DEEPENING CLOUDS OVER EUROPE.

 While economic growth is generally slowing down across the globe the problem is all the more acute  across Europe impacted by fundamental deterioration of real incomes and standard of living of the people at large. European union leaders mainly attribute Russian Ukraine war for many of the problems facing the continent which is heavily dependent on energy supplies from Russia. Major Euro Zone economies of Germany, France, Italy and Spain saw that their growth forecast for 2023 has been downgraded by IMF. Similarly in the United Kingdom decline in growth is also characterized high inflation above 10% first time in 40 years as households struggle with soaring energy prices. Experts forecast that  while Britain is contending with additional pressures from Brexit, soaring energy costs, supply chain disruptions, shortages of workers and drought, it may  result in a lengthy recession.The energy crisis tops the pile of  priorities across Europe.Already 14% families of  Britain are behind paying their utility bills. British growth and productivity have been struck for fifteen years denting living standards and weakening the quality of public services. While  to address impact of inflation to households and firms require appropriate bold action, abandonment of fiscal responsibility or free market principles altogether may not be feasible.Eonomist Intelligent Unit(EIU) analysis indicate that the pain in Europe could go on sometimes because countries must wean themselves off Russian hydrocarbons and build up renewables as an alternative which is time consuming. In the near term a recession in Europe during winter of 2022-23 as a result of sustained high inflation and energy shortages are well expected. 

Germany Europe's largest economy has been experiencing acute energy crisis without rainfall and a breakdown in global trade which battered its manufacturing base. Economic growth slowed down in second quarter and likely to turn negative in the coming months,unless and until an economic miracle happened. Russia supplied more than half of Germany's gas in 2020 and about a third of oil.. Since the war the Russian supply has disrupted blaming technical problems.Major German plants like BASF is facing disruption in maintaining its operations due to natural gas shortage.Apparently it will affect many other products downstream other industries.Further drought and scorchy temperatures have caused a sharp fall in water level as the Rhine river a key transport route for Germany's dominant industrial sector, the water level have fallen below critical 40 cm mark,thus preventing barges from being loaded to full capacity. Receding water level also adversely affected not only the factories located along the shores of Rhine but also coal shipments to power projects. Germany scrambles to avoid recession amid inflation of above 7.9%, natural gas prices increased above 75.1% and corporate insolvency rate of 6.6% as per July data.

Compared to Germany and other European countries France is better insulated primarily because more than 70% of its electricity generation is from nuclear power plants, despite the set back of aging of its reactors.France can still face the damaging power cuts in the coming winter. France's GDP rose by 0.5% in the second quarter lower than any other nation in the continent. Since domestic consumption is really weak French government introduced emergency support package worth of € 20 billion including tax cuts in petrol pumps, while capping an increase in regulated electricity prices at 4%, a policy supported by state ownership of energy giant EDF.

Italian economy has performed much better than it's Euro zone counterparts registering 1% growth in the second quarter. But like Germany Italy has been heavily dependent on Russian gas supply and has added to the energy turmoil further aggravated by political uncertainty following the resignation of Italian Prime Minister Mano Draghias of a coalition Government that has been campaigning vehemently for nationalistic and protectionist policies. In August Italy approved a new aid package worth € 17 billion for consumers and business.Italy has been the weakest performer with low living standards barely higher than at the end of 1990s. It is benefitting this year due to a boost to tourism sector which accounted for 13% of GDP before pandemic. 

Spain has also impacted by the war but compared to Germany France and Italy it has a better opportunity for avoiding recession despite soaring inflation. Like Italy Spain has acquired an additional advantage by the surge in tourism after the Covid19 pandemic. Tourism accounted for 12% of Spain's GDP before Covid19 and even higher share of employment. Incidentally Spain is much less dependent on Russian energy than Italy. Spain imports liquefied natural gas from across the globe. The country witnessed better growth of 1.1% in the second quarter and IMF expects Spain as the fastest growing economy among the big four (Germany, France, Italy and Spain) this year 

As sanctions were imposed on Russia by Western alliance it resulted in an economic war of unprecedented nature. Central Bank of the Russian Federation (CBR) were denied access from deploying its international reserves and also decided to remove select Russian banks lists from the SWIFT messaging system. In fact,Russian banks were systematically disconnected from the international financial system, blocking their global operations.Russia has suffered under Western sanctions plunging its economy into deep recession and forcing Kremlin to default foreign debt for first time since 1918.But Russia's Current Account Balance comprising of trade and investment flows more than tripled to record level $167 billion surplus on account of swelling exports, oil and gas prices Gradually it became clear that sanctions have not impacted much as evidenced by strengthening of Russian rouble against US dollar. IMF has revised Russian GDP contraction from-8.5% to-6%.Since the invasion of Ukraine oil shipments from Russia  declined by 15%.The US import of Russian crude oil had declined by 60% and European union's imports fallen by 35%.But due to comparative price advantage Russian economy and currency weathered the sanctions.Trade with several countries including India zoomed. India's share in crude oil imported from Russia skyrocketed from mere 2% in previous year to 14% making Russia  India's third largest source of crude oil. Moreover  the share of fertilizer imports to India increased from 5% to 23% presently. 

 EIU's GDP projections for 2023 indicated that European Union is projected to grow only 0.3%, France 0.3% , whereas Germany a negative growth of -1% ,UK -0.6%,Italy -1.3% ,Netherlands -0.9% and Russia -3.4% as against positive growth of 5.3% in China,5.1% in India 2.4% in South Africa and 1.2% in USA. Inflation in 19 countries of Europe sharing Euro currency accelerated to 9.1% in August from 8.9% in July. Cumulative effect of the rise in food and energy prices,  the jump in service costs and the 5% inflation for non energy industrial goods obviously  worries policy makers especially European Central Bank. The European Economic Commission's monthly economic sentiment index fell from 98.9 in July to 97.6 in August. In services it fell to 8.7 in August from 10.4 in July.  In Euro zone business activities slipped, energy crisis occurred, inflation persisted,political uncertainty remains in some countries and Euro falls below US dollar, whereas in UK inflation is projected to reach 18% in 2023.Driven by both expensive energy and devastating drought consumer prices jumped more than expected in August causing pain for households and business. Stimulus for them may  fuel further inflation. On the contrary tightening monetary policy will retard growth. Pushing up borrowing costs for governments, firms and households will negatively impact. In short the sanctions  so far had not impacted much on Russian economy which very much diversified its trade .While European economies were unable to cope up with clouds of depression whereas though US economy sustained so far it failed to provide adequate and desirable energy and other support to its European partners. When a full-fledged  embargo on Russia is set to come into force from December 5th in the absence of alternatives, adequate preparations and ground work the recession in Europe is bound to deepen further.