Michael Gfoeller & David H. Rundell
September 27, 2023
In 1919, John Maynard Keynes was a young economist with the British delegation negotiating the Versailles Treaty. Keynes strongly objected to the harsh economic treatment being meted out to Germany. He resigned and went home to write “The Economic Consequences of the Peace,” which accurately predicted how the treaty would sow the seeds for future conflict. Had Keynes been alive last year, he might well have written “The Economic Consequences of the War,” predicting how the economic sanctions being placed on Russia would, in fact, unravel Europe’s political order.
Few products contribute more to economic prosperity and political stability than affordable food and energy. Increased energy costs retard every aspect of economic growth. Rising food costs act much like a regressive tax increase. By imposing economic sanctions on Russia, Europe destroyed its own access to inexpensive food and energy. One did not need John Maynard Keynes to predict that as a result of the sanctions, Europe’s prices would rise and economic growth stall. We made that prediction in these pages a year ago.
Originally published by Newsweek on September 7, 2023
Between February and May of 2022, the OPEC basket oil price rose from $75 to $125 per barrel. During the same period wheat prices in Germany increased from $350 to $530 per ton. Germany had imported half of its natural gas from Russia. According to the Center for Global Energy Policy, last year the cost of heating the average German single family home went from $1,500 to $5,250. As a result, the German government took advantage of the EU‘s Temporary Crisis Framework to provide a $200 billion package, which has ultimately cost German taxpayers more than all the military equipment the United States has sent Ukraine.
While the price on some commodities has since eased, the fact remains that overall levels remain substantially higher than before the war.
In 2022, the Eurozone’s annual inflation rate rose to over 10 percent and although the rate at which prices are rising has now stabilized at prewar levels, the overall price level in Europe remains much higher than it was two years ago. Moreover, the Eurozone’s average inflation rate disguises the fact that in places like Poland and Hungary the inflation rate remains 10 and 17 percent respectively.
Meanwhile, Eurozone GDP growth continues to collapse from 5.3 percent in 2021 to 3.5 percent in 2022 and an IMF predicted rate of less than 1.0 percent this year. Again, this overall figure conceals the fact that some nations like Germany, Poland, and Hungary will see no economic growth at all in 2023. Europe’s unemployment rate remains nearly twice that of the United States while European wages, productivity, and hours worked all remain at or below pre-Covid levels.
Europe’s economic difficulties were compounded by a massive wave of Ukrainian refugees that has strained public services and government budgets across the continent. According to the United Nations, more than 8 million refugees have fled Ukraine.
Most have gone to Poland, Russia and Germany. However all EU nations were affected because for the first time the European Union implemented a temporary protective directive (TPD). This allowed Ukrainians to enter without formal asylum procedures, something that had never been done for African and Middle Eastern refugees. The TPD guaranteed Ukrainian refugees residency, housing, education, employment, medical, and social services benefits. Tensions rose as schools and hospitals became overcrowded and citizens perceived that refugees were receiving preferential treatment.
These economic problems have had very substantial political consequences. Over the past 18 months, more than a third of European Union governments have fallen. It would be inaccurate to blame these changes solely on the war in Ukraine. In many instances, local issues played a major role. Nevertheless, it would be equally misleading to ignore the fact that economic hardship created an atmosphere of anger and apprehension which contributed to political change.
Here is a selection of some of those changes:
- In Italy, Giorgia Meloni, a conservative who openly criticizes EU refugee policies became prime minister.
- In Sweden, the ruling Socialist Party was defeated by a coalition of conservative parties.
- Finnish Prime Minister Sanna Marin was ousted after her Social-Democratic Party lost parliamentary elections to two conservative parties.
- Dutch Prime Minister, Mark Rutte, lost power when his coalition government collapsed.
- Spanish Prime Minister Pedro Sánchez called snap parliamentary elections after his Socialist Workers Party did extremely poorly in local elections. The conservative People’s Party won a plurality in the snap election, securing 136 seats in the 350 seat Spanish parliament but no one has yet been able to form a new government.
- The government of Moldova fell in February 2023.
- Romanian Prime Minister Nicolae Ciucă resigned in June 2023, together with his entire cabinet.
- Bulgaria has been in a state of chronic political instability throughout 2022 and 2023 and held its fifth snap parliamentary election in two years last April.
More ominously, the governments in Europe’s three largest economies look increasingly shaky. In France, economic growth has fallen from 7 percent in 2021 to 2.5 percent last year and is predicted to be only .8 percent for 2023. Economic frustrations are growing and recent opinion polls indicate that the leader of France’s far-right opposition party, Marine Le Pen, would defeat incumbent Emmanuel Macron if a presidential election were held today. Great Britain has had three prime ministers since the war in Ukraine began and few expect its adamantly pro-war government to remain in power after the next general election.
In Germany, the once marginal right wing opposition party “Alternative for Germany” is now the second largest party in the country and is polling ahead of Chancellor Olaf Scholz’s Social Democrat Party. Sensing these changing winds, the German government appears unlikely to increase defense spending to the NATO target of 2 percent of GDP in 2024.
Only one issue unites these diverse outcomes—all of these nations are struggling economically due to the sanctions placed on Russia. Those sanctions have been strikingly ineffective. It now seems very doubtful that Ukraine will defeat Russia or that peace can be restored without significant Ukrainian concessions. Once European voters perceive that their economic sacrifices have been in vain, we expect more governments to fall. Ultimately, the most enduring effect of NATO’s war with Russia may well be the rise of conservative, nationalist-populist governments in much of Europe.
The authors
David H. Rundell is a former chief of mission at the American Embassy in Saudi Arabia and the author of Vision or Mirage, Saudi Arabia at the Crossroads.
Ambassador Michael Gfoeller is a former political advisor to the U.S. Central Command. He served for 15 years in Eastern Europe and the former Soviet Union.
The views expressed in this article are the writers’ own.
