Analysis | Europe’s Wartime Economy Will Last Beyond the Winter






The European “way of life” has always been a vague concept, but — after Covid-19 — it chimed with a new generation looking for la dolce vita. 

Citigroup Inc. is one unlikely poster child. At its new office in Malaga, Spain, junior bankers can expect to be paid half the salary of their London peers — $100,000, reportedly — in exchange for the chance to live continentally. More traditional working hours, the Mediterranean, a lower cost of living and longer life expectancy — the kind of soft power Europe wants to be known for.

That’s the dream, anyway. But the economic reality facing Europe as Russia steps up its war in Ukraine looks very different. A multiyear shock to living standards looms large across countries such as Spain, Italy, France and especially Germany, as real wages fall faster than for their counterparts in the US, where life will look sweeter. Europeans will have to contend with less energy, less output, less disposable income, more inflation and higher import costs. Social unrest is a real risk.

As Europe scrambles to unpick a German-led dependency on cheap Russian gas, hope is fading that the economic pain will be over by spring. Despite an admirable effort to fight Vladimir Putin’s gas shutoffs by building up reserves for the winter, most of that could be depleted by March. High energy prices and scarce supply will linger. Economists at Deutsche Bank AG and Barclays Plc respectively forecast a euro-area economic contraction of 2.2% and 1.1% next year.

Europe’s track record on containing inequality also faces a big test. Energy and food account for a much bigger share of spending for the bottom 20% than the top 20%. European governments have earmarked an estimated 500 billion euros ($496 billion) to cushion the impact of higher prices on consumers and businesses, according to think tank Bruegel, but that figure might just be the start. The UK, whose Brexit headaches hurt trade openness even before tanks rolled into Donetsk, will also have to spend big to protect its population.

Hence why some European firms now dream of an American quality of life. The US’s stable gas prices and government support for manufacturers have seen firms such as Volkswagen AG shift production there, while Tesla Inc. pauses German investment plans, according to the Wall Street Journal. Soaring energy costs have seen one in 10 German companies cut or interrupt production, according to one industry-association survey. This will ripple through trade partners’ supply chains inside and outside Europe, including in China — another place where the EU is reducing its dependency. 

Sure, the US has seen inflation rise, but it also has the advantage of being a net energy exporter; two-thirds of its LNG exports through June went to Europe. The tumbling euro and pound show how Europe’s import bills are rising, from pricier energy to Apple Inc.’s price hikes. As French President Emmanuel Macron gravely tells his people that the age of “abundance” is over, Americans are spending more as gas prices fall. Those who make it to Paris have found luxury distinctly more affordable.

As apocalyptic as this sounds, the EU has endured recessions before. There’s still hope that governments will realize the best way of defending their citizens is through unity, by sharing energy and financial resources in a similar way to Covid. 

But getting there will be tortuous. Governments around the world loaded up on debt during the pandemic, supported by loose monetary conditions that are now tightening fast. Even countries that avoided Germany’s energy errors — such as France with nuclear or Spain with renewables — are contending with their own issues of underinvestment and high debt piles. Rekindling solidarity will be hard.

There are worse places to be than Malaga in a crisis like this . But Europe’s soft-power advantage will likely be less about quality of life and more about building coalitions abroad and managing a wartime economy at home. Whatever the weather, Europe’s dolce vita is about to become a lot less sweet.

More From Bloomberg Opinion:

Harsh Winter Reality Is Finally Sinking In for EU Leaders: Lionel Laurent

Britain Goes the Wrong Way on Energy Bailout: Javier Blas

• A Decision Tree for Biden If Putin Goes Nuclear: Andreas Kluth

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.

More stories like this are available on bloomberg.com/opinion






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