Europe Scattered by Gas and Inflation Woes... Is a 'Second Brexit' Happening? [Global Focus]

Former Editor-in-Chief of German Economic Newspaper Points Out in Column
"Putin Knows Europe's Fake Solidarity"
Russia Reduces Gas Supply... Shaking EU Unity
Hungary Opposes Commission's Proposal to Cut Gas Consumption by 15%

[Asia Economy Reporter Kim Hyunjung] "Putin knows about Europe's fake solidarity."

Andreas Kluth, former editor-in-chief of the German economic newspaper Handelsblatt, recently published a column with this title in Bloomberg News. He stated, "The leaders of the 27 European Union (EU) countries praise the unity that binds their nations together, but in reality, even 'Europe's enemy (Russian President Vladimir Putin)' knows this is not true," and pointed out, "The biggest problem of the EU is that threats, responsibilities, and sacrifices are not shared."

Amid the resurgence of COVID-19, Russia's reduction of natural gas supply, and unprecedented inflation, cracks are spreading within the European Union (EU). Especially in major countries such as Germany, Italy, and France, political voices against sanctions on Russia and support for Ukraine are failing to gain public support, intensifying the confusion.

◆Russia Shuts Gas Pipelines... Solidarity Tested in Crisis= The greatest test of the EU's cohesion is the massive adversity of Russia reducing gas supplies. Russia's state-owned gas company Gazprom recently limited gas supply through Nord Stream 1, the pipeline connecting to Germany, to 60% capacity citing equipment inspections, and then announced a further reduction to 20%. If the supply reduction continues until winter, when heating demand surges, major media outlets fear that Russian President Vladimir Putin will use energy as a weapon to "make Europeans shiver." Fatih Birol, Executive Director of the International Energy Agency (IEA), warned, "This winter will be a historic test of European solidarity."

The European Commission proposed that the entire Eurozone voluntarily reduce gas consumption by 15% and, if necessary, impose mandatory cuts, but reaching consensus is difficult. According to major foreign media such as CNN, Hungary voted against the proposal to reduce consumption of Russian natural gas by 15%. Hungary, which has relatively friendly relations with Russia, and Prime Minister Viktor Orb?n recently announced they are about to sign a contract to purchase 700 million cubic meters of gas from Russia.

Although not explicitly voting against, countries with relatively low dependence on Russian energy such as Poland, Portugal, Spain, and Greece have also shown discomfort. At the same time, the atmosphere recalls memories from about ten years ago when some Southern European countries in financial crisis were refused solidarity requests by Northern European countries. The agreement is expected to be formalized through a written procedure soon and legislated by the European Parliament, but internal and external dissatisfaction is anticipated.

Former editor Kluth pointed out, "Previously, the EU did not show solidarity when over one million refugees crossed from Turkey to Greece, and in 2020, when COVID-19 spread, it destroyed the union by closing borders and restricting the supply of medical equipment such as masks." He added, "After that, Europeans competed over vaccines," referring to a statement by then EU Commission President Ursula von der Leyen who said, "We briefly saw the disintegration of the EU." He further noted, "Great powers like Moscow (Russia) and Beijing (China) know these EU weaknesses and try to exploit them."

The European Parliament has also stepped back by applying exceptions to the May sanctions that deny maritime insurance to ships carrying Russian crude oil. Since June 4, the EU has sanctioned ships carrying Russian crude oil from using maritime insurance, but allowed shipments to third countries, including Russian state energy companies like Rosneft. The UK announced related sanctions last month but applied them only to its own flagged vessels and postponed enforcement until next year, showing a passive stance.

[Image source=Reuters Yonhap News]

Rapid Inflation Adds Fuel to Signs of Division
Italy's Draghi Cabinet Collapses
Leadership to Control Financial Markets Missing

◆Europe's Economy Falters... Leadership Missing= Rapid inflation and recession fears are fueling these signs of division. The European Central Bank (ECB) surprised markets last month by raising its benchmark interest rate from 0% to 0.5%. This was the first ECB rate hike in 11 years since July 2011. The euro fell below 1 euro per dollar, the lowest level since 2000. Germany, considered the 'big brother' of Europe, saw its second-quarter (April-June) gross domestic product (GDP) growth rate estimated at 0% compared to the previous quarter.

In June, the Organisation for Economic Co-operation and Development (OECD) forecasted the Eurozone's overall growth rate at 2.6% for this year, but the situation has worsened recently, with predictions of negative growth by year-end. According to Eurostat, the EU's statistical office, among the 11 countries with available data, seven showed a decline in second-quarter economic growth rates compared to the first quarter. The Baltic states, Latvia (-1.4%) and Lithuania (-0.4%), recorded negative growth.

Eurozone inflation hit a record high of 8.6% in June, up from 8.1% in May. Especially, Germany and Italy, Europe's economic powerhouses, are facing unprecedented challenges of energy issues and political crises, raising the likelihood of rapid deterioration. The collapse of Italy's Mario Draghi cabinet is seen as a failure of fiscal stabilization and reform, regarded as a negative factor for the entire European financial market. Prime Minister Draghi had advocated financial support for households suffering from inflation and support for Ukraine but repeatedly clashed with former Prime Minister Giuseppe Conte, leader of the Five Star Movement (M5S), a key party in the coalition government.

With the formation of a new government expected to take considerable time, leadership to control financial market volatility is currently absent. Goldman Sachs predicted that the yield spread between Italian and German government bonds, which was about 1 percentage point early last year, could widen to 2.5% by year-end.

There are also forecasts that Italy's next government will have a more 'nationalistic' tendency. The Economist reported on the 23rd and 24th of last month that about 2,000 migrants rescued in the Mediterranean arrived in Italy, noting, "The increasing number of migrants benefits the far-right," and that the far-right party 'Brothers of Italy' is leading in opinion polls. Hong Kong's South China Morning Post (SCMP) diagnosed, "Without calm and positive leadership and financial stability, Europe will be dragged into a new existential experiment."

In this situation, Gazprom provoked by announcing it would cut gas supply to Latvia, which has high dependence on Russian natural gas. This came just one day after Latvia stated it was purchasing Russian gas in euros instead of rubles.

This content was produced with the assistance of AI translation services.