EU, Ukraine crisis and great powers

This is the second article of my new series of articles studying Ukraine crisis-related situations from various viewpoints, in the context of great power relations. The first one was “Current situation in Ukraine crisis” of November 30, focusing mainly on military viewpoint. The focus of this article is on the EU.

European identity

The EU elite continues to insist on creating the “European identity,” but is such an idea realistic? Despite the efforts of the left-liberal mainstream media, its meaning and content has up until now passed unnoticed and failed to force the public opinion of different European countries into believing the old continent is united.

This pretentious outlook is presented to Europeans on a daily basis but it instead serves as clear proof that those, who are pushing this idea the most aggressively, do not themselves believe in the thesis. What did Ursula von der Leyen herself say about Italy in September? If Italy elects the wrong parties during parliamentary elections, the EU “has tools” to coerce them, as in the case of Poland and Hungary. This is what European unity looks like per the left-liberal authoritarian concept. Brussels, the left-liberal media and the NGO networks that dictate EU policy are not the only ones, who have tried and failed to forge a common European identity.

The harder Brussels pushes the dream of a united Europe, the further it gets from the goal. After all, the divide is not only East-West or North-South but now also West-West. Just notice the disputes between the two “big ones,” Germany and France. The Franco-German summit at the end of October was already marked by differences over how to deal with the energy crisis in Europe, European defense policy and relations with China. In the end, these two supposedly pro-EU politicians seem to have no real common identity to speak of.

Regarding Europe’s goals in Ukraine crisis, I said in my previous article that the goals of the EU elite have been dictated by the US. The ordinary people of Europe seem to be largely unaware and indifferent, brainwashed by their Mainstream Media (MSM) to adopt any political agenda and bigotry, to be fed by MSM to them. All these circumstances bring about confusing ambiguity in goal defining and setting in European context.

The most shocking examples of these European distortions are European energy policy and the resulting “de-industrialization”, especially in Germany. If/when the coming winter finally wakes up European population lulled by Brussels dream fluff, into harsh reality, it will a real shock.

EU moves toward new official Russia policy: Isolation

The EU has not technically updated its Russian guiding principles since 2016, long before Moscow’s war began. According to an internal draft, EU officials are discussing new principles to replace the outdated document that guides the bloc’s policy toward Moscow. The most notable updated principle: “Isolating Russia internationally, imposing and implementing restrictive measures against Russia and preventing their circumvention.”

The draft text includes six points intended to replace the previous five guiding principles the bloc agreed to in 2016. Other than isolation, the document’s top principles include ensuring accountability for any Russian war crimes and supporting EU neighbors, largely a reference to the Balkan countries, several of which are seeking EU membership. It also references working closely together with NATO allies, supporting civil society in Russia and enhancing the EU resilience, a nod to the bloc’s energy reliance on Moscow.

Since Moscow launched its invasion of Ukraine in February, the EU has focused on adopting and then enforcing sanctions targeting much of the country’s economy, imports and exports. One point of contention may be the statement of declaring that “there can be no return to normal relations” as long as Moscow is attacking Ukraine and violating international law. Diplomats said the Baltic countries, traditionally more hawkish toward Russia, want that line to be stronger. But they also added that Germany is satisfied with the current text.

Latest round of sanctions entails a “price cap” of Russian oil($60/barrel), which may further imbalance international oil markets. The global oil price may exceed $100 amid the introduction of the EU’s price cap and possible reduction of Russia’s exports. Indeed, uncertainty is the keyword in energy markets in December. With the Russian seaborne crude oil import ban around the corner, a potential OPEC+ output cut on the table and ongoing capping Russian oil & gas prices, the supply side of the market has become even more complex.

European energy bills have hit record despite government support. European households are paying more than ever for electricity and natural gas, even as EU governments have pledged more than €550 billion to “protect citizens and businesses from the energy crisis.” Extra energy bill burden on European citizens seems to be unbearable, in particular knowing it is self-induced.

