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Quo Vadis World Economy-III: The EU’s test with the interventionist state

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Both sides of the Atlantic reacted differently to the 2008–9 financial crisis. While the US and UK were pouring vast amounts of money into the market through enormously large rescue packages to bail out big banks. Evidently, this is a policy separate from the neoliberal doctrine of ‘fiscal discipline.’ On the other hand, Germany-led EU went for the neoliberal way. It did not only pursue the austerity measures that sparked social tensions throughout the continent and led to the rise of left and right populisms but also forced anti-austerity countries to implement them.

Now, while the ‘post-neoliberalism’ is being discussed, the United States is pursuing “protectionist” economic policies and seeking to involve its European and Asian allies in its struggle against China (and Russia). As a result of being severed with inexpensive Russian energy, the Inflation Reduction Act (IRA) and the CHIP Act are fueling the EU’s concerns about deindustrialization. On the one hand, indebted and having dependent competitiveness on state interventions, Southern and Eastern Europe and the richer Northern countries, not in favor of rescuing the poorer with joint EU loans, on the other, Brussels is awaiting much more challenging days.

Letter of objection to the European Commission

The European Commission has received a letter signed by Austria, Czechia, Denmark, Estonia, Finland, Ireland, and Slovakia.

Not signatories to the letter, Germany, Belgium, and the Netherlands also oppose the overall concept. The letter raises concerns about a proposed joint fund to support and shield the green industry from US subsidies. Instead of looking for new money, the letter demands, existing loan capacity should be utilized.

Only around 100 billion euros of the total of 390 billion euros of the post-pandemic recovery fund have been used, the seven countries recalled.

Central banks against governments

The tension between governments and central banks, which increase interest rates and employ monetary tightening to focus on ‘fighting inflation,’ is a prime illustration of the contention.

However, the epidemic years were a glorious time: The IMF, the World Bank, and national central banks all issued statements urging governments to “spend as much as you can.” It is believed that at that period, the United States pumped more than $2 trillion into the market via bond purchases and monetary expansion. During the same period, the EU helped the member countries stay afloat through joint borrowing and joint funds.

Now the disparity is widening, and it seems to be one of the most discussed topics among policymakers in the informal gatherings in the halls at the World Economic Forum (WEF) Davos summit.

Anticipating further inflationary pressure due to pandemics, geopolitical conflicts, and green transitions related to the ‘climate crisis,’ governments have prioritized spending more to ease the financial burden on consumers, notwithstanding the central banks argue and act the other way around.

Crying out “fiscal authorities must do more” in recent years, central banks seem to have received their wish, although in an unexpected form.

Furthermore, this difference, called “fiscal authority against monetary authority,” has not yet wholly appeared. According to IMF economist Gita Gopinath, the limits of tension between fiscal and monetary authorities have not been tested.

The European Union (EU) may be the only place where the rising tension is more visible. Member governments continue to unveil substantial aid packages to their citizens battling with energy and food inflation despite the European Central Bank’s aggressive interest rate increases to combat inflation.

Summary: Government aid packages

In the context of energy, the diverging monetary and fiscal policies are pretty evident.

To help with grid fees, a significant part of electricity bills, the Austrian government, for instance, is getting ready to offer a new aid package. In addition to the initial support package of 475 million euros until the middle of 2024, Vienna has revealed intentions to distribute an extra 200 million euros. Thus, the government will pay 80% of the network/infrastructure costs.

Due to rising wholesale power prices, France’s electricity and natural gas regulator CRE has suggested a 108 percent hike in residential electricity rates.

Despite the CRE’s recommendation, the French government only raised the rate by 15% with subsidies for electricity prices.

Households, small local governments, and micro-enterprises with annual revenues of less than 2 million euros are eligible for the government’s “tariff shield” system.

Greece, one of the EU’s weakest economies, even gave subsidies on energy bills to 840 million euros. Citing a fall in gas prices, Kostas Skrekas, the minister of energy, announced that subsidies would be reduced to 95 million euros.

Is the energy crisis over?

Governments seem to have concluded that the worst is over, thanks to the mild winter and energy costs plummeting.

For example, RTE, the French power grid operator, recently announced the risk of power cuts left behind. According to RTE, this is due to increased nuclear power output and the mild winter. RTE has reported that the utilization of nuclear energy capacity has reached 70%.

