“Putin’s war” will be won or lost in Brussels, writes Giles Merritt.
Whatever the military outcome on the killing fields of the Donbass, it’s the solidarity of the European Union that will eventually determine whether Russia’s President Vladimir Putin is defeated or victorious.
That in turn will depend on whether the EU and its member governments can fashion a durable economic strategy. Their challenge is to nurse the Union through the difficult and dangerously divisive winter months ahead while laying the foundations for long-term recovery. Europe must take collective action to resolve its energy crisis, and it must also confront the looming problems of ‘stagflation’ that combines runaway inflation with next-to-zero growth.
EU solidarity has held up well over the six months since Russian troops invaded Ukraine. Its unity was buoyed in part by the failure of the Kremlin’s planned blitzkrieg assault on Kyiv. The real key, though, has been the refusal by EU and NATO member states to be splintered by Putin’s energy blackmail.
The signs are that alternative oil and gas supplies together with greatly enhanced intra-EU cooperation will win out. The cold winter months will be tough for many, and the political fall-out will be heated. But there’s clearly a spirit of fierce resolve in Brussels and most EU capitals. Less encouraging is the absence of focus on the economic dimension that trumps all others – taxation.
EU governments are already deeply in debt and face financial pressures that unless handled well risk sapping the solidarity achieved so far. They must borrow more on the world’s capital markets or raise taxes at home. Perhaps they’ll opt for a judicious combination of the two, but that won’t rescue them from being between a rock and a hard place.
Taking on a lot more debt risks serious internal tensions. Chancellor Olaf Scholz has U-turned away from Germany’s longstanding pacifism to support the emergency strengthening of the EU’s military, but it’s uncertain that his public opinion will accept the need for increased debt to pay for it. Many Germans fear that would turn the EU into a “transfer union” whose purpose is to prop up the ‘Club Med’ countries of southern Europe. Berlin is still trying to digest its pledges to the €750 billion EU Covid recovery fund that for the first time awarded Brussels fiscal powers of its own.
Raising tax thresholds is equally daunting. The eurozone already has a big fiscal deficit, with the collective expenditures of its 19 members running at about €500 billion more than their tax receipts. Paolo Gentiloni, the EU’s Economy Commissioner and a former Italian prime minister, warns that “tax reform is more important than ever.” EU countries are losing at least €130 billion a year to tax evasion, avoidance and outright fraud. On the thorny question of taxing huge multinational corporations, he says “we want a global solution to bring corporate taxation into the 21st century”.
European military assistance to the embattled Ukrainians has been impressive, if somewhat patchy at times. That was a comparatively easy response to what it was hoped would be a containable crisis, but it is now metamorphosing from a localised conflict into a global stand-off between autocracies and liberal democracies. EU member states will have to shoulder a growing share of the burden because the spectre of nuclear escalation places limits on US involvement.
The energy strategy outlined recently by Commission President Ursula von der Leyen reflects a mood of greater political grit. It’s to be hoped this can stave off threats of protectionist national policies within the EU. As this long, hot summer draws to a close it is clear that the financial impact of the energy crisis has been underrated. The yearly – repeat, yearly – cost to EU countries has been estimated at a trillion euros, about eight per cent of GDP.
That’s just the price of staying in Putin’s high stakes geopolitical poker game. The reconstruction of Ukraine was said by the Kyiv government in April to be a trillion euros, and then there will be the kick-starting of Europe’s Covid-stricken economy out of deepening recession. These ‘Black Swan’ developments threaten several trillions more in public spending that will dwarf the EU’s budget limited to around one per cent of its GDP.
Chancellor Scholz has spoken of eventually enlarging the EU to include Ukraine and eight others. Before that can be envisaged, the Union must first stick together in the face of so many fragmenting financial pressures. If it fails to do so, Vladimir Putin will have won much more than his war with Ukraine.
The Author, Giles Merritt, is the Founding Director of Friends of Europe.