Tag Archive for: European Union

Europe’s energy choice

Russia’s war in Ukraine and the disruption of Russian gas exports to Europe has triggered an energy crunch, with price spikes unlike anything seen since 1973. And the situation will get worse before it gets better. Russian natural-gas flows to Europe are likely to be further curtailed—or even shut off—before the northern winter, and sanctions on oil exports may soon start to bite into energy supplies, too.

The crisis is twofold. The urgency of keeping Europe warm and running through the next few winters must be considered alongside the imperative to accelerate the transition to clean energy. Many see a conflict here between the short term and the long term. But responding to the immediate energy crisis in the right way will also help to address the broader climate challenge. Authorities must both buffer the shock and accelerate the transition.

To be sure, the European countries that are most dependent on Russian gas and oil will struggle to secure power and heat for the coming winter. Gas reserves are only 65% full, and the Russian stranglehold will make it difficult and expensive to reach the European Union’s target of 80% before winter.

The crucial question for major economic powers, then, is whether they can manage through the winter without forcing their big domestic industrial gas consumers to shut down. The answer is probably yes, provided that Europeans demonstrate cross-border energy-savings solidarity (as suggested by the EU), and maximise the use of all other energy sources.

Letting high prices destroy marginal demand (including among private consumers) confronts policymakers with a difficult choice.

Contrary to how the situation is often framed in the media, this choice is not between climate change and civil unrest. No one doubts that Europe will need to increase its use of liquefied natural gas, continue burning coal over the next few years, and do more to help vulnerable communities and some industries manage higher energy costs. What matters is how policymakers approach these tasks.

Crucially, subsidising fossil-fuel consumption by capping energy prices at the pump or the power meter will only aggravate inflation, effectively transferring taxpayers’ money to gas and oil producers. Handing out cheques to those most in need is a good idea, whereas eliminating the incentive for everybody to save energy is a terrible one.

This tension is at the centre of the debates now playing out across Europe, from local municipalities to the highest decision-making levels in Brussels. While some Europeans associate today’s energy-price inflation with the war in Ukraine, others think it stems from broader efforts to combat climate change. For example, the vast majority of Italians blame the energy crunch on geopolitical tensions, whereas a significant share of Germans and Poles blame climate-change policies. Much will depend on which side wins this battle for hearts and minds.

Europe’s choice will hold important implications for whether we can limit global warming to 1.5° Celsius above pre-industrial levels. If European politicians can convince their electorates to go along with the right longer-term strategic decisions, they could both manage the energy crunch over the next few winters and leverage renewable energy and energy-efficiency improvements on an unprecedented scale.

That would position the EU decisively as one of the leading major economies in the green transition—making it competitive with China and demonstrating that wealth and welfare are not synonymous with burning fossil fuel. Conversely, if Europe panics and locks in fossil-fuel price subsidies and new investments in long-term gas infrastructure, it will have squandered a historic opportunity.

Even as we move toward a medium term in which renewables can provide stable and affordable energy, other obstacles will arise. We will need ample affordable energy, both to power everything that can be electrified and to provide zero-carbon fuels for industries, products and activities that cannot. We therefore must build the new green-energy infrastructure as quickly and cheaply as possible.

But ‘fast and cheap’ does not always align with security or dependency concerns. The new concept of ‘friend-shoring’ implies that Europe will want to source all essential parts of its energy infrastructure from allies and friendly partners as a means of ensuring reliable supplies. But while achieving near self-sufficiency through domestic green infrastructure production and friend-shoring is ultimately possible, it is not the cheapest or the fastest option in the short term.

Europe will need to engage more widely with neighbours and global partners to scale up green industries and reduce the marginal costs of green technologies. European electorates will demand fast, cheap, clean and secure energy, but satisfying them is unattainable in the short term. Once again, we are back to hard political choices. Creative political solutions can help, but politicians will have to decide on a strategy and then convince the public to come along with them. Europeans should expect nothing less of their leaders.

The golden arches go to war

In the wake of the Cold War, as globalisation gathered speed, commentator Thomas Friedman observed that no two countries with a McDonald’s franchise had ever gone to war with each other. This led him to what he called the ‘golden arches theory of conflict prevention’: when a country reaches a certain level of economic development—one where the middle class is big enough to support a McDonald’s—its people lose interest in fighting wars. The key to peace, the logic went, may well lie in economic development and interconnectedness.

It was not long before Russia disproved Friedman’s theory—first with its 2008 invasion of Georgia, and again with its 2014 invasion of Ukraine. Now, Russia has launched an all-out military campaign aimed at conquering Ukraine and returning its lands and people to ‘Mother Russia.’ Economic ties alone, it seems clear, are not enough to preserve peace.

Many now view economic engagement as a liability. After all, countries like Germany and Italy, with their heavy dependence on Russian energy, are effectively hostages to the Kremlin’s militarism. Severing trade and commercial ties with Russia is now the order of the day. Russia has even ceased to be a ‘McDonald’s country’: the company announced in March that it was closing all 850 of its franchises in the country.

Friedman was far from the first to suggest that economic and commercial relations have a pacifying impact on international relations. French philosopher Montesquieu argued that ‘the natural effect of commerce is to dispose us to peace.’ American revolutionary Thomas Paine went further: ‘If commerce were permitted to act to the universal extent it is capable, it would extirpate the system of war.’ In the 19th century, British politician and industrialist Richard Cobden campaigned for free trade on the grounds that it ‘would have the tendency to unite mankind in the bonds of peace.’

Such arguments are based not only on the idea that countries have an economic interest in maintaining the commercial bonds they have forged. Rather, the Enlightenment theory of doux commerce (gentle commerce) held that trade has a civilising effect on society, because it depends on social interactions with diverse people, as well as principles like fairness and reciprocity.

