EU Divided Over Sanctions Against Israel Amid Gaza Crisis

Economic

Summary:

EU foreign ministers are increasingly split on how to respond to the Gaza conflict, with some nations pushing for stronger economic pressure on Israel, while others remain opposed...

The depth of division in the EU

At the Copenhagen meeting on August 30, EU foreign ministers failed to reach consensus on adopting stronger actions against Israel, particularly in response to the humanitarian crisis in Gaza. EU foreign policy chief Kaja Kallas acknowledged the lack of unity, stressing that without a coherent position, the EU risks losing credibility on the global stage. The divide itself reflects more than mere political hesitation; it underscores how internal disagreements within the bloc reduce its capacity to act as a cohesive power in international conflicts.

Countries such as Ireland, Spain, Sweden, and the Netherlands urged the suspension of the EU-Israel free trade agreement. Their stance is grounded in the correlation between Israel’s restrictive measures on humanitarian aid and the worsening civilian toll, suggesting that economic pressure could influence Israel’s policy decisions. By contrast, Germany, Hungary, and the Czech Republic opposed such measures, arguing that limiting trade or research cooperation would not directly alter Israel’s military strategy and might undermine diplomatic channels. Germany’s stance, in particular, shows a clear cause-and-effect relationship: while Berlin suspended certain arms deliveries, it resisted curbing research ties, suggesting that it perceives weapons transfers as more directly linked to conflict escalation than academic cooperation.

Trade and research disputes

The European Commission put forward a softer proposal to restrict Israel’s access to EU-funded research programs. This option was strategically chosen because it requires only qualified majority approval, not unanimity. Support from at least 15 member states representing 65% of the EU population would be enough for adoption. Here the relationship is primarily symbolic rather than causal: denying access to research funds would not directly influence Israel’s conduct of war but would act as a political signal of disapproval.

The EU remains Israel’s largest trading partner, with bilateral goods trade valued at 42.6 billion euros (49.9 billion USD) in 2024. Any disruption in this relationship would carry tangible economic consequences. Ireland’s foreign minister Simon Harris explicitly linked the urgency of sanctions to the humanitarian situation in Gaza, stating that inaction enables continued suffering as children face starvation. The connection here is causal: sustained EU economic engagement without restrictions strengthens Israel’s resilience against external pressure, while sanctions could weaken its economic flexibility.

The humanitarian backdrop further intensified debate. On August 22, the United Nations officially declared a famine in Gaza, citing systematic obstruction of aid by Israel. According to the Integrated Food Security Phase Classification initiative, over 500,000 people currently face catastrophic conditions, with projections of 614,000 by the end of September. The correlation between Israel’s restrictions and famine levels was highlighted by the UN as a systemic factor worsening the crisis.

Israel’s response and EU credibility

Israel dismissed the criticism, maintaining that its military actions are necessary to defeat Hamas. This defensive stance complicates the EU’s efforts to present itself as a neutral but principled actor. The inability of EU member states to agree on a common line reflects not only their divergent foreign policy traditions but also the tension between moral imperatives and strategic alliances. The causal chain here is clear: divisions within the EU weaken its leverage, which in turn limits its capacity to affect Israeli policy or to shape international negotiations.

The EU’s internal split over economic pressure on Israel illustrates both the limits of its collective power and the growing gap between humanitarian concerns and political pragmatism. While some states see sanctions as a necessary tool to address civilian suffering, others argue that such steps risk damaging long-standing partnerships without producing meaningful change. The debate reveals that the EU’s credibility on the global stage is not only a matter of policy but also of its ability to act with unity when faced with complex international crises.

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Economic

Fitch Cuts Global Growth Outlook to 2.2%: Warning Signs from Tariffs and Investment Slump

The global economy is facing its steepest downturn in years, with Fitch Ratings slashing its GDP growth forecast for 2025 and 2026 to just 2.2%, down from 2.9% in 2024. This figure is notably lower than the historical average of 2.7%, reflecting the lingering impact of the most severe global trade war since the 1930s, according to the agency.

