Fault Lines #5: A New Ostpolitik
Europe's centre of gravity is shifting East. The consequences will be profound.
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Das Ende Der Wende?
After the dizzying speed and scale of the EU response to Russia’s invasion of Ukraine, the familiar anticlimax has set in. Deep-seated national interests are reasserting themselves and longstanding fault lines are reappearing in fiscal policy, energy security and defence. Has Wendepolitik spluttered to a premature halt? Or is this merely a pause for breath?
While the EU has presented plans to reduce demand for Russian gas by two thirds before the end of the year and become fully independent of Russian fossil fuels “well before” 2030, there is no political appetite for an immediate boycott.
According to Bruegel, the current export value of Russian piped gas to the EU is just short of €700 million dollars a day. Research from the NGO Transport & Environment puts the daily value of Russian oil exports to the union at $285 million.
Given that revenues from oil and gas-related taxes and export tariffs accounted for 45% of Russia’s federal budget in January 2022, the continued flow of energy revenues and the escalating prices for these commodities has significantly cushioned the blow of the wider sanctions regime and enabled Putin to finance his war.
This is most visible in the rebound in the value of the rouble: while Russia’s currency initially lost half its value against the dollar, it has now recovered to a rate about 30 per cent below its prewar level.
As the EU’s biggest importer of Russian fossil fuels, Germany is at the sharp end of these contradictions.
In pushing back against calls from Eastern member states like Poland and Czechia for an immediate ban, the government has argued that this would plunge Germany and all of Europe into a recession, with Chancellor Olaf Scholz warning that "hundreds of thousands of jobs would be at risk, entire industries would be on the brink." These claims have been presented with little empirical evidence. Indeed, the most sophisticated external analysis suggests that they are overstated:
At the weekend, Scholz doubled down on his refusal to contemplate an energy boycott, arguing that Putin could not use the hard currency because of existing sanctions, and excoriating economists who advocate this. Not only are they “wrong,” he told German television, but “honestly irresponsible to calculate around with some mathematical models that don’t really work.”
The Government’s reluctance to cut off this key source of funding for Putin’s war machine is better explained as a response to shifting public opinion. While support for Ukraine remains strong, the willingness to tolerate material sacrifices in pursuit of this is weakening:
The contradictions of German policy were exploded by President Zelensky’s address to the Bundestag on March 17th, where he excoriated the country’s prioritisation of its own narrow economic interests over its obligation to try to end the war by turning off the energy spigot. The effect was to send Ostpolitik’s tainted successor “change through trade” to the dustbin of history:
I am grateful to the German businessmen who put morality and humanity above accounting. Above the economy. Economy. Economy. And I am grateful to the politicians who are still trying... Trying to break this Wall. Who choose life between Russian money and the deaths of Ukrainian children. Who support the strengthening of sanctions against Russia that can guarantee peace. Peace to Ukraine. Peace to Europe. Who do not hesitate to disconnect Russia from SWIFT. Who know that an embargo on trade with Russia is needed. On imports of everything that sponsors this war.
Wendepolitik has unfolded at bewildering speed. For now, as it relates to the choices on energy, defence or fiscal policy that this historical turning point demands, it is merely an aspiration for which there is no clear public or political consensus within Germany.
But Germany alone will not decide the course of European politics and statecraft: from the ashes of the old, discredited Ostpolitik, and with Zelensky leading the charge, a new Ostpolitik is coming into view.
Spiegelsaal
In the ‘Spiegelsaal’ or Hall of Mirrors of Versailles on March 17th and 18th, the EU’s leaders were unwilling to properly grapple with the implications of the war, despite the asymmetric burden that sanctions, the refugee crisis and the security threat from Russian aggression have placed on different member states.
The prospect of any further joint borrowing was firmly opposed by Germany and its frugal allies, with Swedish Prime Minister Magdalena Andersson reportedly arguing that plans for greater investment in energy and defence would be akin to a "command & control" economy. Finland went further, by opposing any repurposing of the existing Recovery Fund to fund the war burdens of Eastern member states:
However, a war economy is a command economy, and the decisions that EU leaders have already taken mean that the EU is already at war with Russia. Because the burden of these decisions falls unequally on Eastern member states, in particular, a reluctance to objectively grapple with the consequences of these decisions will place unbearable pressure on EU cohesion and solidarity as the full impact of the war plays out in very diverging ways:
In the hall of mirrors that is the high politics of the EU, it is inconceivable that its leaders would allow bitter divisions akin to those between debtor and creditor states during the Eurozone crisis to appear in a different guise at a time of great peril.
