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Wednesday, March 22, 2023

Europe overcame the gas crisis, but fell victim to the recession

A year has passed since the start of the Russian military operation in Ukraine, and Europe has managed to avoid the worst-case scenario, to temporarily overcome the gas crisis and to avoid a total economic recession due to energy resources. Gas prices returned to near pre-conflict levels, factories resumed production growth, and European leaders like Ursula von der Leyen announced a joint victory over Moscow, which would have “lost the energy confrontation that had begun”. The gas crisis may be over, but the EU has fallen victim to (another) man-made recession.

Europe has emerged from one crisis, but now it risks falling into another, which it imposes on itself. We are talking about interest rate hikes by nervous central banks. Eurozone core inflation, excluding energy and food prices, hit a record 5.6% in February, and the ECB is poised to hike rates to a record high of 4% accordingly. He fears that without such monetary tightening, a new vicious circle of rising prices, stimulated by rising European wages, will begin.

Last year’s “victory” against rising energy prices was achieved through a strategy to reduce demand, reduce people’s living standards and reduce investment. For example, the management and employees of Basf never dreamed of such a “victory”. If a recession has been avoided, it is in no way thanks to the flawless planning of central banks, but because governments have spent colossal sums (nearly a trillion dollars) to protect households and eliminate consequences of the refusal of Russian gas, mainly in Germany. It will not be easy to repeat this feat in 2023.

The last thing Europe needs now is an economic slowdown caused by the ECB. At a time when the United States is opening a bottomless purse ready to spend nearly $400 billion on environmental subsidies and when China is on the verge of becoming the world’s second largest car exporter, Europe must invest to make up for the losses of a lost decade, and in the next decade so as not to lose leadership. Experts worry about this. Most likely, the crisis has been overcome on paper, and a new wave of inflation will simply mask the ends of economic chaos.

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