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Foreign investment down in Europe, Germany hit hard

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Foreign direct investment (FDI) in Europe fell 4% last year, while Germany saw a sharp 12% drop in projects due to the economic slowdown and concerns over energy security, according to a study by professional services group EY.

This was the first annual decline in the number of European FDI projects recorded since the COVID-19 pandemic, following increases in both 2021 and 2022, Reuters reported. Foreign investment in the region is 14% lower than at its peak in 2017.

Companies surveyed cited volatile energy prices, turbulent domestic politics and a constant barrage of new European regulations in areas such as artificial intelligence, sustainability and data protection among their concerns.

Julie Teigland, EY EMEIA managing partner, said the pace of regulations coming into force was creating “daunting compliance challenges”, particularly for smaller businesses.

“The last 12 months will probably go down as the biggest period of regulation in EU history,” she said. “We are not saying regulation is bad … but it will be important to give SMEs time to cope,” Teigland added.

European Union leaders agreed in principle this month on a wide-ranging set of reforms aimed at reviving the bloc’s economy, but differences have emerged over how to free up the money needed to pay for them.

They ranged from deepening the EU’s single market to boosting research and creating a single energy market.

In the EY survey, France topped the foreign investment list despite a 5 per cent drop in investment projects, but these projects still created 4 per cent more jobs than the previous year.

The UK overtook Germany into second place with a 6 per cent increase in FDI projects in 2023. This follows a decline in the previous year, partly due to concerns over Brexit-related trade disruption and labour shortages.

The war between Russia and Ukraine hit FDI in neighbouring countries hard: Romania fell by 13 per cent, Finland by 32 per cent, Latvia by 31 per cent and Lithuania by 40 per cent.

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U.S. sets up new ‘air defence base’ in Poland

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The United States inaugurated a new air defense base in northern Poland on Wednesday, marking a significant move in NATO’s defense strategy. Polish President Andrzej Duda stated that the base strengthens Poland’s security as a NATO member, especially as the war in Ukraine continues.

Located in Redzikowo, a town near the Baltic coast, the base has been in development since the early 2000s. Amid concerns following Donald Trump’s election, some NATO members are uneasy about future commitments. However, Polish officials emphasize that the consistent support of the base project across U.S. administrations underscores the enduring military alliance between Poland and the United States.

“The United States is the guarantor of Poland’s security,” Duda asserted, underscoring that the presence of U.S. troops highlights Poland’s sovereignty and reinforces that it is “not in Russia’s sphere of influence,” despite its historical ties as a socialist state until 1989.

On the other side, Kremlin officials described the base as an attempt to “contain Russia” by positioning American military infrastructure closer to Russian borders.

The Redzikowo base is a vital component of NATO’s Aegis Ashore missile defense shield, designed to intercept short- and medium-range ballistic missiles. Other key elements of this NATO defense shield include a base in Romania, U.S. Navy destroyers stationed at Rota, Spain, and an early warning radar located in Kürecik.

Russia has long viewed the base as a threat, initially opposing the project in 2007. NATO maintains that the shield is “purely defensive” and asserts that it’s not targeted at Russia.

According to military sources cited by Reuters, the Redzikowo system currently targets missiles from the Middle East. Redirecting the radar to intercept missiles from Russia would require a policy shift and complex procedural adjustments.

Polish Defense Minister Wladyslaw Kosiniak-Kamysz recently called for expanding the defense shield, stating that Warsaw would discuss further plans with NATO and the United States.

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German think tank DGAP: Germany and Europe must build military strength in the Asia-Pacific region

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Germany’s leading foreign policy journal, Internationale Politik, calls for significant rearmament and militarization efforts to strengthen European influence in the Asia-Pacific region.

According to Internationale Politik, published by the German Council on Foreign Relations (DGAP), European nations should rapidly expand their armed forces and take control not only of their own continent but also, “if necessary, the Mediterranean, the Red Sea, and the Strait of Bab el-Mandeb,” to “reduce reliance on U.S. troops in Europe.”

If successful, the journal argues, the United States would retain adequate military capacity “in the event of a war in the Indo-Pacific.” In such a scenario, European nations should also prepare for a potential conflict with China and enhance their defense industrial capacity to replenish depleted U.S. munitions if required.

The ‘Asianization’ of security architecture

Calls for a stronger German and European military presence in the Asia-Pacific are driven by the intensifying power struggle between the West and China and the increasing inclination of Asian nations to pursue independent military policies rather than aligning with declining Western dominance.

Felix Heiduk, director of the Asia Research Group at the German Institute for International and Security Affairs (SWP), describes this trend as the “Asianization” of regional security architecture.

Indonesia exemplifies this shift. Since 2007, Indonesia has conducted regular military exercises with the United States, the latest spanning August 26 to September 6, 2024. However, Jakarta has also expanded ties with Russia. During a recent meeting with President Vladimir Putin, Indonesia’s current president and former defense minister, Prabowo Subianto, expressed that he sees Russia as a “great friend” and intends to strengthen relations with Moscow.

Last week, Russia and Indonesia held their first joint military exercises, which Jakarta considers a demonstration of its independent foreign and military policy.

The ‘Indo-Pacific’ as a Japanese-American concept and Germany’s role

The concept of the Indo-Pacific frequently underpins arguments for expanding military activities into the Asia-Pacific. In Internationale Politik, Heiduk clarifies that this term is “neither geographically neutral nor value-neutral” but rather “purely political.”

