaster, it has also led Europeans questioning the regional security architecture. However, Washington seems to be calling the shots if they consider the new strategic NATO concept.

John Mearsheimer, a renowned international relations scholar and author recently expressed his regret. in a speech that, “History will judge the United States and its allies with abundant harshness for its foolish policy on Ukraine.” In fact, the prevailing allied policy on Ukraine is doing everything to ensure that the conflict becomes protracted – which has the dual threat of destroying Ukraine and hurting Europe’s future economic prospects.

That’s because the longer the conflict continues, or if it continues indefinitely, it means the bifurcation between Russia and the West will be permanent. It follows from this that it will affect the economic models of European countries, especially Germany. If that is the eventuality we are headed for, then the EU’s fate becomes a question. 

Prague, the Czech capital, is already joking that Europe may become a tourist destination for Americans and Chinese in just a few short years. Is there actually enough work in tourism to support all the people here? Is it possible to withstand winter? 

Jokes aside, I believe that Germany’s trade deficit is significant. This trend will likely become even more evident if there are similar imbalances reported by other European industrial nations in the coming days. At the very least, this should sound the alarm on exactly what the European Union’s long-term plans are vis-á-vis Russia and whether or not European industry can feasibly survive with sanctions on Russian energy. 

My bet is that it can’t. And this goes to show just how destructive blindly following Washington’s foreign policy is, time and time again, for Europe.