The EU Has Failed

A sclerotic, bureaucratic monster hits a watershed moment

Dear readers,

Sometimes it is strange how events tie into each other. Just two weeks ago, I wrote how Turkey was building a pipeline grid into the Middle East and Russia – and just a few days later Ukraine made a decision which augmented the strategic value of that grid enormously.

Where there’s such a clear winner, there must be losers as well. All pillars of Europe’s competitiveness are under threat. The mismanagement of its energy infrastructure pushes the union to a breaking point. I wanted to post this piece two days ago, but political events are escalating as I’m writing these lines. Apologies for the delay, but my prime objective is to make my postings relevant and rewarding.

Hope this is an interesting read for you! Please drop me a ‘like’ or comment.

On December 26, 2024, Ukrainian President Volodymyr Zelensky announced he wasn’t going to renew a contract to route Russian gas to Europe. It was another unwelcome surprise for European consumers and companies. The Ukraine route was the last pipeline connecting Russian gas directly to central Europe, delivering about 320 million cubic meters per week to Slovakia, Hungary, and Austria. When the contract expired on January 1, 2025, deliveries dropped to zero.

(After shutting down Transgas, TurkStream is the only remaining supplier of Russian gas to Europe. Source: Statista)

Gazprom, the Russian gas company, will lose annual revenues of about $8 billion. In western countries, memories of the NordStream disaster flared up immediately, especially in those countries which were the prime recipients of gas from the Druzhba pipeline.

EU officials quickly jumped in to calm nerves. No big deal, Anna-Kaisa Itkonen, spokesperson of the European Commission for energy, climate, and a few other resorts basically said, because the EU had been building LNG terminals to make up for lost pipelines and had switched to renewable sources of energy.

"The impact of the suspension of transit through Ukraine on ensuring the security of EU supplies is limited" (Anna-Kaisa Itkonen, EU spokesperson)

A representative of the Austrian energy regulator (Austria was the largest buyer from that pipeline with more than 5 billion cubic meters a year) tried to sound confident when he added that prices were probably becoming ‘more volatile’, but wouldn’t spike like they did in 2022 (when they increased to 340 euros/ MWh).

For bureaucrats, things may look just fine. A ten percent price increase here, 20% there, who cares. Bureaucrats don’t feel the pain. Consumers do.

• In 2024 alone, European gas prices rose by 50%

• Germany, the largest industrial producer in Europe, now pays €50 per MWh, instead of $18¹ in the past.

• Because of electricity shortages in Germany (due to insufficient solar and wind production), daily prices fluctuate by a factor of 9 – from 100 euros to over 900 euros in a single day. Those spikes drive up average costs and make production planning impossible. Nordic countries already advocate cutting energy transmission lines to Germany to avoid contamination of their own grids.

It was a repeat experience from 2022. Then, the German minister of the economy decided to shut down the remaining nuclear power plants right at the time when the Ukraine war started; a few days ago, Ukraine shut down the last direct source of gas right at the time when electricity prices spiral out of control. This is another huge setback for the EU which has struggled since the Global Financial Crisis (GFC) to restart its economy. It has received surprisingly little attention, but the EU economy essentially hasn’t made any progress in the last 15 years, a pretty devastating assessment. For comparison, U.S. GDP doubled; China’s GDP more than tripled.

EU leaders realized by 2010 the bloc was falling behind. Good bureaucrats they were, they responded with a series of strategy papers to reinvigorate the union. Which priorities did they present to improve the competitiveness of European companies versus foreign companies? What was the outcome?

In 2010, Jose Manuel Barroso, the President of the European Commission (the EU ‘government’) at that time, published his “Europe 2020” strategy for “smart, sustainable, and inclusive growth”. Here’s the section in the 30-page strategy document that addresses how the EU planned to improve competitiveness:

To improve the business environment, especially for SMEs, including through reducing the transaction costs of doing business in Europe, the promotion of clusters and improving affordable access to finance; (Jose Barroso, Europe 2020)

That’s basically it. Essentially all other points are focused on ‘greater resource efficiency’, whatever that means.

In 2015, the EU followed up with its Energy Union Strategy, “in order to ensure a secure supply of sustainable energy that is competitive and affordable for consumers.” The focus was on diversification (read: increase renewable sources), ‘energy efficiency’ (effectively reducing consumption; already the 2010 Barroso report in all seriousness suggested to “decouple growth from resource and energy use”²), decarbonization, and research focused on renewable energy.

The communication considers energy efficiency as 'an energy source in its own right'

The economic performance of the EU didn’t improve despite all of the strategy papers. The European Commission asked former ECB governor Mario Draghi to write up yet another document. In September 2024 he came back with a 400-page volume, “The future of European competitiveness”. What was his plan to address the mess which decarbonization has created in Europe’s industry? Guess what, more decarbonization, and more central policies.

