Europeans Are Choosing Recession at the Risk of Putting Democracy to a Critical Test.
A choice that is both courageous and perilous.
Europe will probably not escape the recession. If money is the sinews of war, energy is the condition for production. By closing the gas tap, Vladimir Putin's Russia is condemning European manufacturers to reduce their activity. Soaring prices are reducing purchasing power, which will weigh on consumption and therefore on demand. The jump in the energy bill paid by the Old Continent to the rest of the world mechanically translates into its impoverishment.
This recession will be the direct consequence of a political choice.
The European countries have decided together to sanction Russia following its invasion of Ukraine severely. And it is in response to these sanctions, that Moscow stops delivering its gas.
Factories closed overnight
And this is the second time in less than three years that Europe has made this choice of recession. In March 2020, governments decided to confine their populations to contain a terrible epidemic, which was overflowing the hospitals. Factories were closed overnight. Again, the drop in activity was the direct consequence of a political choice.
This is a significant change. Since the end of the Second World War, recessions in Western countries have been caused by events that they suffered, not chosen. The first oil crisis of 1973 was decided not by the consumer countries but by the Gulf States after an offensive against Israel led by an Arab coalition failed. The second, in 1979, was caused by the tensions of the Iranian revolution following the fall of the Shah.
Lax regulations
In the United States, the recession of the early 1990s was caused by a financial crisis in the very specific system of American savings banks. In Europe, it was caused by the upheavals of German reunification and ineffective monetary coordination. A decade later, it was the bursting of the Internet bubble that caused activity to plummet (or to slow down sharply, as in France). Finally, in 2008, it was once again a financial crisis that derailed the economy, against a backdrop of lax regulations in the face of perilous financial innovations.
Of course, political decisions played a role in each of these downturns. Washington decided to help Israel in 1973. For a long time, the American authorities turned a blind eye to the excesses of finance, under the pressure of the powerful Wall Street lobbies.
The religion of growth
In 1980, U.S. Federal Reserve Chairman Paul Volcker raised interest rates to 20 percent knowing that this level would cause output to fall. Similarly, in Germany, the Bundesbank raised its key interest rate sharply to combat the inflation caused by the integration of the eastern Länder into the Federal Republic of Germany. But central bankers are supposed to be independent of political power.
Until 2020, elected officials had never taken decisions that would push their countries into recession together. This shows that politics is still powerful, despite the many ills that afflict it. But why now? Perhaps the religion of growth is not what it used to be. After having been the supreme goal of politics, implicitly or explicitly, the increase in GDP would now be only one objective among others.
This assumption is probably a bit bold - or premature.
What is more likely is that epidemics and war are ancestral fears, which justify exceptional means. Their horrors are described in countless paintings and stories, such as the Apocalypse of St. John.
A return to the dark ages
When the French government decided to confine the population following the Dantesque images of the overcrowded Italian hospitals, it was almost sacrilegious to question this choice and its modalities. The absolute protection of human life then took precedence over everything else, even if the cost of that something else could be high later on, including in human lives.
Russia's invasion of Ukraine, on the other hand, sends Europe back to its darkest hours of the last two centuries. The starting point of the Second World War was Germany's invasion of Poland in 1939 (a few years after it annexed Austria without major effects). Alsace and Lorraine had been divided between Germany and France in the two previous wars, in 1870 and 1914.
A 65 billion aid plan in Germany ... Who would have believed it?
By throwing their countries into economic turmoil, governments are exposing themselves as never before. They may have been able to explain the need to stop the coronavirus, which was wreaking havoc at home, with neighbors, parents, or grandparents. But it is more complicated to argue the need to preserve the integrity of a country 2,000 kilometers away.
Hence the public money poured in by tens of billions of euros, and even by hundreds of billions on a European scale, to cushion the shock. We saw it during the Covid epidemic. We see it again today. Not only in France, where public spending is a reflex but also in Spain, Italy, and even in thrifty Germany, which has just announced a new aid plan of ... 65 billion.
But public money is not infinite, especially when rising prices prevent the central bank from making money. The choice of the recession could prove to be a critical test for democracy.
Some reading
In the Wake of the Fed, the ECB Is Bound to Have a Heavy Hand in Raising Rates. A 75 basis point increase is more than likely on September 8.
Bottom or Not Bottom for Bitcoin? Here Are Some Thoughts on the Matter. Looking where you need to will help you see more clearly.
Rather Than the End of Abundance, It Is Sustainable Abundance That We Must Aim for. Emmanuel Macron is wrong.
An American Student Trader Pockets $110M in One Month and Becomes the New Prince of Wall Street. Lucky guy or genius?
Cold War Between America and China — The New Space Race. The war in Ukraine started by Putin also upsets the balance in space.
What you describe as "democracy" will soon be replaced by leaders and governments that will make Orban appear to be the last liberal among them. Meloni is gaslighting when she says she will maintain sanctions against Russia, the Czech people will return with their pitchforks and replace their government a few years earlier than expected, and Rutte's coalition will fall. Expect a big change even in Sweden tomorrow, and I don't have to even comment on Turkey. The Obiden Junta is shoveling money into the Ukraine money pit managed by some of the most adept money launderers in the world. That will stop or be slowed down come next January when a new Congress will demand an accounting which will not be forthcoming, and the "aid" will stop.