Tag: EU

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The EU views Trump’s trade deal quite differently. Here’s how.

Based on President Trump’s public statements about the EU-US trade deal announced on 27 July 2025, here’s how they align or potentially contradict the European Commission’s framing:

Points of Agreement

Both sides emphasize:

  • The 15% tariff ceiling: Trump confirmed that the U.S. will impose a flat 15% tariff on most EU goods, including cars, which is consistent with the EU’s statement.
  • Energy and investment commitments: Trump highlighted the EU’s agreement to purchase $750 billion in U.S. energy and invest $600 billion in the U.S., which matches the EU’s announcement.
  • Strategic product exemptions: Both sides noted that certain products like aircraft parts, chemicals, and pharmaceuticals will receive special treatment or exemptions.
  • Section 232 investigations: Trump acknowledged that pharmaceuticals and semiconductors will temporarily face 0% tariffs pending national security reviews, aligning with the EU’s description.

Here’s where Trump’s tone or framing may differ from the EU’s:

  1. Tariff Framing:
    • Trump described the deal as a “very powerful” and “biggest of all the deals”, emphasizing tough negotiations and portraying the 15% tariff as a win for the U.S.
    • EU framing presents the 15% as a ceiling that reduces existing tariffs (e.g., on cars from 25% + 2.5% MFN), suggesting relief rather than escalation.
  2. EU Expectations:
    • Reports indicate that Europe had hoped for lower tariffs, around 10%, and some EU officials expressed relief mixed with concern over the final deal.
    • Trump’s tone suggests the EU market was “essentially closed” and now “opened up,” which may not reflect the EU’s view of its own openness.
  3. Military Purchases:
    • Trump mentioned that the EU would be “purchasing hundreds of billions of dollars worth of military equipment”, a claim not mentioned in the EU’s official statement.
  4. Steel and Aluminum Tariffs:
    • Trump indicated that 50% tariffs remain for now, with a quota system to be negotiated. The EU emphasized cutting tariffs and protecting against global overcapacity, suggesting a more cooperative tone.

Moreover: the EU-US trade deal announced on 27 July 2025 is a political agreement and not legally binding until it is formally ratified through the EU’s internal procedures, which may require approval from all 27 member states.

Download the official EU Commission’s statement

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How Americans Have Been ‘Borrowing’ Money from the Rest of the World for Decades Without Consequences

It’s a strange phenomenon. Americans keep buying Mercedes cars and other expensive items—even though they can’t actually afford them. Normally, a country that does that would be in serious trouble. But we lend them the money to buy those things. What’s going on here?

US Dollar and other currencies

Trade Deficit
America has been living beyond its means for decades. They buy far more than they produce, and that gap is filled with imports. Last year, Americans bought over $1.2 trillion more from abroad than they sold abroad. That’s more than the Netherlands produces and consumes in a whole year. And they’re buying on credit—Europe or China lends them the money for those Mercedes cars and other goods.

Budget Deficit
It’s not just trade that shows a big deficit; government spending is also way out of balance. Last year, the budget deficit was $1.8 trillion, or 6 percent of GDP. The government structurally spends more than it takes in. Many developing countries are doing better financially than the U.S.

Normally, a country with such deficits would face a huge problem. Financiers would demand high interest rates for loans—if they’re willing to lend at all. That forces a country to make painful choices to fix its deficits.

Many developing countries are doing better financially than the U.S.

Greece
Take Greece ten years ago. The country had major deficits. To fix them, they had to slash government spending, which mostly hurt the public. Thousands of civil servants lost their jobs, and wages dropped sharply so they could become competitive with foreign countries again. For Greeks, no more new Mercedes—only second-hand Dacias.

But the U.S. has no problem financing its deficits. In fact, we’re lining up to lend them money. While Greece saw interest rates on new government bonds spike to 35 percent, the U.S. borrows at just 2 to 4 percent.

The Secret
There’s no talk of painful measures in the U.S. On the contrary, the government—recently with Congress’s approval—raised the debt ceiling again. So the state can borrow even more. Elon Musk might be laying off millions of civil servants, but not as a government spending cut. That money is meant for tax cuts, which means less income for the government.

So what’s America’s secret? How can they rack up debt for decades without serious consequences? The answer: the dollar.

