Sunday, August 17, 2014

Economy: Europe - The Bill For The Russia Sanctions

(Drivebycuriosity) - Europe´s economy is falling back: In the second quarter Italy dropped again into a recession, Germany´s GDP also shrank and France stagnated. The setback is - at least partly - the bill for the sanctions against Russia.

As I wrote in March (driveby) sanctions against Russia are a bad idea and Europe has to bear the highest costs. These warnings were confirmed by the latest economic numbers:

1. Contrary to the USA, who has a rising oil production thanks to fracking, Europe is dependent on the global oil supply and receives a lot of oil & natural gas (Germany a third) from Russia, who is a major global oil exporter. 

The price of oil has been artificially elevated because the sanctions are fanning speculation that the global oil supply could be disrupted. The price for Brent Crude, the financial instrument (future) and gauge for the international oil market, has been floating stubbornly north of $100 even that the global supply of oil is rising (especially because of fracking in the US) and demand is shrinking as a result of more energy efficiency (less gas suckling cars) and the slow global economy.

The high oil price works like a tax on consumption and production. Consumers have less money to spend for other goods, thanks to high gasoline bills, heating and transportation costs which make many goods more expensive. This - at least partly - explains the weak European retail sales that are holding the economy back. And companies have to deal with higher costs and are therefore reluctant to invest and to hire.

2. Russia is the third largest foreign customer for the European industry and imports cars, machines, medicaments, chemical products and more. Shrinking exports are the main cause for the weak German industrial production. They also discourage companies to invest.

Europe`s economy is already slow and fragile. High energy costs and measures against exports worsen the problem. The russia sanctions are another example what damage ignorant and economic illiterate politicians can do.

PS: As an illustration I used a segment of the painting "Frühbürgerliche Revolution In Deutschland/Early Bourgeois Revolution In Germany", by Werner Tübke (driveby), another example in which turmoil Europe can get because of political stupidity.

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