Europe’s Wartime Economy Will Last Beyond the Winter


The European way of life has always been a vague concept, but – after Covid-19 – it met a new generation looking for la dolce vita.

Citigroup Inc. is an unlikely figurehead. At its new office in Malaga, Spain, young bankers can expect to be paid half the salary of their London counterparts – reportedly $100,000 – in exchange for the opportunity to live on the continent. More traditional working hours, the Mediterranean, lower living costs and longer life expectancies – the kind of soft power Europe wants to be known for.

That’s the dream anyway. But the economic reality Europe faces as Russia ramps up its war in Ukraine is very different. Countries like Spain, Italy, France and especially Germany face a multi-year shock to living standards as real wages fall faster than in the US, where life will look nicer. Europeans will struggle with less energy, less output, less disposable income, more inflation and higher import costs. Social unrest is a real risk.

As Europe scrambles to end a German-led dependency on cheap Russian gas, hopes that economic troubles will be over by spring are fading. Despite admirable efforts to combat Vladimir Putin’s gas shutdowns by building up reserves for the winter, most of that could be gone by March. High energy prices and scarce supplies will continue. Economists at Deutsche Bank AG and Barclays Plc are forecasting economic contractions in the euro area of ​​2.2% and 1.1%, respectively, for next year.

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Europe’s track record in reducing inequality also faces a major test. Energy and food make up a much larger portion of bottom 20% spending than the top 20%. European governments have allocated an estimated 500 billion euros ($496 billion) to cushion the impact of higher prices on consumers and businesses, according to think tank Bruegel, but this figure could only be the start. The UK, whose Brexit headaches impacted trade openness even before tanks rolled into Donetsk, will also need to spend heavily to protect its people.

That’s why some European companies are now dreaming of an American quality of life. According to the Wall Street Journal, stable gas prices in the USA and government support for manufacturers have led to companies such as Volkswagen AG relocating their production there, while Tesla Inc. is pausing German investment plans. According to a survey by an industry association, rising energy costs have led to every tenth German company cutting back or interrupting production. This will ripple through trading partners’ supply chains inside and outside Europe, including in China – another place where the EU is reducing its dependency.

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Sure, the US has seen inflation spike, but it also has the advantage of being a net energy exporter; two-thirds of its LNG exports went to Europe by June. The plunge in the euro and pound shows Europe’s import bills soaring, from higher energy prices to Apple Inc. price hikes. As French President Emmanuel Macron solemnly tells his people that the age of “abundance” is over, Americans are spending more , when gas prices fall. Those who make it to Paris will find luxury much cheaper.

As apocalyptic as that sounds, the EU has weathered recessions before. There is still hope that governments will realize that the best way to defend their citizens is unity by sharing energy and financial resources much like Covid.

But getting there will be difficult. Governments around the world have borrowed during the pandemic, helped by easy monetary conditions that are now rapidly tightening. Even countries that have avoided Germany’s energy mistakes – like France with nuclear power or Spain with renewable energy – are struggling with their own problems of underinvestment and high debt levels. The revival of solidarity will be difficult.

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There are worse places than Malaga in a crisis like this. But Europe’s soft power advantage will likely relate less to quality of life and more to forming coalitions abroad and managing a war economy at home. Whatever the weather, Europe’s dolce vita is about to get a lot less sweet.

More from the Bloomberg Opinion:

The harsh reality of winter is finally becoming visible for the heads of state and government of the EU: Lionel Laurent

Britain takes wrong approach to energy rescue: Javier Blas

• A decision tree for Biden if Putin goes nuclear: Andreas Kluth

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. He was previously a reporter for Reuters and Forbes.

For more stories like this, visit bloomberg.com/opinion



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