Losses Due to Sanctions Grow in the West

By Ulrike Reisner

The EU countries are not able to compensate for the economic losses caused by the sanctions against the Russian Federation. The process of deindustrialisation in Europe continues. This is resulting in a permanent loss of wealth for Western societies.

At the end of August, the Scientific Service of the German Bundestag published a report .The report received virtually no media coverage in German-speaking countries. The starting point is questions about the economic consequences of sanctions and countermeasures for member states of the European Union, the United Kingdom, as well as Russia. This publication provides a number of important economic facts and figures. All data is sufficiently supported by reliable sources.

Why is this report so interesting? The answer to this question is contained at the very beginning: "In general, there are few estimates of the economic impact of sanctions on sanctioning states. Publicly available sources focus primarily on the impact on Russia." (page 7)

This is true. In the West, the topic of sanctions against Russia has been viewed very one-sidedly by politicians and the media since the very beginning. Basically, only individual economic indicators are mentioned. But it is not enough to look at the trade balance between the European Union and the Russian Federation. It is not enough to look at the profits or losses of those companies that have suffered from sanctions. A particularly important aspect is the macroeconomic impact. They usually appear with a time lag and are cumulative in nature.

For this reason, the report is of interest. The purpose of this brief review is to make the main conclusions from this publication accessible to a Russian-speaking specialised audience. I will therefore focus on those data relating to the European Union and the UK. Although the report also contains data for the Russian Federation, I will not delve deeper into this topic. There are many experts, especially in Russia, who know better and are able to interpret the country's economic data.

High inflation

The economic consequences of sanctions for Europe are already far-reaching: “While the direct fiscal impact of caring for refugees, increasing military spending and strengthening energy autonomy remains limited, the impact of rising energy and food prices on national income and its distribution is potentially significant.” (page 8)

Inflation in the European Union and the UK has been rising since 2021. It reached its preliminary peak in October 2022 and amounted to 11.5% (EU) and 11, 1% (UK).

In the UK, the dynamics of consumer prices, particularly for food, have increased sharply. The reasons for this, in addition to Britain's exit from the EU, are high inflation, rising wage costs and the energy price crisis. In March 2023, the year-on-year food and beverage inflation rate rose to 19.2%. The increase in food prices in the EU today also exceeds 10%.

Closely related to inflation is the impact on real wages. “A 4.0% decline in real wages has led to an unprecedented fall in the purchasing power of workers in the European Union in 2022.” The hardest hit countries were the Baltic states (down 7-9%), Greece and the Czech Republic (down 8%), and the Netherlands (down by 7%). In the EU countries, the fall in real wages has been accompanied by an increase in the cost of living (food, housing, energy). In the UK, the decline in real wages is not so significant; there it is only down 0.5%.

Retirees are also forced to use an increasing portion of their pension to cover the cost of basic needs. However, the impact of inflation varies greatly across the European Union because they have different pension systems.

The Commission estimates that the EU's GDP growth should be around 1% this year. However, there are increasing signs that even this target cannot be achieved. Germany, the EU's most important economy, is already in recession. Spain and Greece currently have the highest unemployment rates, at over 12%. The UK economy is also stagnating this year, at minus 0.2%. However, its unemployment rate of 4% is better than that of most EU countries.

Government debts

However, it also follows from the Scientific Service's documentation that European states want to mitigate the effects of sanctions with high subsidies.

Since September 2021, the EU and UK alone have spent €750 billion on energy price subsidies.This approach is paradoxical. First, because higher inflation is mainly due to rising profits of Western companies in the energy sector. Labor costs and taxes do not contribute much to inflation in Europe. Second, because that EU policy is doing everything possible to prevent the purchase of oil, gas and other raw materials from the Russian Federation.

The documentation goes on to say the following:

"European countries have responded to this crisis with safety nets and subsidies, including a moratorium on energy price increases, reductions in public transport fares and caps on electricity and natural gas prices for households and businesses." (page 44)

Sanctions have had a particularly strong impact on Europe's largest economy, Germany: The consequences of this are manifested in a decrease in the growth dynamics of the German economy due to sanctions and increased prices for energy and raw materials (+80%). By 2030, the German economy will lose more than 260 billion euros of added value even without a complete cessation of gas supplies. In 2022, German imports from Russia fell by 41.5%. However, due to high energy prices, its value increased by 6.5% compared to the previous year to 35.3 billion euros. As a result, in 2022, Germany will record a trade deficit with Russia in the amount of 20.7 billion euros.

Summary

The report of the Scientific Service is limited to listing economic data and facts. However, based on these numbers, it is very easy to draw a clear conclusion:

• EU countries are not able to compensate for the economic losses caused by sanctions against the Russian Federation.
• First of all, this concerns the energy and raw materials sectors. The huge increase in prices for these resources is causing serious damage to the industry. European industry is increasingly falling behind global competition.
• With the introduction of sanctions against Russia, the process of deindustrialisation of Europe is accelerating.
• High government subsidies in the EU began during the pandemic and continue during the sanctions period. However, these high subsidies have contributed to the growth of government debt and further fuel inflation.
• This combination of inflation and recession is leading to an economic crisis in Europe that will continue for many years. This will result in a permanent loss of wealth for Western societies.

This situation is disastrous for the Eurozone. Currently, the European Central Bank's hands are tied when conducting monetary policy.
This article originally apeared at https://valdaiclub.com/a/highlights/losses-due-to-sanctions-grow-in-the-west/