European Parliament declares Russia a “state sponsor of terrorism”

The European Parliament, on November 23, adopted a resolution declaring Russia as a state sponsor of terrorism because of Moscow’s strikes on civilian targets in Ukraine. The EU Parliament declaration is symbolic but it does call for new sanctions and further isolation of Russia. The resolution was adopted with 494 votes in favor, 58 against and 44 abstentions.

Unlike the US, the EU currently cannot officially designate states as sponsors of terrorism and

does not have a list of terrorist states and lacks a legal definition of the consequences of such a declaration. The Parliament is therefore urging the EU and its member states to “put in place the proper legal framework and consider adding Russia to such a list.”

While some European states like Estonia, Latvia, Lithuania and Poland have already added Russia to their national list of terrorist states, the US has held back from such a move. The EU resolution, however, calls for further isolation of Russia internationally by stripping it of its membership in international organizations and bodies, reducing diplomatic ties with Russia to the absolute minimum and adopting a ninth sanctions package.

Russia and China, for their part, will isolate the EU

After the European Union imposed sanctions against Russia, European politicians decided to fight the EU’s dependence on China. Economic and political pressure on Beijing is mounting. In addition, the European Union regularly accuses China of violating human rights and sees China as a threat to economic security.

At the same time, China’s reaction to such attacks seems to have surprised European politicians. Not that long ago, the Chinese authorities decided not to air a video message from the head of the European Council, Charles Michel, at an exhibition in Shanghai. Beijing demanded the recording of the video message should be provided in advance. It turned out that Michel criticized Russia and called for reducing trade dependence on China. It would have been strange, if such a statement had been announced at an exhibition in Shanghai.

By this kind of measures, the EU will completely lose its connection with China soon as it has already happened in its relations with Russia. Probably, the EU will find itself excluded from the massive, free-trade area unfolding in Eurasia, established by Russia and China, as the blocs differentiate into separate trading spheres.

In this case, Europe’s dependence on the United States will increase even more. The US will thus be able to make the EU become a political vassal to the US and an appendage of the American economy. The EU officials may be aware of such a development but so far, they only have spoken about it carefully, while it appears that those words will entail no action.

President Xi Jinping and his European Council counterpart Charles Michel met in Beijing, on December 1. “China and the EU should jointly oppose decoupling and jointly oppose politicization and weaponization of trade and technology. China will remain open to European companies and hopes that the EU would reject interference and provide Chinese companies with a fair and transparent business environment,” Xi said.

Xi’s bid to keep the European cash flowing in, comes as EU resentment grows over US President Joe Biden’s Inflation Reduction Act (IRA). The IRA is a huge tax, climate and health care package and a subsidy bonanza that is likely to suck fresh industrial investment out of Europe to the US.

It’s also a direct response to the growing political rhetoric in Europe — including the main economic engine Germany — calling on companies to diversify from the Chinese market and reduce dependency on a key trading partner that has grown increasingly nationalistic and ideological under Xi’s watch.

Dark views for Eurozone economy

Eurozone inflation rose above 10 percent in October as economies across the 19-nation bloc begin to slow. Rising prices throughout the continent have put immense pressure on countries throughout the region.

The European Central Bank (ECB), like its counterpart the US Federal Reserve, has been working to control inflation by raising interest rates. The chance of a recession in the eurozone has increased as higher interest rates slow the economy down even more. The ECB raised its key policy rates by 75 basis points on Oct. 27 and confirmed additional rate hikes later this year.

Prices throughout the zone have been skyrocketing over the past year, especially food and energy. The spikes have largely been led by supply chain disruptions over the war in Ukraine and EU energy sanctions against Russia, forcing Europeans to import their gas from elsewhere and at higher prices. The sudden rise in the cost of living has also launched a wave of protests across Europe, as residents fear the lack of heat and food and severe financial stress this coming winter.

Another concern for the ECB is the decline of the euro against the US dollar, which has become a key factor in pushing up inflation throughout the bloc. Inflation means currency is worth less. In the Eurozone inflation rates vary from 6% in France to 17% Netherland & 24% Estonia. This is not sustainable and without their own currencies little can be done to rebalance, which means that pressure will build to disintegrate Eurozone and end Euro.

