Russia sits pretty but the situation far from ‘pretty’ in European capitals

Last week I was in Lithuania to attend a conference. Once part of the erstwhile Soviet Block, it still has a large population who speak and understand the Russian language. The buildings and the architecture are also reminders of the Soviet era but I had the distinct feeling that Lithuanians did not like Russia much. They hold Russia responsible for the present-day economic hardship that their country, alongside other countries in Europe, is facing.

Jobs are hard to find and inflation is going through the roof. My cab driver revealed that earlier a ride between the airport and the hotel cost just 1 Euro but now it costs around 4 Euros. A quick look at the annual inflation data confirmed it. In 19 countries of Europe the price of energy, food, alcohol and tobacco went up from 0.9 percent in June 2021 to 3.7 percent in June 2022, a 4.3 time increase. Cost of fuel in the petrol pump was reading 2.02 Euro a litre, translating to Rupees 190 a litre. But then Lithuania is a relatively cheaper country in the Baltic region.

People in Europe are not used to economic hardship. On my earlier visits, I had seen local residents proudly speak about the social security program and how the "welfare state", that is the government, took good care of their well-being.

Soon after the Second World War, policy makers in the war-devastated region wanted to re-build Europe on the premise of socialist capitalism. The state would ensure that a labour market comes into play and jobs become available. For the elderly, and those without jobs, the state would take care through a benevolent social security system — paying unemployment benefits and pensions.

To make the system work, the government had to ensure that it collected funds through taxation to pay dole for the unemployed and pension for the retired. At times of recession and/or a war, when businesses are down, energy prices are high and agriculture food production is not forthcoming, it is quite natural that tax collection would be inadequate.

Remember, a bulk of edible oil and wheat imported by Europe and elsewhere in Africa used to come from Ukraine and Russia. Almost 40 percent of the total energy demand in Europe (in particular, the natural gas) was met by the Russians. The war, by imposing sanctions, has reduced the supply of Russian gas. The substitute is the pricier US energy, which means Europe has to shell out more.

This means an aggravating budget deficit for the European governments. A higher budget deficit can be sustained, provided the economy is growing. However, economic growth is continuously falling in the Euro Zone. As per July 2022 estimate, Real GDP in the Euro Area is expected to fall from 5.4 percent in 2021 to 2.3 percent in 2022.

In a socialist capitalist structure, wages are protected by trade unions. This is irrespective of labour productivity and firms' ability to earn profit. Add to this Europe's ageing population, which is likely to increase further in the future.

To maintain a stable population, 2.1 children should be born to each woman in an economy. In contrast, the figures for some Euro-Zone economies are much lower: 1.38 for Greece, 1.39 for Spain, 1.41 for Italy and 1.94 for the UK. For Spain and Greece, the over-65-year population will increase from around 17 per cent now to 25 per cent by 2030. The bottomline: Europe has fewer younger people to work and pay for the expensive welfare programme.

A natural suggestion would be to reform labour and pension laws (dubbed as austerity measures) and slacken the immigration laws. But voters in Europe would rather punish parties in favour of austerity measures. During the last two months, Europe has seen an increase in the number of labour agitations, starting with train workers in France and UK, energy sector workers in Norway, aviation workers in various budget airlines in Europe and farmers in several countries.

Income inequality is rising at an alarming level. Most of the migrants and even the natives have now taken up gig-type jobs, such as delivery boys, working for Wolt and Bolt food delivery companies. When asked, one of them informed they earn around 600 Euros per month.

Popular media narratives in the West held that Russia would suffer because of sanctions. But inflation has come down in Russia and the Russian Rouble has never been this strong. Rouble is appreciating, as Russia is now asking its counterparts in Europe, and its other major trading partners, India and China, to trade in Rouble. This is good news for Mr Putin. He can sustain this war. Russia being one of the largest producers of wheat (around 10 percent of world production) has enough food for its population to feed. China is also stockpiling its food grain over the last few years. And the Indian government too decided to restrict export of foodgrains.

While this is good news for the Asian countries and Russia. But only God (and not the US) can save Europe. With high inflation and low income, even businesses will be difficult to sustain in Europe.

For the first time, I saw my fight from Delhi to Helsinki (in economy class) serving an all-vegetarian meal. For an out and out non-vegetarian like me, I thought the drink would come as a respite. But then you can get only one small bottle of wine (around 180 ml), and the next one you demand, you have to buy. On the return flight to Delhi, I observed a few passengers saying, “Bahut ho gaya Europe. Aa, Ab Laut Chalen.” (IPA)

(The author is Professor, School of Management, Mahindra University)