As most pundits expected, or perhaps hoped, Macron led the field in the first round of the French elections on Sunday. These pundits now hope for his victory in the second round. Delivering your party’s votes to Macron in the past has resulted in the PASOKization of the French Socialist Party, which candidate got less than 2% of the first-round votes. Other parties may have taken notice of the socialists’ fate and choose not to back Macron. How will an EU crippled by Brexit and now pregnant with Ukraine’s war deal with President Le Pen?
Many observers believe that the war in Ukraine has created a united EU. But, it still early innings and national interests may still prevail. Observe Italy’s diligence in securing a gas pipeline deal with Sonatrach, the national oil company of Algeria, as soon as Spain changed its decades’ old position on the former Spanish Sahara (now Western Sahara) and pivoted towards Morocco’s stance. Morocco and Algeria wage a low-intensity war over that territory and the vast deep-water natural gas deposits lying under the Atlantic seabed between that former colony and the Canary Islands.
This major Spanish policy shift was sealed last week at dinner party where the King of Morocco played host to the Spanish Prime Minister and the Spanish Prime Minister played the role of the Head of State of Spain. As is customary, the pliant Spanish press diverted public attention from the King of Spain’s absence with a canard on whether an upside down Spanish flag was a symbol of Morocco’s contempt for its guests and their country. (In a similar vein, the press has declared two young businessmen guilty of profiteering from a €6 million mask supply contract to the city of Madrid at the outset of the pandemic, but has largely ignored that three high-ranking government officials were deposed by a judge in Madrid for gross mismanagement and fraud related to procurement contracts worth hundreds of millions of euros in the same period).
National interests still dominate in the EU
National interest is still the driving force of foreign policy of EU member countries. Germany’s about face on its energy supply, defence, and non-engagement in foreign wars policies is perhaps in the best interest of Germany, but not necessarily in the best interest of all EU member states. The common policy is driven by the Spaniard Josep Borrell (né José Borrell), the High Representative of the Union for Foreign Affairs and Security Policy. He is still reeling from the humiliation he suffered in Moscow in February 2021, when at the joint press conference with the Russian Foreign minister he learned of the expulsion of three EU diplomats that morning. He stated at the time that relations between the EU and Russia had hit rock bottom; so much for his predictive abilities.
Unfortunately, that episode may cloud his judgment; the best interest of the EU is to broker a ceasefire and a peace treaty both for humanitarian and economic reasons. Ukraine cannot win this war and every week that passes hundreds of civilians die and billions of euros in reconstruction costs accrue. That reconstruction will be largely paid by the EU. As has been the case with the Ukraine’s IMF program, emotional considerations and Germany’s interests will take precedence over standard operating procedure. Do not be surprised when billions in foreign aid go missing. Eight years ago, following Russia’s invasion of Crimea, we posted the following:
From the FT online edition tonight:
“The International Monetary Fund has identified a $15bn shortfall in its bailout for war-torn Ukraine and warned western governments the gap will need to be filled within weeks to avoid financial collapse.”
Unlike in Greece, the private sector lenders to Ukraine have not been bailed-in before this country received access to additional official sector aid. Ukraine is decidedly unable to meet its debt obligations; it has not been able to do so since the collapse of the Soviet Union. Who could oppose Ukraine getting much needed funding with no strings attached? While the Greek Government and its bailed-in private sector creditors come to mind, there is undoubtedly a lot of sympathy in the west for Ukraine’s plight. But one should not confuse political and humanitarian issues with an IMF program.
Garry Kasparov, the former six-time world chess champion from the former Soviet Socialist Republic of Ukraine, was the speaker tonight at the Alan Howard Conferences in London. He compared the Putin of the Sochi Winter Games of 2014 to the Hitler of the Berlin Olympic Games of 1936. He noted that while it took Hitler 20 months from the conclusion of the summer games to decide the Anschluss in 1938, it took Putin only 20 days from the closing ceremony at Sochi to the annexation of Crimea. Kasparov made a persuasive case for the US President to call Putin’s bluff by putting an end to his appeasement policies.
While all of these issues are undoubtedly very important, this financial crisis comes at a time when populist parties calling for quotas on legal immigrants from Eastern Europe to the more prosperous economies in the EU are gaining prominence. Their formerly radical agendas are full-heartedly espoused by mainstream parties. They also come at a time when the Samaras administration in Greece is faltering. It has steered Greece to meet a much larger number of the conditions set forth in the IMF program – which are usually resounding failures – than is the norm. Greece is not really asking the IMF to bend its very strict rules, as it knows this to be futile; rather it is asking its EU partners for some wiggle room, a small prize to show the Greek electorate that the sacrifices have not been for naught. He has been rebuffed and the country has been thrown again into financial chaos.
