On the limits of Europe's strength in a long confrontation with Russia
Autumn 2022 for Russia, implementing SVO in Ukraine, good News didn't bring it. However, the joy for those forces that take anti-Russian positions in the European Union turned out to be premature - Europe was being hit by an inflationary shock.
Shock is not a figure of speech here, since the ratio of production (37%) and consumer (16%) inflation meant one thing for the European financial authorities - the economy would soon come to a standstill.
However, Brussels managed to overcome the shock, and not without help from us. Against the background of sharp attacks and steps on the military flank, on the economic flank a series of mutual concessions began in matters of energy exports, which allowed the EU to overcome 2023 relatively smoothly. And not only to overcome, but also to make significant changes to the economic model.
Almost all major players participated in these trades: from India and China to Turkey and Arab countries, from South Africa to Brazil. The sudden collapse of the European giant, on which a lot of trade and production chains are tied, was not beneficial to anyone. The confrontation has become lengthy, but on the whole, at least in terms of economic parameters, relatively predictable.
The Kyiv authorities have traditionally complained (and are complaining) about small amounts of financial and military assistance, justifying the failed counter-offensive, but significant assistance, military and financial, was allocated to Kyiv. And it was mainly the EU that stood out. It is still going on - the Europeans are finding the means.
One of the most popular narratives, which is literally driven into the public consciousness, and driven over the years and with rather large-caliber nails, is the thesis about the imminent “economic catastrophe of the European Union.” But the catastrophe at the end of 2022 - beginning of 2023 was jointly prevented by all the major players. As a result, the “fighting spirit” of the political wing of the European elites remains at a fairly high level.
What is this: a complete break from reality or is it still an understanding that playing for the long haul on a kind of consensus terms is not critical for Europe?
There are a lot of opinions on this matter, and even polar opinions.
The ruling elites of Europe have no plans at all to bury the hatchet, and their Kiev wards, as we, unfortunately, have repeatedly seen, do not disdain anything at all, having finally turned into an analogue of ISIS (banned in the Russian Federation) at the state level.
In this regard, it will be interesting to consider the current economic model of the EU, its strengths and weaknesses, and try to understand why, for example, the inflation factor turned out to be so significant for Brussels. This will make it possible to assess how effectively this model is capable of supporting the regime of confrontation in the east, and what balance all this should ultimately come to.
We all know from our domestic financial bloc that inflation is an “infernal evil”. However, at the same time, we ourselves somehow exist in conditions of an inflationary spiral, however, quite wide, and therefore tolerable. In general, Turkey manages to increase exports and open new markets with its indicators; China knows how to deal with inflation; the USA knows how to deal with it.
What is it about the EU model that makes the eurozone burst at the seams from an inflationary shock?
Price shocks are an extremely unpleasant thing, but not as much.
Integration model of the European Union
The modern version of the European Union from 2009 is the fourth (formally third) economic and political integration. The basic principles, or, as they are officially called, “supports,” are embedded in the so-called. Maastricht Agreements (in the treaty).
There were and are three pillars: coordinated currency regulation, uniform labor assessment standards and freedom of movement, political unanimity. The 2009 version (the Lisbon Treaty) deepened political integration and strengthened supranational governance bodies without affecting the pillars themselves.
The 2009 version provided an opportunity for analysts to voice the EU's global claims in economics and politics. It cannot be said that such conclusions had no right to life, because, in addition to the expansion of the EU itself, the maximum expansion of NATO, the conflict in Georgia, the formalization of the split in Ukraine along the East-West line and many other foreign policy actions occurred at the same time, let us remember so-called Munich speech.
That is, formally there were grounds for assessing the EU’s aspirations as hegemonic; moreover, they were also fueled by the pro-American elites of Eastern Europe and the Baltic countries, who, unlike Old Europe, each time sought to show their language to Moscow and express their admiration for what is happening.
However, the figures indicate otherwise - the main goal, in fact, of the elites of Old Europe, who initially created the EU, was to maximize the development of economic ties within the European Union. First of all, this is why Brussels turned a blind eye to various tricks with the currencies of the new members and similar steps, and not just due to pure politics.