The doux commerce theory has had plenty of critics; there was clearly nothing ‘gentle’ about the slave trade, or about imperial powers stripping colonies of raw materials for manufacture back home. But nor can we ignore that war is now essentially unthinkable among the members of the European Union, including the eight Central and Eastern European countries that joined the union after the Cold War’s end.

Why doesn’t Russia fit this pattern? The answer might lie in its political exclusion.

After the fall of the Soviet Union, the former members of the Warsaw Pact were offered not only trade packages, but also a host of opportunities to connect to networks of European regulators, judges, legislators and civil society, even before they became candidate EU members. Those without EU prospects joined NATO, leading to some military integration and a sense of membership in the Western club.

Not Russia. In 2000, Vladimir Putin proposed to Bill Clinton that Russia could join NATO, but the step was never taken. Had it been, it would have fundamentally changed Russia’s geopolitical incentives, though it would also have changed NATO dramatically.

In any case, that ship has sailed. Putin’s war on Ukraine has revived and strengthened NATO as an anti-Russia alliance, with Finland and Sweden now likely to become members. On top of this, the EU has awarded Ukraine and Moldova candidate status, and EU Commission President Ursula von der Leyen has laid out a kind of Marshall Plan for Ukraine aimed at enabling the country to make rapid progress after the fighting stops.

Simply put, Putin’s war has united the West. The task now is to uphold that unity long enough to ensure that Putin incurs such losses for his aggression that he is permanently deterred from further efforts to expand Russia’s borders by force.

But there is an even bigger challenge on the horizon. The West will never have truly peaceful relations with Russia without a significant degree of economic, political and social integration.

Western strategists should therefore be thinking not only about how to defeat and deter Russia (and rebuild Ukraine), but also about how eventually to roll back sanctions against Russia and create incentives for a new generation of Russian leaders to develop political and economic relations with the West. A combination of political and economic engagement was, after all, vital to the success of the Marshall Plan in Western Europe and the reintegration of Japan into the global economy after World War II.

Similar logic applies to China. Many commentators excoriated former US president Donald Trump for withdrawing the United States from the Trans-Pacific Partnership, a trading bloc encompassing 12 Pacific Rim countries—and excluding China. In their view, the TPP was essential to enhance America’s influence in a critical region, while diminishing China’s.

But, while Trump’s policy was far from prudent, isolating China is a bad idea. Doing so risks empowering hardliners in the Chinese leadership and increasing China’s incentive to behave antagonistically, or even aggressively. Instead, the US should join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (the TPP’s successor) and back China’s inclusion.

The doux-commerce effect depends on economic and political inclusion. That is a tall order in today’s world, and it certainly cannot be achieved overnight. But as we seek to meet the short-term imperative of ending Russia’s aggression, we must also devise a longer-term strategy for building a more peaceful and prosperous world.

Ukraine’s case for EU membership

In September 2002, I published a commentary in The Wall Street Journal entitled ‘Kyiv has a case for the EU.’ I was a first-term member of the European Parliament and, I believe, the first elected official anywhere to openly support Ukraine’s inherent right to future European Union membership. Nearly 20 years later, the EU has at long last decided to grant Ukraine candidate status. The move is both momentous and fully justified.

For most of the intervening two decades, Ukraine’s declared Euro-Atlantic aspirations had remained just that. As a European Parliament rapporteur for the 2004 European Neighbourhood Policy (ENP) report and again as rapporteur for the Eastern Partnership Dimension in 2007, I had long battles to convince my German and French colleagues of the merits of Ukraine’s EU case.

To its credit, the European Parliament in 2007 settled for compromise wording that was vague but hopeful. It did not reject Ukraine’s right, under Article 49 of the Treaty on European Union, to join the bloc. But nor did it suggest, as had been the case since 2004 for the countries of the Western Balkans, that Ukraine was entitled to the formal status of a ‘candidate’ or ‘potential candidate’ country.

Importantly, Article 25 of the 2004 ENP report clearly stated that EU membership for Ukraine remained ‘possible’, and this was restated in the next ENP report in 2007. But the 2011 ENP report did not mention any individual countries as potential candidates, so Ukraine’s EU membership aspiration was not noted.

The heady days of Ukraine’s 2004 Orange Revolution and the Maidan Revolution a decade later culminated in the 2014 EU–Ukraine Association Agreement, which included a ‘deep and comprehensive free trade area’. But the agreement merely confirmed that the EU acknowledged Ukraine’s European aspirations and welcomed its European choice, including its commitment to building a sustainable democracy and market economy.

The pact made no mention of the country’s Article 49 rights to EU membership, nor of the Copenhagen criteria it would need to fulfil as a formal prerequisite for candidate status. These criteria stipulate that an EU candidate state must have democratic institutions and a functioning market economy, uphold fundamental human rights, and accept the obligations of membership.

But EU enlargement is essentially a political decision by member states, based on a multitude of considerations that sometimes include dramatic events. Russia’s war of aggression against Ukraine is such a turning point.

The robustness of Ukraine’s institutions and the strength of its civil society in the wake of Russia’s invasion have generated a sense of awe in the West. The country’s resilient government stood its ground as the invading barbarians massed at the gates of Kyiv. The country’s railways have continued to operate while under massive attack by a major military power. Then there is the courage of Ukraine’s armed forces and the sacrifices of civilians targeted directly by Russian missiles. Russia’s war crimes, including the rape and murder of civilians in occupied territories, have shocked the West and spurred the change of mindset among EU members that made Ukraine’s candidacy possible.