An additional, abysmal challenge has emerged in late autumn, regarding Italy’s budget problems. Both ECB and Brussels bureaucrats have warned Meloni’s government of dangerous situation, how to balance the Italy’s budget 2023. On the scenario there is also the hypothesis of a commissioner of the Italian economy by Brussels. For Italy it would be a national capitulation. The question remains: could Europe continue to exist with the default of one of its founding countries?  The answer is, no.

Europe will see forced de-industrialization as result of energy crisis

Besides the catastrophic energy policy of Germany, troubles in France’s nuclear power plants are mounting primarily due to routine maintenance of the country’s 56 aging reactors. A new update from French electric utility company EDF said an outlook for nuclear power generation was released ahead of winter, causing chaos in European energy markets. 

The situation changed drastically this year, when France swung from being one of Europe’s largest exporters of electricity to a net importer, because of issues with its reactors. The outages worried officials that France and the broader region might run short of electricity in the winter, when power demand in Europe peaks.

The EU has been “quietly celebrating” a moderate decline in gas and electricity consumption this year amid record-breaking prices. Yet the cause for celebration is dubious: businesses are not just curbing their energy use and continuing on a business-as-usual basis. Firms are shutting down factories, downsizing or relocating. Europe seems to be on the way to de-industrialization.

That the European Union is heading for a recession is now clear to anyone watching the indicators. The latest there—eurozone manufacturing activity—fell to the lowest since May 2020. The October reading for S&P Global’s PMI also signaled a looming recession, falling on the month and being the fourth monthly reading below 50—an indication of an economic contraction.

From bad to worse however, German conglomerate BASF said last month it would permanently downside in its home country and expand in China. The announcement served as a blow to a government trying to manipulate energy shortages with climate goals without extending the lives of nuclear power plants. Significant increase in natural gas and power prices over the course of this year is putting pressure on chemical value chains,” said BASF’s chief executive, Martin Brudermueller and added that “the energy crisis was not the only reason but increasingly tighter EU regulation was also a factor behind this decision”

A tenth of Europe’s crude steel production capacity has already been idled; all zinc smelters have curbed production and some have shut down; half of the primary aluminum production has shut down as well; in fertilizers, 70 percent of factories have been idled because of the energy shortage; chemical plants are also curbing their activities, ferroalloy furnaces are going cold and plastics and ceramics manufacturing is shrinking as well.

Some of these businesses might choose to eventually relocate to a place with cheaper and more widely available sources of energy, contributing to the de-industrialization process in Europe. As for the best candidate for this relocation it is the United States, with its abundant gas reserves, rising production and friendly investment climate.

Wrap-up of today’s situation

  • European industries including metals, fertilizer plants and specialty chemicals are shutting down as a result of the ongoing energy crisis
  • Certain industries may not come back, even if the energy crisis eases
  • An increasingly tight regulatory environment is another reason for de-industrialization in Europe

One thing has become clear: reduced energy consumption in Europe’s industrial sectors is really no cause for celebration. If anything, it is a cause for concern and urgent action on the part of decision makers. Meanwhile, the winter is coming and freezing is arriving in Germany and northern part of Europe, which highly likely means very expensive winter time.

EU – US contradictory interests

Nine months after Russia’s invasion Ukraine, the allied the West is beginning to fracture. Top European officials are furious with Joe Biden’s administration and accuse the Americans of making a fortune from the war, while EU countries suffer. Americans are selling more gas at very high price (four times more expensive than Russian pipe gas) and much more weapons.

It is obvious that the United States has used the conflict to strengthen its global position and its presence on the European continent, to contain Russia and to increase its gas exports to replace those of Russia. The US has imposed sanctions against Moscow with EU involvement, dragging the EU into a dangerous crisis that has exposed the poor political management of the EU leaders.

Unfortunately, the European politicians have not realized the absurdity of this war that has so much damaged the European economy and energy management. They have failed from seeing they are playing into Washington’s interests. These EU leaders decided to buy more expensive gas from the US, contributing to hyperinflation. The International Energy Agency has warned that Europe could face a gas shortage of 30 bcm also next year.

