Europe’s new era might not last long
A malevolent expansionary autocracy waging war on its doorstep seems to have cured the European Union of its complacency over self-defense. The pandemic had already underlined the need for closer coordination in other areas. Europe's politicians are now talking of a new era of cooperation.
Historians will surely record Russia's invasion of Ukraine as a transformative moment — yet what kind of transformation is harder to say. Celebrating Europe's new unity under pressure might be premature. The demands being placed on the union could strengthen it. Or, in the end, fracture it.
Europe's shock at Russia's brutality would be hard to exaggerate. Not long ago, Germany's former chancellor Angela Merkel was celebrating a new economic partnership with Moscow, one that put Germany at the mercy of Russia's energy exports. The invasion was stunning. Jolted into action, the EU moved quickly by any standards — and faster than anyone accustomed to its usual torpor would have thought possible.
Member countries agreed on unprecedented sanctions. They sent arms to Ukraine. Sweden and Finland, in a decision unthinkable before the war, applied to join NATO. Governments rushed to boost their spending on defense, promising to strengthen joint procurement of weapons and better integrate their systems. Suddenly, Europe's politicians see effective mutual defense as an urgent need, not an aspiration.
Keep updated, follow The Business Standard's Google news channel
Sustaining these efforts, though, will demand deeper political unity — which is where the EU's reach has usually exceeded its grasp.
At the outset, Russia's aggression was seen as a threat to all, demanding solidarity. As the fighting drags on, disagreements over how to end the war will emerge. The sanctions imposed on Russia will cause growing collateral damage in Europe. These costs will hit some countries harder than others, severely testing the EU's half-built economic and political systems.
This week the European Central Bank meets to decide when and how far to raise interest rates. At the moment, the policy rate stands at minus 0.5%, as it has for years. The supply shocks caused by the pandemic and the war in Ukraine have pushed eurozone inflation to 8.1%. Investors expect the ECB to start tightening soon. This might not go smoothly.
The headline inflation number was startling — but the pattern of inflation rates across the euro area is no less arresting. In the year to May, inflation in France was 5.8%; in Germany, 8.7%. It was lowest in Malta, at 5.6%; and highest in Estonia, at 20.1%. This spread is an indicator of how far economic integration across the EU still has to go — especially when it comes to energy supplies. But it also poses political and economic-policy problems.
Sensitivity to inflation varies from place to place. An inflation rate of 8.7% would be viewed as high anywhere in Europe — but in Germany, long preoccupied with the imperative of price stability, it's downright horrifying. These differing perceptions, together with the wide dispersion of inflationary forces and national economic conditions, make the US Federal Reserve's job look easy by comparison. It's impossible for the ECB to set policy in a way that suits all the eurozone's members.
That's not all. As interest rates rise, other fissures will resurface. The EU's members differ in fiscal capacity — how easily they can support the ECB's actions with changes in their budget balances. Slower growth and higher borrowing costs will renew questions about the creditworthiness of countries such as Italy, whose public debt rose to 150% of gross domestic product last year (roughly double the figure for Germany). Ongoing demands for higher defense spending as the war grinds on, together with all manner of adjustment costs due both to the war and the pandemic (spending on infrastructure, health care, income support) will draw fresh attention to who pays for what — and to what the EU offers its members and asks of them.
Years of negative interest rates suspended such divisive questions. All the while, progress toward the declared goal of ever closer union was halting at best. Efforts to build the fiscal union that the monetary union logically requires haven't gone far. The EU created some pandemic-related programs, but the members' fiscal response to Covid was mostly disorganized and uncoordinated. Euroskeptic populism has continued to gain ground, and some countries — Hungary and Poland, most notably — seem determined to challenge the prevailing wisdom about Europe's purpose. Future discussions might include membership terms for Ukraine, a poor country even before Russia set about destroying it.
The war's consequences therefore push strongly in opposite directions. Europe now understands that on its eastern border is not a potential friend but a ruthless enemy. That's clarifying. Nobody denies that the EU should develop a new security order and spend what it takes to make this effective. Any such progress, you might think, goes hand in hand with a deepening sense of European identity. But this new project has to contend with rapidly mounting economic pressures, economies that are far from fully integrated, dysfunctional fiscal arrangements, a slipshod constitution, diverging political values and too many citizens who aren't remotely convinced.
The EU has passed tests like this before. In fact, its visionaries have often seen the path from crisis to closer union as the best way to make progress. Let's just say, success isn't guaranteed.
Clive Crook is a Bloomberg Opinion columnist and member of the editorial board covering economics, finance and politics. A former chief Washington commentator for the Financial Times, he has been an editor for the Economist and the Atlantic.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.
