Trade Wars

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As Europe reacts to the reality of war, the state is set to play a much more interventionist role across Europe. The scramble to secure the very foundations of a functioning economy, food, energy and security, has the potential to change policies and the way we think about them.

War seems to concentrate minds on the essentials. Entrenched beliefs about balanced budgets, state moderation and independent regulation take a back seat when physical security is at stake.

Perhaps the most striking example of this change is the speech given by German Finance Minister Christian Lindner to the German Bundestag on Sunday 27 February.

Pistols

Usually a fervent defender of the debt brake and a small non-interfering state, he pleaded for an additional budget of 100 billion euros to be devoted to the German armed forces, more than double the current annual budget of the Bundeswehr.

In response to criticism of the price to be paid by center-right Christian Democrats, he simply replied that defense spending was an “investment in our freedom”.

Germany is not the only country to have increased its defense spending in recent days. Romanian President Klaus Iohannis has called for spending of 2.5% instead of just 2% of GDP, EURACTIV.ro reported.

Finnish Prime Minister Sanna Marin said on Tuesday March 1 that defense spending should be increased, Czech Finance Minister Zbyněk Stanjura spoke of a “war budget” and Swedish Prime Minister Magdalena Andersson on Tuesday announced “resources extra for our defence. .

Energy

Realizing that it might not have been the best idea to rely on the extremely violent dictator next door for its energy supply, governments turned their attention to energy security, with centre-right politicians suddenly chanting the praise of renewable energy.

“Renewable energy is the energy of freedom,” said avowed free trader Christian Lindner.

Greek Prime Minister Kyriakos Mitsotakis said: “The country’s goal is to quickly become self-sufficient using wind and solar energy.”

These are not the words of politicians who expect the market to hand them energy security on the silver platter – these actions will require state action. One such action is expected to be proposed soon by the European Commission, namely the taxation of windfall profits from high energy prices to invest in renewables, as shown in a leaked document seen by EURACTIV.

Food

Finally, the war in Ukraine is also forcing governments to think about food security.

Over the past 12 months, Russia and Ukraine have accounted for 40% of EU soft wheat imports, with an additional 9% coming from Moldova. Albania is already feeling the pinch, raising fears of empty supplies or not being able to buy wheat from other sources.

In addition, the war posed questions about the supply of animal feed and fertilizers, essential for European agriculture.

Less than two years ago, food safety was considered “no longer a major concern” by Commissioner Virginijus Sinkevičius, calling for a focus on sustainability instead. On Wednesday March 2, Commissioner Janusz Wojciechowski said that the EU’s flagship policy for more sustainable agriculture could be readjusted.

The past days have shown that what matters, in the end, is the physical reality on the ground.

Accounts can be frozen, billions of dollars can be rendered inaccessible by political will overnight. How your economy works in an emergency will ultimately depend on whether you have enough guns to defend yourself, enough food to sustain yourself, and enough power on the grid to keep factories running and warm houses.

Vlad Makszimov, Bogdan Neagu, Georgia Karagianni, Charles Szumski, Pekka Vanttinen, Aneta Zachova contributed to this article.

Chart of the week

This week’s chart shows the composition of EU imports from Russia in 2021 by value. About 62% of EU imports from Russia come from the fossil fuel industry, making all other categories relatively meaningless in euro terms. In total, imports from Russia represent only 4% of all imports to the EU.

The EU was pleased to have reacted quickly and forcefully to Russian aggression with several sanctions. The French Minister of Finance, Bruno Le Maire, even spoke of a “total economic and financial war” against Russia, even if he later had to come back to these remarks.

However, the sanctions do not target energy imports and therefore omit the most important, most important part of EU-Russia trade.

Eurostat data. Graphic by Esther Snippe.

For example, Gazprombank and Sberbank, two of Russia’s largest banks, are excluded from the ban on SWIFT, the interbank messaging system that facilitates international bank transfers, because they play an important role in settling energy payments.

The energy exception also undermines the effectiveness of freezing the international reserves of Russian central banks. With gas and oil prices unusually high, continued energy payments guarantee an influx of foreign currency to the Russian government and offer some support for the Russian rouble, even though it has lost much of its value in recent days.

The fact that many companies have nevertheless severed their ties with Russia, stopped buying Russian oil and withdrawn their money from Russian banks suggests that one of the most important effects of the sanctions is their political sign towards companies.

Literature corner

The Kremlin’s gas wars: how can Europe break free from Putin’s gas blackmail? Bruegel scholars present some insights in this article. One of them: the creation of a compensation fund for the regions of the EU most affected by a possible stoppage of the flow of Russian gas, financed by EU loans.

From Shock Therapy to Putin’s War: In this article, Katharina Pistor examines the failures of economic policy in post-Soviet Russia, which favored economic reform over political reform. US economic advisers convinced Russian leaders to focus on economic reforms and put democracy on the back burner. – where Putin could easily turn it off when the time comes,” she argues.

Russian perspective on economic sanctions: A YouTuber shows how sanctions from the West affect people’s daily lives, or at least the life of a YouTuber who receives his salary mainly from outside Russia.

Russian economists against Russian war: Nearly 300 Russian economists signed a letter opposing Putin’s war in Ukraine, saying they could “predict with complete certainty the most serious negative consequences for the Russian economy “.

Difficult trade: The hidden costs of economic coercion: Do you remember the economic blockade of Lithuania imposed by China? This policy paper by Jonathan Hackenbroich of the European Council on Foreign Relations offers some ideas on how the EU could get tough on trade wars. Hopefully, soon again, trade wars will be the EU’s only concern.

[Edited by Alice Taylor]