Europe Implodes

A Biophysical Economics Evaluation

This is a brief comment originating from the July 29th meeting of Donald Trump with Ursula von der Leyen, which many commentators viewed as a humiliation for Europe. Why is Europe so easily trashed around? There are good reasons, the main one being that the European economy is imploding.

I don’t know what your impression is of Trump meeting Ursula von Der Leyen in Scotland. Most commentators were not nice to Europe’s first lady. They spoke of “humiliation,” of “surrender,” and the like. Maybe these terms are exaggerations, but Trump went back to the US gloating about how much money he was able to extort from those hapless Europeans in exchange for expensive gas and outdated military equipment. It is clear that it was not a meeting among equals. It was mostly an exercise in hailing the boss, a desperate attempt to keep Europe afloat in a moment in which it is sinking. But why is that happening?

I think I can propose an explanation with a single graph.

Let me explain. First, I chose a group of “core” European countries that are reasonably homogeneous in terms of their economic structure and embedded in the same trading area. They all have the characteristic that they do not produce fossil fuels, or just minor amounts. That is, the countries of the Eurozone, plus UK, Switzerland, and Norway. I excluded two Eurozone states, Cyprus and Malta, small islands that don’t fit so well with the main group. Then, I examined the economic performance of these countries in terms of how their electricity generation varied in the past, after the oil crisis of 2008, and after the Russian gas crisis of 2022. I chose these two periods because they correspond to two majour perturbations of the fossil fuel market that ushered a period of higher prices.

The idea of examining countries in this way is based on biophysical economics, that is, viewing economies as engines that turn energy and resources into products. No energy, no economy (despite what the Nobel Prize in Economics Robert Solow said once). So, you can measure the state of an economy by measuring the energy it consumes. Energy comes in two main forms: heat and electricity. Of the two, electricity is the most important one. You can run your car on electricity, but you can’t run your PC on a diesel engine. So, I chose electricity generation as the fundamental parameter.

Energy is a much more reliable parameter than the GDP, a measurement continuously adjusted to take into account such things as “hedonic factors.” Once people started using these arbitrary corrections, the GDP ceased to be a measurement of the state of an economy. It became a political tool to demonstrate that the economy grows, no matter what. If you live in Europe with a European salary, you can see the point very clearly. According to the GDP data, you should be better off than before. But you aren’t. It is the opposite, no matter how much more “hedonic” your life is supposed to have become. You may prefer to use the primary energy consumption, which includes heat, but you get similar results.

So, I plotted the variation in the electricity generation in different countries over the years as a function of the fraction of fossil fuels they imported in 2023 — of course that has varied over the time intervals considered, but the 2023 value is a good indication of how a country’s energy system is structured.

The result is what you see. Almost all these European countries show a decline in their electricity generation, and this decline is proportional to the fraction of fossil fuels they import. The interpretation is straightforward. Being forced to import fossil fuels means that Europe must pay for them from the profits of its exports. But higher prices of energy make Europe’s products less competitive in the international market. That reduces profits, and Europe can’t afford to import as much as before. In turn, that increases the prices of Europe’s products even more: so, you have a nice illustration of the concept of “death spiral.”

In short, Europe suffered the equivalent of a stroke in 2008, when fossil fuel prices spiked up to levels never seen before. It suffered another stroke, a worse one, in 2022, when the imports from Russia were sabotaged, politically and physically, with the destruction of the North Stream pipeline. Note in the figure that the red curve (after 2021) shows a lower decline than the blue curve (after 2008). But the red curve covers only 3 years, whereas the blue one covers 16 years. The decline is accelerating. As usual, Seneca rules with his idea that “ruin is rapid.”

The only countries that were able to avoid decline are France, Austria, Norway, and (in minor measure) Switzerland. All of them import very little in terms of fossil fuels. France relies mostly on nuclear energy, Austria, Norway, and Switzerland on hydroelectric plants. All the others are going down. It is not by chance that those countries that can produce their own energy, e.g., Russia and China, show no decline in their electricity generation capability. The US is static, but not declining.

Add to that the disastrous slowdown, even the sabotaging, of Europe’s effort to move away from fossil fuels to renewable energy. Renewable energy is still growing in Europe, but the interest in such things as the “Green Deal” and the “Energy Transition” has disappeared from the debate. In any case, it will be impossible to engage in a major infrastructural upgrade based on renewable energy (or even on nuclear energy) if the plan is to orient Europe’s industry to military production, with the serious possibility that the European leaders will engage their countries in a major war.

It is hard to think of a better example of the ancient saying that “those whom they want to destroy, the Gods drive mad first.” It nicely applies to the current European leadership, divided, weak, and formed by people who were co-opted by the older generation of leaders and have no idea of what they are doing and why. This problem was pointed out several times by Aurelien in his blog.

In 1972, the calculations of “The Limits to Growth” produced scenarios indicating that the start of the collapse of the World’s economy would occur during the first decades of the 21st century. These calculations were based on physical factors and, ultimately, on thermodynamics. There is no thermodynamic reason why, when decline starts, leaders should go mad and squander the few remaining resources of their countries on a military buildup. But many historical examples show that it is the case. We are seeing exactly that in Europe. Apparently, we Europeans have the privilege (so to speak) to lead the world’s race to the bottom of the Seneca Cliff. It will be a rough ride.

To conclude, here are some data comparing a functioning economy (China) with declining ones (Italy, Germany, and the UK). Interesting, isn’t it?