This requires some explanation. The U.S. dollar is the world’s dominant currency. The vast majority of international trade transactions are settled in dollars—just think of the oil trade. As global trade grows, so does the demand for dollars. That demand helps the dollar maintain its value. This is a major reason why investors and countries keep investing in the U.S.

That’s why the U.S. can borrow at low interest rates despite its large deficit—unlike Greece, which had to offer sky-high rates.

Mountains of Dollars
Because many countries have trade surpluses with the U.S., they end up with large reserves of dollars. They reinvest those dollars in the U.S., buying U.S. government bonds—called treasuries. These treasuries are considered the safest government bonds in the world. And the market is enormous.

So you can always sell those bonds if you need dollars, or buy them if you have dollars to spare. The euro or the Chinese yuan offer nothing similar and thus can’t compete with the dollar.

There’s something ironic about it. The fact that Americans have such a massive and growing mountain of debt actually makes the dollar strong. And the dollar’s dominant position seems untouchable—there are no credible alternatives to the American currency.

A Drawback
But the dollar isn’t only beneficial to Americans. Because there’s always demand for dollars, the exchange rate stays high compared to other currencies. And that expensive dollar is a disadvantage for U.S. companies that export. It’s one reason much of U.S. industry has disappeared. Countries with weaker currencies can produce more cheaply.

That’s why Trump is trying to improve the competitive position of American companies by imposing tariffs on imports. That makes imports more expensive compared to domestic production.

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SAP Dethrones Novo Nordisk as Europe’s Most Valuable Company

There’s a new frontrunner on the list of Europe’s most valuable companies. The Danish pharmaceutical giant Novo Nordisk no longer tops the ranking — that position now belongs to German business software maker SAP.

With a market value of €313 billion, SAP is now worth more than the entire German automotive industry combined.

The company, founded in the 1970s (Systeme, Anwendungen und Produkte in der Datenverarbeitung), doubled its market value in 2024. It was solely responsible for half of the gains in Germany’s DAX index — all thanks to the rise of AI.

SAP Joule
AI assistants are already showing their first returns when it comes to managing business processes. That’s exactly why they developed SAP Joule, which customers can integrate.

And when you have a lot of customers, things move fast. And SAP has a lot of customers. According to the company, 80% of German SMEs use SAP business software.

SAP has long been one of the most valuable companies on European stock exchanges — but it had never claimed the number one spot. That honor previously went to Novo Nordisk, best known for Ozempic, a diabetes drug that skyrocketed in popularity as a miraculous weight-loss treatment, sending the company’s valuation soaring last year.

That surge may have been a bit too steep. Ozempic may have outpaced what the company could deliver. They couldn’t meet demand, and investors began to think the stock price had gone a bit too far. As a result, the share price has dropped by 40%. It’s a game of musical chairs.

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What New Steps Will NATO Take for Ukraine?

The official agenda for the NATO foreign ministers’ meeting doesn’t mention it anywhere. However, as they convene in Brussels today and tomorrow, discussions behind the scenes are very much focused on the next steps NATO countries might take in the war in Ukraine. Among these considerations is the potential deployment of European troops to Ukraine—so-called “boots on the ground”—which is not being ruled out.

NATO logo

This has been confirmed by insiders within the military alliance involved in the meeting at NATO headquarters. This summit is the last before Donald Trump potentially resumes his position in the White House, making the discussions even more pressing.

Uncertain Times

Trump has previously claimed he could end the war between Russia and Ukraine “in a day” and has expressed intentions to drastically reduce U.S. aid to Ukraine. How he plans to achieve this remains unclear. Within NATO, there is considerable apprehension about these uncertain times.

President Zelensky seems unwilling to wait for Trump’s plans to unfold and has taken proactive steps. In recent weeks, he has openly discussed the possibility of a ceasefire with Russia. Just days ago, the Ukrainian president also expressed, for the first time, a willingness to temporarily relinquish territories annexed by Russia. However, he demands something in return: strong security guarantees for Ukraine if such an agreement is violated.

Membership Debate

For Zelensky, NATO membership remains the ultimate security guarantee. He believes such membership should apply to parts of Ukraine not under Russian control. However, despite Ukraine’s long-standing aspiration for membership, NATO is unlikely to extend an invitation anytime soon.