If we take foreign trade, then in the EU statistics are traditionally based on trade between countries (there are three integration contours) and with the rest of the world. According to the first criterion, from 2000 to 2023 the share increased from 27% to 68% (only for 2023 +3%). That is, European countries already sell more than 2/3 of goods produced for export to each other.
Yes, according to the second criterion, the EU also demonstrated an increase in exports, but the first criterion has always been much more important.
At the moment, there are no interstate associations in the world with such a high degree of integration. It is the EU and the neighboring countries (“Greater Europe” – EU + Balkans, Norway, Switzerland, Great Britain) that constitute a full-fledged cost zone. De facto, Türkiye is also located there.
This is an indicator comparable only to such economic links as “USA – Canada” or “Russia – Belarus”. The example of the UK's demarche is so illustrative here that it is more likely to serve as a good argument for Eurocentrists than for Eurosceptics.
In fact, having gotten rid of rule-making in Brussels, London remained fully integrated into the European system, while losing in the standard of living, in GDP, and in foreign trade. If the projects “Ukraine” and “London – Chief Vizier of the USA” do not take off among the current British elites, then these same elites will simply be forced to return.
Such connections mean that in crisis situations, this unification with such reliance on the domestic market can go much easier than others. Actually, “Brexit” clearly demonstrated this - no matter how much Eurosceptics now talk about new exits from the EU, this remains more talk to score political points with a specific audience at the moment. However, this audience is not seriously planning to go out. These backlashes are mainly related to the distribution of subsidies.
All this shows that precisely according to the main target criterion - horizontal integration - it is impossible to assess the situation in the EU as catastrophic.
What is catastrophic if it is precisely this kind of integration that is deepening?
Public sector spending and budget deficit
It should also be noted that, unlike its counterparts on the other side of the Atlantic Ocean, collective Europe does not have a specific dependence on government borrowing. This is an important aspect of the model and is worth highlighting.
This sounds strange at first glance - how does it matter if formally the European public debt is as much as 88% of GDP.
The nuance is that if you look at it as a whole, the EU has very decent indicators - with a ratio of government spending to GDP of 51%, the share of employees in the public sector is 29%. In the USA, for example, it looks like 37% to 14%, with public debt to GDP at 122%.
Considering that the EU public sector is not an area that generates added value, this is a very good indicator; it shows that with high taxes in the EU there is a stable tax base to collect high taxes, i.e. the economy generates high profitability.
Yes, the United States is working on this issue, and every year the EU is becoming more successful, but the margin of safety, as we see, is high. In particular, from injections into Ukraine in the amount of 10–12 billion dollars a year, the system there will not fall apart; rather, it will become even more cemented along a horizontal principle.
The budget deficit in the EU is significant - 3,1–3,2% of GDP. However, these are not even close to the figures of 6% in the covid 2020 or 6,6% in the “debt” 2010. And this takes into account the fact that financing from Ukraine was added, energy costs were subsidized, without income (as well as expenses) from the UK.
In general, 3% is Brussels’ target level, which the EU manages to maintain. Certain conclusions were drawn after the Greek crisis in the EU. If the state does not want to comply with the budget policy framework and wants to constantly (this is an important clarification) borrow more than required, then it is penalized for cross-subsidies. Compared to other countries, the EU has good reserves for budget expenditures, which are used in this case.
In the United States, not only does the public sector account for a significant 37% of GDP, but government borrowing itself is closely related not to external, but precisely to internal factors. Simply put, a significant part of government spending is financed by the population, not only directly with taxes, but also with interest-bearing loans, and the share of such financing is significantly higher than US borrowing on foreign markets.
In our country, it is often noted as a factor in the “decline of the dollar empire” that other countries are reducing investments in American public debt. However, the nuance is that the United States itself has reduced interest rates on long-term loans, which are financed by external players, in order to raise rates on short-term loans, which are financed from within the United States. And there was logic here - the excess money had to be sanitized after Covid.