With its large, highly educated population, Ukraine could one day play a strategic role as a bridge between Western and Central Europe and Russia. After all, the EU allowed Turkey to become a negotiating candidate, with all the geographical and cultural controversy the move provoked, on the grounds that Turkey was a bridge between Europe and the Islamic world. Surely Ukraine has the same or perhaps an even greater right to a roadmap for its long-term goal of EU membership. Unfortunately, it has taken a brutal war for the EU finally to come to its senses and fully appreciate that its security interests are tied tightly to Ukraine’s independence and European outlook.

Once Russia’s vicious attempt to re-establish an empire by force is finally defeated and its forces are permanently driven from Ukraine, the country will need a vast reconstruction program that mobilises financial aid to rebuild its war-ravaged infrastructure. But Ukraine’s efforts to build a democracy from scratch—particularly since Russia’s illegal 2014 annexation of Crimea and the subsequent war started by its proxies in the eastern Donbas region—deserve greater recognition. The association agreement and the free-trade deal have already brought about significant structural reforms, with Ukraine implementing as much as 60% of the acquis communautaire (the body of EU law). This will give it a head-start when accession negotiations begin.

EU candidate status will further encourage the reforms needed to strengthen the independence of the judiciary, bolster democracy and human rights, protect minorities, and combat corruption and cronyism, with the European Commission supervising the process and neighbouring EU countries providing the necessary expertise.

Given Europe’s looming demographic problems and the United Kingdom’s regrettable departure from the EU, a pool of highly skilled Ukrainians will be a favourable addition to the European workforce. And, as the war has dramatically shown, Ukraine’s EU accession will bring other benefits related to food security and defence capabilities.

It will be many years before Ukraine becomes an EU member, but the country’s candidate status is a strong morale boost in its existential war against Russia. The EU must now ensure that Ukraine eventually takes its place where it belongs—in the European family.

Europe’s fate is intimately linked to Ukraine’s survival

Russian President Vladimir Putin’s intentions in Ukraine are not in doubt. He wants to end its status as an independent political entity and incorporate its territory within the Russian Federation. In his opinion, achieving this goal would undo two great historical errors committed in the last century: first, allowing a Ukrainian republic to exist within the Soviet Union, and, second, allowing this republic to become an independent nation-state.

How likely is this outcome? In theory, the Russian army could slog brutally across Ukraine’s vast plains for many years, reducing its urban centres to rubble. But one lesson from the areas Russia has managed to occupy since 24 February is that it also would need to establish a harsh regime of repression, forced Russification and outright elimination of opponents. This would require a massive, widespread mobilisation of resources in Russia.

So far, Putin has been reluctant to order any such mobilisation, or even to speak in terms of war. In the four months since the invasion began, the Russian people have been told that there is merely a ‘special military operation’ in Ukraine. Additional army recruitment has largely come from Russia’s less developed areas, where high unemployment leaves young men with few alternatives.

In any case, intensified repression and increasingly hysterical propaganda would be necessary to sustain a wartime mobilisation within Russia. The Kremlin’s messaging would most likely focus increasingly on establishing a narrative making the case for a necessary, righteous war with the entire West, which will duly be described as a cohort of Nazis bent on destroying Russia. Mounting Russian casualties—which are already higher than from the decade-long Soviet war in Afghanistan—will be a problem, but if recruitment efforts steer clear of major urban areas, it might be manageable.

A fully mobilised Russia would be a country completely decoupled from the West. Since harsh sanctions will remain in place, Russian industry would be forced to climb down the technology ladder, putting a powerful brake on vast new oil and gas projects in the Arctic, where the Kremlin has staked the country’s economic future.

Russia would have to become dramatically more dependent on China. But it is unclear how long the Chinese government would play along with a ‘rescue Russia’ policy, nor is there any reason to believe that India would choose Russia over the United States as its technology partner for the future. As the Kremlin’s intentions in Ukraine become clearer, any remaining international support is likely to dwindle further. Putin has set his country on a course that is highly problematic, if not utterly catastrophic.

Meanwhile, with its recent decision to make Ukraine (and Moldova) a candidate for membership, the European Union has taken a huge strategic step that will have far-reaching implications in the years ahead. Whereas Putin radically escalated his efforts to eliminate Ukraine in February, the EU has now doubled down on supporting the country and helping it build a brighter future.

Of course, formal Ukrainian membership is not imminent. While Ukraine made some progress by implementing an extensive free-trade and association agreement with the EU in 2014, it still has a long way to go to meet all the requirements for membership. Nonetheless, by inviting Ukraine to join, the EU has committed itself to upholding the survival of the Ukrainian state in the face of the Russian onslaught. Apart from the military assistance now flowing in, this will require very substantial financial support for as long as Russia’s aggression continues. War is expensive.

Europe has made the right move. The unravelling and eventual elimination of a European state would threaten all Europeans’ security, not to mention undermining global stability and opening a Pandora’s box of other issues. Are there any other places in the vast space between the Vistula and Volga rivers where borders could be moved or eliminated, as they have many times before? Are there other states that could be eliminated from the roster of United Nations members? These are not idle questions. Putin has already indicated that he thinks as little of Kazakhstan’s sovereignty as he does of Ukraine’s.

The EU has made clear that it intends to stand firm in defence of existing states, recognising that the inviolability of borders is the foundation of European security and global order. It therefore must be firm in not recognising any Russian-occupied territory—including Crimea. It is now simply inconceivable that the EU will accept Ukraine’s violent dismemberment or elimination. The question, then, is whether Putin can agree to back down, or whether regime change or state collapse will be required to bring about a similar outcome. That is fundamentally where the aggressive war that Putin launched on 24 February is bound to lead.

China’s relentless export machine

China’s trade surplus hit an extraordinary US$292 billion in the first five months of the year—more than double its pre-pandemic level—and its aggressive pursuit of export markets is likely to become a flashpoint in a slowing world economy.

