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EU Energy Crisis is Destroying Multipolar World

Jeff Clogan associate professor Brown University (Courtesy photo public domain for education only)

Ukraine pipelines and war 2022 (Graphic public domain for edu. only)

Energy pipelines affected by Ukrainian war 2022 (Photo for education only)

Jeff Clogan associate professor Brown University (Courtesy photo public domain for education only)

Jeff Clogan associate professor Brown University (Courtesy photo public domain for education only)

By , (an associate professor of political science at Brown University) – The energy crisis provoked by the war in Ukraine may prove so economically destructive to both Russia and the European Union that it could eventually diminish both as great powers on the world stage. The implication of this shift—still dimly understood—is that we appear to be moving swiftly to a bipolar world dominated by two superpowers: China and the United States.

If we consider the post-Cold War moment of unipolar U.S. dominance as lasting from 1991 to the financial crisis of 2008, then we can treat the period from 2008 to February of this year, when Russia invaded Ukraine, as a period of quasi-multipolarity. China was rising fast, but the EU’s economic size—and growth prior to 2008—gave it a legitimate claim as one of the world’s great powers. Russia’s economic resurgence since about 2003 and continued military strength put it on the map as well. Leaders from New Delhi to Berlin to Moscow hailed multipolarity as the new structure of global affairs.

The ongoing energy conflict between Russia and the West means that period of multipolarity is now over. Though Russia’s arsenal of nuclear weapons will not go away, the country will find itself a junior partner to a Chinese-led sphere of influence. The relatively small impact of the energy crisis on the U.S. economy, meanwhile, will be cold comfort for Washington geopolitically: The withering of Europe will ultimately degrade the power of the United States, which has long counted the continent as a friend.

Cheap energy is the bedrock of the modern economy. Though the energy sector, in normal times, accounts for only a small fraction of total GDP for most advanced economies, it has an outsized impact on inflation and input costs for all sectors because of its ubiquity in consumption.

European electricity and natural gas prices are now close to 10 times their historical average in the decade leading up to 2020. This year’s massive uptick is almost entirely due to Russia’s war in Ukraine, though it was exacerbated by extreme heat and drought this summer. Until 2021, Europe (including the United Kingdom) depended on Russian imports for about 40 percent of its natural gas as well as a sizable share of its oil and coal needs. Months before its invasion of Ukraine, Russia began manipulating energy markets and driving up prices for natural gas, according to the International Energy Agency.

Europe’s energy costs approximately 2 percent of GDP in normal times, but it has soared to an estimated 12 percent on the back of surging prices. High costs of this magnitude mean that many industries across Europe are scaling back operations or shutting down completely. Aluminum manufacturers, fertilizer producers, metal smelters, and glassmakers are especially vulnerable to high natural gas prices. This means Europe can expect a deep recession in the coming years, though economic estimates of exactly how deep vary.

To be clear: Europe will not get poor. Nor will its people freeze this winter. Early indicators suggest the continent is doing a good job cutting consumption of natural gas and filling its storage tanks for the winter. Germany and France have each nationalized major utilities—at considerable expense—to minimize disruptions to energy consumers.

Instead, the real risk the continent faces is loss of economic competitiveness because of slow economic growth. Cheap gas depended on a false faith in Russian reliability, and that’s gone forever. The industry will gradually adjust, but that transition will take time—and could lead to painful economic dislocations.

These economic woes have nothing to do with the clean energy transition or the EU’s emergency

Ukraine pipelines and war 2022 (Graphic public domain for edu. only)

Ukraine pipelines and war 2022 (Graphic public domain for edu. only)

response to market disruptions caused by the war in Ukraine. Instead, they can be traced to Europe’s past decisions to develop an addiction to Russian fossil fuels, especially natural gas. Though renewables like solar and wind can eventually replace fossil fuels in providing cheap electricity, they cannot easily supplant natural gas for industrial uses—especially since imported liquified natural gas (LNG), a frequently touted alternative to pipeline gas, is considerably more expensive. Attempts by some politicians to blame the clean energy transition for the ongoing economic storm are thus misplaced.

The bad news for Europe compounds a preexisting trend: Since 2008, the EU’s share of the global economy has declined. Though the United States recovered from the Great Recession relatively swiftly, European economies struggled mightily. Some of them took years to regrow just to pre-crisis levels. Meanwhile, economies in Asia were continuing to grow at eye-popping rates, led by China’s massive economy.