The primary driver of this shift is a surge in U.S. tariffs, particularly against China and the European Union, with effective tariff rates (ETRs) now reaching 15–20%, a sharp rise from just 2.5% in 2024. Such a sudden increase is historically rare and difficult to model, but preliminary estimates from Oxford Economics indicate a global GDP loss of around $1 trillion over the next two years.

U.S. Economy Slows Sharply as Tariff Effects Ripple

America's growth, which hit 2.8% in 2024, is expected to fall to 1.5% in 2025. Although U.S. consumers front-loaded import purchases to avoid incoming tariffs in Q1 2025 leading to a temporary surge in inventories both consumer demand and wage growth have now weakened due to higher inflation from tariff-induced price rises. Household income growth is slowing, and fiscal uncertainty is dampening investment. Real GDP excluding trade and inventory factors is decelerating, and housing remains in a slump.

While the U.S. plans to redirect tariff revenues into tax cuts to stimulate demand, the impact won’t be felt until at least 2026, reducing near-term economic momentum.

China Absorbs Shock with Stimulus, But Structural Weakness Remains

China’s export sector is also bearing the brunt of the trade war. U.S. tariffs on Chinese imports surged to 41% in 2025, a slight retreat from the 125% peak in April but still highly punitive. Chinese exports to the U.S. dropped 16% YoY by June, though sales to other markets remained stable thanks to a relatively stable USD/CNY exchange rate.

Despite aggressive fiscal and monetary stimulus, including credit easing and infrastructure spending, China’s domestic consumption remains soft, investment is slowing, and the real estate sector is under renewed pressure. Although real GDP grew 5.2% in Q2, nominal GDP has slipped to just 3.9%, signaling rising deflationary pressure.

China’s annual growth is projected to fall below 5%, with serious implications for East Asia’s smaller, export-dependent economies that are deeply integrated into China's supply chains.

Eurozone Falters, But Germany Eyes Recovery through Spending Surge

The Eurozone economy, long plagued by post-COVID inertia, energy shocks, and weak exports, is now being hit by new U.S. tariffs averaging 15% on EU goods impacting its largest export destination, which accounts for 21% of non-EU trade.

While overall Eurozone growth could fall to just 0.8% this year, Germany is showing signs of resilience. Real wages have started to recover, household savings rates are declining, and consumption rose by 1.1% YoY in Q1 2025.

Importantly, the European Central Bank’s rate cuts totaling 200 basis points since June 2024 have stimulated household lending and construction. Adding to the momentum, Germany’s new government has announced an €850 billion investment plan (18% of GDP) over five years for defense and infrastructure. As a result, Germany’s growth is forecast to rebound to 1% in 2026, ending a three-year stagnation cycle.

A Fragile Global Outlook Hinges on Policy Moves

Despite some localized fiscal support and easing, the global economy remains vulnerable to demand shocks, geopolitical risk, and protectionist policies. Tariff escalation especially from the U.S. has already triggered structural slowdowns in trade and investment, with limited offset from monetary or fiscal tools in the near term.

With major economies like the U.S., China, and the Eurozone all showing signs of deceleration, the risk of a broader global stagnation or even synchronized recession is rising, unless there is a meaningful de-escalation in trade tensions and a coordinated push for investment and consumer recovery.

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Economic

Russia-Ukraine Conflict

U.S. Steps Up Pressure on Russia with Economic Sanction Threats

As the Russia-Ukraine war stretches on, the United States has escalated diplomatic pressure by signaling it may impose additional economic sanctions on Moscow should the conflict continue unresolved. Speaking at a UN Security Council session on August 29, acting U.S. representative John Kelly expressed grave concern over the ongoing attacks in Ukraine and warned that "it is time for Russia to choose peace." He called for a direct bilateral meeting between Russian and Ukrainian leaders.

The message comes amid President Donald Trump’s increasingly active diplomatic role. According to White House sources, Trump is pushing for a Russia–Ukraine peace summit, which could later evolve into a trilateral meeting involving the U.S. He has held a series of shuttle diplomacy meetings with President Putin, President Zelensky, and various NATO and EU leaders to facilitate progress.