The Chinese export surge includes Australia, despite Beijing’s continuing campaign of illegal trade sanctions against Australian exports.

China’s exports to Australia over the last reported five months were up 44% from a year ago, while Australia’s shipments in the other direction were down 5%, despite soaring commodity prices.

There is no hint of a concerted Western response to China’s mercantilist strategy, which treats trade surpluses as a manifestation of national power. The World Trade Organization’s rules place no restriction on either the preponderance of state-owned enterprises in the Chinese economy or the subsidies China extends to its private sector, which are fuelling its export boom.

Donald Trump’s administration concluded that the WTO was the problem, not the solution, and sabotaged its ability to adjudicate trade disputes. It unilaterally embarked on a trade war with China, successfully forcing China to sign an agreement in 2020 committing to lift purchases of US goods.

Joe Biden’s administration has been unable to articulate a coherent strategy for managing the Trump legacy in its dealings with China. Although China has increased some US imports, it has fallen far short of its commitments, while China’s exports to the US have surged.

US exports to China in the first four months of this year were US$16 billion higher than they were two years ago as the Trump deal took effect, while China’s exports to the US were US$73 billion higher.

The Trump deal provided for a punitive escalation of US tariffs on Chinese goods if Beijing failed to fulfil its commitments. The Biden administration toyed with enforcement. Trade representative Katherine Tai said last October that not only would China be required to meet its commitments, but it would also have to reduce its ‘state-centred and non-market trade practices’ which had not been addressed by Trump.

However, the sharp rise of inflation this year has led the Biden administration to foreshadow the removal of tariffs on Chinese goods, some of which are scheduled to expire in July. There have been media suggestions of differences between Tai, who favours retaining tariffs, and Treasury Secretary Janet Yellen, whose over-riding concern with inflation is pressing for their removal. Tai’s promises of enforcement and action on Chinese state subsidies have come to naught.

Political pressure on the Biden administration to do something about Chinese inroads in the US economy will continue to mount. His electoral success in 2020 was founded in winning back the support from manufacturing workers in states like Pennsylvania and Wisconsin who had voted for Trump in 2016. If a slowing US economy over coming months results in rising unemployment and if Trump declares he will run again in 2024, those votes will switch back.

The European Union’s deficit with China has also risen by 50% over the past two years with trade figures for the first four months of this year showing a further blowout. The EU has a number of trade remedies at its fingertips: it is instituting a ‘climate border adjustment’, which allows it to impose taxes on energy-intensive imports that haven’t paid for their carbon emissions and is introducing a scheme to counter the use of trade for economic coercion. The latter would enable the EU to impose retaliatory barriers to trade and investment. Although these measures wouldn’t be legal under the WTO rules, the EU argues that the economic coercion is itself illegal and hence justifies going outside the WTO. There are also moves to strengthen the EU’s human rights restrictions on trade and investment.

Australia is in an invidious position: as a mid-sized nation, it lacks the power of the US or EU to retaliate against Chinese coercion and sees the WTO as its best bet. Canberra is counting on the WTO to find in its favour on the disputes it has lodged over Chinese tariffs on Australian barley and wine. Both Australia and China are signatories to an alternative interim dispute mechanism for the WTO.

At last week’s WTO meeting of trade ministers in Geneva, Tai agreed to a motion requiring members to come up with a reform proposal for the WTO, including its ability to resolve disputes, by the time of the next ministerial meeting, which is likely to be held late next year.

However, the US is yet to present any package of reforms it would find acceptable and there are some significant hurdles. China will never agree to any proposal that allows the subsidies at the heart of its industry policy to be challenged.

A new study by the Center for Strategic and International Studies highlights the massive dimensions of the industrial subsidies that are supporting China’s export machine. It estimates that the Chinese government is spending 1.7% of GDP on industry support, mainly through cheap credit to state enterprises and more general direct subsidies. That is more than it spends on defence and is equivalent to over US$400 billion at purchasing power exchange rates. It is more than twice as much in dollar terms as the US devotes to industry support and more than twice as much as a share of GDP as the next most aggressive industrial nation, South Korea.

The trade policy that the Australian Labor Party took to the election emphasises the importance of diversifying markets for Australian exports but is silent on China’s fast-rising share of Australian imports, which is heading for 30%, up from a quarter before the pandemic.

The Labor policy emphasises strengthening trade relations in the region, with early ministerial visits to India, Indonesia, Japan, South Korea, Malaysia and Vietnam. India and Indonesia will receive particular focus.

Japan has been a valuable trade partner; its share of Australia’s exports, which had dropped below 10% in late 2020, recently reached 18%, its highest since 2015, helping to compensate for the Chinese trade bans.

The risk for Australia is that, as China’s trade surpluses with the US and the EU become politically toxic, deals are struck that, like Trump’s 2020 deal with China’s Xi Jinping, inflict collateral damage on Australia. The Trump deal saw the US take Chinese markets from Australia in beef, barley and cotton.

Getting serious about European defence

Russia’s war in Ukraine has forced the European Union to address longstanding strategic challenges. The most immediate task is to end Europe’s dependence on Russian energy imports, and this process is now underway, with a gradual oil embargo that will reach 90% by the end of the year.

More broadly, Europe must also develop an effective security and defence policy, as well as the capabilities required to implement it. While this ambition itself is not new, there is a fresh impetus for it. Russia’s war makes clear that we need a step change toward greater pooling of defence investments. That was the main conclusion from the European Council’s discussion about defence this week.

No two political problems are identical. Sometimes, a challenge seems so new and unprecedented that it cannot be addressed until there has been a proper assessment of a changed landscape. And sometimes, the solutions are known but the resources for them are lacking. The European security and defence debate falls into a third category: the diagnosis and prescriptions are clear, but there has been a deficit of political will.