The alliance is divided on this issue, and since NATO decisions require consensus, Ukraine’s desire for membership will not be fulfilled in the near term. However, a potential ceasefire compels NATO countries to consider what security guarantees they could provide to Ukraine in the interim. Deploying troops to oversee such an agreement is one option being discussed.

The Estonian Foreign Minister recently advocated for sending troops, and French President Emmanuel Macron mentioned this idea back in February. Germany, among others, strongly opposed the proposal.

No Options Off the Table

According to the French newspaper Le Monde, discussions about “boots on the ground” have recently gained momentum. The French Foreign Minister previously urged that no red lines should be drawn in supporting Ukraine. When asked whether this included sending French troops to Ukraine, he replied that no option should be excluded.

This stance reflects a deliberate strategy of “strategic ambiguity,” leaving adversaries uncertain about future actions to avoid revealing NATO’s hand. Similarly, the EU’s new foreign policy chief has stated that no options are off the table when it comes to supporting Kyiv. Over the weekend, former Estonian Prime Minister Kaja Kallas visited Ukraine.

The deployment of NATO troops to Ukraine remains an extremely sensitive topic. Russian President Putin already claims that the West is waging war against Russia, a narrative frequently repeated on state television. In his view, “boots on the ground” would signify further escalation, as NATO forces would be physically present on Ukrainian soil.

This doesn’t necessarily mean NATO troops would engage in direct combat with Russia. Previous discussions have considered training Ukrainian soldiers within Ukraine itself rather than abroad.

As a potential ceasefire between Russia and Ukraine draws nearer, all options are once again being reviewed in NATO capitals and behind the scenes at NATO headquarters in Brussels. Only when a ceasefire appears genuinely imminent will it officially make the agenda.

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Economists Warn: The European Union Must Act

Dark clouds are looming over European industry. More experts are sounding alarms about the EU’s economic transition. A worrying signal came this week with the quarterly figures of Germany’s biggest carmaker, Volkswagen.

@roelthijssen

“If we do nothing, in fifty years, Europe will be just an open-air museum for American tourists,” warned former European Central Bank president Mario Draghi in a recent report on the EU’s economic future.

Most countries agree that action is needed. But what should Europe do to remain a global financial power alongside China and the United States? Economists say clear goals must be set and significant investment made over the coming years.

In Europe, much thought is being given to this. The EU remains a global player but risks being overtaken by emerging economies in the coming years. China has invested heavily in the green industry for years. Over the past ten to fifteen years, the country has become a major producer of solar panels, everyday semiconductors, and batteries.

Now, China is also making significant strides in the production of electric cars, putting pressure on European automakers from their East Asian competitors.

Europe is also increasingly struggling to keep pace with the United States. Of the fifty largest tech companies, only four are from the EU. Over the past decades, numerous startups in the U.S. have grown into major companies with trillion-dollar valuations.

Everyone in Europe agrees that something must be done, but what? “If we Europeans think we can build major companies from the ground up in just a few years, we are mistaken,” says Samuele Murtinu, professor of economics at Utrecht University. Competing with other global economies will require a lot of time and money.

Should European industrial companies collaborate more closely?

This happened with General Motors in the United States, now one of the world’s largest car companies. A successful European example is Airbus, which began in the 1960s as a collaboration between British, French, and German aircraft manufacturers.

However, economists see little support for this idea. Market competition leads to lower prices. “There was an idea to merge large European companies, but this was ultimately prohibited due to monopoly concerns,” says Niclas Poitiers, an economist at the EU think tank Breugel. “It would be a death knell for other existing European companies.”

Alarm

What everyone does agree on is that significantly more money needs to be invested in the European economy soon. The United States is investing $700 billion in the green transition. Estimates suggest China is doing the same, but Europe does not yet have a unified plan.

Former ECB chief Draghi also proposed such an amount for the EU. Some may be alarmed by this, but economists warn that if Europe is not willing to invest in the new economy, the price could become even higher. Without a long-term view, it may soon be too late to catch up.

Five Tips for the EU from Economists

Be bold in investing heavily in sustainability over the coming years.

Collaborate, even with companies outside the EU.

Gain control over the supply of essential raw materials.

Set clear political objectives.

Countries must come together for more unified policies.

Besides funding, having a clear plan is crucial for Europe. Although the 27 EU member states form a union, they often do not align their national policies. The member states also seem divided on their priorities.

