When sanctions backfire | Critical Analysis |Axisoflogic.com

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

As Germany reports its first trade deficit in 30 years, the prospects for West European industry look grim thanks to the US-led sanctions on Russia

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. As of 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%. Meanwhile, on July 5, the euro fell to its lowest level against the US dollar since 2002.

Robin Brooks, chief economist for the Institute of International Finance, summed up the situation regarding German trade quite well. “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.

The question is whether or not this dip is permanent. 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.” Because of this, he deems the situation temporary.

It seems reasonable, however, that there would be a clear correlation between rising energy prices and this hit to German manufacturing. Rising energy prices likewise imply reductions in savings because of 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.

One solution on the table is for the EU to import liquified natural gas (LNG) from the United States. However, shipments of American LNG to the EU and UK have already increased since the political tensions between Europe and Russia began. According to the US Energy Information Administration, the US exported 74% of its LNG to Europe in the first four months of 2022, which is up from 34% the previous year. But this was apparently not enough to keep European energy prices stable.

This raises a fundamental issue, which is whether the European Union can actually afford to maintain its sanctions on 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. No doubt the situation in Ukraine is horrifying and has led Europeans to question the existing security architecture of the region, but, if the latest strategic concept of NATO is any suggestion, the shots are being called from Washington.

Famed international relations scholar John Mearsheimer recently lamented 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. And it logically follows that this will impact the economic model of European countries, particularly of Germany. If that is the eventuality we are headed for, then the EU’s fate becomes a question.

Already, people in the Czech capital of Prague are beginning to joke that in a few years Europe will be nothing more than a summer holiday spot for the Americans and Chinese. But are there really enough jobs in the tourism industry for all of us here? And can we all withstand the winter off-season?

Jokes aside, I believe that Germany’s trade deficit is significant. In a few days, the trend could be more pronounced if other industrial European countries report similar deficits. 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.

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