Heiduk explains that the concept of a “Free and Open Indo-Pacific”, which the U.S. adopted from Japan, aims to encircle China and maintain U.S. hegemony in Asia. He further notes that Germany is also entangled in this geopolitical struggle.

Heiduk points to Germany’s Asia-Pacific military deployments in 2021 and 2024, along with maneuvers involving German air and ground forces in Australia and other countries in the region. These actions align with Berlin’s official Indo-Pacific Strategy—a conflict framework Germany has adopted in alignment with the U.S. in its great power struggle with China.

Europe’s Need to Rebuild Its Land Armies

Max Bergmann, an expert from the Center for Strategic and International Studies (CSIS) in Washington, illustrates the pressure for greater militarization in the Asia-Pacific in a recent article for Internationale Politik.

Bergmann describes European nations as lacking “hard power,” noting that European armies have been underfunded for two decades and that rebuilding ground forces should be the priority. He argues that while Britain and France possess advanced weapons systems, including anti-submarine capabilities, their forces are “too thinly deployed.”

While Russia remains the immediate military priority for Europe, Bergmann sees a long-term role for European security in the Indo-Pacific.

Reducing the U.S. military rresence in Europe

The CSIS expert suggests six strategic steps Europe can take to reduce U.S. military presence.

The first step, according to Bergmann, is for Europe to focus on securing the continent, the Mediterranean, and, if needed, the Red Sea and Bab el-Mandeb. This would allow the U.S. to concentrate fully on the Indo-Pacific if war broke out in the region.

Bergmann notes that in such a conflict, the U.S. could dedicate its full military production capacity to support Indo-Pacific logistics, but only if Europe is militarily fortified.

Beyond the ‘third way’ for Europe

Bergmann proposes additional diplomatic and security roles for European states. He advocates strengthening relations with countries like Vietnam, which have limited ties with the U.S. However, he emphasizes that Europe should not pursue a “Gaullist third way” between the U.S. and China since European interests align closely with U.S. strategic interests.

Finally, Bergmann recommends that European states establish stronger military-political and arms-industrial partnerships within the Asia-Pacific and, ultimately, bolster their own military presence in the region. The most effective way to achieve this, he suggests, would be to organize a European naval mission under the EU flag to coordinate all European naval activities in the Asia-Pacific.

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Green light from CDU for debt brake reform

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Friedrich Merz, leader of Germany’s conservative Christian Democratic Union (CDU), announced on Wednesday that the constitutional debt brake, which limits public deficits to 0.35% of Gross Domestic Product (GDP), could be open to reform under certain conditions.

Merz, the frontrunner to become Germany’s next chancellor after the collapse of the country’s “traffic light” coalition, has previously argued that Germany should adhere to the constitutionally guaranteed debt brake, a measure introduced by his party under Angela Merkel in 2009.

The debate over debt brake reform within the CDU was reignited this year by Berlin’s conservative mayor Kai Wegner. Several powerful CDU leaders from regional governments have also supported the reform push, as these states face more constraints than the federal government and lack the flexibility for new borrowing.

Merz: Revision possible if borrowing is for investment

Pressure is mounting within the party, with CDU state premiers urging Merz to include debt brake reform plans in the campaign for the early elections on 23 February.

Speaking at an event on Wednesday, Merz stated: “Of course, reform is possible. The question is: why? To what end? What would be the result of such a reform?”

Merz emphasized that he would not support reform aimed at increasing consumption or social policy spending. However, he suggested that if additional borrowing were used to increase investment, “then the answer could be different.”

According to the Greens, the only way out of the crisis is a revision of the debt brake

Merz noted that the debt brake was a “technical issue” and stated that he did not wish to engage in the discussion at that moment. Later, a source close to the CDU leader told Reuters that Merz had no immediate plans to reform the debt brake.

However, Bruno Hönel, a member of the Bundestag’s budget committee from the Greens, argued that if Merz assumed power, the debt brake would be reformed immediately, pointing out that the budget could not be financed without borrowing during such a crisis.

Hönel stated, “If you want to work with the budget in a forward-looking way, there is no other way than to reform the debt brake.” He also noted that 80 billion euros would be needed to meet NATO’s 2% defense spending target by 2028, nearly 30 billion euros more than the draft budget for 2025, which currently envisions defense spending of 53 billion euros.

Traffic light coalition collapses over debt brake debate

The debt brake was a key factor in the collapse of the coalition, leading to calls for early elections.

Christian Lindner, leader of the fiscally conservative Free Democrats (FDP), who was dismissed as finance minister last week by Social Democrat Chancellor Olaf Scholz, claimed that Scholz had pressured him to suspend the debt brake.

Suspending the debt brake in an emergency, citing special circumstances, is possible with a government majority. Germany reinstated the debt brake in 2024 after a four-year suspension to allow for extra spending on the COVID-19 pandemic and the energy crisis.

CDU’s sister party CSU opposes reform

However, reforming the debt brake requires a two-thirds majority in both the Bundestag and the Bundesrat.

The CDU premiers from the eastern states support the debt brake reform, while Markus Söder, the leader of Bavaria’s CSU, opposes it. Söder emphasized that “absurd extra spending” must be cut first.

Before discussing the debt brake, Söder argued that the fiscal equality of federal states must be addressed, referring to Germany’s income redistribution system.

The wealthy state of Bavaria recently had to transfer over €9 billion to other states. “This cannot go on,” Söder declared.

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