GO
Loading...

How Europe’s Economic Slump Could Doom Ukraine

As the full impact of sanctions against Russia hit the European Union and as the EU attempts to recover from the sovereign debt crisis that nearly destroyed it, the European economy is once again in contraction, threatening to derail the country's unified response to the Ukraine crisis.

European leaders met in Brussels over the weekend after Russian troops and pro-Russia separatists opened a third front in the fight for eastern Ukraine. However, despite strong talk, the group could not reach agreement on how to increase punishments against Moscow. Some European leaders urged restraint in the face of stagnation across the eurozone.

German Chancellor Angela Merkel speaks during a news conference with Ukraine's President Petro Poroshenko in Kiev in late August.
Reuters
German Chancellor Angela Merkel speaks during a news conference with Ukraine's President Petro Poroshenko in Kiev in late August.

"I believe that the sanctions will become senseless and counter-productive. Slovakia may use its right of veto," Slovak Prime Minister Robert Fico said Sunday.

Economic data released Monday revealed by Fico is concerned about the residual impacts of sanctions on Europe. The manufacturing purchasing managers index (PMI), an indicator of the health of an economy's manufacturing sector, dropped to a 13-year low of 50.7 in August, down from 53.8 in July. In short, economic output is dropping fast.

More from The Fiscal Times:
The Israeli solution for Kurdistan
Obama makes the Middle East our new 'quagmire'
If Kurds fall, chaos in Iraq and abroad to follow

"Although some growth is better than no growth at all, the braking effect of rising economic and geopolitical uncertainties on manufacturers is becoming more visible," said Rob Dobson, senior economist at Markit.

Even Germany, whose economy powered the eurozone's tepid recovery, is slipping. According to Eurostat, the German economy contracted from April to June. France and Italy, the continent's second and third largest economies respectively, also are in trouble.

"France remains a real concern, as does Italy's descent from solid expansion to stagnation. Signs that growth impetus waned in the key industrial engine of Germany, and in Spain and the Netherlands too, is also less than reassuring," Dobson said.

Read MoreEuropean bank officials weigh QE 'shock and awe'

Austerity Failed?

The European slowdown has increased calls for some kind of stimulus from the European Central Bank. But any action by the ECB would have to be coordinated across a number of different countries with a number of different fiscal policies. This brings up the Catch 22 that has haunted Europe since the start of the crisis -- the EU has common monetary policy, but not common fiscal policy.

The ECB's inability to affect change prompted its chief, Mario Draghi, to question whether the austerity demanded by Germany in exchange for a bailout of Greece and other struggling European nations was the right call.

Read More Coming to Europe: A 'three arrow' strategy?

"It would be helpful for the overall stance of policy if fiscal policy could play a greater role alongside monetary policy, and I believe there is scope for this, while taking into account our specific initial conditions and legal constraints," Draghi said. "The risks of 'doing too little' outweigh those of 'doing too much.'"

Shadow over NATO Summit

Europe's economic stagnation, as well as Draghi's comments, is likely to hang over the NATO summit later this week. Europe is now faced with a difficult choice; it could increase economic sanctions, which would hurt Russia while also negatively impacting the European economy. The alternative is to choose to look the other way as Russia carves up Ukraine.

Read MoreInvestors focused on ECB as Europe's health deteriorates

"If not the … sanction policy then what?" asked Edward Goldberg, a professor at Baruch College and the New York University Center for Global Affairs. "Probably the only alternative now would be for the EU, not NATO, to send some military equipment to the Ukraine."

—By David Francis, The Fiscal Times