Russia and Ukraine Respond with Conditions

Russia's Deputy UN Ambassador Dmitry Polyanskiy signaled conditional openness to a summit with Kyiv but insisted that proper preparation and meaningful content are essential. He also stated that the U.S. must address the root causes of the conflict, implicitly pointing to NATO expansion and regional security concerns.

Ukraine’s response was also cautious. Prime Minister Yulia Svyrydenko reiterated Kyiv’s commitment to a peaceful resolution, emphasizing that a ceasefire must be established first as a prerequisite for any successful negotiation. Kyiv also demands credible security guarantees, indicating skepticism about Moscow’s intentions.

Summit Prospects Remain Unclear

While both sides publicly express willingness to meet, preconditions on both ends have delayed the feasibility of a direct summit. Trump’s administration continues backchannel consultations with both governments, but progress is limited by deep-seated distrust and divergent views on what constitutes a fair resolution.

In response to recent mixed messages from Moscow, President Trump warned of "serious consequences" if no summit is convened soon. Although economic sanctions are not new in the U.S.–Russia standoff, Washington appears poised to intensify financial restrictions as leverage to compel Russia toward the negotiating table.

This moment reflects a critical diplomatic juncture, as the Biden-era approach of multilateral pressure gives way to Trump’s preference for deal-making summits and direct engagement. Whether this yields concrete results, however, remains to be seen amid the entrenched dynamics of war and diplomacy.

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Economic

Historic Decline in EU-Russia Trade Ties

Trade relations between the European Union and Russia have reached a historic low, following years of escalating sanctions and geopolitical fallout from Russia’s invasion of Ukraine in February 2022. According to Eurostat, total bilateral trade in Q2 2025 shrank to just €14.5 billion, the lowest level since 2002, when modern records began.

This dramatic decline reflects an 82% drop from Q1 2022, when trade still stood at a robust €81.9 billion the third-highest quarterly total ever recorded. By Q2 2025, EU imports from Russia fell to €7 billion, while exports slightly rose to €7.5 billion, resulting in a rare €0.5 billion trade surplus the first in over 20 years.

Sanctions and Energy Decoupling Drive Shift

The downturn is largely driven by EU sanctions imposed in response to the war in Ukraine. Since 2022, the EU has passed 14 sanction packages, which have systematically restricted imports and exports across strategic sectors, especially energy. These measures replaced Most Favored Nation (MFN) treatment under WTO rules and included bans on Russian crude oil and refined products, especially those transported via sea.

Before the war, Russia was one of the EU’s top trading partners, primarily due to its role as the bloc’s largest energy supplier. In Q1 2021, for example, 29% of EU oil imports came from Russia. But by Q2 2025, that share had plummeted to just 2%, thanks to alternative sourcing strategies and falling energy prices.

The EU’s trade deficit with Russia on energy peaked at €42.8 billion in Q2 2022, but had fallen to just €4.2 billion by Q2 2025, reflecting successful efforts to diversify energy sources and reduce dependency.

Strategic Implications for the EU

The collapse of EU-Russia trade marks not just an economic realignment, but a geopolitical one. Moscow’s pivot toward Asian markets, particularly China, has become more urgent as Europe shrinks from its former position as Russia’s key revenue source.

Meanwhile, the EU’s first trade surplus with Russia since the early 2000s underscores a new phase of economic decoupling. The shift signals a lasting transformation in the EU’s global trade relationships, with long-term implications for energy security, industrial policy, and strategic autonomy.

While the EU continues to absorb short-term costs related to inflation and supply chain restructuring, it has made substantial progress in cutting its reliance on Russian resources a central goal of its post-Ukraine war strategy.

