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The European Union has a lot more to lose than the U.S. from conflict with Russia, one reason why the western allies are having difficulty agreeing on a tough stance in the standoff over Ukraine.
Russia ranks as the EU’s fifth-biggest trade partner — as well as its top energy supplier — while for the U.S. it barely makes the top 30. There’s a similar gap for investment, with Russia drawing in money from Europe’s household names including Ikea, Royal Dutch Shell Plc and Volkswagen AG.
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With inflation surging and consumers squeezed by a surge in energy prices, EU officials are moving carefully on the prospect of sanctions. They want Russia to feel more pain than Europe from measures aimed at preventing an invasion of Ukraine. They’re worried a war could choke off natural gas supplies in the middle of winter when they’re needed most.
All those issues may feature in a call between U.S. President Joe Biden and his European counterparts scheduled for Monday in a bid to strike a unified position.
Adding to Europe’s reluctance is a sense that for penalties imposed on Russia in the past, especially after the 2014 invasion of Crimea, it was the EU economies and not the U.S. that paid the price. As U.S. President Joe Biden warns that Russia’s military may move shortly, EU leaders such as France’s Emmanuel Macron are playing for time. Russia maintains it has no plans to invade Ukraine.
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“Sanctions have the best effect if they are efficient,” German Foreign Affairs Minister Annalena Baerbock said last week. “It’s about sanction which really have an effect, not against oneself, but rather against Russia.”
By contrast, Russia is “well prepared” to weather any sanctions after taking steps to insulate itself from measures the U.S. might impose, said Viktor Szabo, fund manager at Aberdeen Asset Management in London.
“It will be difficult to inflict such a pain that would be felt,” Szabo said. “It wouldn’t push Russia to the edge.”
What Bloomberg Economics Says…
“Europe stands alone when it comes to how much more consumers will have to pay for natural gas. Our in-house model of the eurozone economy points to a hit from higher energy prices of as much as 1% of GDP, with the impact lasting well into this year.”
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–Jamie Rush, chief European economist. Click for the INSIGHT.
Energy is the biggest friction point. The U.S. is a net energy exporter, but the EU relies on imports, and Russia is its No. 1 supplier of both oil and natural gas.
JPMorgan Chase & Co. economists on Friday warned a surge in the price of oil to $150 a barrel would hammer growth and spur inflation.
Gas is a particularly sensitive matter now, with Russia holding back supplies for the past few months. Prices have tripled, boosting the cost of electricity across the continent. It’s the main reason Europe is suffering a bigger energy shock than the U.S.
Escalation with Russia over Ukraine could make it worse. EU officials are caught in a bind, since domestic gas production is in decline while Russia has built facilities to supply more.
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Russia’s gas exporter Gazprom PJSC and partners including Shell have spent 9.5 billion euros ($10.8 billion) completing the Nord Stream 2 pipeline and want to open it. Military action in Ukraine would put that on the chopping board — and any future deals to boost Russian supply to the region. That would exacerbate the energy shortage in the EU.
“Were sanctions to be placed on Russia’s energy exports or were Russia to use gas exports as a tool for leverage, European natural gas prices would probably soar,” said Capital Economics analyst William Jackson. “We think they would far exceed the peak reached last year.”
Sanctions against Russia would also benefit U.S. exporters who are seeking to ship more liquefied natural gas into Europe.
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Possible Sanctions
ING Bank Eurasia’s Chief Economist Dmitry Dolgin says the U.S. and its allies could hit Russia with:
Sanctions on non-military technologies, or blocking access to foreign financing for companiesA ban on Western funds buying state-issued debt, costing Russia $10 billion a yearA retroactive ban on foreign participation in local state debts, costing $60 billionHalting access to the Swift payment system, which would make it much more difficult for Russia to collect payments on $535 billion of exports a year
Europe’s businesses have more at stake because they’ve invested more in Russia than their U.S. counterparts — and the gap has widened in recent years. Russia is also one of the biggest exporters of aluminum, nickel, steel and fertilizers.
