Who Is Winning in Ukraine?

Everyone is cheering the recent string of Ukrainian successes against the Russian military. It was, to say the least, unexpected. 

And yet, to counterbalance the optimism, I draw your attention to an Irish economist, by name of Philip Pilkington, writing in The Spectator.

One understands that European nations are more than happy to tank their economies in order to save Ukraine. So, the events Pilkington describes seem to be acceptable to voters in those countries.

And yet, if you are looking for a picture of victory, take a gander at this assessment of European economies:

We know that the British economy is collapsing, and that the new Truss government is already in trouble. One needs to mention that between Boris and Liz, the conservative Tory party has lost its commanding electoral lead. If a vote were held today, the Labour Party would win resoundingly.

The rapid economic collapse that Britain is facing is simply an accelerated version of what the whole of Europe is about to go through; unsustainable borrowing to fund the gap between high energy prices and what households can actually afford. With the sabotage of the Nord Stream pipeline, there is now no feasible way back. Europe can no longer physically import Russian gas – prices will remain high until Europe builds more energy capacity, which could take years.

Basically, this means that governments cannot allow energy prices to rise to a level where no one can afford them. The solution, subsidizing pricing by printing money and incurring massive levels of debt.

Evidently, the sabotage of the Nordstream pipeline has rendered the situation even more dire. For now, no one knows who did it, and we will await information before drawing our own conclusion. 

Pilkington thinks that the costs of manufacturing will still rise, and that this will produce inflated prices. It will also make European manufactured goods uncompetitive in world markets:

What is likely to come of this? High energy prices will render European manufacturing uncompetitive. European manufacturers will be forced to pass through the higher energy costs in the form of higher prices and consumers will find it cheaper to buy products from countries with normal energy prices. The only logical European response to the threat of widespread deindustrialisation is to raise tariffs. This is the only way to equalise prices between more expensive European goods and cheaper foreign goods, therefore artificially supporting European manufacturing. This strategy will lower living standards, depriving Europeans of cheaper goods, but it will at least preserve some manufacturing jobs.

Aside from the fact that exports will cease being competitive, Europe will need to impose tariffs on cheaper foreign goods, lest they push domestic goods out of the markets.

As for the question of tariffs, I draw your attention to a Jeb Hensarling op-ed this morning in the Wall Street Journal. In it the former Republican Congressman argues that the Trump tariffs against China were largely a failure. The people who paid the increased prices were Americans; the tariffs had little impact on Chinese manufacturing.

As for the situation unfolding in Europe, Pilkington believes that it resembles the start of an economic collapse. The problem is accumulated debt, which is fast reaching unsustainable levels:

This process looks remarkably like the start of the Great Depression. In the 1920s, due to lopsided financial arrangements initiated in the Treaty of Versailles, western economies accumulated enormous amounts of debt. In 1929, the collapse of the American stock market removed one of the key remaining props and the western economies collapsed. Europe went first and, as trade dried up, America followed it down the hole.

Modern western economies have been accumulating debt for decades. But since the lockdowns in early 2020, this debt accumulation has gone into overdrive. In 2019, Eurozone government debt-to-GDP was 83.8 per cent. In 2020, after the lockdown bailouts were unveiled it shot up to 97.2 per cent. In the same period, Britain’s debt-to-GDP ratio went from 83.8 per cent to 93.9 per cent. These are the largest single increases in history. The run-up in debt during the lockdown was probably unavoidable. But it certainly triggered the beginning of the inflationary pressures we now see everywhere, especially because the lockdowns themselves completely demolished supply chains. So, more money chasing fewer goods. But what has happened since the start of this year is something else entirely.

The Russian invasion of Ukraine set off an energy supply calamity:

The Russian invasion of Ukraine has triggered an energy price war in Europe that is forcing even higher levels of government borrowing to cover energy costs. Unlike the lockdowns, these energy price increases are putting direct pressure on both prices and the trade balance between countries. Higher energy prices mean that Europe must send more euros and pounds abroad to get energy and so the value of imports rises and these higher import costs are fed through to consumers as businesses try to offset rising energy costs by raising prices. The situation is no longer remotely sustainable. This is almost certainly our 1929 moment.

And yet, some nations around the world are not at similar risk. As of now, Russia and China and their allies are working to set up an alternative trading bloc, the better to undermine Western dominance:

One key difference this time around is that there is a rival economic bloc that could be insulated from these dynamics, the emerging Brics+: Brazil, Russia, India, China, South Africa and Argentina – with Iran, Turkey, Egypt, Indonesia, and Saudi Arabia also joining the queue. Since the start of the war in Ukraine, the Brics countries have been solidifying trade and financial ties and adding new members. It appears that the goal is for these economies to decouple as much as possible from the West. If they are successful in doing that – and it looks like they may be – they may avoid the depression. The Nord Stream sabotage could be the point at which future historians mark the end of western dominance.

For all I know, this might have been the plan all along. Perhaps it was never really about Ukraine, but about a civilizational clash between Western democracies and Eastern autocracies.

While we are cheering for the brave Ukrainians, we might have ignored the fact that no one much cares about Ukraine. One might imagine that the powers that be in Beijing are more than happy to see the West sabotaging itself on behalf of a grandiose ideal.