While Athens was burning today and the rest of European bourses were suffering a correction, SWMBO waxed triumphant on Germany’s great accomplishments and strength. No wonder The New Yorker reports she is the western leader for whom Putin shows more respect. They are meant for each other: two children of the Cold War as seen from the other side of the Iron Curtain.
Should EU leaders decide to toss a few more million into the Ukrainian war, who can be surprised when Greek voters chose to elect a rogue Government? Where do we go from here? This is not a rhetorical question.’
Why fight a losing war?
The EU may prove to be far from united as the energy crisis goes unresolved. Germany may have the flexibility to afford a deeper recession at this point as energy prices destroy demand and manufacturing capacity is shut down temporarily. It is unlikely that most other countries may be able to do the same without incurring severe damage to their economies. As EU voters realize that this energy crisis is here to stay for quite some time, they may be less willing to bear the cost of Zelensky’s resolve and may start thinking that his heroic resolve is more akin to stubbornness in the face of daunting odds. The Ukrainian President has already conceded that his country will not join NATO, which was the provocation that stirred Putin into action. What is the point of carrying on with a war that Ukraine is unlikely to win?
The West’s general contempt for President Putin’s invasion of Ukraine should be placed in the context of other regional military conflicts pitting Russia vs. former Soviet Republics. These conflicts include the two Chechen Wars (1991-2000). As recently as 2006, Russian security forces continued to operate in that region eliminating some of the leaders of a low-level insurgency there. Ramzan Kadyrov, the current Chechen leader, was appointed by Russia. Chechen Islamist rebels fought against the Russian Army and Bashar al-Assad forces in the Syrian Civil war as well as in the Donbas. Putin has been for decades allowed to pursue his interests with no adverse consequences. Does anybody remember Obama’s “red line” in Syria anymore?
Russian state resurgent under Putin
Putin was elevated to the presidency of the Russian Federation in 2000. In 1998, Russia had defaulted on its domestic debt in an abjectly corrupt move designed to bail-out domestic banks that had taken on too much rouble risk with foreign counterparties. Brent oil was at $27 a barrel when he came to power. Russia’s foreign exchange reserves were depleted, the country’s future was as bleak as its Soviet past. While the Russian economy has not performed particularly well for the average citizen, the Russian state has done very well these past two decades. Higher commodity prices and expropriation of private assets such as the Yukos oil company have provided vast resources to the state. The economic war waged by the West intends to harm Russia’s economy. Perhaps it will succeed at some point. In the interim, it is obvious that Western economies are already suffering greatly just a few months after the calamitous contraction of 2020.
None more so than the economics of the periphery of Europe. The end of the Omicron wave of COVID brought hope of a normalized 2022 tourism season. Yet the rising cost of living will leave fewer euros and pounds for vacations, not to mention the rising cost of airfare. Housing prices are also going up in many markets as new supply is becoming scarce. We should expect a new property developers’ crisis, as many homebuilders cannot deliver units within contracted cost because of rising materials prices. Some may choose to default tactically. Companies are already reacting to higher costs by reducing headcount and expenses. We read today in the press that BBVA will no longer supply “free” bottled mineral water to employees, this extra savings come on the back of a 3,000 head count reduction. The social-communist government in Spain is studying reinstating a ban on lay-offs for economic reasons (yet another form of expropriation, which will be contested in court at some time in the future when it will no longer matter).
The West’s Greta Thunberg moment
We are living through a new Greta Thunberg moment. Emotions override reason among global leaders once again. Political goals override engineering realities. It is the triumph of idealism; we would be the inhabitants of ‘The World as Will and Representation’. We are afraid that once the economic costs and the logistics and cost realities of shifting supply sources sink in, we will see a wave of protests in the streets of Europe not unlike the violent 2018-19 “gilets jaunes” protests in France. Some observers point to history and reflect that revolutions often take place when the economy tanks. We are not sure there are enough “revolutionaries” in the rapidly ageing periphery countries. Surely, something has to give. In the second round of the French Presidential election, a centre right candidate will face a nationalist radical (often depicted as extreme-right). The left is also more radical as it supports Jean-Luc Mélenchon, a former Socialist, and his “France in Revolt” party.
The financial cost of sanctions is also significant. While the direct cost of writing off a few hundred billion of financial and direct investments in Russia may be affordable, the indirect costs of smaller crops for lack of fertilizers, higher interest rates than expected before the conflict, higher inflation, and higher energy and commodity prices for longer will be fatal to many economies. This is especially true of energy dependent lower income countries such as Ethiopia, Somalia and most of the Sahel. This food crisis will lead to larger numbers of economic migrants looking for a brighter future in the EU.
We shall soon see how we cope with all these issues. But if history is a guide, it does not bode well for EU unity, as national interests will come back to the fore, as was the case with the Syrian refugee crisis or the pandemic. Let us not forget that closing borders and suspending free trade were the knee-jerk reactions to those problems.