What is more important: accelerating sustainability or maintaining major European companies and thus preserving jobs? Opinions on this choice currently differ significantly.

Nevertheless, it is not an impossible task. Europe has faced bigger challenges in the past. “The closure of coal mines was actually the last major transition,” says Poitiers. “A huge number of jobs were lost back then. I estimate this green transition to be smaller. I don’t expect as many jobs to be at risk.”

European tech sector lags behind the U.S. Market value of companies in billions of euros:

European Union:

NXP Semiconductors: 59, Spotify: 72, ASML: 255.

US:

Amazon: 1,870, Alphabet (Google): 2,040, Microsoft: 2,980, Apple: 3,250.

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Draghi: Hundreds of billions extra needed to save the European economy

It is high time for a drastic overhaul of European economic policy. The survival of the European Union is at stake, facing an “existential challenge.” These strong words come from a report on the future of European competitiveness presented this morning by former European Central Bank head Mario Draghi. According to him, hundreds of billions of euros are needed annually.

@roelthijssen

Last year, Draghi was asked for advice by Ursula von der Leyen, President of the European Commission. The European economy lags behind the US and China. Disposable income growth in the US has been nearly double that of Europe since the early 2000s, Draghi writes.

The struggles of European industry were highlighted again last week when Volkswagen considered closing factories in Germany due to increasing pressure from Chinese competitors.

At a press conference this morning, Von der Leyen stressed that improving the economic position is “top of the agenda,” with Draghi’s report serving as guidance for the new European Commission.

Investing in innovation
Draghi points out that all three factors driving European economic growth—thriving international trade, cheap Russian energy, and America’s defense of Europe—have become uncertain or have disappeared. Significant changes are needed in the EU, according to Draghi.

Investing more in knowledge and innovation is crucial for the EU to compete with economic giants like China and the US. Currently, the EU is “punching below its weight,” writes Draghi. He calls for removing strict regulations and barriers hindering innovative entrepreneurs in Europe.

Expensive energy
Energy policy is another challenge. Since Russia stopped supplying cheap energy following the invasion of Ukraine, gas prices for European industry have risen to over three times those in the US. The EU needs to accelerate its clean energy plans, Draghi urges.

The report includes over 170 concrete proposals to bring about the “radical change” needed, according to Draghi.

The EU must also become more self-reliant in security matters, investing and collaborating more in defense. Additionally, the EU should ensure the supply of crucial raw materials, forming partnerships with resource-rich countries and increasing domestic production, such as opening new lithium mines.

Various EU processes must also change. For example, the report suggests better coordination of competitiveness and quicker decision-making in the European Council by reducing veto powers.

Download the report here -> https://www.roelthijssen.nl/wp-content/uploads/2024/09/The-Future-of-European-Competitiveness-2024.pdf

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Europe must protect its own green industry against Chinese overcapacity

Something remarkable is happening in China. With potentially significant consequences for Europe. Last week, The Economist reported that the fall in profitability of Chinese companies has never been as severe as it is now.

Well, you might think they would go bankrupt. But that doesn’t happen. The influx of the Chinese government continues, and these companies keep producing. China is creating ‘overproduction’ to keep its own economy going. The country produces large quantities of electric cars, solar panels, and wind turbines. This drives prices down significantly. Good for the consumer, good for the sustainable energy transition.

What exactly is wrong with this? A lot.

Because it’s more than just the consumer and the energy transition. Every society needs an industrial base to provide everyone with decent work: whether local or migrant, man or woman, theoretically or practically educated. Not only to give everyone an income safely, but especially to give everyone a decent place in a community: meaningful work, self-confidence, a social network. This fact often remains underexposed in the industrialized rich Western economies. China has realized this and has industrialized at breakneck speed. It is not just about increasing consumption; it directly involves the core of society. This affected millions of people and gave rise to a middle class. It became the vital breeding ground for discontent in industrial states like Ohio, Michigan, and Wisconsin. It was precisely from these areas that the victory of Trump in 2016 emerged.

The new wave of overcapacity that China is creating will hit Europe especially hard.

