Economic costs of the war | Economy

In February Putin met with Xi, the Chinese president, they signed a document in which they defined a new world order of blocs and that included recovering territories of influence; Ukraine in the case of Russia, Taiwan in the case of China. The NATO summit in Madrid has reinforced the geopolitics of blocs. Spain is in the block of the most developed countries, with the highest level of income per inhabitant and, from an economic point of view, we are on the good side of the world to do business and progress.

In Madrid, NATO leaders have reinforced the alliance, they have given priority to security and defense over the economy and social and climate policies, they have warned that support for Ukraine will continue, that there are no signs of a ceasefire agreement in the short term and point to China as a “challenge”.

What economic consequences will these decisions have for citizens? In the short term, a worsening of the energy crisis. Putin has halved gas supplies to Germany in the past month. That prevents several European countries from complying with the recommendation of the European Commission to fill the strategic reserves in September. And the International Energy Agency warns that Europe will have to cut gas consumption by 30% next winter.

The main use of the gas is industrial and this implies that several European industries will not be able to produce. GDP is production and, therefore, Europe would enter an intense recession, until the gas supply is normalized. It would affect the less competitive sectors and lead to an industrial reconversion with high social and political costs, as happened in the 1980s with the oil crisis.

Germany would be the country most affected by its myopic energy policy of the last 20 years. It is one of the countries in the developed world that has grown the least since 1980. In 2008 it was a country with very little debt and was less affected by the Great Recession. Since 2007 it has grown more than the rest of the European countries, but less than the US and much less than the Asian countries. Since last summer of 2021, German GDP has stagnated but its employment continues to grow and its unemployment rate has dropped to 3%. However, in June unemployment rose sharply.

Their wages grew by 4% before the Ukraine war but there are already union demands in the industry for increases of 7%. If the Bundesbank pressures the ECB for a quick rise in interest rates to contain inflation, the recession would most likely turn into a financial crisis in which the euro would be in question again.

Stagflation impoverishes the middle and lower classes. Leaders should ensure that their citizens are overwhelmingly willing to make these sacrifices. Otherwise, the crisis of the Western democracies will intensify and the costs of the war will be long-lasting.