Europe’s Metacrisis Just Got Worse

The latest conflict between Iran and Israel just made Europe’s already precarious energy and economic situation a lot worse.

Many analysts and politicians are celebrating Europe’s resilience after losing its natural gas supply from Russia.

“Two years on from Russia’s invasion of Ukraine, trade in energy products between Russia and the European Union has largely disappeared. The EU has adapted remarkably well to a decoupling that many would have considered impossible.”

Bruegel

There is some truth here but it misses the larger picture. In the wake of Russia’s invasion of Ukraine, the world has witnessed a major shift in its geopolitical, economic, and social order. These changes have had a particularly large effect in Europe. Events in the Middle East make things even worse.

The Covid-19 Pandemic in 2020 resulted in a re-arrangement of supply chains and trade dependencies, prompting countries to consider the vulnerabilities inherent in globalized production networks. The era of unipolar dominance by the United States has given way to a more multipolar world. The traditional alliances and partnerships that underpinned the post-World War II order are unraveling.

Just before Russia’s invasion of Ukraine, China and Russia issued a joint statement declaring that their partnership had “no limits” in opposing NATO expansion. They further stated their intention to reshape the global governance system to be more representative of the changing global landscape, challenging the current US-dominated world order.

In early 2024, the BRICS group of emerging-market nations—Brazil, Russia, India, China and South Africa–expanded to include Saudi Arabia, Iran, the United Arab Emirates, Ethiopia and Egypt. These countries now hold a dominant position on more than half of the global oil exports, with major implications for oil prices and energy geopolitics. The group is likely to challenge the dominance of the US dollar in the oil market, and how global energy markets are controlled and operated.

Russia’s invasion of Ukraine in 2022 added to Europe’s economic problems. Among the immediate consequences of the conflict was the disruption of energy supplies, particularly natural gas. Europe’s heavy reliance on Russian gas left it vulnerable to price volatility and supply shortages. Higher energy and commodity prices put strain on an already fragile economic recovery from Covid economic closures.

Europe’s energy prices are moderating as alternate sources of natural gas and oil have been hastily substituted but the true cost of this transition is unclear.

The CEO of multi-national energy company RWE made these comments to The Financial Times last week.

“German industry is unlikely to recover to pre-Ukraine war levels as elevated prices from imported liquefied natural gas have put Europe’s largest economy at a disadvantage.

“Gas prices in continental Europe, especially in Germany, are structurally higher now, because we, in the end, depend on LNG imports.”

“You’re going to see a bit of recovery, but I think we’re going to see a significant structural demand destruction in the energy-intensive industries.”

Markus Krebber, chief executive of RWE

Some analysts see permanent closures of industrial capacity in Europe that will not come back.

“Gas demand from Europe’s industrial sector was down 24 per cent last year from 2019 levels, according to S&P Global Commodity Insights. The firm expects 6 to 10 per cent of the continent’s gas consumption to have disappeared forever due to demand destruction.

“A survey by the German Chamber of Commerce and Industry last September found that 43 per cent of large industrial companies were planning to relocate their operations outside of Germany, with the US being the top destination.”

Financial Times

There is a growing awareness that the old world order has crumbled, and that Europe is unprepared to meet its own energy needs or defend itself without U.S. support.

In this post, I look at these changes through the lens of energy and its effect on the European economy.

European natural gas futures prices increased from an average of about €21 per Megawatt hour in April 2021 to a high of €350 after the Russian invasion of Ukraine (Figure 1). Prices have fallen considerably but remain much higher than pre-2022 levels.

This is not the case for consumers. European household electricity prices have not decreased (Figure 2). Prices began to rise in 2020 before the Ukraine invasion so not all energy increases can be linked directly to supply interruptions.

The public would have paid far more except that governments spent more than €900 billion in 2022 to subsidize their energy costs. Some countries introduced measures including electricity price caps and subsidies for low-income families and energy-intensive companies, totaling billions of euros to help households and businesses cope with rising energy costs​.

Liquefied natural gas (LNG) imports provided some relief for natural gas shortages in Europe.

“The real story behind European energy security post-Russian invasion of Ukraine is the incredible growth of the US LNG industry.

Ellen R. Wald

That’s just great but what about its cost? Since Russia’s invasion of Ukraine, Europe has significantly increased its LNG regasification capacity by adding 53.5 billion cubic meters (bcm). These infrastructure costs are difficult to obtain but early estimates indicated that Germany’s share alone for these terminals was more than €3 billion.

The costs associated with LNG imports into the EU27 have been substantial. In 2022, about €110.6 billion was spent on LNG imports, and nearly €61 billion in 2023, amounting to approximately €171.5 billion over the two years for imported LNG.

The United States emerged as a significant gas supplier but the second largest LNG sources were Russia and Qatar. Algeria, Nigeria, Norway and Angola also contributed.

Despite these efforts to bolster supply, gas consumption declined considerably. European natural gas consumption has been about 14% less than average since mid-2022 (Figure 3).

