Page 25 - bne IntelliNews monthly magazine October 2024

bne October 2024 Cover Story I 25
In the first year of the war in Ukraine the lights started to go out across Europe as the consequences of cutting off Russian trade and gas began to kick in. The end of cheap Russian energy imports was disastrous, causing an energy crisis that quickly spilled over into Europe’s economy as the biggest chemical
and metallurgical plants ceased to be economically viable and were shuttered. “De-industrialisation” has become the buzzword but Europe’s problems run deeper than the economic shock caused by the war and were well entrenched long before Russian President Vladimir Putin ordered the invasion of Ukraine. Europe had already lost its competitive edge.
Two and half years on and the
energy crisis has receded but not the de-industrialisation. Indeed, sanctions on Russia have catalysed the other problems and made them more visible. Sanctions are doing as much damage to the EU as they do to Russia, or more.
Europe became bloated on cheap energy, but innovation was stifled by reams of Brussels’s red tape. The Union is half baked with federated trade and monetary policy, but the administration of regulations and fiscal policy
remain under the control of national governments. The need for unanimity on all EU legal decisions works
well in quiet times, but has proved cumbersome in times of crisis.
A year ago European Commission President Ursula von der Leyen commissioned former Italian Prime Minister and ex-European Central Bank boss Mario Draghi to compile a report on Europe’s competitiveness, which was released in September.
And its conclusions have been a bombshell. Draghi outlines in detail the structural problems and shortcomings of the European system and says the
EU now needs to invest more money to reinvent itself than it spent on repairing the damage from WWII.
The boomerang effect
Within days of the invasion of Ukraine on February 22, 2022, von der Leyen took to the podium and announced
the most extreme set of sanctions ever imposed on another country. There have fourteen rounds since then, targeting everything that makes Russia money. The problem is that Russia used to make money from selling products and materials to Europe, inputs that are essential to European business.
As bne IntelliNews reported, the boomerang effect of the sanctions is weighing very heavily on Europe and comes on top of the polycrisis that included the global pandemic that had already knocked the EU for six. The one-time engine of Europe, Germany, is spluttering and has become the weakest economy in the G7. The sanctions have cost Russia a lot of money, and probably doom it to long-term stagnation, but it is currently flourishing and one of the fastest growing major economies in
the world. Things are going so well that a new war middle class has emerged
in Russia who are enjoying a period of unprecedented prosperity.
Europe had already fallen behind the US and the other G7 countries before the war started. It was feeling the growing pressure from the US and rising emerging markets before the war started. In 1995 European productivity was 95% of America’s; today it is less than 80% and falling, says Draghi.
The US and China continue to attract
the bulk of global financing for tech frontiers that will fuel future growth, whereas Europe only gets the crumbs. That has already led to a European collapse in productivity over the last three decades.
“While the US productivity upturn is partly cyclical, it is also experiencing an underlying productivity renaissance. The country will continue to outperform most advanced economies, but we don't think much stronger GDP growth or
far higher neutral rates are coming,” Oxford Economics said in a note on September 20, adding that both the UK and the Eurozone have underperformed compared to their peers.
The developed nations can no longer compete with emerging markets
in more complicated sectors as
the combination lower wages, but rising skills, in medium- and heavy- weight industries has already made the developed world companies uncompetitive.
US manufacturing employment has fallen by a third from its peak in 1979, even as the population has grown by nearly 50% over the same period as the US also deindustrialises. Boeing and Intel are struggling; machine tools through industrial robots to consumer electronics are under increasing
Advanced economies: Hourly labour productivity
The hourly productivity of the EU has fallen behind that of most of the other major economies
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