Economic Crisis Threatens European Union Solidarity

Photo credit: European Parliament

Russia’s invasion of Ukraine on February 24, 2022 galvanized Europe, creating solidarity at a time when many questioned the strength of the European Union (EU). However, eight months since the invasion, cracks are starting to show. Consumers are feeling the pain of record-high levels of inflation that shows no signs of letting up, and an expected energy crisis looms large as winter approaches. Protests and strikes related to rising costs of living have erupted across the EU. Most focus on demands for higher wages, but some have targeted Russian sanctions and inadequate government assistance in the face of economic difficulty. Multiple EU members have become apprehensive about sanctions and have warned about the dangers the current economic situation poses to the future of the EU. Rising domestic discontent and the pressure it is putting on governments also runs the risk of countries choosing unilateral action in response to the economic crisis, threatening to break EU unity.

A Worsening Economic Situation

Inflation in October reached a record high in the 19 eurozone countries, with Germany at 11.6%, Italy at 12.8%, and France at 7.1%. Rising prices energy (41.9%) and food, alcohol, and tobacco (13.1%) were the main contributors. In response to inflation, the European Central Bank is increasing interest rates, putting pressure on businesses and EU members with high debts, such as Italy, by raising borrowing costs. While the EU experienced 0.2% growth in gross domestic product in the third quarter, economists predict a recession is imminent. Additionally, the IMF has warned that central and eastern European countries could experience “shortages, rationing, and gross domestic product losses of up to 3 percent,” as well as further increases in inflation across the continent, if Russia were to completely cut off its gas to Europe.

The last major financial crisis the EU faced provides a potential preview of what is to come. During the Great Recession, the eurozone almost collapsed. Southern eurozone members required bailing out by the Northern members, who tied forced austerity policies to the bailout, sparking conflict between the two groups that impeded EU cooperation for many years. Members who received the bailouts, such as Greece, Portugal, and Spain, continue to have among the highest debt as a percentage of GDP among EU members, placing them in a particularly precarious economic position. A repeat of the European sovereign debt crisis would further strain these economies and their relations with richer EU members, such as Germany. The EU seems to be recognizing this danger and is considering a more lenient, less austere approach to economic recovery. However, the proposed changes are not guaranteed, and Germany has expressed reservations, potentially further inflaming tensions with the rest of the EU.

Support for Sanctions Wavers

The EU has thus far approved eight rounds of sanctions against Russia since the start of the invasion. However, member governments have started to express doubts about future sanctions and rising domestic discontent threatens the durability of current sanctions.

Hungary has consistently been the most difficult EU member to get on board with sanctions. Prime Minister Viktor Orban, who is seen as a Russian sympathizer, has stepped up his attacks on EU sanctions. He successfully pushed for an exemption from the EU’s embargo on Russian oil in June and is now demanding the same for a potential EU price cap on imported Russian gas. Orban has claimed EU sanctions are devastating Hungary’s economy and, even more ominously, made a veiled prediction of the EU’s disintegration, likening it to the collapse of the Soviet bloc. Hungary is also blocking the EU’s latest Ukrainian economic support package, which requires unanimous approval. This marks Hungary’s biggest break from the EU since Russia’s invasion of Ukraine and drew sharp criticism and accusations of blackmail from other members. The blocking of the economic aid package demonstrates how one country can have an outsized impact on certain EU policies. If the issue is not resolved, this could be the first step in the breakdown of EU solidarity.

While Hungary’s anti-sanctions position is not surprising, other EU members are starting to express concerns. Greece, Cyprus, and Malta all expressed misgivings regarding the curbs on the transportation of Russian oil that were part of the latest round of sanctions, arguing that they could affect their economies disproportionately. In Italy, there has been disagreement among the key members of the new coalition government over the country’s approach to sanctions. Prime Minister Giorgia Meloni has publicly maintained a pro-sanctions stance, but Matteo Salvini and Silvio Berlusconi, the leaders of two of the coalition parties, have denounced the sanctions as harmful to both Europe and Italy. This puts Meloni in a potentially precarious situation where she would have to choose between changing her approach to sanctions or watch her government collapse. Neither option would be favorable for the EU. A change in sanctions policy would break EU unity while the collapse of the Italian government would create further instability in one of the EU’s largest members at a time when unity and stability are needed most.

Governments are not the only ones expressing concerns about the sanctions. Several European industry associations have pressed the EU to avoid sanctions on Russian aluminum, warning they could “put thousands of companies out of business.” Additionally, the Czech Republic has seen several anti-government protests, demanding the resignation of the pro-Western government for supporting sanctions and for its inaction on high energy prices. Similarly, protesters in eastern Germany are demanding the German government lift its sanctions on Russia.

