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8 NEWS 1.9.2022 Austerity follows Russian audacity to invade George Mangion George Mangion is a senior partner at PKF, an audit and consultancy firm, and has over 25 years' experience in accounting, taxation, financial and consultancy services. His efforts have made PKF instrumental in establishing many companies in Malta and established PKF as a leading professional financial service provider on the Island G lobal political leaders have come to see Vladimir Putin as a threat to the entire West. Solidarity with the invaded Ukraine will show how with increasing audacity, the free world has re- warded Ukraine for its steadfastness with arms and cash. Under Putin, Moscow spent the last two decades engaging in economic state- craft that resulted in the deep integration of gas supplies particularly in Europe. European policymakers also preferred to engage in business as usual with Krem- lin rather than risk economic disruption. is was perhaps a natural extension following the policy of Ostpolitik - the normalisation of relations between West Germany and Eastern Europe beginning in 1969. Now this friendship has drawn us clos- er to Russian energy dependency over the past decades. e Kremlin has insid- iously encouraged corruption along the entire energy value chain in the process of cultivating close ties with utility firms that profited Europe's dependency on Russia. Notice how Germany has de- veloped a predominantly commercial framework for energy security, which saw dividends in strengthening Russia's integration into the European economy (quote the €8 billion North Stream 2 pipeline). One recalls the previous two Ukrainian gas crises in 2006 and 2009 that result- ed in the interruption of gas supplies to Europe, yet once bitten still European increased reliance on Russian hydrocar- bons. is commercial love/hate game has eventually entrenched German users in increasingly deep interdependence. ese are some factors that may help tip Germany into recession over the coming months, according to the country's Bun- desbank. Sadly, as a consequence, European leaders have witnessed the economic pain of breaking these ties. Witness a sudden drop in value of the euro having fallen below parity with the dollar. is is a level never recorded in the past two decades. A weaker euro this increases the cost of imports, pushing up prices, notably for energy. Perversely, self-sanctioning and open discussions of embargo of Russian's oli- garchs, have caused commodity prices to spike, resulting in higher consumer energy prices. is policy has augment- ed energy hikes for the Putin regime and created an unprecedented landslide to boost his war chest. Sharply rising commodity prices re- minds us ominously of the 1973 extreme fallout from a global oil crisis. In 1973, OPEC had cut supplies to the US and demanded that foreign oil corporations increase prices and cede greater shares of revenue to their local subsidiaries. In retaliation, the Nixon administra- tion announced an energy strategy to boost domestic production to reduce US vulnerability to oil imports and ease the strain of nationwide fuel shortages. e onset of the embargo contributed to an upward spiral in oil prices with global implications. e price of oil per barrel first doubled, then quadrupled, impos- ing skyrocketing costs on consumers and structural challenges to the stability of whole national economies. Since the embargo coincided with a devaluation of the dollar, a global re- cession seemed imminent. European nations and Japan found themselves in the uncomfortable position of needing US assistance to secure energy sources. e United States, which faced a grow- ing dependence on oil consumption and dwindling domestic reserves, found it- self more reliant on imported oil than ever before, having to negotiate an end to the OPEC embargo under harsh domes- tic economic circumstances that served to diminish its international leverage. With hindsight, one recalls how during the 1973 OPEC oil embargo the dollar plummeted and this directly hurt the OPEC producers which depended en- tirely on its value for government reve- nues. All this points to the phenomenon of global inflation which crept up to dou- ble digit levels. It came at a vulnerable time for the global economy. In the US the effect was higher since domestic oil producers were running at full capacity and in the short term, they were una- ble to produce more oil to make up the OPEC induced embargo. Furthermore, non-OPEC oil production had declined as a percentage of world output. e ghost of stagflation became a buzz word. Economists define stagflation as what happens when runaway inflation occurs at the same time as a recession. e cy- cle is familiar: as prices rise, Labour ex- pects an increase in wages to keep up, but higher wages raise the cost of pro- duction. is raises prices of goods and services again. It becomes a wage-price spiral when this cause-and-effect contin- ues. Is this a harbinger that may repeat itself this winter? Will Europe succeed in avoiding a recession due to higher gas prices. Obviously as commented earlier in reference to the OPEC embargo, then consumers had less money to spend on goods and services.is lowered de- mand. It also weakened consumer con- fidence. People were forced to change habits, making it feel like a crisis that the government tried unsuccessfully to re- solve. is lack of confidence made peo- ple spend less. Such hardship must not repeat itself now as a bleak reminder of consequenc- es should Russian turn off the taps on European gas supplies. European drivers (except for Malta as fuel is being tempo- rary state-subsidised) are seeing almost unprecedented prices at the pump, and natural gas prices already at historic highs prior to the war. e EU is advising members to con- sider emergency measures to limit soar- ing electricity prices. In the early stages of the war, Europe was in denial about its costs: even asking citizens to adjust downwards the air-conditioner thermo- stat felt like too much of an imposition. at is changing and locally we are in- formed that Malta public offices are to dim cooling and heating. Public lighting is being dimmed, and some are even jok- ingly predicting that this winter Maltese will be taking cold showers. According to guidelines issued to all government and public sector entities, air conditioning is to be set at a mini- mum of 24oCwhen cooling and no high- er than 21o on heating. As always, there will be an exception for hospitals and clinics. All façade light- ing on public buildings and monuments to be switched off late at night. As a dire measure, the EU plans to cut gas con- sumption by 15 percent between August 1, 2022 and March 31, 2023 to cope with the crisis. e latest local news talks volumes about a cut in the University's budget. As a bolt in the blue, this brings along a reality that austerity is knocking on our doors. e public sector is already bloat- ed with thousands of unskilled people collecting a salary as a gift. We'll need more and better policemen, judges, ad- ministrators and regulators. Where will we find them if we slash our expenditure in education? e spectre of inflation is tightening the screws of our cherished existence – aka "l-Aqwa Zmien" – so lovingly chore- ographed by party apologists unaware of Putin's audacity.