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Ikea, Volkswagen and the brewer Carlsberg A/S operate in Russia. Italy’s UniCredit SpA has been eyeing an acquisition there that would make it the biggest foreign bank in the country — overtaking Societe Generale and Austria’s Raiffeisen.
Europe also has been stung hard by past sanctions aimed at Russia. After Russia annexed Crimea in 2014, the U.S. and EU agreed on a sanctions regime.
Three years later, a study by the Kiel Institute for the World Economy found that while Russia suffered the biggest trade losses, Germany wasn’t all that far behind. Other EU economies got hit too. The U.S. actually came out ahead. A similar pattern followed sanctions on Iran.
Politicians in the U.S. and Europe boast about the economic pain they’re capable of inflicting on Russia. They’ve kept quiet about the “inconvenient truth” that there’ll be consequences at home too, according to Tom Keatinge, head of the Centre for Financial Crime and Security Studies at the Royal United Services Institute in London.
“Sanctions issued by Western countries rarely include the need to accept any meaningful self-harm,” Keatinge wrote last month. “The impact on the economies of the issuers — particularly in the EU — may be significant.”
Bloomberg Economics research …
How Putin Could Embolden ECB’s Hawks What the Energy Crunch Means for IndustryHow Putin Could Embolden ECB’s Hawks
Growth in gross domestic product (GDP), the total value of all goods and services produced in the economy annually, is one of the most frequently cited indicators of economic performance. To assess Canadian living standards and the current health of the economy, journalists, politicians and analysts often compare Canada’s GDP growth to growth in other countries or in Canada’s past. But GDP is misleading as a measure of living standards when population growth rates vary greatly across countries or over time.
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Federal Finance Minister Chrystia Freeland recently boasted that Canada had experienced the “strongest economic growth in the G7” in 2022. In this she echoes then-prime minister Stephen Harper, who said in 2015 that Canada’s GDP growth was “head and shoulders above all our G7 partners over the long term.”
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Unfortunately, such statements do more to obscure public understanding of Canada’s economic performance than enlighten it. Lately, our aggregate GDP growth has been driven primarily by population and labour force growth, not productivity improvements. It is not mainly the result of Canadians becoming better at producing goods and services and thus generating more real income for their families. Instead, it is a result of there simply being more people working. That increases the total amount of goods and services produced but doesn’t translate into increased living standards.
Let’s look at the numbers. From 2000 to 2023 Canada’s annual average growth in real (i.e., inflation-adjusted) GDP growth was the second highest in the G7 at 1.8 per cent, just behind the United States at 1.9 per cent. That sounds good — until you adjust for population. Then a completely different story emerges.
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Over the same period, the growth rate of Canada’s real per person GDP (0.7 per cent) was meaningfully worse than the G7 average (1.0 per cent). The gap with the U.S. (1.2 per cent) was even larger. Only Italy performed worse than Canada.
Why the inversion of results from good to bad? Because Canada has had by far the fastest population growth rate in the G7, an average of 1.1 per cent per year — more than twice the 0.5 per cent experienced in the G7 as a whole. In aggregate, Canada’s population increased by 29.8 per cent during this period, compared to just 11.5 per cent in the entire G7.
Starting in 2016, sharply higher rates of immigration have led to a pronounced increase in Canada’s population growth. This increase has obscured historically weak economic growth per person over the same period. From 2015 to 2023, under the Trudeau government, real per person economic growth averaged just 0.3 per cent. That compares with 0.8 per cent annually under Brian Mulroney, 2.4 per cent under Jean Chrétien and 2.0 per cent under Paul Martin.
Canada is neither leading the G7 nor doing well in historical terms when it comes to economic growth measures that make simple adjustments for our rapidly growing population. In reality, we’ve become a growth laggard and our living standards have largely stagnated for the better part of a decade.
Ben Eisen, Milagros Palacios and Lawrence Schembri are analysts at the Fraser Institute.
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Delivering remarks to his Liberal cabinet during a caucus meeting on Wednesday, Prime Minister Justin Trudeau emphasized that the newly-announced federal government is intended to help create a fair economy for “everyone” in Canada, particularly those from Millennials and Gen Z.