America has since better shielded its own industry with its industrial policy, the Inflation Reduction Act (IRA), which includes higher energy prices. The blow will be even greater here. Chinese overproduction is much larger, and Europe has already lost twice as much production. Moreover, the social fabric in large European countries has been showing deep cracks. The rise of extremist rights in France and Germany and the shocking results in England illustrate this. And this process threatens to accelerate further.

Europe must come out of this. It is precisely here that the consensus was based on globalization for a long time. The idea was always that purchasing power would increase and that as a result, everyone would have better things: things that are made elsewhere that are the best (read: cheapest). Yes, but that only works if you have your own industry for everything that is needed.

Yet in 2019, when the European Commission laid the foundation for its Green Deal, it was written that what was needed was a massive scaling up of the production of wind turbines, solar panels, and electric cars in the European Union. Not to mention the question of where all those things would come from. Europe didn’t realize that at the time, but that should have been the purpose of the new green industry.

Five years later, three times the amount of production has been outsourced worldwide. Then Russia invaded Ukraine, and it became clear that raw materials for our prosperity were not subject to the laws of Friedman but rather to the laws of Putin and Xi. In response, China is accelerating its own industry.

The European Commission has now realized that and has come up with the ‘Net Zero Industry Act.’ A European answer to the American IRA. But where the IRA is well-funded with an estimated $2 billion annually, the money and ambition in the European Industry Act is completely lacking.

The coming months must bring about change.

Europe must allow the green industrial revolution to take place here and show China where to go. Not because of the climate. But primarily because society demands it. An agreement must be made between the ECB president and the European heads of government to direct their policy towards prosperity in their own countries. How much industry is needed for that? How much prosperity must come from that? Europe must now take that step. Otherwise, the Chinese will keep shouting that there’s no alternative. But that can’t last much longer.

This piece was published by Diederik Samsom in Dutch. See the original here: https://www.volkskrant.nl/columns-opinie/europa-moet-de-eigen-groene-industrie-beschermen-tegen-chinese-overcapaciteit~bda61e7d/

Diederik Samson is a Dutch physicist, former politician, and columnist for de Volkskrant

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EU leaders at the table: who gets which top job and will determine the course?

Who will secure top European positions? One week after the European elections, 27 heads of state and government leaders will meet tonight in Brussels to discuss this question.

Over dinner, they will decide who will fill the key positions and thus have the most influence on the EU’s direction for the next five years. Decisions on these positions are expected to be made in about ten days at the next summit.

Brussels rumor mill

For months, various names have been speculated behind the scenes about potential candidates. This opaque backstage process resembles a Brussels rumor mill, where names are dropped to gauge reactions.

EU leaders are deciding on four positions: President of the European Commission, President of the European Council (who leads the summits of government leaders), the new EU foreign affairs chief, and the President of the European Parliament. Political preferences play a crucial role in these appointments, but geographic distribution and gender balance are also important.

The Christian Democrats strengthened their position as the largest faction in last week’s European Parliament elections. This increases the chances that Ursula von der Leyen, the German President of the European Commission, will secure a second term.

The Christian Democrats are also likely to initially provide the President of the European Parliament. Currently, Roberta Metsola from Malta holds this position, and she is expected to remain.

The Social Democrats, the second-largest party in Parliament, will provide the President of the European Council. Antonio Costa, the former Prime Minister of Portugal, is a long-rumored candidate for this role. Costa resigned last year due to a corruption scandal, but was later cleared by an investigation, and Portugal is now putting him forward as their candidate.

Candidates in the running

Ursula von der Leyen from Germany: current and potential future President of the European Commission.

Roberta Metsola from Malta: current President of the European Parliament.

Kaja Kallas, the Estonian Prime Minister: in the running to become the EU foreign affairs chief.

Antonio Costa, former Prime Minister of Portugal: potential President of the European Council.

Estonian liberal Prime Minister Kaja Kallas is a contender to become the new “high representative,” responsible for EU foreign policy. Kallas, a hardliner on Russia, has strong support from Eastern EU countries warning against naivety towards Putin. Kallas was also previously mentioned as a candidate for NATO chief.

Mark Rutte’s potential last summit?

Mark Rutte, a strong candidate for the NATO chief position, may be attending his last EU summit for the Netherlands. This depends on whether the new Dutch cabinet is sworn in before the next EU summit on June 27. If so, Rutte’s successor, Schoof, will attend.