We have known for years—even decades—that European governments have been spending too little on defence, and in too fragmented a manner. The result is that we lack the military capabilities to guarantee our own security or serve as a capable partner for NATO. We need to spend more, and we need to do more of that spending together.

Over the years, many European politicians, institutions, defence ministries, think tanks and others have issued reports and proposals calling for more and better defence spending. These exhortations have reflected a clear and firm consensus among experts on the issue. In 2004, the EU created the European Defence Agency to support member states with joint research, development and procurement projects.

But many countries cut their defence spending following the 2008 financial crisis, reducing the shares of their budgets devoted to collaborative security investments. Since then, governments have too often paid lip service to joint spending while continuing to put national procurement first (often for political reasons, such as to support domestic industries and employment).

The net result has been dramatic. Between 2009 and 2018, member states’ cuts amounted to an aggregate defence underspending of around €160 billion ($238 billion). Worse, many others around the world have raced ahead. In the last 20 years, EU combined defence spending increased by only 20%, compared to 66% for the United States, almost 300% for Russia, and 600% for China. Even more alarmingly, Europe reached a new low in 2021, when only 8% of equipment spending went towards collaborative investments—a far cry from the 35% that EU member states themselves have set as a target.

This underspending and lack of collaboration is costing EU countries (and thus taxpayers) tens of billions of euros per year, because of redundant spending and inefficiencies. But it doesn’t have to be this way. It is within our own power to change course, and we already know the way. Through the strategic compass, EU institutions and all 27 member states have drawn up a roadmap. We have tools and frameworks in place—starting with the Permanent Structured Cooperation and the European Defence Fund—to help member states pursue research, development and investments in a more coordinated manner.

But other pieces still need to fall in place. We must provide financial incentives for joint procurement and move towards more strategic programming. We also need to strengthen the EU’s defence industrial and technological base by supporting research and development and harnessing the potential of disruptive new technologies. As I told European leaders this week when they endorsed this approach, both the European Commission and the European Defence Agency can help with coordination.

Yes, it is a cliché in European politics to say that we lack only the political will to use the tools at our disposal. But clichés are generally true. We Europeans tend to make tough decisions only when we have tried everything else and are facing an acute crisis.

Those conditions have clearly been met. We are watching Russia wage a brutal war of aggression against Ukraine—one that has underscored Europe’s own vulnerabilities, revealing longstanding capability deficits and new needs (such as to refill our depleted stocks). And this crisis comes on top of many other threats, both in our own neighbourhood and beyond. European interests are being challenged in all strategic domains, including cyber, maritime and space.

We need to develop the means to protect ourselves in a dangerous world. That will require not just more defence spending but better defence spending. To ensure our collective security, we must invest more together.

Manipulated election entrenches Hungary’s autocracy

Hungarian Prime Minister Viktor Orban has just won a fourth term. In a democracy, such a victory would reflect the decision of the voters to whom the incumbent is accountable. But in Hungary, the European Union’s only full-blown autocracy, the outcome merely reflects the incumbent’s manipulation of the electoral process. With Orban securing his fourth consecutive supermajority, Hungary has clearly become a country where elections are decided before polling day.

To be sure, classic electoral fraud through falsifying the vote count was probably limited, owing to organised civil-society efforts to ensure that opposition delegates were present in every polling station. If there was massive fraud, it would have been in the mail votes from abroad, many of which were collected by organisations connected to Orban’s party, Fidesz. The discovery of burned opposition ballot papers in Romania helps to explain why over 90% of mail-in votes have favoured Fidesz in the last two elections.

This was not the first manipulated election in Hungary. After Fidesz won its first supermajority in 2010, it changed the electoral law unilaterally to boost its own future results (through gerrymandering and new rules awarding extra seats for big wins in individual districts). With these changes in place, Fidesz retained its supermajority in 2014, even though it received 8% less of the vote than it had in 2010.

Changing the rules has since become the party’s modus operandi. Its amendments to the electoral law now number in the hundreds; the latest were adopted just months ago. Owing to the electoral system’s skewed rules, Fidesz has secured 68% of parliamentary seats with 53% of the vote.

On top of this, Fidesz won its simple majority of the popular vote by leveraging the full power of the state on many fronts. In the month before the election, the government disbursed cash payments to households totalling around 3% of GDP, including tax refunds to 1.9 million employees, an extra month of benefits to 2.5 million pensioners and large bonuses to 70,000 members of the police and armed forces.

Second, pro-government forces spent eight times more on political ads than the opposition did, in what appears to have been a violation of the country’s spending cap. And the government itself spent freely to boost Fidesz’s votes under the guise of public service announcements, and by scheduling a homophobic ‘child protection’ referendum (a central Fidesz campaign theme) to coincide with the election.

Third, Fidesz continued to deploy public media as a propaganda machine. The basic strategy used this time was no different from what the Organization for Security and Co-operation in Europe reported before the 2018 election, when 96% of public news coverage about the government was positive, and 82% of its coverage about the opposition negative. Since 2018, virtually no opposition politicians have been invited to appear on the public media’s political shows. During the campaign, each party with a national list was granted just five minutes of airtime to present their party platform.

Meanwhile, public and private Fidesz-controlled media outlets flooded audiences with fake news and slander about Peter Marki-Zay, the candidate for prime minister representing a united bloc of opposition parties. Fidesz-friendly media repeated ad nauseam that the opposition, if elected, would privatise healthcare, allow gender reassignment surgeries for pre-school children and bring Hungary into the war in Ukraine.

