As the year draws to a close, we need to look at the interacting developments that will impact Europe’s economy in the next year – starting with the war in Ukraine.
One of my boldest decisions this year has been not to join in the premature celebrations of an early end to the war. My solidarity is with Ukraine, but we have to acknowledge a brutal reality, which is that western sanctions have failed to achieve their stated goal: to deny Vladimir Putin the resources to fight a prolonged war. China has aligned with him strategically. Russia’s alliance with Belarus is deepening. US sanctions against China, and the US House speaker Nancy Pelosi’s extremely ill-judged August visit to Taiwan, are bringing China and Russia closer together. You can either drive a wedge between them, or subject both countries to sanctions. But you can’t do both at the same time.
The sanctions had the undesirable side effect of fragmenting global energy and commodity markets, which translated into higher headline inflation rates, with dramatic consequences for people who live at or below the poverty line in Western countries. They have economic consequences, and thus political consequences. We should expect support for Ukraine to become an election issue, especially in the US as the 2024 presidential election draws closer.
Military experts have got almost every aspect of the war wrong. Many were complacent about Putin’s threat ahead of the invasion. But perhaps their biggest and repeated failure has been to exaggerate the speed at which Ukraine would defeat Russia. I heard a former general speculating that Ukraine would succeed in defeating Russia within two weeks. That was in March. When Ukraine managed to regain Kherson in November, I heard similarly optimistic predictions. What has been so surprising is Ukraine’s resilience to continued Russian bombardment of its infrastructure. The latter has managed to damage the former’s electricity and water supplies, but the lights have usually come back on after a few days. As the West is stepping up supplies of air-defence systems, now including Patriot missiles, Ukraine’s ability to withstand Russian missile and drone attacks will improve further.
There is little chance that Russia will achieve its military objectives. But it’s also not clear that Ukraine will defeat Russia. Since neither side has an overwhelming advantage, it would be irrationally optimistic to see the war ending in a military victory in 2023. The continuity of Western support for Ukraine beyond the next year will depend to a large extent on the outcome of the 2024 US presidential election.
I would expect the Joe Biden administration, with strong support from France and Germany, to pursue a diplomatic settlement. Biden once talked about both sides licking their wounds, which sounded like something an equidistant observer might say. Emmanuel Macron said that any peace deal would have to respect Russian security interests, a comment that triggered angry reactions. Olaf Scholz used similar words. The time is not yet right for a peace agreement. But if and when a peace deal is agreed, many in the West could be bitterly disappointed, especially those who believe that the West’s strategic goal should be regime change in Russia.
From a Franco-German perspective, the ideal outcome would be one that respects Ukraine’s pre-February borders, and that keeps Russia down but not out. Europe will not revert to the old days of Gerhard Schröder and Angela Merkel. The physical destruction of the Nord Stream pipelines and the construction of liquefied natural gas terminals have created facts that will not be easily reversed.
The EU is trying to make itself less dependent on China, too. You lose output when your supply chains are no longer optimised for efficiency but for robustness. Here, too, I think the best strategy is to strike a balance. Remember that the opposite of black is not white, but “not black”. The opposite of German neo-mercantilism is not isolationism.
Here is a final thought. The loudest voices in Europe during the war have been the Anglo-speaking commentariat and northern and eastern European politicians. Do not mistake them for a policy consensus in the EU. France and Germany remain the European policy debate’s centre of gravity. This crisis is rekindling their difficult relationship. What they have in common with each other, and where they both differ from the eastern Europeans, is that their strategic interests focus on the wider Eurasian continent.
A version of this piece originally appeared on EuroIntelligence.