Discussions tonight will also likely address Rutte’s NATO candidacy, which is not yet approved by Hungary, Romania, and Slovakia.

“Total package” approach

EU leaders aim to finalize a comprehensive package for all these roles due to the current geopolitical situation. With the war in Ukraine and the upcoming US presidential elections, timely decisions are crucial.

The goal is to have everything settled by the next summit on June 27-28, though it could be finalized sooner. French President Macron mentioned that this might be possible in the coming days.

The European formation process

Heads of state and government leaders will nominate a new President for the European Commission, who must be approved by a majority of the new European Parliament through a secret vote, expected in July or September.

Once the new President is appointed, they will form a new European Commission with 27 members, one from each member state. Governments nominate candidates for the position of European Commissioner. For the Netherlands, this is currently Wopke Hoekstra (CDA) for climate action, but his future depends on the new government’s support, as the CDA is now in opposition.

All nominated Commissioners will face hearings before the European Parliament. By mid-December, a new European Commission will be ready to address key issues for the coming years, such as defense, security, and strengthening the EU’s competitiveness.

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Macron: Europe Could Perish, It Depends on Our Choices

Future of the EU: Fewer regulations, more investments, and improved cooperation are needed to keep Europe viable, according to French President Macron. “The awakening is too slow.”

Macron @ Sorbonne 25-04-2024

Macron delivered his speech at the Sorbonne University in Paris in front of students, French politicians, and European diplomats.

Europe could die, and decisions must be made now to prevent this. This grave message was at the heart of the speech delivered by French President Emmanuel Macron on Thursday morning in the lavish amphitheater of Sorbonne University in Paris. The successive shocks that Europe has faced in recent years with the coronavirus pandemic, global trade conflicts, the war in Ukraine, and the rise of populism have exposed the weaknesses of the European Union, and according to Macron, immediate intervention is needed for the EU to withstand the test of time.

The weaknesses of the European Union are numerous and significant – the president named them one by one in front of students, French politicians, and European diplomats in a nearly two-hour-long speech. Macron is particularly concerned about the poor state of European militaries, which also lack cooperation, and dependence on other world powers in areas including defense, technology, food safety, and medicines. Also, the climate and biodiversity crises pose challenges to Europe, as do immigration at European external borders, foreign interference, and the lack of oversight on social media. “We do not set the rules in this digital space, where our democracy is shaped.”

The president came up with numerous proposals to make Europe a significant geopolitical player again, with the same core message: EU member states should cooperate more and invest more and smarter so the EU can become autonomous and compete with China and the United States. This is necessary, according to Macron, because these power blocs “no longer adhere to trade rules” with the massive support packages they are pumping into their economies.

To prevent Europe from being crushed, member states should invest heavily in existing sectors and several “sectors of the future” such as artificial intelligence, quantum mechanics, aerospace, biotechnology, and green energy forms. He also wants European countries to form more “real partnerships” with third countries to counteract the “bipolar confrontation” of China and the US. “We must show that we are a balancing power.”

Europe is also “too complicated,” Macron believes: there are too many and too complicated regulations, particularly in the area of climate. “It is not sustainable to have the strictest environmental rules, invest less, and be more naive [than other power blocs].” Trade rules within the EU would also weaken the international competitive position of the Union. “We need to dismantle the rules among the 27 countries so we can have a real shared market. Only then can you compete.”

Campaign Kickoff

In France, the speech is seen as an attempt by Macron to revive the campaign for the European elections of his Renaissance party. It could use it: the lead candidate Valérie Hayer struggles to gain momentum, in the polls the radical-right Rassemblement National leads by a large margin, and the third party, the Socialists, are dangerously close to Renaissance. As the socialist lead candidate Raphaël Glucksmann held a large gathering on Wednesday evening, it almost seemed like a duel between the two.

But within the Élysée, it is denied on all fronts that the speech is part of the European campaign. “It is a speech of a head of state speaking on behalf of France. (…) That is something entirely different,” says a source.

For the Élysée, ‘Sorbonne’ was mainly a continuation of the speech Macron gave in the same amphitheater in 2017. At that time – newly elected and very young – he was the one who put the theme of European autonomy on the European agenda with an inflated speech that is still often quoted. Then, it led to other EU member states tempering Macron’s words. But after the unrest and conflicts filled recent years, Macron sees that he has been proven right by his European partners. “The very French concept of sovereignty is increasingly spreading across Europe,” he said with satisfaction.