Initially, the war seemed to be an issue that would divide the Fidesz electorate: while Fidesz voters have been conditioned with pro-Vladimir Putin and Eurosceptic rhetoric for the past decade, the inflow of tens of thousands of refugees, among them Ukrainian-Hungarians, has aroused much sympathy. The government’s solution was to push a narrative mixing fear and selfishness. The opposition was labelled ‘warmongering’, whereas Orban stood for prudence and restraint. He has promised that ‘Hungarian families will not pay the price of war’, meaning that he will oppose any proposal that would endanger Russian gas supplies and his own government’s ‘utility price cuts’.

This narrative exploits the morally unconstrained collective egoism that is a hallmark of populism. While NATO and its Central and Eastern European members (besides Hungary) have backed Ukraine unreservedly, Fidesz voters are absolved from showing solidarity with those in need. The moral obligation to support Ukraine is further undermined through the parroting of Kremlin propaganda, including denunciations of Ukrainian President Volodymyr Zelensky, whom Orban has now described as an ‘opponent’.

The election result reflects a highly polarised society, a problem exacerbated by the fact that many Hungarians, especially in rural areas, are ‘informed’ wholly by Fidesz-controlled media. Owing to the scale of media capture, the electoral system’s structural biases and other factors, the 2022 Hungarian election cannot be considered ‘free and fair’, or even ‘free but not fair’. It was wholly manipulated, and while Orban’s government is ‘elected’, it is not democratic.

Hungary’s government will continue to present a unique challenge at home and abroad. Orban has described his role in the EU as ‘the sand in the gears of the machinery, the stick caught in the spokes, the thorn in the flesh’. And his close, corrupt relationship with Putin’s Russia represents an even greater security risk to Europe than it did in the past. The question of what the EU can and should do about autocratic member states will be as pressing as ever.

That said, electoral manipulation in Hungary has not yet reached the same level as in Russia. This year’s election was not completely hopeless for the opposition, which will need to consider why its own vote count fell by a third since 2018. Opposition MPs now face a difficult dilemma: to accept their own electoral mandates would confer a veneer of legitimacy to an autocracy, but to boycott the new parliament would mean forfeiting what little visibility they have.

How the West paved the way for Russia’s invasion of Ukraine

Contrary to what Russian President Vladimir Putin has claimed and what political scientists like John Mearsheimer believe, NATO enlargement did not cause Russia’s invasion of Ukraine. Nor did a sudden descent into irrationality by Putin, who, starting with his Munich Security Conference speech back in 2007, has long telegraphed his irredentist intentions. The key enabler of Russia’s invasion was European division and ambivalence, which left a void where there should have been a strategy.

The contest for Ukraine commenced in early 2008. With oil prices high and Putin’s rule entrenched, Russia began to turn to its near abroad. The war in Georgia in the northern summer demonstrated the Kremlin’s resolve and ambition, but the strategic prize was always Ukraine. At the same time, the West moved to attract Ukraine into its orbit, with the launch of the European Union’s Eastern Partnership and US encouragement for a NATO membership bid.

From this point on, tensions over Ukraine were always likely to mount. But over the next 14 years, the EU and its member states pursued a dangerously confused set of initiatives. Their failure to align legal, security and financial policy created the context in which war became possible.

In legal terms, the EU pursued a strategy of attraction. Through its Eastern Partnership, the union encouraged slow but steady convergence of Ukraine’s legal, political and economic order towards European standards. Making its geopolitical intentions clear, the EU emphasised that Ukraine would have to choose between Brussels and Moscow: It could not simultaneously join Russia’s Eurasian Economic Union and sign an association agreement with the EU.

On security policy, by contrast, division reigned. While the United States, the United Kingdom and Poland had long favoured Ukraine’s NATO accession, Germany, France and Italy were opposed. From NATO’s Bucharest summit in April 2008 to the training and supply missions that followed Russia’s invasion of Crimea in 2014, the West continued to send mixed signals. These were too weak to deter Russia, yet too threatening for the Kremlin to ignore. Ambiguity became a formula for escalation.

Security ambiguity alone may not have been fatal, had Europe pursued an effective financial strategy to complement its legal approach. An economically and financially stable Ukraine might have continued to gravitate towards the EU’s orbit, up to the point where NATO accession would have been bold but feasible, or perhaps even unnecessary. Domestic unrest, civil war and with it the moment for Russia’s invasion might never have come.

But the opposite occurred. At two crucial points when Ukraine most needed financial support, Europe left it out in the cold.

First, like most of Eastern Europe, Ukraine received scant attention during the 2008 global financial crisis. With half of all Ukrainian pre-crisis loans denominated in foreign currencies, a dollar or euro swap line would have gone a long way towards preventing a financial collapse. But while the US was providing a dollar swap line for Mexico, the eurozone was unwilling to extend similar assistance to EU members Poland and Hungary, let alone to Ukraine.

Desperate for dollars and euros, Ukraine had no choice but to turn to the International Monetary Fund and austerity. This fuelled a 15% decline in GDP, an inflation rate of 22% and an unabated crisis in Ukraine’s steel industry, which helped the pro-Russian Viktor Yanukovych win the 2010 presidential election. Yanukovych immediately turned to the Kremlin for financial support, trading an extension of Russia’s lease on the Sevastopol naval base in Crimea for a 30% reduction in the price Ukraine paid for Russian gas.

Second, in 2013, Ukraine was hit by the global fallout from US monetary tightening. When then-Federal Reserve chair Ben Bernanke signalled a tapering of the Fed’s quantitative easing program, dollars rushed out of emerging markets and back to the US. Ukraine’s borrowing costs jumped from 7–8% to more than 11%. At the same time, as Putin observed Ukraine inching ever closer to the EU’s legal order, he imposed sanctions on Ukrainian exports, starting with the now quaint ‘chocolate war’. By late 2013, Ukraine was facing insolvency and recession.