What does solidarity require at a time of physical and economic war? Nicholas Mulder, the author of ‘The Economic Weapon’, a timely, and original history of the use of economic sanctions as a form of war, and their unintended consequences, teased out the implications at length in this Foreign Affairs piece:
Using sanctions against very large economies will simply not be possible without compensatory policies that support the sanctioners’ economies and the rest of the world. The problem of managing the fallout of economic war is greater still in Europe. This is not only because the European Union has much stronger trade and energy links with Russia. It is also the result of the political economy of the eurozone as it has taken shape over the last two decades: with the exception of France, most of its economies follow a heavily trade-reliant, export-focused growth strategy. This economic model requires foreign demand for exports while repressing wages and domestic demand. It is a structure that is very ill suited to the prolonged imposition of trade-reducing sanctions. Increasing EU-wide renewable energy investment and expanding public control in the energy sector, as French President Emmanuel Macron has announced, is one way to absorb this shock. But there is also a need for income-boosting measures for consumer goods and price-dampening interventions in producer goods markets, from strategic reserve management to the excess profits taxes that are being rolled out in Spain and Italy.
Such state intervention is the price to be paid for engaging in economic war. Inflicting material damage at the scale levelled against Russia simply cannot be pursued without an international policymaking shift that extends economic support to those affected by sanctions. Unless the material well-being of households is protected, political support for sanctions will crumble over time. At the moment, simply maintaining existing sanctions will require active compensatory policies. For Europe especially, neither laissez-faire economic policies nor fiscal fragmentation will be sustainable if the economic war persists.
If the price of a sustained economic war against an economy of Russia’s scale and significance is compensatory policies, then the current politics of the EU seem ill-suited to grapple with what this implies.
In place of the economic punishment meted out to creditor countries during the Eurozone crisis, and the emergency backstop of ECB support and once-off joint borrowing that characterised the response to the pandemic, the need for such a trade-dependent bloc to practice long-term containment while transforming its energy and security policies and enlarging to the East requires a long-term settlement that is taken out of the hall of mirrors and given legitimacy by popular consent. If the EU is indeed serious about becoming a full-spectrum actor, Treaty change must surely be on the table.
Public opinion is ahead of politics. Witness the transformation in public attitudes to participating in common EU defence arrangements, and even NATO, in Ireland. In the midst of such unprecedented events, is it really credible to assert that European public opinion is as frozen as the stalled politics of the hall of mirrors suggests?
Conquering Peace
Strategic thinking has long been anathema to German politics.
Witness for example the recent takeover of the PCK Schwedt oil refinery by Russian oil giant Rosneft, a deal approved by Germany’s Bundeskartellamt competition authority the day before the Russian invasion of Ukraine.
The takeover means that a large part of the petrol production for East Germany and Poland is de facto in the hands of Russia. The plant supplies 95 per cent of the regions of Berlin, Brandenburg and western Poland with petrol, diesel, jet fuel and heating oil.
The Bundeskartellamt was adamant that its review of the deal was based on purely legal competition criteria. Its statement inadvertently encapsulates the dominant strain of political-economic thinking in Germany since the foundation of the Federal Republic:
"Political considerations play no role in our agency."
The ever-present danger is that Wendepolitik gets bogged down in the German political economy of surpluses, which sees the world first and foremost as a gigantic export market. This drives a politics that is crudely mercantile and defiantly non-strategic.
What is different now is that unprecedented external scrutiny is being brought to bear on the political choices that Germany’s preferred approach entails. Zelensky pointedly stated that Germany would only be with Ukraine “A little later” at last week’s EU summit, and used his interview this week with the Economist to once again take aim at Germany’s mercantilism:
Mr Zelensky praises America and Britain. Although he notes that the complexities of American politics have sometimes caused delays, he acknowledges that Mr Biden has become increasingly engaged. But Germany, he says, is trying to strike a balance between Russia and Ukraine. “They have a long relationship with Russia and they are looking at the situation through the prism of the economy,” he says. “They can help, if there is pressure on them domestically to do so, and they can stop when they see what they have done is sufficient.”
Zelensky draws on a consistent line of Eastern European thinking. As Ivan Krastev has written, the predominant Polish view is that Ostpolitik betrayed the 1981 Solidarity rebellion for the sake of maintaining good relations with Moscow. More recently, Poland’s deputy foreign minister said that the now-abandoned Nordstream 2 pipeline was reminiscent of the Molotov-Ribbentrop Pact of 1939 that divided Central and Eastern Europe between Nazi Germany and the Soviet Union.
In the original conception of Chancellor Willy Brandt, Ostpolitik was first and foremost a policy of reconciliation and an attempt to normalize relations with the countries of the Warsaw Pact. As Hans Kundani has argued persuasively, the German foreign policy establishment was disingenuous in deploying the rhetoric of Ostpolitik to justify the policy of change through trade, which was something quite different from the original Ostpolitik:
Whether or not increasing economic interdependence turns authoritarian powers into democracies and “responsible stakeholders”, it has little to with the original aims of Ostpolitik, which was not meant to transform the Soviet Union – “I didn’t go to Moscow to make democrats of the communists,” Egon Bahr told me. Nevertheless, German policymakers continued to invoke the memory of Ostpolitik to pursue economic objectives and in particular the interests of German exporters.
The great Eastern transformation of the EU is underway. Whether it is on defence, the energy transition, enlargement or post-war reconstruction, the union must reinvent itself to face the fundamentally different geopolitical world the war has made. The object should not be to make Western Europeans of the East, but instead to build a political community that can, in the title of Stella Ghervas’ superb recent book, “conquer peace.”