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Economic

India’s Economy Defies Global Headwinds with Robust Growth

India has once again demonstrated its economic resilience. On August 29, the Ministry of Statistics and Programme Implementation (MOSPI) announced that India’s GDP grew 7.8% in the first quarter of the 2025–2026 fiscal year (April–June 2025), compared to the same period last year. This figure exceeded the 6.7% forecast by economists polled by Reuters, and was also higher than the 7.4% growth recorded in the previous quarter.

The stronger-than-expected expansion reaffirms India’s reputation as the fastest-growing major economy in the world, even as it faces external challenges.

U.S. Tariffs Pose Risks but India Stays the Course

One of the most notable headwinds is the 50% tariff imposed by the U.S. on selected Indian goods. Analysts warned that such high tariffs could reduce India’s GDP growth by 20 to 90 basis points, depending on the extent of the trade impact and the sectors affected.

However, the robust Q1 data suggests that domestic demand, investment, and service exports may be compensating for trade-related disruptions. The resilience in private consumption and public infrastructure investment appears to be cushioning the effect of foreign trade tensions.

IMF Outlook: India to Surpass Japan in 2025

According to the International Monetary Fund (IMF), India is projected to overtake Japan by the end of the current fiscal year, becoming the fourth-largest economy in the world (in nominal GDP terms). Japan’s economy, despite being mature and technologically advanced, has recently struggled with deflationary pressure, aging demographics, and a weak yen, which have weighed on its nominal GDP performance in USD terms.

India, by contrast, benefits from a young labor force, booming tech and manufacturing sectors, and ongoing government-led infrastructure development. These structural advantages, alongside consistent GDP growth in the 7–8% range, place it on a clear upward trajectory.

A Milestone in India's Economic Rise

India’s better-than-expected GDP growth marks more than just a quarterly beat it signals momentum toward a long-anticipated economic milestone. Should current trends persist, India will not only retain its title as the world’s fastest-growing major economy but also cement its place among the top four global economic powers, overtaking Japan and trailing only the U.S., China, and Germany.

The real test, however, will lie in sustaining this momentum amid geopolitical trade friction, currency volatility, and external demand fluctuations. Yet, for now, India’s growth engine remains firmly in motion.

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Economic

Commodity

China's Gas Strategy Shifts to Existing Pipeline Over New Investment Uncertainty

China is looking to increase its annual gas imports from Russia via the existing Power of Siberia 1 pipeline, amid stalled negotiations over the more ambitious Power of Siberia 2 project. Currently, Russia supplies 38 billion cubic meters (bcm) of gas annually through Power of Siberia 1, which began operation in 2019. Talks are now underway between Gazprom and China National Petroleum Corporation (CNPC) to raise that volume by an additional 6 bcm, starting from 2031.

According to industry sources cited by Reuters, this increase, priced at approximately $250 per 1,000 cubic meters, would generate an extra $1.5 billion in annual revenue for Russia’s energy giant Gazprom.

Pipeline Expansion as Strategic Pivot

While the Power of Siberia 2 pipeline originally planned to carry 50 bcm/year from West Siberia to northwest China remains central to Russia’s long-term export ambitions, a final agreement on pricing and financing has eluded Moscow and Beijing for over a decade. The $13.6 billion project is unlikely to gain new momentum during President Vladimir Putin’s upcoming visit to China, where energy will nevertheless dominate discussions with President Xi Jinping.

In the meantime, PipeChina, which controls China’s domestic energy infrastructure, has begun studying upgrades to its internal pipeline network to absorb more gas from the existing Power of Siberia 1. Construction could start as early as late 2026.

Russia Seeks to Replace European Markets

For over five decades, Russia exported gas mainly to Europe via pipelines from West Siberia, fulfilling up to 40% of EU gas needs and bringing in $90 billion annually. That trade collapsed after Russia’s 2022 invasion of Ukraine, when most EU countries halted imports, forcing Moscow to pivot east.

Power of Siberia 1, which sources gas from East Siberia, is not connected to West Siberia, the heart of Russia’s legacy production and export infrastructure. The Power of Siberia 2 project was supposed to bridge this gap and establish a new export corridor to Asia. However, the growing availability of renewable energy and domestic gas production in China has reduced its urgency to finalize the new pipeline.