Recognising the opportunity, Russia made Ukraine a strategic offer: US$12 billion per year of subsidies and economic benefits if the country abandoned the association agreement—or an escalation of sanctions, should Yanukovych sign the pact.

Europe’s economic and financial experts failed to register either Russia’s seriousness or Ukraine’s predicament. German officials estimated the impact of potential Russian sanctions at a puny US$3 billion per year, a fraction of Ukraine’s figure—no doubt strategically inflated—of US$160 billion per year. Blind to facts on the ground and to the geopolitical consequences of its penny-pinching, the EU made a counteroffer of €610 million (US$670 million), less than a tenth of Russia’s proposed assistance.

Pressured by the Kremlin and low-balled by the EU, Yanukovych abandoned the association agreement, instead accepting further gas discounts and a US$15 billion concessionary loan from Russia. This, too, might not have spelled war had Europe’s rejection been wholesale. But, while Yanukovych was trying to navigate Europe’s financial stinginess, the Ukrainian people had been won over by the EU’s legal attraction.

Whether a bold financial offer would have been realistic at the time, given the EU’s internal divisions and corruption in Ukraine, is open to debate. Either way, the accumulated contradictions gave rise to the Euromaidan protests, which ousted Yanukovych but paved the way for Russia’s annexation of Crimea, its incursion into eastern Ukraine’s Donbas region, and today’s war. In what was surely an understatement, then-European Parliament president Martin Schulz said, ‘I think we underestimated the drama of the domestic political situation in Ukraine.’

Europe’s offer to Ukraine was legally attractive, militarily ambivalent and financially mean. It was too expansive for Russia to be at ease, too weak on defence to provide effective deterrence and too penny-pinching to keep fickle Ukrainian elites on a pro-EU course when it mattered most. Devoid of an overall strategy, Europe’s approach was a recipe for disaster.

Europe’s return to the geopolitical jungle

In his 1960 book, Crowds and power, Elias Cannetti observed that paranoid autocrats who identify as ‘survivors’ will surround themselves with empty space so that they can see any approaching danger. The only dependable subjects are those who will allow themselves to be killed. With each execution that the dictator orders, he accrues ‘the strength of survival’.

How better to describe to Vladimir Putin? Russia’s autocrat prefers to sit alone at the end of a long white table—issuing ultimatums, launching invasions and ordering the arrest (or assassination) of his political opponents. Putin has built his power through bloody wars in Chechnya, Georgia, Syria and now Ukraine. His survival depends on ending others’ existence.

But now, Putin has triggered others’ own survival instincts. Ukraine’s actor-turned-president, Volodymyr Zelensky, has emerged as the hero who embodies his nation’s existential struggle. NATO has been revived from its creeping ‘brain death’. And the European Union has suddenly been transformed from an inward-looking peace project into a community of sovereignty and security. As one senior European diplomat told me this week, ‘Russia is too big and too connected to us to be allowed to behave like a bully that is freed from all norms. Either our response to this war puts a stop to it or our world will collapse.’

The crisis that Putin has created for Europe is not only about security. It is philosophical. The European project was built on the idea that former enemies could become friends through economic, legal and (eventually) political interdependence. From the outside, the war in Ukraine looks like a 20th-century military intervention. But this conflict is not unfolding across an iron curtain. It involves parties that are totally bound up with one another, and it is being waged not only with planes and tanks, but also with sanctions, supply chains, financial flows, people, information and digital bits.

This hyper-connectedness makes a stable peace impossible. Europe will have to be prepared for continuous disruption and disorder, at least as long as Putin remains in power. In rethinking the European order, policymakers must grapple with four sets of questions.

First, where should the borders of Europe and NATO lie? For years, when Europeans have thought about borders, it has been in the context of removing them internally (or relaxing them to recognise an independent Kosovo). The precise edges of the European Union and NATO were somewhat ambiguous. But now there will be a big debate about who is in and who is out.

Crystallising these distinctions will result in a slightly smaller but more consolidated West. Sweden and Finland may join NATO, but there will be less tolerance for countries that try to straddle the fence: Hungary, Turkey and Serbia will have to choose a side. There will also be a big debate about countries that want to join the EU but lack the qualifications for membership: Ukraine, Moldova, Georgia, the western Balkans. Some European diplomats have begun to talk of a multi-speed Europe, whereby these countries might gain limited access to the single market, the energy union or the Green Deal.

The second question is whether Europe is ready for a regional order based on a balance of power, rather than on laws and institutions. The old vision of an order with Russia has been replaced by one against Russia, with no common institutions or trust. There will be a major push towards rearmament, a process that has already begun in Germany and Denmark. There will also be a new debate about military bases and nuclear weapons, which will divert European attention (and probably resources) away from global multilateral engagement.

Third, does Europe have a political basis for building economic and societal resilience? In connectivity wars—conflicts between interdependent powers—the keys to success are patience and the capacity to endure pain. While there is currently much public support for sanctions against Russia, this may not last if oil and gas prices continue to soar, precipitating a recession.

After creating a massive recovery fund to prevent Covid-19 from ripping the EU apart, European institutions are now considering new solidarity mechanisms to help consumers cope with soaring energy prices and other knock-on effects from the sanctions. One way or another, Europe will be restructuring its energy markets, supply chains and finances, with major global implications.

The last big question is whether Europe is part of a regional order or a global one. Until a few weeks ago, Europe was seen as a geopolitical sideshow to the defining contest of the 21st century: the battle to control the Indo-Pacific. But the re-emergence of war on the continent and the tightening partnership between China and Russia have put Europe and ‘Eurasia’ back at centre stage. As Jeremy Shapiro of the European Council on Foreign Relations argues, NATO will now need to link up with Asian democracies, ‘coordinating policy and even force dispositions’ across the European and Pacific theatres.

