Anyone visiting western Europe in recent days will have sensed its febrile cerebral quality. The overload of toxic, sneering propaganda against Russia, now fearmongered up to the threat of a tactical nuke ‘Armageddon’ against Ukraine, has taken collective Europe into a delusory trance.

In the US, the preoccupation with Ukraine seems to be fading (the ‘stats’ suggest), yet within a segment of the European leadership class, ‘war with Russia’ has ignited old revanchist passions (that would have been best left to their slumbers). Pulling Europe out of its deep Ukraine ‘trance’ will not be quick, or easy. Indeed, it may prove to be indeterminate in its outcome.

This Ukraine ‘bubble’, however, is deflating: It was always primarily ‘psy-ops war’ intended, at best, to fracture the Russian peoples’ resolve, and to trigger a backlash against President Putin; and at worst, to evolve into a protracted quagmire. Kiev now has sunk to terrorist-like, one-off military ops, and ‘show’ offensives, amidst implausible calls by Zelensky for NATO to bomb Russia. Dirty war however, exudes the whiff of weakness, rather than strength. 

Yet, this alone does not account for the jittery atmospherics in Europe today. The temper is undercut by palpable, but largely unsaid, fears. For, it is not just the Ukraine bubble that is slowly deflating -- there exist two separate other major bubbles which are bursting, too. 

As a result, Europe stands amid schizophrenic tensions. On one hand, ‘the Normal’ (high-end ostentatious consumption) is very present, yet, on the other hand, increasing clusters of the ‘Abnormal’ also exist: Violent civil clashes in big city outskirts, and examples of state decomposition that are visible as ‘things’ periodically cease functioning. No one knows to where this path leads -- hence the under-cutting mood of unstated foreboding.

One of these twin bursting bubbles is that of Europe’s ‘business model’: At the EU centre, is Germany. It has been the economic ‘engine’ both keeping the EU financially ‘liquified’, and at the same time, Germany has profited hugely from an Euro structurally uniquely conceived to give German high-value manufactured exports an otherwise unavailable competitive edge.

The alacrity by which the EU embraced Biden’s sanctions war on Russia, and then vented some unsuspectedly deep veins of Russophobia, has culminated with Germany’s – and by extension – Europe’s decades old, business model collapsing.

German high-quality export surpluses (which lubricated Brussels’ functioning) were only competitive because of the availability of cheap Russian piped Natural Gas. This is now gone (particularly after the sabotage of the Nordstream pipelines). And even were Germany to make a U-turn, it is not certain that Moscow would oblige by restoring the gas supply to Europe. Russia’s attention, maybe irrevocably, has turned East. 

The markets for both LNG and oil are tight (because of ‘Green’-promoted under-investment). And even if Europe can get any gas, it is only at nose-bleed prices. US LNG costs approximately seven and a half times more than piped Russian gas.

Much of EU industry simply is now uncompetitive. Simply put: the cost of energy is bankrupting Europe’s industry. And it is now dawning on leaders that energy scarcity may not be ‘transitory’ (to borrow a term from the financial markets' ‘hopes’ for transitory inflation).

Capping prices won’t work, and subsidising (i.e. protecting) EU industry inevitably will lead to distortions and dysfunctionality. No, Europe’s business model will have to be re-cast (if that is even remotely possible, given the rigidities of the EU political structures).

This prospect would be bad enough on its own -- but then there is the third ‘bubble’ that has begun to burst in tandem.

And what is that?

It is the ‘zero inflation – zero interest rate – massive government spending’ bubble that has begun to burst. And it is huge. 

For two decades and more, western economists believed they had both the bust-and-boom trade cycle and inflation licked.

It just required Central Banks to operate the monetary policy levers of interest rates, QE and QT appropriately to keep the ‘magic’ of endless deficits, financed through money printing (endorsed as Modern Monetary Theory), chugging the spending out.

It was great while it lasted, but inflation has killed it. The West had enjoyed a period of unparalleled consumer abundance, thanks to low inflation and ultra-low interest rates. Just to be clear, western economic hegemony has rested on these two pillars of low inflation and low or zero interest rates.

The reality is that this comfortable prosperity did not rest on Central Bank wizardry, but owed firstly to China’s cheap manufactures (its export model), and secondly, (for Europe) to Russia’s cheap energy.  So when these two pillars fell, the inflationary monster was back.

First came ‘de-coupling’ and US tariffs on China. Then Europe at Biden’s behest sanctioned Russia’s cheap energy (before securing any alternatives).  Commodity prices soared, and inflation dug in deep -- and we are on an escalatory track.

However, as interest rates spike, asset valuations inversely tumble, and markets risk at best a painfully-hard ‘landing’ as Central Banks have trapped themselves with little alternative but to fight inflation -- even at the risk of a market bust.

Is there a way out? Maybe -- maybe the EU could revoke sanctions and ask for Russian energy to be restored. Maybe Moscow would agree, but very possibly not. And would the US permit its’ EU acolytes to cosy up to Russia? What happened to Nordstream suggests very strongly it would provoke a ‘no’ from the US. And a ‘no’ -- even if it tanks the economy of its closest ally.

This is a moment that evokes an earlier period of Great Power fragility: namely, the initial escalation leading into World War I (as Malcom Kyeyune has noted (see below)) that saw an array of nations dragged into the conflict -- all of them disastrously underestimating the length and severity of the conflict. (Sound familiar?):

“The parallels go deeper. The immediate pre-war period saw a structurally weakened Great Power - Austria-Hungary - beset on all fronts… In other words, Austria-Hungary was slowly falling apart. Outside it were various rivals plotting the empire’s demise, and inside, lurked a plethora of nationalist malcontents - each hoping to gain freedom or glory from blowing it up. The result was that Austria-Hungary felt it had no choice but to act extremely tough, especially in the Balkans, and especially against the Serbian nationalists. The Austrians didn’t dare let any enemy be successful.”

“The lead-up to World War I was less a story of hubris [as today] and more one of imperial desperation. There were simply too many leaks that Vienna was trying to plug at the same time. The parallels to the contemporary United States should be obvious at this point … it’s a fine line that the United States is walking. It isn’t easy to permanently scare your enemies while you are also giving off clear signs of weakness. Washington is trying to do just this on two fronts. Sooner or later, bellicose rhetoric may end up backfiring, inspiring not deference but defiance from its intended targets”.