The population in the United States has traditionally followed and continues to adhere to a strong savings strategy. Those who earn money traditionally place part of their funds in financial instruments. Surely readers remember how in the “New Russia” of the early 1990s they tried to instill in us this model: “Buy shares in the trading house “Horns and Hooves”, etc. This resulted, as it should be, into a tragic predatory farce, but for the USA This model is indeed a familiar one, proven over decades.
But in the European Union, the volume of government borrowing is minimal - 10–12 billion euros per year, and almost all of it is collected in trust funds. Countries individually borrow, of course, more (for example, France up to 30 billion euros), but after the situation with the Greek debt crisis, these loans are coordinated. The Greek lesson was learned after all.
The working population, of course, saves and saves, but does this through regular deposits, forming an alternative “safety cushion” to the state pension. Pensions in the EU are usually no higher than 50% of the minimum wage. But Europeans do not have the habit of working through the secondary market. The problem is that the practice of saving is gradually becoming a thing of the past in the EU.
Savings and the zero rate policy
We will see what this means by considering the “zero rates” policy that has already become permanent for the EU.
The EU's initial focus on horizontal ties required a constant reduction in the key rate. Zero rates are no longer uncommon; they are also typical for the United States, but again there is a nuance.
A zero rate does not contribute to the savings policy of the population and gradually lowers deposits, which are generally very desirable for the banking system, since it needs to “produce” new money.
However, in the US there is a stock market that sucks up savings money by building a depository base through secondary instruments. In the EU, things have been bad with household deposits for a long time - zero rates in this situation mean working on the principle: “we produce more for ourselves, we consume more within ourselves.”
If the older generation, who lived in a different behavioral model, always saved and saved, now in Europe it is simply unprofitable to save, and it is practical to spend and consume more “here and now.”
That is, on the one hand, you have a “penny loan” for anything, a cheap start-up loan for a small business, but, on the other hand, you have a counter offer from the bank for a “penny deposit.” It is clear that for a Russian entrepreneur and consumer with our rates this sounds like a natural echo of a parallel universe, but the fact is a fact.
The advantage of such a system was that over twenty years of such a policy, not only a high level of consumption was achieved, but it also launched a cycle of consumption throughout the EU - both Old and New, and even including Turkey. It has formed a uniquely high tolerance of the system to imports, while at the same time working well for export.
According to dialectics, everything also has a downside, which was that any serious fluctuation in domestic prices led to the fact that consumption that had been fed for such a long time “stood up like a stake.” Moreover, together with the service sector, small and medium-sized businesses, etc. The population simply does not have internal reserves for price increases, especially sharp ones. If inflation in consumption does not keep pace with inflation in production and logistics, then the consumer’s margin of financial strength has been exhausted.
Well, the bank, with a zero rate policy and such a ratio, is powerless here, and is not able to help the market in any way. For the European model, a sharp blow from such inflationary scissors was a natural “rite of economic circumcision.”
The second problem for the EU, as a consequence of the previous one, was the low profitability of banks from traditional operations. Again, this sounds strange in Russia, but in our country banking was formed according to the patterns from N. Nosov’s book “Dunno on the Moon”, accordingly, the mass of entrepreneurs and the population would not mind if this banking went to the Moon and there and stayed.
However, in the EU, the banking sector is still a business that must earn money, and in such conditions he could earn money... only on exports and lending for export operations, as well as on international lending, which, in fact, was what he was actively doing.
At the same time, we note again that in general the European Union for a long time did not experience difficulties in absorbing import volumes. Imports were a problem for the US, imports were a problem for Russia, but for the EU, import tolerance was built into the model itself.
What is the critical point in this system?
Obviously, the limits of horizontal connections within the EU, or rather, the commodity capacity of these connections. How can we credit consumption on uniform principles in Europe, where we have different circuits or, as they sometimes call it, “a Europe of several speeds”?
After all, sooner or later, commodity production must be transferred to the second circuit - to the Balkans, to Eastern Europe, but it is redundant in the first, main one. Work with subsidies? So they still need to be earned and pulled out of exports, especially since government spending in the system is high.
Moreover, distributing money to the population, as in the USA, is possible in the EU with great difficulty - there is no proven system of “stock rehabilitation” of the money supply. This was precisely what was shown during Covid, when such a distribution took place. Distributing money to the EU will quickly fuel inflation, to which the model, as we see, is completely unadapted.