‘The EU is Awakening’

The French president was also cautiously positive about other developments. Where he portrayed a dozing European Union in 2017, he now described how member states have realized the dangers of being dependent on Russian gas and Chinese medicines. He celebrated the steps announced in recent years to reduce this dependence. He also repeatedly emphasized that the importance of the existence of the European Union is hardly disputed anymore. Where in 2017 radical-right parties like the Dutch PVV and the French Rassemblement National still advocated for Frexit and Nexit, “no one dares to talk about leaving the EU or the euro now.”

We are awakening, Macron concludes. “But the awakening is too slow.”

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The Russian economy appears to be more robust than estimated at the start of the Ukraine war. But the outlook is far from rosy.

Russian gas exports have already fallen sharply, but the oil industry has yet to be affected. The Russian economy is contracting this year and the next, but less sharply than previously estimated. On balance, income from oil and gas exports has increased considerably, which is filling the state treasury. The European oil boycott will put pressure on revenues, while other sanctions will also hurt more.

Russian economy

Is Europe sinking as Russia climbs out of the trough? A Russian journalist recently asked this question during a press conference of the International Monetary Fund. Wishful thinking, the IMF economists clearly hinted in their response. They expect a contraction of -3.4% for this year, -2.3% for next year, while the eurozone is expected to grow slightly in 2023. However, last April, a contraction of more than 8% was expected for 2022.

Energy exports

Where does this relative windfall come from? Earlier analysis of the Russian economy still assumed a financial crisis. This scenario did not materialize because capital movements were restricted. Russian monetary authorities also prevented a bank run by raising interest rates. Friend and foe praise the attitude of the Bank of Russia, which operates independently and paints a fairly realistic picture of the economy. In a recent publication, the central bank stated that the economic recovery stalled in September, while inflation is rising again — partly due to ‘the exodus of suppliers and retail chains from unfriendly countries’.

Higher returns from energy exports keep Russia going. It is true that Moscow has largely turned off the gas tap to Europe of its own accord (exports are 80% lower than a year ago), but the sale of gas before the war ‘only’ accounted for a quarter of oil revenues. Oil is therefore much more important to the Russian economy. The price per barrel is higher this year than in 2021 (the recently announced production cut by the oil cartel Opec sets a new floor), while the export volume has remained stable. The state is likely to receive RR 11,700 billion (€194 billion) from oil and gas sales this year, an analyst estimates, compared to RR 9,100 billion last year (€151 billion).

The big blow

Western sanctions are potentially disastrous for Russian industry, which relies heavily on imports of machinery and technology. So far, Moscow has succeeded in limiting the effects with a bit of trickery and wizardry. As soon as the stocks run out, it is expected that major problems will arise. In the meantime, the combination of robust energy exports, falling imports and strict monetary policy is resulting in a strong ruble. This also dampens inflation, as imported consumer goods are relatively cheap as a result.

Normally, the strength of the currency says something about the strength of the underlying economy. But in the case of Russia, this is misleading. Analysts still expect the war to cost the country 10% to 15% of GDP, although this bill is spread over several years. The biggest blow will be the European boycott of Russian oil, which will take effect in December.

Emigration wave

This impending intervention has already led to shifts in trade flows: less to Europe, more to Asia. But can the entire decline of exports to Europe (accounting for about half of Russia’s oil exports before the war) be absorbed by, for example, China? It would then have to import more than twice as much Russian oil. Given the limited supply of tankers, this is only possible if new pipelines are built — and that costs time and money. Bofit, the think tank of the Finnish central bank, foresees an ‘exceptionally large drop’ in Russian exports before 2023. Finnish economists expect a 4% contraction for the Russian economy this year and next, making them more pessimistic than the IMF.

Oil and gas sales account for 40% of Russian government revenue. Lower exports will push up the budget deficit. In view of the low, largely domestically financed government debt, this is not an acute problem.

The decline of the Russian economy is happening in slow motion. This not only concerns the effects of the sanctions, but also of the wave of emigration as a result of the mobilization. Demographers expect a declining birth rate, accelerating the population decline that started in 2018. Bloomberg economists now estimate Russia’s potential economic growth at 0.5% annually — up from 2.5% before the war.