Ukraine Will Save the EU from Economic Recession

The European Commission has given its assessment of the growth rate of industrial production in the Eurozone: industrial production in June 2023 decreased by 1.2% (compared to June 2022). At the same time, these dynamics are not yet a final verdict: industrial production for the same period showed an increase of 0.5% compared to May 2023. And the general trend of the continent's GDP depends on the dynamics of the industrial core. 

In general, analysts' estimates were more pessimistic: industrial production was expected to fall by 4% (annualized rate) and even decline compared to the previous month (by 0.1%).

A sectoral analysis of industrial production shows that the production of so-called durable goods is falling. These are typically quite expensive products (e.g., cars, household appliances, etc.), which are heavily dependent on the formation of long-term savings and positive inflation expectations. 

In the euro area, the decline in industrial production in the durable goods segment was 0.1%, while in the EU as a whole it was 0.4%. 

In other words, the "old" core of the European Union retains the backbone of industrial production and demonstrates better resistance to the crisis, which is formed as a result of higher household savings and lower inflation expectations compared to the "new members".

At the same time, the production of short-lived goods (mainly consumer goods) is showing the opposite trend: A 1.1% decline in the euro area and a drop of only 0.4% in the EU as a whole.

That is, the population of "old Europe" is already beginning to save on consumer spending, while the new EU members are experiencing a certain consumer boom that arose as a preemptive response to inflationary processes (the formation of certain inventories).

It is symptomatic that the energy sector is showing growth: energy production in both the euro area and the EU increased by 0.5%. On the other hand, the production of intermediate goods (semi-finished products) fell by 0.9% in the euro area and by 0.8% in the EU as a whole.

The decline in intermediate goods production indicates a slowdown in consumption in the industrial sector. 

Looking at individual countries, the drivers of industrial production growth in June were Ireland (+13%), Denmark (+6.3%), and Lithuania (+3.2%). 

The anti-leaders were Sweden (-5.3%), Finland and Malta (-3.3%), and Belgium (-3%).

The rest of the countries balanced around zero, with the transition from the growth phase to the decline phase and vice versa occurring on a situational and permanent basis. 

The great equalizer

The transition to a new cycle of business activity has always been driven by a systemic crisis, in this case, the transition from the old to the new technological order.

Until a new mass market emerges (e.g., virtual reality glasses, life-prolonging pills instead of smartphones and laptops), new global value chains will not be formed and the driver of consumer demand will not work at full capacity. Therefore, we should expect a balancing act from the downside to the upside.

After the pandemic and as global inflation increased, the economic insurance in the form of domestic consumption suddenly came to an end, and the total increase in basic living expenses equalized the susceptibility to the crisis of both the countries of "old" and "new" Europe.

Previously, developed countries survived any global crisis with minimal losses, as most of their GDP was generated by a large domestic market, which has always been an active absorber of any monetary or fiscal stimulus. 

At the same time, commodity countries such as Ukraine have always fallen "deeper and more painfully" because their economies were directly correlated with the dynamics of global commodity prices and a significant part of GDP was generated in foreign markets through exports, while the domestic market remained in an unhealthy state.

The possible economic downturn in the EU is also more global in nature, given the parameters of the European economy. 

Today, it is a conglomerate of 450 million people that accounts for more than 15% of global GDP. 

At the same time, the group of old EU members (EU-15) accounts for 90% of the continental gross product, while the group of new members (EU-13) accounts for only 10%. 

A sharp change in the business trend will hit the latter harder, as they will partially lose the markets of the "old members" of the Union and, in addition, the counter-investment flow, including centralized development subsidies and regional equalization, will be significantly reduced.

Another dimension of the crisis is the restructuring of the EU energy market from relatively cheap Russian energy resources (oil, natural gas, coal) to more expensive substitutes (increasing the share of "green energy", buying liquefied natural gas in the United States and Qatar).

At the same time, given the crisis of overproduction in the EU's agricultural sector, conflicts over increasing food exports from Ukraine are growing.

This problem can be solved by creating so-called "dry ports" in the EU on the basis of a customs warehouse for the gradual transit of Ukrainian grain to third countries in Africa and Asia.

A separate case is the expansion of exports/imports of Ukrainian electricity to the EU, not only in the context of the Burshtyn Energy Island, but also after the launch of the energy bridge from Ukraine to Poland (connection to electricity exports of the Khmelnytsky NPP). 

Closer integration of the IPS of Ukraine with the European Continental Energy System (ENTSO-E) will allow for a significant increase in the export of excess electricity from Ukraine to the EU and vice versa - compensation for electricity shortages in Ukraine with the help of the European Union.

A trap with a way out

Once upon a time, the "prophet of crises" Nouriel Roubini predicted a new phase of the global crisis in the form of a "Very Great Depression." But as the world jokes, analysts have been able to predict "all ten" of the last two crises

The biggest risk currently being discussed in the EU is the likelihood of significant structural distortions between the member states, which will increase as the post-pandemic economy model is activated, adjusted for the factor of the Russian war against Ukraine and sanctions against Russia.

This could lead to a weakening of the EU's integrity. 

As a result, global supply chains will be disrupted, economic selfishness and domestication of production/consumption systems will be reinforced by right-wing and nationalist political movements within individual countries.

A situation may arise where, in order to save national labor markets and the real sector from massive bankruptcy, individual EU countries will put their selfish interests above supranational ones. 

The overleveraging of European businesses risks leading to spot bankruptcies and the closure of enterprises, especially energy-intensive ones. 

In this context, Ukraine's post-war reconstruction program may become one of the EU's largest "development projects" in the 21st century, when infrastructure spending will create powerful incentives for the development of EU industry and prevent it from slipping into the mire of recession.