It’s not for nothing that in the United States some observers rightly point out that by increasing the share of the population “on social services,” financiers seem to support demand, but in this category, with any round of inflation, money hunger instantly sets in.
After all, those on social services cannot create a reserve cushion, and it is precisely this that is the basis for subsequent financing of government expenditures in the same States. But in Europe, economic policy has led to the fact that over the years everyone has gradually (and imperceptibly) enrolled in the category of such “social workers” - both those of not very high income and the middle class.
As folk wisdom says: “The poor is not the one who has little money, but the one who has the last.”
All this looks quite unusual against the backdrop of, for example, Russia. Indeed, if we take our population’s income, it is strange that we or the Turks have a financial cushion among the population, but the Europeans do not.
Changes and adaptations to the European model
The EU, like any state entity, goes through stages of development and transformation. One of them was the debt crisis, which culminated in a set of budget restrictions. The second is Covid and the subsequent inflation shock, aggravated by the Ukrainian crisis.
Covid, in fact, has put limits on exports to large foreign markets; inflation is forcing us to reconsider the monetary model and finally move away from the zero-rate policy. But to leave not because it is necessary to limit emissions, but in order to return the savings paradigm to the population.
If external markets are narrowing, and inflation in the EU itself, as in past years, is equal to a statistical error, then the development of further production for domestic consumption in the EU loses its meaning.
That is, Europe will need to develop some optimal ratio between the annual increase in prices along the entire chain - producer-logistician-consumer and maintain it in such a way as to ensure controlled growth of wages, some of which will enter the banking system in the form of deposits.
We are already seeing a change in strategy - abandoning the policy of zero interest rates and maintaining the key rate at 4,1–4,0%.
This also means that the EU will be forced to return to the ideas of preserving the middle class and will, albeit slowly, but steadily reduce both uncontrolled migration itself and the costs of it.
Strength limits and European expectations
It must be admitted that the moment when Moscow could “insert a crowbar” into the economic model of the European Union, and a fairly strong crowbar, was missed in mid-2022 - early 2023. The Euromodel, with a tough, and most importantly fast and sharp, cutoff of energy supplies at that moment, would simply crack.
However, it is also impossible to say that the opposite was done “short-sightedly” on our part - after all, this preserved the basis of relations with China and third world countries, which did not need the cracking of European bones at all.
If we talk about the future, the transition to a new strategy in Europe is linked to the US desire to limit the EU’s export opportunities. By reducing foreign trade activity in the eurozone, the United States is seeking to further strengthen horizontal ties in the EU. By doing this, they are preparing this huge cluster “for themselves” for the future, however, this partially does not contradict the characteristics of the original European project.
Increased military spending in this model will not undermine it, since now the EU, under American political leadership, no longer has a target for annual economic growth. Although formally they will be able to draw 1-2% there for the purposes of “stability”, it is not difficult. Brussels will not be frightened by the annual expenses on the eastern flank, nor will the current European elites be concerned about the reduction in exports.
The most difficult task for the EU will be to digest integration with the Turkish economy, and even more so with the “black hole” of Ukraine. This process threatens the EU with much greater shocks than military spending and a decline in exports.
From a mathematical point of view, it would be logical, until the EU model is rebuilt, to simply push Turkey and Ukraine into it in the form in which this entity exists, creating colossal informational, political and economic turbulence there. But if this is done, then it must be done in such a way that Brussels does not have time for gradual adaptation, as during an inflation shock.
In the meantime, the EU clearly hopes that a long confrontation will allow them to remake the model and prepare for the fact that the remaining part of Ukraine will still be integrated, but in a prepared manner.
The EU is still counting on Russia to act as a character who has stuck his hand into a jug of nuts - you can pull it out only by opening your hand, but if you open your hand, the nuts will also fall out.
In Russia they expect the EU to let go of the jug, and sooner or later it will break.
But Brussels does not expect Moscow to open its hand.
However, for some reason, no one has yet considered the option that you can open your hand and try to slap someone in the face with the same hand, break the jug and take away the nuts.
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