Will America Profit from Europe's Misery? 9/16

The Ukraine War smothers Europe and Russia

[Note: We will discuss this, the latest inflation news, and other issues related to the economic outlook, on Monday September 19 at 8 PM NY time. I will provide a link in a separate post. The discussion will be for paid subscribers only.]

Concerning Ukraine’s recent counter-offensive, Noah Smith writes,

This is obviously a great development — Ukraine are clearly the good guys in this war, a peaceful country invaded by a brutal, imperialistic neighbor without provocation, and it’s good to see them throw the invaders back. But it also illustrates some important principles about the broader conflict unfolding across our world between liberalism and illiberalism.

I could not resist commenting,

I think that Robert Wright (https://nonzero.substack.com/) would be surprised to hear that he is illiberal.

That said, at this moment it appears that the U.S. will come out of this war as the only major economy still standing, sort of like the end of World War II. But I would not spike the ball for liberalism just yet. Putin is not finished. European liberalism is going to be severely stressed.

Here at home, the champions of the liberal order are eager to ring-fence China out of it. And both political parties have factions that arguably deem it necessary to destroy democracy in order to save it.

Before reading Noah’s essay, I had been thinking about the economic situation related to the war and sanctions. My musings:

For Europe, replacing Russian energy supplies will be costly. Where will that lead?

One scenario is that manufacturing in Europe becomes very expensive, so firms shut down. This reduces exports, drives down the value of the Euro, and weakens European consumer spending.

Does Russian oil and gas simply stay in the ground, or does it go to Asia instead? Reportedly, it is going to Asia, primarily China and India.

a new analysis by the Financial Times finds that “Indian and Chinese oil buying has offset most of the fall in Russian shipments to Europe.” After reviewing customs data from China and India, the Times concluded that “the countries imported 11mn tonnes more oil from Russia in the second quarter of 2022 compared with the first quarter” and that “payments for Russian oil from the countries increased by $9bn.” These purchases, analysts believed, are not primarily aimed at buoying Russia’s economy so much as cashing in on its inexpensive and abundantly available oil and gas.

To the extent that the oil goes to Asian countries, their energy costs will be low, at least relative to Europe. Manufacturing in China and India will not suffer the stress that Europe’s manufacturers will feel. Although Asia will face less demand from Europe, its exports to other countries could be boosted.

Ordinarily, weak demand from Europe and a weak Euro would put downward pressure on prices in the United States. But ordinarily, a reduction in world manufacturing would put upward pressure on prices. If I had to bet, I would bet that the deflationary pressures will be stronger, particularly because China and India (and the U.S.) can make up for some of the lost manufacturing in Europe.

European governments face a lot of challenges: keeping consumers warm; staving off bankruptcy of their manufacturing firms and a potential financial crisis; dealing with inflation and already-bloated government debt. I could see pundits start saying things like “Europe needs a new Marshall plan.”

Russia is also in a bad way. Reports are that they are trying to replenish supplies of weapons by buying them from Iran and North Korea.

Russia’s official line is that sanctions are not hurting the economy. But if that were true, they would probably not be shutting off gas to try to get European countries to remove the sanctions. My guess is that the Russian economy is in bad shape, but that this will not weaken Putin’s hold on the country.

If Europe and Russia both shrink economically, and if China remains constrained by its real estate troubles and other challenges, we could see the United States in a position almost like that after World War II. That is, we could be the only major economy left standing.