While neither the Czech nor German government appears to be in immediate danger, there have already been political consequences. Though the Czech Republic’s main opposition party, ANO, had limited success in recent Senate elections, taking only three of the 27 contested Senate seats, they achieved modest gains in municipal elections, winning in most of the major cities. In Germany, the right-wing, pro-Russia Alternative for Germany party has experienced a five-percentage point rise in ratings to 15%, the highest it has seen in three years. The German government is also facing backlash from moderate parties and union leaders demanding more economic relief measures. This could serve as a harbinger of what is to come in Europe as the economic situation deteriorates, protests rise, and an energy crisis looms. Inaction risks a resurgence of the Eurosceptic parties that grew in popularity in Europe following the financial crisis. It may only be a matter of time before public discontent grows large enough to threaten the ruling governments of EU members, forcing them to choose between sanctions or negative electoral consequences.

Germany’s Unilateral Action Causes Backlash

Germany’s approach to the economic crisis also threatens EU unity and raises questions about the ability of the bloc to maintain a collective response to the economic crisis. France, Italy, Spain, Belgium, and Hungary have all denounced Germany’s recent €200 billion domestic aid package meant to help consumers and businesses deal with inflation and energy prices. The move could have a negative impact on the single market, and EU members have expressed concern that it could give Germany an unfair advantage. France was pushing for “EU joint borrowing” and price caps on gas to deal with rising energy costs, policies that Germany has been reluctant to support. This has added to tensions between the two largest economies in the EU, which have worsened in recent months. A bilateral meeting between President Emmanuel Macron and Chancellor Olaf Scholz in France ending without the normal joint press conference¾a tactic usually used to rebuke a visiting foreign official¾and the annual Franco-German ministerial council meeting postponed until January. Further complicating the relationship was Scholz’s decision to visit China to meet with President Xi Jinping and refusing Macron’s offer to join him to demonstrate European unity. The Franco-German rift is particularly important because EU policy rarely gets made without both of their support, and their relationship does not seem to be improving anytime soon. While the fractious relationship may hinder the EU’s response to the economic crisis, one positive note is that the two countries continue to agree on economic support for Ukraine and separately provide military support.

Meanwhile, Italian politicians have accused Germany of using its financial power to boost its economy while other EU members suffer, and warned the move could “distort the internal market” of the EU. Senator Andrea Ferrazzi, a member of Italy’s Democratic Party added, “If it continues moving in this direction we won’t have a united Europe anymore, but a hegemony of the strongest countries, with Germany first, which would weaken not only the EU but all the others.” The prime ministers of Spain and Belgium both argued that Germany’s decision undermined fair competition in the EU and threatened the single market, with the Belgium prime minister warning of the dangers involved when “everyone is just doing their own thing.” A goal of the EU is greater economic integration and a desire for members to have coordinated economic policymaking in support of the single market. Germany’s unilateral fiscal policy move and its resistance to France’s push for coordinated EU economic policy, combined with the reaction from other EU members, raise concerns about the current and future state of the EU’s economic union.

All is Not Lost

While the EU solidarity that developed at the beginning of the invasion is at great risk of folding under the pressure of economic deterioration, rising energy costs, and domestic discontent, more extreme outcomes, such as Orban’s warnings about the collapse of the EU, seem far-fetched. The EU remains unified in its opposition to Russia’s invasion of Ukraine. In fact, in an indication of the EU’s continued support for Ukraine, Bulgaria’s parliament recently voted in favor of providing military assistance to Ukraine. Bulgaria had previously been one of only two EU members to refuse to provide Ukraine with military aid, the other country being Hungary. Additionally, the Inflation Reduction Act that recently passed in the United States has led to a collective rebuke of the U.S. government by the EU, with officials arguing that it violates international trade laws and poses a threat to European industry. This provides the EU with two common causes to rally around.

Recent gains in the Ukrainian counteroffensive and President Volodymyr Zelenskyy’s reversal of his demand for President Vladimir Putin’s ouster before joining peace talks could begin to raise hopes for a peace agreement, or at least a ceasefire. While such an agreement could relieve some pressure off the EU’s economy, it could also cause conflict among the member states regarding whether and what sanctions should remain following the end of the war. The EU has survived major crises throughout its existence, and, thus far, there is little indication this crisis will bring its downfall. However, the EU will undoubtedly be less unified and more fractious in the coming months.

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