2022 Yearender: The domino effect

Amr Helmy
Tuesday 27 Dec 2022

Amr Helmy discusses European repercussions of the Ukraine war.


While reports from international financial and economic agencies have sought to assess the impacts of the war in Ukraine on developing economies and to gauge the potential for political instability in developing nations due to crises in food and energy and rising living costs, those agencies have not devoted the same attention to the impact of the war on the political and economic conditions in Western democracies.

Nor have they attempted to evaluate the efficacy of ongoing and escalating sanction regimes the industrialised nations have imposed on Russia. These policies have accelerated the looming onset of a recession likely to be worse than the global recession in the 1980s, which prompted the IMF to forecast a “Gloomy and More Uncertain” world economic outlook, with declining growth, rising inflation and greater supply-demand imbalances.

The economic impact of the war on developing nations and on Russia are undeniable, but clearly European nations as a whole are among the hardest hit since the hostilities began, aggravating one of the most dangerous periods of change Europe has experienced since the end of World War II.

The shockwaves rippling through European countries due to the war have precipitated shifts in the political balance in tandem with economic deterioration in all EU members and other European states.

German Minister for Economic Affairs Robert Habeck was not exaggerating when he said the high energy prices were a threat to social stability in Germany which, moreover, is expanding its reliance on coal and the nuclear power plants it has abandoned plans to close for now.

The rapidly changing European political map reflects how the economic repercussions of the war are lending momentum to the rise of right-wing populism Europe.

Epitomising the trend is Marine Le Pen’s ability to win 41 per cent of the votes in the French presidential elections in April after which her party, the far-right National Rally, garnered 89 seats in the National Assembly legislative elections in June, up from just eight seats in the previous assembly.

Then, in October, Giorgia Meloni, the head of the right-wing populist Fratelli d’Italia (Brothers of Italy, or FdI) swept to power in the Italian general elections and formed a ruling coalition government that leans heavily to the right. In Sweden, too, Ulf Kristersson became prime minister at the head of a right-wing bloc.

Before this, the far-right Alternative for Germany (AfD) won 12.6 per cent of the vote in the federal legislative elections, enabling it to enter the Bundestag for the first time. The Freedom Party of Austria (FPÖ) became a junior partner in the coalition government in Vienna on the strength of 26 per cent of the vote in the last Austrian general election.

The ultra-right Volya Movement has gained popularity in Bulgaria while its counterpart, the Party for Freedom, became the second largest bloc in the Dutch parliament. Viktor Orban, head of the right-wing Fidesz, remains prime minister of Hungary.

The UK is keeping pace with the decline in political stability affecting other European countries. After the Boris Johnson government fell on 22 September, his successor, Liz Truss, lasted only 44 days, resigning on 25 October, leaving her successor, Rishi Sunak, to take the helm in very turbulent political and economic waters.

Britain has become the worst-performing economy in the G7 and the second worst-performing economy among the members of the Organisation for Economic Cooperation and Development (OECD).

The S&P credit rating agency has put the UK on notice with “negative outlook” and Moody’s has downgraded its outlook for the British economy from stable to negative. Finance Minister Jeremy Hunt has officially acknowledged that Britain has fallen into a recession that could last until 2024 and that could push more than half a million people into unemployment.

At the same time, various reports reveal that Britain has experienced the biggest fall in living standards since records began, with inflation reaching the highest levels in 40 years as energy and food prices and mortgage rates skyrocket, the value of the Sterling erodes and the public deficit climbes to £50 billion. The Tories lay the blame for this grim downturn on the Covid-19 pandemic and the repercussions of the war in Ukraine.

This war came at time when Russian oil and gas are described as the most important energy sources for European countries. EU states, as a whole, depend on Russia for 41 per cent of their natural gas needs, a figure that reaches 49 per cent for Germany, 47 per cent for Italy, 54 per cent for Poland and 95 per cent for Hungary.

The EU depends on Russia for 29 per cent of its petrol needs and 54 per cent of its solid fuel (i.e. coal) needs. In 2021, European energy imports from Russia came to around $148 billion.

Since the start of the war in Ukraine, the implementation of Western sanctions against Russia and Russian counter-measures, and the freezing of the North Stream 2 pipeline project, European countries have been trying to reduce their dependency on Russian energy resources. But many economic experts foresee many obstacles standing in the way of this goal.   

Firstly, presuming European countries can fine alternatives to Russian petrol and oil, they are still left with the main problem: finding alternatives to Russian natural gas.    The available options are extremely expensive compared to the natural gas Europe was importing through pipelines. With regard to liquified natural gas (LNG), Russia is the fourth largest producer of LNG in the world and supplies 15 per cent of its output to Europe.

While alternative sources of LNG are to be found in the US, Algeria, Qatar and other Middle Eastern countries, the quantities are not sufficient to meet European needs.

A second factor complicates the problem. Chinese natural gas imports are likely to rise considerably in the near future which will reduce supply in international markets. Thirdly, while European countries reportedly replenished their natural gas storage facilities to 95 per cent capacity, this does not imply a reduction in prices for consumers or that prices will return to their levels before the Russian invasion of Ukraine. That stock will also run out by April 2023, forcing Europe to continually search for new sources at much higher prices.   

Beneath the grim headline, “Europe’s Energy Nightmare Has Just Begun,” Bloomberg News predicts that Europe is heading for its worst energy crisis in 50 years and that this one will be more severe than the oil embargo of 1973.

Europe will be forced to make difficult choices as it struggles to balance demand with limited supply. Already it is taking such measures as reducing lighting in public spaces and urging households to cut down on heating and hot water as what some have called “the winter of discontent” sets in.

But not only is energy in short supply, rising energy prices coincide with steadily rising prices of many basic commodities and with the declining performance of many vital industries which have had to cut back operations due to rising fuel costs. Such developments are accelerating the onset of a recession and a cost of living crisis which, in turn, will precipitate growing discontent, protests and unrest.

Given the gravity of the difficulties facing European countries and in light of the growing realisation that the military option will not produce a real and lasting solution to the conflict, and that the “Ukraine first” policy that many European governments have adopted at the expense of the welfare of their own societies can generate dangerous political repercussions, many hope that European countries will change course and try to open channels of dialogue and negotiation with Russia without preconditions.

Then it will become possible to reach a diplomatic settlement to a war that could have been averted and the repercussions of which have spiralled beyond the point that European societies and other countries in the world can sustain.

*The writer is a senator and diplomat.

*A version of this article appears in print in the 22 December, 2022 edition of Al-Ahram Weekly

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