Over the medium term, decarbonisation will help shift power generation towards secure, low-cost clean energy sources. (Mario Draghi, The future of European competitiveness, September 2024)

But why, then, were prices that high? Draghi explained in his report that escalating energy prices were due mainly to market imperfections, as trading in Dutch energy derivatives supposedly suffered from “high concentrations of positions”.³

Excuse my question, please - The continent just shut down access to cheap and reliable Russian gas, one of the few pillars of competitive strength in Europe, and destroyed cooperation with one the world’s most resource-rich countries, but now blames “dealer concentration” for high prices on Dutch gas markets? This is beyond absurd.

Know them by their fruits

At the same time that the Commission asked Draghi to prepare his recommendations how to improve competitiveness, it implemented the most complex and expensive regulation ever, informally called the ‘Supply Chain Directive” (officially the Corporate Sustainability Due Diligence Directive/ CSDDD). The regulation forces companies and all suppliers and customers along the complete value chain of a product to comply with European regulations on workers’ rights, human rights, protection of biodiversity and ecosystems, water bodies, air quality, and on combating climate change. Companies must know and keep records how goods were produced and what the consequences were for the environment, climate, and for the workforce. The level of complexity of the regulation is bizarre, and it exposes companies to enormous legal risks – especially from bad-faith actors like NGOs that are now in a position to destroy companies with endless lawfare.

Feedback wasn’t long in coming. The European head of ExxonMobil, one of the world's largest energy companies, said in a Bloomberg interview in December Exxon wasn’t going to invest anything of its $20 billion budget for environmental investments in Europe. Exxon specifically mentioned the regulatory burden and excessive reporting requirements in the EU as dealbreakers.

Exxon’s decision hurts on two fronts. Europe’s disastrous economic performance is driven by very low levels of investment, in particular in Germany, where foreign investment has dropped to a ten-year low. Secondly, its hits directly an area of economic development which has been prioritized in every strategy paper since Barroso’s 2010 report.

No way out?

The EU Commission, the governing body which has been driving all those initiatives, is not elected in a public vote, but by decision among the member state heads (which together make up the European Council). The general public doesn’t have any say in the process. Therefore, there’s no feedback loop – bad and unpopular decisions of the Commission aren’t penalized in elections.

Like many large organizations which are protected from change, the EU has developed bureaucratic inertia, a syndrome affecting political systems which are dominated by a small group of leaders who prioritize their own agenda, and who are absorbed much more about self-preservation than efficiency or effectiveness (another term might be ‘deep state’). To break that pattern, you need a disruptor – a force which is not part of the political establishment. The U.S. is just going through that transition, but Europe is bending over backwards to avoid it.

However, one of the smaller EU countries, Austria, might become the catalyst for change which the EU urgently needs. Austria ran general elections last September but still doesn’t have a government, because the winner of the elections, center/right party FPÖ, was blocked from forming a coalition government. Only yesterday (January 6), after talks among the other, utterly incompatible parties broke down after three wasted months (enforced in another example of systemic inertia), the party was finally asked to form a government. Austria thus set an example for much larger neighbor Germany, due to hold elections in February, where another center/ right party co-leads opinion polls. Similarly to Austria, Germany’s AfD has been ostracized by the media and the political establishment, but after the huge fail in Austria it will be much more difficult to sideline the AfD in Germany going forward. France is limping along with a hung government in which no political bloc achieved a majority in recent snap elections. In Italy, the ideological shift has already taken place with Giorgia Meloni, who heads the Fratelli d’Italia (FdI, Brothers of Italy), running the country (as the first female prime minister).

Either outcome is bad news for the EU. If disruptive parties become part of more governments or even lead them, they will have their hands full with unwinding the most outrageous legacy policies, like the exit from conventional power generation (especially gas and nuclear), the phase-out of ICE cars from 2035, or unchecked immigration. While they are generally pro-business and pro-trade, they are very critical of the current political establishment consensus, and their vision for the EU is a much smaller role, not much more than a trade union.

The EU has maneuvered itself into a huge legitimacy problem. Its strategic, enormously costly recovery programs, from Barroso to Draghi, never addressed economic weaknesses and were nothing but energy transition programs in disguise – agenda instead of crisis response. The outcome has been an unmitigated disaster. As there is no democratic process in place to renew the EU, unlike the U.S., the only logical outcome will be that member countries develop a new nationalist perspective, ignoring central EU programs (the EU has no formal authority over member countries. EU legislation needs to be ratified in member countries’ parliaments), or even pursue an exit for which Great Britain has provided a template. Derivates of the term ‘Brexit’ swirl all around.

Considering the institutional forces, I don’t think there is much hope. As the old saying goes – today, the EU is standing on the brink of an abyss. Tomorrow, it will be one step ahead.

Let me know what you think!

All the best,

John

1. Long-term, basically fixed price of NordStream deliveries

2. Jose Barroso, “Europe 2020”, page 14

3. Mario Draghi, “The future of European competitiveness”, page 44. The report never explains what an acceptable firm structure looks like, what the concentration is like in other markets, why he considers the concentration “high” in Dutch markets, and how exactly dealer concentration translated into higher prices, if it did at all.