Many observers have pointed out that Putin, with his historical fantasies and fears of encirclement, is living in a different world. But this metaphor belies the fact that our fates are intertwined. It doesn’t matter what world (or time period) Putin thinks he is living in. As long as he’s in the Kremlin, Europe is not safe.

European leaders will need to reconcile the world they want to live in with the one that Putin has foisted upon them. Some will say that progress towards a rules-based, ecologically conscious world was always illusory. But I continue to believe that the pooling of sovereignty among Europeans, the development of supranational regulatory regimes, and cooperation on technology, environmental protection and health represent huge advances for our civilisation.

Geopolitics in Eurasia has become a competition for survival. The ultimate question, then, is how to maintain the values of Kantian perpetual peace within the EU while also defending against the threats from the jungle outside.

Chinese market won’t dampen the effects of economic sanctions on Russia

Russia and China are making much of their strategic partnership as a counterbalance to their stresses with the West, but the European Union is still much more important economically to Russia than is China, and Australia comprehensively trumps Russia as a supplier to China.

There’s no realistic prospect of China becoming an alternative market to Europe for Russia in the face of fresh sanctions targeting its exports.

Nor does the obviously warm relationship between Russia’s President Vladimir Putin and China’s President Xi Jinping bring any relief from China’s continuing dependence on Australia for raw materials.

While the numbers have bounced around from one year to the next, particularly during the pandemic, the EU and the UK combined take a little over a third of Russia’s exports compared with China’s 15%.

Energy is by far Russia’s biggest export to Europe. It delivers 40% of Europe’s gas supplies and about 27% of its oil. Around 70% of Russia’s oil exports go to Europe, compared with 18% to China.

The highlight of the meeting between Xi and Putin ahead of the Beijing Winter Olympics was a deal under which a second pipeline would be built from Siberia to supply China with an additional 10 billion cubic metres a year of gas later this decade.

Russia currently supplies China with 38 billion cubic metres a year; however, Russian gas sales to the EU are five times greater. The pipeline would have just a fifth the capacity of the Nord Stream 2 pipeline under the Baltic, from Russia to Germany. The project has been completed but was awaiting certification by Germany before deliveries could start. Following Russia’s actions this week in eastern Ukraine, German Chancellor Olaf Scholz announced that approval of the pipeline had been halted.

Russia’s finance minister, Anton Siluanov, said last week that Russia would reroute Europe’s gas supplies elsewhere if sanctions were imposed, but there are neither pipelines nor ready alternative markets.

Russia’s economic relationship with China bears some resemblance to Australia’s, although it’s much smaller in scale. It sells minerals and food and buys manufactured goods. For both Russia and Australia, 95% of goods exports to China are either primary goods or lightly processed products like aluminium and wood pulp.

One exception for Russia has been its supply of military equipment to China, although this trade is understood to be waning as China becomes a major arms supplier to world markets itself.

China’s exports to both Russia and Australia are dominated by mobile phones, computers, clothing and machinery. Russia gets more Chinese motor vehicles and fur goods than Australia, but both markets are small from China’s perspective, ranking 12th and 13th among its export destinations. Australia accounts for 2.1% of China’s exports and Russia slightly less at 2.0%.

Australia is much more important as a supplier of essential inputs to the Chinese economy, accounting for 6.6% of China’s goods imports in 2020, making it the fourth largest supplier behind Japan, Korea and the US. Russia ranked ninth with 3.3% of its imports.

The burgeoning relationship between Russia and China may, at the margins, come at some cost to Australia. Australia’s gas sales to China have remained solid amid the campaign of economic coercion targeting many of Australia’s other exports. China overtook Japan as Australia’s principal LNG customer last year, with deliveries rising by 7.1%.

However, both Russia and the US have been boosting their gas sales to China and may take market share over coming years. For the moment, LNG is in short supply globally and anything not sold to China could readily be placed elsewhere, particularly in Europe.

Russia is also an iron ore producer. Although it uses most of its output in its own steel mills with exports of only around $2 billion, it has large reserves and Chinese exploration teams are active in Siberia.

A 2020 report by the US-based Center for International and Strategic Studies notes that the trade routes between Russia and China are relatively underdeveloped. Despite the two countries sharing a 4,000-kilometre border, there are only a few rail crossings and just 25 road crossings in total. China’s Belt and Road Initiative includes projects for upgrading infrastructure along these routes.

China and Russia are both parties to a trade agreement through the Russia-sponsored Eurasian Economic Union, which incorporates Armenia, Belarus, Kazakhstan and Kyrgyzstan along with Russia in a common customs union. But the trade agreement with China, which came into force in 2019, doesn’t include any tariff reductions and is focused on harmonised customs procedures. It did include some sectoral plans aimed at fostering joint investment projects.

Actual investment flows between Russia and China are weak. Chinese investors are responsible for just 1.6% of foreign direct investment in Russia, compared with 25.4% coming from members of the EU, plus another 8.6% from the UK and 6.4% from the US. Russia is also a very minor investor in China; data from the UN Conference on Trade and Development shows it’s responsible for just 0.4% of all FDI in the country (Australia’s share, by contrast is 1.1%).

Russia became a member of the World Trade Organization in 2012 but has never made its presence felt in international trade negotiations. Other than deals with former members of the Soviet Union, it doesn’t have any comprehensive bilateral trade agreements.

The 5,400-word partnership document released following the meeting of Putin and Xi was mainly focused on strategic rather than economic issues. Where it did touch on trade, it reflected China’s agenda, declaring support for the multilateral trading system centred on the WTO and opposition to ‘unilateral approaches and protectionism’. It criticised the implementation of ‘unilateral sanctions, and extraterritorial application of jurisdiction, as well as the abuse of export control policies’.