The Nightmare of a New Recession – Europe’s Secular Stagnation

Andrea Muratore

Europe risks returning to a recession storm for the fourth time in less than 15 years. After the crisis of 2007-2008, the long phase of instability following the 2010-2011 sovereign debt crisis, alleviated only by the 2015 launch of quantative easing, and the pandemic recession of 2020, the combination of the Covid aftermath, the energy crisis and war in Ukraine, has brought Europe back into uncharted territory in this complex 2022.

The secular stagnation of the old continent

In this perspective it can be said that what Europe is experiencing is not a crisis phase alternating with moments of full development, but rather the symptom of an increasingly accentuated decline in the context of the global economy. Turning to the American economist Alvin Hansen we could speak of secular stagnation and view the last 15 years as a common period of destabilization of the old continent, in which the response to each crisis has brought with it the seed of the subsequent one.

In 2007-2008, support for financial institutions going through a crisis paved the way for debt unsustainability; in 2010-2011 the attempt to respond to the great recession with rigor and austerity failed dismally. After 2015, quantitative easing allowed liquidity to enter the system but, due to the more extensive measures following the pandemic, it acted as a lifeline launched by the European Central Bank to the Union without stimulating domestic demand and a moderate increase in inflation. In the end, Frankfurt’s bazooka proved to be unloaded when Europe, a net importer of energy sources, found itself blown over by the raw material supercycle, accelerated by the war in Ukraine and monetary tightening by the US. This resulted in a weaker euro, a net increase in inflation, and even a plunge into a trade deficit for Italy and Germany.

A crisis within the crisis

The 2022 crisis which once again risks dragging Europe back into a recession is ultimately determined by factors linked to the great game of the international system.

We are talking about a crisis within a crisis, or to put it in the words of economic historian Adam Tooze, of a “polycrisis”. It is primarily linked to a geopolitical fact: Europe is increasingly becoming the object, and much less the subject, of international dynamics. And in this period, the European economy is clearly the tool in the asymmetrical war waged by the US-led West against Vladimir Putin’s Russia. A fundamental battle that is in fact transforming the EU once and for all into an American satellite, crushing Europe’s will for strategic autonomy, deconstructing the Franco-German axis around which the embryos of border development cooperation were forming, making Brussels and the EU member countries committed to diversifying their energy sources look strongly at liquefied natural gas beyond the Atlantic.

The result? A short circuit. Europe which (legitimately) supports Ukraine and looking ahead is seeking the best way to include Kiev in its sphere of influence, has consciously chosen to give in to Russia’s energy blackmail. Financing Putin’s war with over half a billion euros a day, it preaches the impossibility of disengaging from Russian gas in the short term; while Brussels and Frankfurt have resumed the most problematic word of the new millennium: austerity. This creates the most classic of vicious circles: deprived of the decision-making capacity on the geostrategic front and dependent on external sources, the European Union is overwhelmed by energy inflation, putting its industries and productive sectors at risk.

We have proof of this if we looking at some of the data: in June inflation reached 8.6% in the old continent and according to Citigroup energy supplies could cost the whole of Europe 1.2 trillion euros in 2022, over 60% of the Italian GDP. The commission’s growth estimates for now forecast a downturn in the post-Covid rebound that will lead many economies not to resume to pre-pandemic levels before 2024.

Yet, Ukraine is not the only event acting as a watershed. If we look at industrial production data in the old continent since October 2021, growth has stopped settling at zero growth followed by four months of contraction and only three of expansion. The energy bill was growing even before the war, but Europe was also suffering greatly due to the chip crisis, a symbol of the difficulty of finding itself in a central position in vital value chains on a global scale. 

To date, looking at the data, the risk of a recession is not formally there. However, the commission’s forecasts have always proved ineffective at internalizing the trends unraveling throughout this chaotic year. The hypothesis of the old continent falling into a recession is not only something theoretical. Especially if the EU were to put in place its own policies leading to an acceleration of the crisis.

Haunted by Austerity 

The Energy Committee’s proposal in this sense is clear: the panacea and the most important response to the crisis of the economic system driven by an increase in the price of energy are entrusted to the myth of austerity. The European Union is preparing to roll out energy austerity with the aim of saving up to a fifth of consumption in the perspective of a perfect autumn storm. But that is not all.

The words of Christine Lagarde, governor of the ECB, in June suggested that the Eurotower is also preparing to launch a more restrictive policy. Despite the proposal of an anti-spread shield to protect those countries which are most exposed when it comes to purchases, the increase in rates goes precisely in this direction.

And even in the commission headed by Von der Leyen there has been open talk of censuring countries’ public accounts, requiring them to repay the debts contracted during the pandemic and of rigour as a prerequisite for development. It looks like a return to the myth of expansive austerity debunked in practice after 2010-2011. Today it would be even more ruinous. What Europe needs is a new perception of the problems of the global economy and a focus on security that is far from secondary, enabling it to separate routine administration from the response to the crisis in the sectors most exposed to geostrategic threats by protecting them.

In this respect, in recent months Italy and France have proposed a new approach capable of presenting an alternative to the usual duo of rigor and austerity: a European Debt Agency capable of “digesting” the debts contracted during the pandemic by reducing the member countries’ interest payments and so the non-productive outflows from the public coffers by mutualising the response to a shared challenge over the whole continent. At the same time, the Recovery Fund will have to be evaluated in its effects to understand how far the union is capable of common planning against crises. And finally, the elephant in the room will have to be addressed: the revival of the geopolitical role for the euro.

The Euro is in a storm

It has not escaped observers that after an initial phase in which the ruble took the biggest hit, the euro has so far been the currency most damaged by the turbulence in 2022. The “crisis within the crisis” and the recessionary risks have a lot to do with this. At the beginning of the war we wrote that the euro could be the great loser in this phase and might tip the Community into recession. This is because “it risks being penalised since it refers now more than ever to a secondary geopolitical area. It can see its scope reduced by the absence of a real debt mutualisation policy that would create a secure financial asset at a European level. Finally, it is becoming relatively more exposed, together with the banks in its system and the economy as a whole, to sharp fluctuations in the exchange rate.” This has happened.

A Europe with a relatively weakened currency, now in substantial parity with the dollar, which pays for raw materials and products to foreign markets denominated in third currencies and faced with recessionary and inflationary risks at home is a fragile Europe. The euro is a derivative of the continental economy but it could be one of the keys to gradually restoring the continent to the planet’s reference markets. Europe should understand the geopolitical role of the currency, start using it forcefully in energy purchases and trade agreements, using it as an ally to the dollar but not subordinate to it, as the world moves towards decoupling between the US and its rivals. We need to shed the 1980s mentality of competitive devaluation that sought to weaken currencies so that they would act as a flywheel for exports. From computer chips to oil, gas and food, Europe pays more for the production elements it needs most urgently at this stage. And a monetary and political strengthening of the euro is one of the keys to avoiding the crisis together with the rejection of a new policy of austerity. The alternative is to die of torpor or from the adoption of policies that have already been tested and failed in the past.