Between 2009 and 2020, the EU’s GDP annual growth rate averaged just 0.48 percent, according to the World Bank. The U.S. growth rate over the same period was almost three times higher, averaging 1.38 percent per year. And China grew at a blistering pace of 7.36 percent annually over the same period. The net result is that, while the EU’s share of global GDP was larger than those of both the United States and China in 2009, it is now the lowest of the three.

As recently as 2005, the EU accounted for as much as 20 percent of global GDP. It will account for just half that amount in the early 2030s if the EU economy shrinks by 3 percent in 2023 and 2024 and then resumes its tepid pre-pandemic growth rate of 0.5 percent per year while the rest of the world grows at 3 percent (the pre-pandemic global average). If the 2023 winter is cold and the coming recession proves to be severe, Europe’s share of global GDP could fall even faster.

Worse still, Europe lags far behind other powers in terms of military strength. European countries have skimped on military spending for decades and cannot easily make up for this lack of investment. Any European military spending now—to make up for lost time—comes at an opportunity cost for other parts of the economy, potentially creating further drag on growth and forcing painful choices about social spending cuts.

Energy pipelines affected by Ukrainian war 2022 (Photo for education only)

Energy pipelines affected by Ukrainian war 2022 (Photo for education only)

Russia’s situation is arguably graver than the EU’s. True, the country is still raking in huge revenues from its export sales of oil and gas, mostly to Asia. In the long run, however, the Russian oil and gas sector is likely to go into decline—even after the war in Ukraine comes to an end. The rest of the Russian economy is struggling, and Western sanctions will deprive the country’s energy sector of the technical expertise and investment finances it desperately needs.

Now that Europe has lost faith in Russia as an energy provider, Russia’s only viable strategy is to sell its energy to Asian customers. Happily, Asia has lots of growing economies. Unhappily for Russia, almost its entire network of pipelines and energy infrastructure is currently built for exports to Europe and cannot easily pivot east. It will take years and billions of dollars for Moscow to reorient its energy exports—and it is likely to find that it can only pivot on Beijing’s financial terms. Energy sector dependence on China is likely to carry over to broader geopolitics, a partnership where Russia finds itself playing an increasingly junior role. Russian President Vladimir Putin’s Sept. 15 admission that his Chinese counterpart, Xi Jinping, had “questions and concerns” about the war in Ukraine hints at the power differential that already exists between Beijing and Moscow.

Europe’s energy crisis is unlikely to stay in Europe. Already, demand for fossil fuels is driving up prices around the world—especially in Asia, as Europeans outbid other customers for fuel from non-Russian sources. The consequences will be especially hard on low-income energy importers in Africa, Southeast Asia, and Latin America.

Shortages of food—and high prices for what is available—could pose even more of a problem in these regions than energy. The war in Ukraine has spoiled the harvests and transportation routes of vast amounts of wheat and other grains. Major food importers like Egypt have reason to be nervous about the political unrest that often accompanies rising food costs.

The bottom line for world politics is that we are moving toward a world where China and the United States are the two paramount world powers. The sidelining of Europe from world affairs will hurt U.S. interests. Europe is—for the most part—democratic, capitalist, and committed to human rights and a rules-based international order. The EU has also led the world in regulations pertaining to safety, data privacy, and the environment, compelling multinational corporations to upgrade their behavior worldwide to match European standards. The sidelining of Russia might seem more positive for U.S. interests, but it carries the risk that Putin (or his successor) will react to the country’s loss of stature and prestige by lashing out in destructive ways—possibly even catastrophic ones.

As Europe struggles to stabilize its economy, the United States should support it when possible, including by exporting some of its energy resources, such as LNG. This may be easier said than done: Americans have not yet fully woken up to their own rising energy costs. Natural gas prices in the United States have tripled this year and could go higher as U.S. companies try to access lucrative LNG export markets in Europe and Asia. If energy prices increase further, U.S. politicians will come under pressure to restrict exports to preserve energy affordability in North America.

Faced with a weaker Europe, U.S. policymakers will want to cultivate a wider circle of like-minded economic allies at international organizations like the United Nations, World Trade Organization, and International Monetary Fund. This could mean a greater courting of middle powers like India, Brazil, and Indonesia. Still, Europe seems hard to replace. The United States has benefited for decades from shared economic interests and understandings with the continent. To the extent that the economic heft of Europe now declines, the United States will face stiffer resistance to its vision for a broadly democracy-favoring international order.

Jeff D. Colgan is the Richard Holbrooke associate professor of political science at Brown University and director of the Climate Solutions Lab at the Watson Institute for International and Public Affairs. Twitter: @JeffDColgan Source: Foreign Affairs magazine

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