Will Europe’s ‘Third World’ Economic Crisis Lead To Global Recession?

Europe wants to blame Russia for all of its problems. But anyone who has spent a few years in the markets, and watching global business, knows that the sole source of Europe’s problems is its radical post-fossil fuel economic policies. Russia is just the scapegoat. Will the world suffer the consequences of this policy direction; a direction the entire EU has long said it was taking?

There are three things to consider here.

First, China is also slowing down. Thanks to its zero Covid policy, which put part of Chengdu city on lockdown last week, China is also impacting supply chains. And while there doesn’t seem to be any companies laying off because of this — as was the case last year when auto companies like GM temporarily furloughed workers because it couldn’t get basic semiconductors from Asia. No one can discount China’s slowdown as recessionary as China is the single largest consumer of commodities, something emerging markets and even the United States rely on for exports.

Another thing to consider is that in 2008 oil was over $180 a barrel. That summer, Goldman Sachs forecasted oil at $200. Gasoline was easy $4 a gallon in California, if not $5.

Yet, Europe didn’t suffer any of the problems it is suffering now. No one in the power structure of the European Commission, the European Union, in Germany, in France, not a soul, was calling for energy rationing and asking farmers to reduce fertilizer because fertilizer is also sourced from petroleum and — from Russia. No one did this even with Russian imported fuel at historic highs. No leaders were talking about living frugally while in a mansion surrounded by gold leaf panels. No one blamed the high diesel prices on Russia.

So all of this is policy driven. Russia is not the only country in the world that has oil and gas, even if European Commissioner Ursula von der Leyen seems to think so.

Markets drove up prices because speculators do what speculators do — bet on markets, bet on policy. They saw Europe taking an about-face on Russian oil and gas supply, so they jacked up the price expecting shifting allegiances and new price negotiations from the Saudis and Emirates.

The crisis in Europe is a policy error. It is designed to force-feed Europeans on a post-fossil fuel economy, and into a new industrial revolution, one in which — it seems — they will be less likely to participate in as energy prices in Asia and Latin America are nowhere near where they are in Europe.

There is no way no one in Europe’s leadership thought that be seizing over $250 billion worth of the Central Bank of Russia’s money, the Russians would only retailiate by banning imports of Nordic codfish. Seriously, people? So Russia has no interest now in shipping natural gas to Europe. Europe can get it elsewhere.

Like China.

Despite energy prices rising elsewhere too, nothing compares to the Euros.

In August, Brazil’s hydroelectric dams priced electricity at $36 per megawatt hour. Germany? That’ll be 315 euros per megawatt hour, danke.

If Europe goes into recession, and it will, it will buy fewer commodities from Brazil, Argentina and the U.S., its biggest suppliers. There is a chance that Europe will still be forced to import more food anyway because of, once again, its ludicrous food and fuel policies, but that is unknown. Will a weaker economy mean weaker demand, especially if inflation is high and European companies go broke, or downsize?

High-paying engineering jobs are already being cut at European tech firms.

Earlier last month, German wind turbine maker Siemens Gamesa said it is aiming to cut 1,500 jobs.

European stocks are underperforming the U.S. and most big emerging markets except China. The European Central Bank shows no signs of easing. With inflation over 9%, it is unlikely the ECB will step off the brakes.

Economic Growth Forecasts

It is wise to remember that natural gas prices rose, let’s say, around 700 points in all the volatility. There is no reason those prices can’t fall 500 points. All the talk about a rough, cold winter in Europe may just be media drama. Anti-nuclear Germany is already saying it will keep two nuclear reactors operational after pressure from anti-nuke activists to shut them down following the Fukushima power plant disaster in Japan over a decade ago.

If electricity prices keep rising, then Germany will be in a recession soon. They would be better off throwing money at oil, gas and nuclear to signal to the market that Europe is not giving up on fossil fuels. They’ve gone from Covid relief packages now to inflation relief packages.

“The third relief package does little to change the fact that Germany is likely to slide into recession in the autumn,” Commerzbank chief economist Joerg Kraemer was quoted as saying in Reuters on Monday.

ING chief economist Carsten Brzeski told Reuters the same thing, “The package will probably fall short in preventing the broader economy from falling into recession.”

The Third World-ization of Europe is pushing it below actual “third world” nations. India will overtake Germany’s GDP at this rate, some have predicted.

European economies are alive because of stimulus. It’s making inflation worse. They conserve electricity in parts of Europe now. They’re not doing this in India and Brazil.

It’s fine, though. The Netherlands’ leader Mark Rutte is ready for Third World Europe.

“You cannot help everyone so…we in the West will be a bit poorer because of the high inflation, and the high energy costs,” Rutte was the first to say when prices began rising in May.

The International Monetary Fund downgraded the 2023 growth forecasts for Germany, France, Italy and Spain, citing the Russia-Ukraine war uncertainties and higher interest rates to curb high inflation.

In the UK, inflation is above 10% for the first time in 40 years. The Bank of England forecasts inflation will peak above 13% in the fall, but that’s okay, because they are so rich in the UK that they are raising electricity rates by a reported 80%.

They’re not doing that in Vietnam.

Europe is one policy blunder mixed with mega-greed on top of the other.

Last week, the Economist Intelligence Unit (EIU) lowered its growth forecasts for the global economy. All of the European economies were downgraded, but for some reason, they are still positive for 2022.

Next year looks better for almost everyone. Except for most of Europe. Here’s how the EIU sees 2023 GDP.

• China: 5.3%
• India: 5.1%
• South Africa: 2.4%
• United States: 1.2%
• France: 0.3%
• Brazil: 0.3%
• EU27: 0.3%
• UK: -0.6%
• Germany: -1%
• The Netherlands: -0.9%
• Italy: -1.3%
• Russia: -3.4%

The takeaway: these numbers will be revised lower unless Europe gets its act together on its fuel and food policy.

Once the market senses this, oil and gas prices will come down to earth and stop rising on the uncertainty. Then it will be a matter of curbing inflation, which depends on European stimulus.

Inflation concerns are a tailwind. The ECB will either abandon its inflation-fighting mandate or cut it in half by slowing the economy. Such will be the tug of war in the markets for the rest of the year.

The big surprise will be a Fed pause — though with last week’s strong job numbers, a pause in rate hikes is unlikely this year.

So long as U.S. policymakers don’t track European food and fuel policies, the U.S. should turn out okay and remain the best in the Western markets.

Instead of a strong, stable and growing economy with a future, Europe looks like a region on the wane. High electricity means manufacturers are better off manufacturing abroad. Higher electricity means small businesses can’t afford to keep their lights on.

How long will the Europeans go along with that?