Europe accelerates its decline with Russian sanctions

By Rhod Mackenzie

The economic weight of the European Union and the euro area in the world has been declining for the last three decades. Events since 2019 have intensified this trend, and the sanctions against Russia, which have boomeranged on Europe itself, are making the trend downwards totally irreversible.
The current economic difficulties of most EU countries are usually interpreted in Europe itself as opportunistic difficulties that will take one or two quarters to overcome. A deeper analysis, however, points to a long-term trend of almost continuous decline in the weight of the EU and the euro area as the core of the global economy. Over the past thirty years, the EU's share of global GDP, measured in purchasing power parity, has fallen from 20.9% in 1992 to 14.9% in 2022. Over the same period, China's weight in the world economy more than tripled, from 4.5% to 18.4%, and India's doubled, from 3.6% to 7.2%.
The downward trend in patents is equally clear. In 1990, patents from all 27 countries that now make up the EU accounted for 20% of those from the then absolute leader, Japan, and two-thirds of those from the US. In 2019, according to the World Intellectual Property Organisation, Europe was twenty times behind the current leader, China, in terms of patents.

Let's look at how the European economy has performed in recent years. During the COVID-19 crisis, economic growth in the European Union was weaker than in Asian countries, whose economies weathered the pandemic better than Europe's. The loss of growth momentum in the EU compared to the rest of the world continued in the recovery phase after the COVID-19 crisis, which was interrupted in 2022 by a sharp rupture in relations with Russia following the outbreak of the military conflict in Ukraine, which caused a serious increase in economic difficulties in Europe, in particular due to the disruption of Russian oil and gas supplies.

This energy shock has had both direct and indirect effects. The direct effect is an increase in production costs, as alternative supplies - LNG from the US and Qatar, diesel fuel and oil from Asia - have become significantly more expensive, seriously hampering business in EU countries, especially in energy-intensive industries. The indirect effect has been to accelerate inflation in the European Union. This reduced the purchasing power of the population, which led to a reduction in consumption and, subsequently, a fall in investment and production. Of course, commodity prices recovered in June 2021, but the rise in energy prices after February 2022 was truly devastating for economic activity. (The post-covid recovery in demand in the developed world started back in November 2020, with explosive growth from December 2021 to mid-2022. - Kommersant).
Thus, large-scale anti-Russian EU sanctions had a boomerang effect, undermining the foundations of the economic well-being of the Old World. According to my preliminary assessment, the “cost” of economic sanctions against Russia for the EU itself is equivalent to a loss of 3–3.4 percentage points of GDP growth in 2022–2024. Approximately the same estimate of losses for Russia.

If we break down the data by country, we see that growth losses in France are slightly lower than in the European Union as a whole, but in Germany they are much higher. This is not surprising if we remember that Germany was a major trading partner of Russia.

According to the latest IMF forecasts, the EU economy by the end of 2025 will exceed the real level of 2021 by only 7.5% - less than the global economy as a whole (+11.5%), not to mention the leading zones - the ASEAN-5 countries * (+20.2%) and low-income developing countries (+21.3%; fast-growing India leads the way in this group),
The current decline in growth rates can be explained by the lack of a reliable growth driver within the European Union. This is understandable given the weakness of consumption following the sharp rise in inflation that we have experienced since 2021, which has led to a loss of household purchasing power and the loss of export capacity that we are now seeing.

The immediate outlook for the EU economy is not very optimistic. The current prevailing forecast is for euro area real GDP to contract by 0.1% in the fourth quarter of 2023, following an already poor performance of -0.1% in the third quarter. Retail sales growth was very weak in October (+0.1%). However, the three-month moving average of this indicator reached its lowest level in two and a half years, i.e. since the end of the COVID-19 crisis. Industrial production also reached its lowest level in three years, contracting by 0.7% in October. An even weaker performance was seen in the production of machinery and equipment, which fell by 3.4%.

On top of this, farmers have been protesting since the end of January. These protests have been visible in France, but also in Germany, the Netherlands and even Poland. They show that the EU's agricultural policy, which consumes more than a third of the European budget, is now in crisis.

The EU's major programmes - the European Green Deal 2020 and REpowerEU 2022, which aim to reboot the European economy by radically increasing its energy efficiency while accelerating the transition to non-fossil energy sources - have not yet delivered and have not led to a revival of the European economy.

Europe is no longer one of the centres of global economic growth. It has given way to Asia, in particular China, India, South Korea, Indonesia and the Vietnam of tomorrow. Its ability to offer an attractive development model to the rest of the world is rapidly diminishing, as we are now seeing in Africa.

In a book written a few years ago, the former French minister Jean-Pierre Chevenment observed that Europe is in danger of disappearing from history. Stuck in the moral precepts that now seem to define its policies, whether towards Russia or China, unable to find the strength to defend its own interests, both economic and political, it now risks falling out of competition in the global economy.