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Gas rationing and the Ukraine crisis – the EU at the brink

The EU is fast approaching a crisis that threatens the economic welfare of households and businesses across all member countries as well as the political stability of Europe.  The fault lines are becoming increasingly evident, even as EU monetary policy pushes up mortgages and pushes down living standards while undermining the obvious institutional fragility of the EU.

Inflationary expectations reflecting rising energy and food costs are now firmly entrenched across the bloc. This ECB has joined other Central Banks in raising interest rates to levels that were not envisaged at the beginning of the year. This will have the entirely predictable effect of stymieing a supposed post-Covid economic ‘recovery’.

The ECB, the US Fed and the Bank of England are attempting to curb inflation that, we were assured, was ‘transitory’ just six months ago. The effect will be stagflation –  the worst of all worlds. The dollar is strengthening against Euro, despite the yawning political tensions, effectively exporting inflation to other countries. This is showing up in the bond markets. Spreads between German and Italian 10 year bonds are rising – a flashing red light.

The ECB have given themselves new Gizmos to buy the bonds of Governments under pressure, to  prevent what they call the ‘fragmentation’ of Euro bond yields. Welcome back to the Sovereign Debt crisis and Troikanomics. Regardless of what the ECB says, this latest version of bond buying is emphatically  ‘monetary financing,’ which is specifically prohibited under the ECB’s own rules.

Mostly, people aren’t interested in any of this. We are all fatigued of crises. It’s summer. Kids are off school. Europe is in the middle of a heatwave. Covid is still out there. We assume that ‘they’ will take care of it: ‘they’ being the Government, or the EU or the ECB or US, or Multinationals, or whoever.

‘They’ won’t. ‘They’ are the problem. One way or another, ‘they’ have watched the crisis develop up close and personal and observed it metastasise. No effort will be spared to deflect attention away from this and from the prospective scale of the crisis this winter. Already electorates are being softened up for legislation to control the consequences of the EU’s mismanagement of the crisis.

That’s the problem. Wherever you look, Europe simply lacks the calibre of leadership to comprehend, much less address, what is unfolding. Reflect on the calibre of the trope of candidates in the UK jostling to succeed Boris Johnson, or the spectacle that is US politics. The demonstrations by Dutch farmers tell their own story us about a hopelessly inept EU Commission. Let’s draw a veil over what passes for politics in Ireland.

The epicentre of the crisis is Russia’s brutal invasion of Ukraine and, importantly, Europe’s policy response. The EU is unrolling a seventh set of sanctions against Russia ‘aimed at crippling its economy’. To date, there is little indication that they will work. Even the Financial Times recently acknowledged that ‘the EU has all but reached its sanctions ceiling, and that any move against (Russian) gas exports….is a pipe dream’. How has it been allowed to come to this pass?

The war continues. Buildings across contested battle zones are being levelled. Millions displaced. Thousands buried – God rest them. The lethal nature of weapons being deployed on both sides is escalating as the combatants become more desperate for progress in a stalemate. The Russian economy has been badly impacted. But so too has the EU and the West.

Even worse, authoritative analysis point to the scale of the growing food crisis arising directly from the war and the rise in energy costs, including a rise of  300% in the costs of fertilizers. Countries far from this war are ‘paying the price’ for a war not of their making, that was foreseeable and almost  certainly avoidable and which is proving to be catastrophically damaging.

None of this exonerates or mitigates the humanitarian consequences of President Putin’s brutal and unnecessary invasion.

Six months on from the invasion, a serious rationale is needed for the West persisting with a strategy that hasn’t worked.

It makes no sense – and it needs some explaining. EU attempts at embargos and price caps on Russian oil exports have failed. The EU’s Green Energy policies have been skewered. And there will be more. Did anyone think this through?

EU gas imports from Russia are one of the few remaining cards for Brussels has to play. But it’s a weak one. Russia has already restricted supplies to a number of EU countries. Some, notably Germany, remain highly dependent on Russian gas imports. The German Government are close to rationing: and supplies are well below existing and prospective demand. If this continues when Nord stream pipeline comes back on line, then its game over.

The West has thrown everything in its armoury, from sanctions to seizure of assets, at Russia. It can hardly be surprised at Russia responding by turning down/ off the gas – especially since the EU has unequivocally committed itself to eliminating Russia as an oil and gas supplier just as soon as it possibly can.

Consider for a moment this Trade Theory 101 exam question. The EU needs cheap oil and gas to continue to support its economy, households and public services as well as to adapt to a whole new clean, renewable strategy. Russia has abundant oil and gas. Russia and the EU are at loggerheads and the EU is increasingly regressing to fossil fuels. Discuss. Absurdities, anomalies, contradictions piled high on a war that should never have been started.

In the present energy impasse, EU Commission policies are set to become draconian. Again. They are now discussing mandatory gas rationing, notwithstanding formidable political and technical arising from very different national energy ‘mixes’ and existing exemptions. Ireland imports gas from the UK and Norway. That will make little difference to the overall impact or to energy bills. The hit to the German economy if Russia does turn off the gas will impact all of Europe including an Irish economy with a problematic and overly dependent Business Model.

The costs and wider impact of these developments on ‘social solidarity’ across the EU, and its first cousin political stability, are sufficient to spook Government – and that tells its own tale.

It’s hardly an exaggeration to point out that with Brussels in summer stasis, autumn approaching and Russia and Nato playing ‘chicken’, all the ingredients for a perfect storm this winter are in place.

The Irish Government is a passive and compliant recipient of war strategies and perverse sanctions forged in other places. It has a responsibility, based not on EU politics but on Christianity, to welcome and embrace Ukrainian families, victims of this war, to the extent of its capacity to do so and its responsibility for the welfare of the Irish nation.

But it has no business, or political mandate, to cede its neutral status and contribute to the further militarization of a Europe originally predicated on peace-building.

Have all the adults left the room? If so, pray for peace and prepare as best you can for the rigors of energy rationing and a Eurozone Sovereign Debt Crisis 2

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