European industry is on an emergency footing thanks to high gas prices and new lavish subsidies for American rivals. Therefore, the EU is ready for a big emergency subsidy push to prevent European industry from being wiped out by American rivals.

Inflation Reduction Act by Biden administration

Despite the energy disagreements, it wasn’t until Washington announced a $369 billion industrial subsidy scheme to support green industries under the Inflation Reduction Act that Brussels went into full-blown panic mode. “The Inflation Reduction Act has changed everything,” one EU diplomat said. “Is Washington still our ally or not?”

The biggest point of tension in recent weeks has been Biden’s green subsidies and taxes that Brussels says unfairly tilt trade away from the EU and threaten to destroy European industries. Despite formal objections from Europe, Washington has so far shown no sign of backing down. At the same time, European economies are going into recession, with inflation rocketing and a devastating squeeze on energy supplies threatening blackouts and rationing this winter. 

French President Emmanuel Macron said high US gas prices were not “friendly” and Germany’s economy minister has called on Washington to show more “solidarity” and help reduce energy costs. Ministers and diplomats based elsewhere in the bloc voiced frustration at the way Biden’s government simply ignores the impact of its domestic economic policies on European allies. 

When EU leaders tackled Biden over high US gas prices at the G20 meeting in Bali last week, the American president simply seemed unaware of the issue, according to the senior official quoted above. Other EU officials and diplomats agreed that American ignorance about the consequences for Europe was a major problem. EU trade ministers are discussing their response as officials in Brussels draw up plans for an emergency war chest of subsidies to save European industries from collapse. 

Behind the scenes, there is also growing irritation about the money flowing into the American defense sector. The US has by far been the largest provider of military aid to Ukraine, supplying more than $16 billion in weapons and equipment since the start of the war. The EU has so far provided about €8 billion of military equipment to Ukraine, according to Borrell. The Pentagon is already developing a roadmap to speed up arms sales, as the pressure from allies to respond to greater demands for weapons and equipment grows. This has fueled fears that the US defense industry can profit even more from the war. 

Existential challenge to European industry

EU industry chief Thierry Breton is warning that Biden’s new subsidy package poses an “existential challenge” to Europe’s economy. The European Commission and countries including France and Germany have realized they need to act quickly, if they want to prevent the Continent from turning into an industrial wasteland.

The EU is now working on an emergency scheme to funnel money into key high-tech industries. This would be a “European Sovereignty Fund” to help businesses invest in Europe and meet ambitious green standards.

This is no more a nightmare; European industry is being transferred to the US – the Financial Times reports. The politicians alert us of the exodus of investors to the other side of the Atlantic because of the more affordable gas prices and additionally thanks to the brand-new US incentive measures.

Financial Times refer to Emmanuel Macron’s words that here is desperately need a wake-up call ere is in Europe. Robert Habeck, German Vice Chancellor and minister of economy, is also being quoted with his panic driven warnings that the US is sucking up all the EU finances.

There are only six weeks more to go to avert a Transatlantic trade conflict. The Germans come across as rather frustrated because the Biden administration has not come out with any sort of a peace offer whatsoever. With the 1st January 2023 fast approaching, which is the date for the Green Agenda for business to start being enforced, risks grow that all these US investments and subsidies are bound to get European business to flee far away from Europe (and its bankers’ vaults).

If this heated argumentation between the US and EU turns into a trade war that is what the Europeans fear the most. Bloomberg reports that tensions are running high in Europe because of the growing social inequality compared to that in the US. Eurozone trade surplus has turned into a trade deficit because too high gas prices merely make the European consumers poorer while at the same time get the US exporters richer.

The views of the US and EU differ hugely also in that China is the US chief rival and Berlin’s major interest is to keep their main trade relations, which are in fact with China.

The famed German business model and effective production as such are under a most severe breakneck pressure. It is questionable, whether in ten years there will be anybody in Germany to produce anything at all and be competitive in the global market. The important questions are, what is the US doing to the EU allies and is the EU brave enough to dare oppose the US?