It’s tempting to explain the reduction in gas consumption to the Russia-Ukraine War alone but weather is always a factor with natural gas. Figure 4 shows heating degree days since 2013, a measure of how much energy was used for space heating.

The European Union has used less natural gas than average for winter heating since 2021 but levels were similar to those from 2013 through 2015.

This suggests, going back to Figure 3, that only about 8% of the decrease in gas use was because of lower industrial and economic activity. This is still significant but perhaps not as much of a factor as some believe.

GDP growth for the European Union fell from 3.4% in 2022 to only 0.4% in 2023 (Figure 5).

Growth for 2024 is estimated at 0.9% but that is not expected to be distributed evenly across Europe. The European Commission projects that German GDP, for example, will grow only 0.3% this year while France will increase at the EU average of 0.9% (Figure 6). Higher levels are estimated for Spain, Portugal, Belgium, Ireland and Czechia.

Energy is the economy and Europe has no remaining indigenous energy supply of consequence outside of Norway. During its colonial and post-colonial period, certain states had access to oil outside the Continent but those days ended after World War II. Natural gas supply from Russia is now largely ended and oil is not far behind.

“I don’t think it is possible for European countries to end their energy relationship with Russia. The world economy cannot function without Russian crude oil. Even if less Russian crude oil is now coming directly to Europe, more of it is going to Asia – in particular, India – and then returning to Europe as refined petroleum products. Likewise, there is not enough supply of liquefied natural gas available for export for European countries to replace pipelined supplies from Russia with sea-borne imports from elsewhere.

“European countries are condemned to struggle with energy security, because they are not resource-rich. And more wind and solar power won’t change that, because the use of these energy sources requires metals that come predominantly from elsewhere in the world.

Helen Thompson

Not only Europe, but the West generally, is facing economic and political strains, which are partly due changing global dynamics and the relative decline of Western economic dominance in the face of rising powers like China.

Of equal importance are internal conflicts in European countries as wealth inequality moves larger numbers of people to the margins of prosperity. This is part of what drives populist movements. It often manifests as antipathy toward immigrants, “woke” liberal groups, Jews and Muslims, EU governance, and the media.

At its core, however, populism is a reaction to so-called elites whose policies are imagined to have degraded economic prosperity and caused unacceptable social changes. It’s an identity crisis but grievances about deteriorating economic conditions are valid although responsibility is probably misplaced.

“If you look at how unhappy most Western economies are now, and they’re pretty unhappy, and how polarized, and you look at the high level of government debt that we have, and you look at the fiscal deficits that we have. And then you turn around to that population, polarized as it is, and you say,

‘Well, we need to spend shed loads of money on new aircraft carriers and submarines and F-35s or whatever.’

“The far right are getting 30 to 35% of the vote in the G7 economies. And the far left, they’re getting 10, 15. You’re getting up to half the population prepared to roll the dice. And that’s with an economic rebound.”

“We’ve got massive polarization in most economies, which is extremely dangerous in the long run, massive wealth inequality, which is extremely dangerous…Labor is doing badly compared to capital which has been the case for decades.

“That’s my metacrisis.”

Michael Every

Europe’s metacrisis is characterized by economic and military weaknesses.

Economically, Europe is struggling with high debt, large fiscal deficits, and a lack of sustainable growth. On the military front, Europe is facing a dilemma of how to balance its pacifist, free-trading identity with the need to rearm and protect itself.

Ukraine is losing the war with Russia. The threat has prompted discussions about increasing defense spending and building a stronger military. However, this poses challenges within the European Union, where national interests and supranational cooperation must be reconciled.

Europe is economically damaged by the aftermath of its energy divorce from Russia. Everything about its present situation is inflationary

Europe’s metacrisis was elevated this weekend when Iran attacked Israel with missiles and drones. Europe depends heavily on oil and gas imports from the Middle East. Any conflict that disrupts these supplies can lead to increased energy prices and potential shortages in Europe. This not only affects prices and supply but also increases the cost of goods and services that rely on energy-intensive production processes.

Increased oil prices can lead to higher inflation and even slower economic growth in Europe. European businesses that rely on Middle Eastern markets or suppliers may also face disruptions. Moreover, conflicts can affect global markets broadly, affecting European stock markets and investment flows.

Conflicts in the Middle East often lead to significant displacement of people. Europe may face increased pressure on its asylum and immigration systems as more refugees seek safety and stability. This may increase already problematic social and political tensions within European countries.

The next phase in the Middle East conflict may be determined by China, Iran’s most important commercial partner, and Russia. China benefits from uninterrupted oil flow from the Middle East. Russia, on the other hand, benefits from the higher oil prices that will result from military escalation.

International Energy Agency Director Fatih Birol this week criticized Europe for making “two historic, monumental mistakes”—relying on Russian gas and turning away from nuclear power.

“The existing industries, especially the heavy industries, are experiencing, and going to experience, a significant cost disadvantage compared to other major economies such as China and the United States.”

Fatih Birol

Energy is the economy and Europe is an energy have-not on the front lines of armed conflicts that characterize a collapsing world order. Energy underlies everything in this present and emerging metacrisis, and that bodes poorly for Europe’s future.