Strategic Calculations and Geopolitical Leverage

Despite the lack of progress on Power of Siberia 2, China and Russia are not abandoning their long-term pipeline ambitions. Energy analyst Tatiana Mitrova from Columbia University notes that while China’s energy demand is somewhat constrained, overland gas supplies from Russia remain attractive due to lower geopolitical risk compared to LNG sourced by sea.

Sergey Sanakoev, director of the Asia-Pacific Research Center in Moscow, added that Gazprom is exploring the technical feasibility of increasing Power of Siberia 1’s capacity to 45 bcm/year. Gazprom itself has confirmed the pipeline could exceed its initial design limits, indicating confidence in infrastructure resilience.

In parallel, a new Sakhalin–China gas pipeline is expected to go online in 2027, supplying up to 10 bcm/year, further diversifying Russia’s export routes and deepening its energy ties with China.

By doubling down on existing infrastructure like Power of Siberia 1 and the upcoming Sakhalin route, Russia is adapting to geopolitical constraints and shifting demand dynamics. China, for its part, is pursuing energy security and flexibility, prioritizing scalable and secure supply routes over committing to new megaprojects. The incremental increase in gas flows may not match the original Power of Siberia 2 vision, but it represents a pragmatic realignment of Sino-Russian energy cooperation.

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Economic

China’s AI Chip Ambitions Accelerate

According to the Financial Times, China is gearing up for a massive production surge in artificial intelligence (AI) semiconductors, with major players such as Huawei and Semiconductor Manufacturing International Corporation (SMIC) at the forefront. This expansion is expected to more than triple the country’s output of AI chips by 2026.

The strategic move comes as U.S.-China tech tensions escalate, pushing Chinese firms to build domestic capabilities to match or replace Western suppliers. AI chips essential for powering large language models, facial recognition systems, and autonomous technologies have become a central battleground in this effort.

Huawei’s Factory Push and Strategic Role

Huawei, which currently leads China’s AI hardware innovation, is supporting the launch of three new AI-focused semiconductor facilities. The first is set to begin operations by the end of this year, with the other two following in 2026. If all three reach full capacity, their combined output is expected to surpass SMIC’s current AI chip production, a significant benchmark given SMIC is China’s largest semiconductor foundry.

Although Huawei claims it won’t directly own or operate the chip fabs, it remains a key driver in shaping their design and operational focus. Its latest AI chips reportedly meet performance criteria laid out by DeepSeek, a fast-growing AI startup in China specializing in large-scale models, showcasing the alignment between hardware development and software deployment in China’s AI ecosystem.

SMIC to Double Capacity for 7nm Chips

In parallel, SMIC plans to double its production capacity next year for 7-nanometer chips, the most advanced nodes currently mass-produced in China. Huawei is SMIC’s largest customer in this segment, underscoring a growing alliance between China’s top fabless and foundry firms.

Industry executives suggest that once these new facilities come online, domestic production constraints will no longer be a bottleneck, paving the way for rapid AI model deployment and system integration.

Reducing Dependency on Nvidia and AMD

China’s production ramp-up also comes amid growing uncertainty around Nvidia’s H20 AI chip, a U.S.-sanctioned variant intended for the Chinese market. Local firms are now working on homegrown alternatives to compete with the H20 and similar models from AMD, aiming to eliminate a strategic vulnerability in the supply chain.

By boosting domestic chip supply, China seeks to provide greater stability for its AI developers, particularly as U.S. export restrictions continue to tighten. The goal is not merely to fill the gap left by foreign suppliers but to eventually surpass them in efficiency and specialization, particularly for AI applications tailored to Chinese platforms and needs.

China’s aggressive investment in AI chip manufacturing marks a critical phase in its long-term strategy to achieve technological sovereignty. If successful, this expansion could transform China from a major chip importer into a globally competitive chip producer, especially in the AI domain. The impact will be felt not just in the domestic tech scene but also across global supply chains and the broader AI arms race.

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