Unity in Adversity
EU avoids the worst and dreams about the best
🔸The European Council decision to finance Ukraine’s continuing war effort with joint debt is an historic milestone (19/12). For a very long time, there has been a wide gap between the European Union’s ambitions and its modest financing capacity (relying on the Multiannual Financial Framework). Common security is clearly a goal (public good) that needs to be served with common tools and common resources. Hence the justification of the method that 5 years ago was already used to combat the economic and social consequences of the Covid-19 crisis (Next Generation EU). Even if three member states opted out, the joint debt as a method prevailed over the reparation loan (originally proposed by the Commission).
🔸The risks of the reparation loan scheme were convincingly explained by the Prime Minister of Belgium. Using frozen Russian assets in such an unprecedented way would have turned the EU into a direct participant of the war, inviting immediate counter-measures by Russia, to start with. HRVP Kaja Kallas, one of the main promoters of the reparation loan idea, had suggested that Russia would be put outside the domain of international law, hence no risk was associated with the scheme. The reality, however, is that it is the EU that would have put itself outside international law, and the consequences could have been hugely detrimental. It would have hindered, and potentially blocked the efforts of the European Central Bank (ECB) to internationalise the euro and turn it into a more significant reserve currency.
🔸As compared to the reparation loan option, the joint debt delivers a message to the European citizens that they directly cover the costs of the war effort, and they need to know that. The loan is simply a postponement of the payment, and the true costs of the conflict need to be transparent. Most likely, this approach will invite more accountability. Leaders will have to talk more about what the actual war strategy is, and what kind of peace order is realistically attainable after the war. After the meeting of the European Council, French President Emmanuel Macron even hinted that now again it would make sense to speak with Russian President Vladimir Putin.
🔸Ukraine now has enough money to finance itself and the defensive war for another two years but this does not mean that the war would necessarily last for that long. Wise person of the year Alexander Stubb publicly opined that we might be closer to the end of the war than any time before. The President of Finland either knows something about the deteriorating condition of the Russian economy, or the great difficulties of Ukraine to mobilise more people for the front. For either or both of these reasons, the latent peace process may lead to some kind of settlement in 2026, especially if the Trump administration maintains its diplomatic campaign for forging a deal. Ukrainian President Volodymyr Zelenskyy seemed to have abandoned NATO membership as a goal, while the definitions of effective security guarantees and realistic territorial concessions remain missing deal makers.
🔸In the run-up to the European Council, Germany hosted a summit about peace in Ukraine, attended by Zelenskyy but also US peace envoy Witkoff and presidential son-in-law Kushner (14-15/12). This event demonstrated the endeavour to attain an outcome of the war which would be more favourable for Ukraine. It also helped boosting the profile of Chancellor Friedrich Merz, despite the fact that he was associated with the (failed) reparation loan idea. He might have known the reparation loan scheme (without open ended guarantees for Belgium) would not fly, but may have wanted to demonstrate that he was on the more committed wing of the European foreign policy spectrum when it comes to supporting Ukraine and its self-defence.
🔸Three countries: Czechia, Slovakia and Hungary opted out from the joint debt, signalling their dissent partly with the chosen method (CZ) but to some extent also with the objective of the financing effort (HU). HU PM Viktor Orbán for long has been seen as the most pro-Putin leader within the EU and his cooperation with the new CZ PM Andrej Babiš highlight the growing influence of the far right „Patriot” bloc. With Bulgaria appearing among the opponents of the reparation loan option, it is now clear that the Eastern flank of the EU is divided into two groups: the Baltic area (dominated by historic neurosis) and the more pragmatic nations South of the Carpathian Mountains.
🔸The postponement of the EU-Mercosur trade agreement – under pressure from France, Italy, but also Poland and Ireland – was another critical decision of the week. This is a major failure of the European Council, which leaves the whole megadeal with South-American countries in a vulnerable position. Trade is more obviously a core mandate of the EU than war, and the Mercosur negotiation has been a long chapter in EU history (25 years). Now, in the Trump era, it has an additional meaning as compared to the start. Somewhat ironically, one can conclude that the farmers of Europe unite more effectively than the workers of Europe, when it comes to imposing their will on EU decision making. The continuing stalemate also underlines that without more internal risk sharing a more robust representation of Europe in the world remains difficult.