Macron’s crusade

French President Emmanuel Macron met his US counterpart Biden during a visit to Washington on December 1. Macron seems to have got Joe Biden to suggest that European companies could some way benefit from a controversial American subsidies package. At news conference with Macron on Thursday, Biden conceded more ground than had been thought possible.

Fury has been boiling over in Europe after it became clear that Biden’s Inflation Reduction Act could drain investment out of the EU and into the US. Macron’s visit to the US had been described as a doomed last-ditch effort to secure a truce over Washington’s largesse before the EU and US would fall into a full-blown trade war with countervailing tariffs. For weeks, the French have been campaigning for European partners to agree to their own rival subsidy package, including a “Buy European” component.

Biden said “We’re back in business, Europe is back in business. And we are going to continue to create manufacturing jobs in America, but not at the expense of Europe.” That question of excluding Europe has been one of the major bones of contention. At a time when Europe has been paying dramatically higher energy prices than the US, many Europeans have seen this Act as a hostile attempt to profit from European weakness.

Several top European officials have been arguing that the EU and US need to join forces against China instead of competing against each other. That logic seemed to make headway with Biden. While making “no apology” for legislation that he said was vital to creating US jobs, he noted that parts of the IRA could need a fix. “There’s obviously going to be glitches in it and we need to reconcile changes in it,” he said.

Despite the conciliatory words, several Democratic lawmakers said they have no plans to revisit the legislation, which passed after more than a year of negotiations without any Republican support.

It still remains to be seen, however, how much can be achieved in practice and whether Biden was making more concessions in his friendly public appearance with Macron than he will really be able to deliver. He will be likely to face hostility in Congress over attempts to give in to Europe. It’s unclear how far Biden’s administration will go in resolving issues for the Europeans at a technical level, as teams on either side still need to hash out the details.

German finance minister warns of US trade war

On December 3, Finance Minister Christian Lindner warned over a brewing trade war between Europe and the United States and said that Berlin preferred diplomacy to resolve a dispute over the Inflation Reduction Act (IRA), enacted by the Biden administration.

“The USA is our partner of shared values but at the same time there is an enormously protectionist economic policy, that is why the German government must represent German interests in Washington and point out the negative consequences for our country,” he added.

Lindner said that the German economy is closely linked to the US market but only countries that have signed a free trade deal with the US, like Canada and Mexico, can benefit from the new subsidies.

The subsidies have received sharp criticism from EU-based business leaders and politicians as putting European firms at a disadvantage. EU leaders say that €200 billion out of the total package is tied to provisions for domestic US manufacturing that potentially violate World Trade Organization (WTO) rules. The EU is not Washington’s only ally frustrated at the new subsidies. South Korea has also raised concerns that its carmakers will not be eligible for the US tax breaks.

European shaky support to Ukraine

The EU has given nearly twenty billion euros of financial aid to Ukraine since the beginning of the conflict, but far less humanitarian and military aid. Looking ahead to 2023, the EU is committing to give Kiev 1.5 billion euros per month. The remaining monthly welfare for Ukraine’s government is expected to come out of the American taxpayers’ pockets and international institutions.

Bilateral military aid from France, Germany, Spain, Italy and Poland has fallen since the end of April. EU foreign-policy chief Josep Borrell has warned that member states’ weapons stocks were “severely depleted” after months of providing Ukraine with arms, reinforcing perceptions of the EU’s inability to provide long-term military support to Kiev.

On October 17, the EU formed its own military training program for Ukrainian soldiers. France declared it would train 2,000 on its soil, while other EU members will train another 13,000 Ukrainian soldiers. The latest round of EU sanctions against Russia, which were approved on October 5, demonstrate Europe’s commitment to keeping pressure on Russia.

A drastic increase in EU assistance to Ukraine and confrontation with Russia, however, remains unlikely and with Europe’s energy costs mounting, the ability of the EU countries to maintain, let alone increase, their support for Ukraine may also soon come under much further strain.

Military production dilemma

Besides the US, the European NATO countries started sending massive amounts of weapons and munitions to Ukraine already in early 2020s, months before the Russian invasion. Initially, the deliveries primarily included tens of thousands of man-portable missiles for various purposes, including ATGM (anti-tank) and MANPADS (air defense) weapons.

