Ian Proud
Friedrich
Merz won’t survive a single term in office and France will be the next country
to exit the EU, triggering an implosion of the project.
Europe will either continue the
war at huge cost to avoid a reckoning with its disastrous policy towards
Russia, or end the war, and face the prospect of Ukrainian membership which
will tear the EU apart. No wonder the Eurocrats are bang out of ideas and
throwing out more pointless sanctions.
Few things characterise the
emptiness of European energy policy that Ursula von Der Leyen’s announcement
that the Nordstream 1 and 2 pipelines would be hitherto banned. In what has
been described as a significant escalation, she announced on X that ‘Europe is
putting Nordstream 1 & 2 behind for good.’ Both pipelines lay empty, and
some were destroyed by a terrorist attack in September 2022. Nothing says
escalation less than a sanction with zero economic cost.
And this latest move also signals
increasing desperation in Europe about what to do about Russia, in
circumstances where no one wants to fight Russia. The arrival of Friedrich Merz
as German Chancellor has undoubtedly shifted the centre of gravity of EU policy
towards Berlin, as he tries to position himself as the tough kid on the block.
But I want to be the first to
predict that Merz won’t survive a full term in office.
The weight of domestic concern in
Germany about self-defeating foreign policy is turbo-charging the growth of AfD
which has become Germany’s most popular party since the February elections,
according to polls.
As I, and many others, have said
before, European industry has been crippled by high energy prices, and we are
told, this is Russia’s fault. But it is manifestly driven by self-defeating
energy policies in Brussels and Berlin. Rather cutting energy connections, the
only answer is to boost global supply which would inevitably bring
uncomfortable choices about Russian pipelines back to the table. Should this
happen, von der Leyen’s credibility and Merz’s honeymoon in office, would
suffer a cold shower.
Taking every step possible to
delay or prevent a ceasefire in Ukraine simply kicks the sloshing bucket of
iced water further down the slippery bathroom floor.
Yet citizens suffering under the
weight of high prices will still remember that before the war started, gas
prices in Europe were extremely low – comparable to U.S. gas prices today –
because of hugely favourable global supply. LNG from the U.S., the Middle East
and Africa together with piped gas from Norway and Russia, pushed the wholesale
price of gas down to levels not seen since 2005.
European LNG imports had risen
sharply after the onset of the Ukraine crisis in 2014 increasing from only 10%
of to nearly 50% today, while Russian piped gas kept flowing. As part of this,
imports from the U.S. tripled in volume between 2021 and 2023 and they now make
up almost 50% of total European LNG imports.
Cutting Russian gas pipelines has
had a devastating effect on the European supply equation.
Read the European press and
you’ll hear often how U.S. LNG is too expensive, which contributes to the
economic headwinds manufacturers in Germany and else are facing. Emmanuel
Macron has in the past called out the U.S. as ‘unfriendly’ for selling expensive
LNG. But this is deeply misleading.
Back in 2019, there was more gas
than the world could possibly use, bearing down on prices. The fact of piped or
shipped was immaterial to the glut in supply. The surge in U.S. supplies was
doing to global gas prices what the glut of U.S. shale oil was doing in January
2016 when prices sunk to $26 per barrel.
The 2016 oil price collapse put
immense pressure on Russia’s economy, which is heavily reliant on tax from oil
and gas exports. Russia’s current account surplus in 2016 hit its lowest level
since 1999, pinching tax income significantly. And that was at a time when
Russia was pumping record amounts of oil and gas.
Because herein lies a truth; the
global price of energy has a much bigger impact on Russia than the amount of
energy that you buy from Russia.
When President Trump talks to
OPEC about slashing the oil price, and, by extension, the gas price, he thinks
that this will damage Russia’s economy more than cutting Russian supplies
However, Russian monetary policy
today is very different to 2016. A low rouble is embraced which helps to offset
energy price slumps and brings in bigger surpluses when prices soar.
That’s why the second strand of
von der Leyen’s grand plan – getting the G7 to agree to reduce the oil price
cap from $60 to $45 – may also not work. And, in any case, G7 agreement to this
will only be possible if the United States agrees. While Trump has spoken often
about reducing the oil price by boosting global supply, it is far from clear
that he will sign up to imposing another exogenous sanction on Russia, at a
time when his administration is looking to reset relations with the Kremlin.
Mothballing Russian pipelines as
putative punishment for Putin’s war in Ukraine is having the opposite effect –
restricting supply, pushing up prices and hurting Europe far more than it is
hurting Russia.
And, of course, Europe finds
itself caught in a perfect storm of bad economic options. Continue the war at a
huge economic cost, to delay the inevitable reckoning with its self-defeating
policy with Russia. End the war and face an even bigger political and economic
cost of admitting Ukraine as a member.
I have said before, admitting
Ukraine to the EU would shake the financial foundations of the bloc and cause
such widespread resistance, that Ukraine could only join on second-class terms
and conditions. Specifically, countries like France and Poland will block and
delay to avoid handing their generous subsidies to Kyiv.
It should come as no surprise
that the newly elected President of Poland, Karol Nawrocki, has already said
that Ukraine should not be admitted to the EU. He is not alone. Hungary’s Prime
Minster Viktor Orban has long said that Ukraine’s accession to Europe would be
an economic disaster.
It might be for some EU
countries. The bigger problem, if you consider it a problem, is that it would
cause a political disaster and an unravelling of the European project. What is
happening political in Germany will, too, happen in France, and the lawfare
against Le Pen will only accelerate that. It’s now a matter of when, not if,
National Rally runs the government in Paris. When that happens, expect to see
an increasingly nationalist France head for the exit triggering an implosion of
the project.
Only radical reform, slashing the
EU institutions and handing sovereignty back to member states can prevent this
from happening. The chances of that, right now, appear very low.
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