Even then, it became clear that NATO’s stocks couldn’t provide enough weapons for a long-term conflict, while it would take years to ramp up deliveries by expanding production lines. This was further exacerbated, when the Kiev regime started asking for more advanced weapons amid mounting battlefield losses.

Many NATO member states were (and still are) forced to send weapons and munitions, which were already in short supply for their own militaries. On the other hand, the Kiev’s ever-growing demands are putting additional pressure. On November 26, the New York Times reported that approximately two-thirds of NATO members have effectively run out of weapons by sending them to Ukraine.

Even the more prominent alliance members with big MICs (Military Industrial Complexes) are having major issues keeping up with the Kiev demands. 20 out of 30 NATO member states are “pretty tapped out” in terms of additional weapon and munition supplies. While members such as the United States, United Kingdom, France, Germany and Italy still have the ability to arm the AFU with basic weapons, even they are refraining from sending specific weapons systems.

The demands include various types of strategically impactful weapons, including surface-to-surface guided missiles such as ATACMS, a weapon with a 300 km engagement range. The US officially rejected such demands, supposedly “out of concern” the missiles could be used to attack targets deep within Russia.

However, the more likely reason is that the Pentagon is fully aware of the fact that it would take years to replace its current stocks of such missiles and it’s not very keen on expending them all without certain replacement. The same is true for many other types of weapons and systems which are equally needed to maintain optimal military power.

Artillery is especially important in this regard. As soon as the Kiev regime started burning through its Soviet-made stocks, many of which were also destroyed in Russia’s long-range strikes, NATO was forced to provide both artillery pieces and shells. As the alliance’s post-Cold War doctrine shifted toward a more interventionist style of warfare, artillery became less important, resulting in ever-shrinking stocks.

According to various reports, the enormous demand for artillery munitions is putting tremendous pressure on NATO members trying to meet the Kiev regime’s requests. At present, the Ukrainian forces are firing at least five thousand shells per day, but the US, by far the most heavily armed NATO member state, can only produce 15,000 shells per month. Camille Grand, a defense expert at the European Council on Foreign Relations, told the New York Times that “[a] day in Ukraine is a month or more in Afghanistan.”

On the other hand, the soaring demand is extremely profitable for the Military Industrial Complexes of the political West, the US MIC has been experiencing by far the largest windfall in this regard. Arms industry giants such as Lockheed Martin and Raytheon already made billions in the opening months of the Ukrainian crisis. However, most US officials and experts agree that this is not only a question of funding, as it will take years to increase production in order to meet the current demand, which is expected to grow exponentially in the foreseeable future.

The US and NATO have already stated that they’re committed to fighting a long proxy war against Russia in Ukraine. However, as the US is profiteering from the crisis, especially at the EU’s expense, the bloc is becoming increasingly frustrated, even the most senior officials in Brussels are now ready to admit the critical situation.

What, if?

As in the article “Current situation in Ukraine crisis” of November 30, where I analyzed the possible military operations and their outcomes in the near future, I am going here to sketch some obvious trajectories and main consequences, in the case Russia is winning in the Ukrainian war. The question is, what will happen to the EU in this kind of context?

Firstly, it is necessary to recall that the whole political elite of the EU, led by President of EU Commission Ursula von der Leyen, and the whole Brussels apparatus has pledged their 100% commitment to support Ukraine and obstruct Russia’s victory at “any” cost.

This absolute constraint given, one can just imagine those fundamental changes taking place in the top political and administrative positions inside the EU, if they have to admit publicly “betting on a wrong horse”. Similar fundamental changes will take place also in the structures and membership of the block. Disintegration process of the EU will begin soon after such a political bomb.

Further ramifications can be found in the NATO, in transatlantic relations between Europe as a whole and the US, in accelerating development among BRICS & SCO circles as well as in the transformation of the world order and polarity of the system. These topics will be analyzed in next articles.

One key element in all these articles is and will be “What, if?” that is what may be the main consequences, if Russia will be militarily the winner in Ukraine crisis. So, very interesting analyses will be available. Please, stay with.