Once again, the mild winter seems to be reducing power use. This year’s consumption was 8.5% lower than the average for the same period of 2014-2019. Also decreasing by 13% was the use of natural gas.

Indeed, natural gas’s MW/s price on the Dutch stock market dropped from 200 euros to 70 euros in January. Moreover, 81 percent of the EU’s gas storage tanks are still full, and it is anticipated that this rate for Germany is close to 90%.

Still, Klaus Müller, the president of Germany’s federal grid agency Bundesnetzagentur, pointed out that if many heat pumps and charging stations continue to be installed, local power cuts will become a source of concern.

In order to avoid power outages, TransnetBW, the grid operator in southern Germany, has asked residents to decrease their energy use in the evenings.

South Holland has similar problems. The grid is reportedly overloaded due to balancing demand and integrating new energy sources.

For this reason, inconveniences occur in the ‘transition to green energy,’ an objective of these two countries. The load on the electricity grid is growing as demand for industrial heat pumps and charging stations increases. Considering a 27 percent growth in demand for electric cars in Germany alone, it is next to impossible to expect this problem to be solved quickly. In the short term, major transmission issues, particularly on local low-voltage lines, are anticipated to arise in Germany. From 2020 to 2021, investment in distribution networks had a 10% increase, much below the expected 40% rise.

Eurelectric predicts that in 2021, between 375 and 425 billion euros would need to be invested in energy infrastructure to render it endurable for the new electrification mechanisms. In addition, the inflationist change in electrical equipment over the last two years makes this prediction seem unduly optimistic.

The flutters of Brussels

The 0.2 percent shrinkage in Germany, the largest economy of the Old Continent, in the last quarter of 2022 is another indication that things are not going well. However, Olaf Scholz has pointed to declining energy prices and a mild winter as evidence that the recession is beginning to turn around.

One of the largest steel makers in Germany and the world, Thyssenkrupp, has urged the German government to match Washington’s “protectionism,” a sign that warning bells are ringing. Martina Merz, CEO of the conglomerate, emphasized the need to succeed in the green transition without deindustrializing the continent. Highlighting the sufferings of the steel, cement, and chemical industries from higher energy costs, Merz said that “tomorrow’s markets are being carved up now.”

Carved-up markets are ominous words that require no explanation. The European Commission’s “Green Deal Industrial Plan” seems like another dead-cat bounce by Brussels before the EU leaders’ summit to be held next week. The proposed draft urged Europe and its allies to combat “unfair subsidies” and “prolonged market distortions.” The United States and China seem to be the primary targets of this battle.

The loosening of the EU’s government incentives system appears vital for Europe in the ‘green energy transition.’ EU members have the same right as governments outside the EU to provide subsidies to businesses operating within the union.

The combined economic might of Germany and France, of course, exists here as well. Recalling that German and French industries get 77% of EU-wide state incentives (€356 billion and €162 billion, respectively), financially weak nations in the south, such as Italy, Spain, and Portugal, are once again bringing up joint EU borrowing for subsidies. The German and Dutch coalition, on the other hand, blame poor countries for seeking ‘grants’ rather than using the money in the pandemic recovery fund as a loan.

Moreover, the fragmentation is not only between EU countries but indeed between regions. Craig Douglas, the founder of World Fund, for instance, says the discrepancies between the specific buckets of capital in Europe are sharp, and there is more regional capital available in Aachen or Bavaria than in Paris if they want to build a manufacturing facility.

‘Europe is in panic mode’

Fear of the escape of investments created by the IRA has gripped all of Europe. “Europe is in panic mode,” Paul Tang, a Dutch member of the European Parliament, told the Financial Times (FT).

Panic is not a temporary problem. Concerns over the very fundamentals of the EU’s economic model are not comparable to this panic. Long before the IRA, the pandemic and the Ukraine crisis have already started to undermine the economic orthodoxy of the German-led EU.

Mark Rutte, the Dutch prime minister, is among those drawing attention to this, reminding that a more ‘interventionist’ approach could have a long-term impact far beyond the IRA.

However, the genie is out of the bottle. Ineligible for state subsidies, several EU-based manufacturers decide to relocate their operations to the other side of the Atlantic. These are by no means a few. Since the transition to “green capitalism” calls for significant investments, state interventions are crucial in managing and directing these investments and convincing society with the carrot and stick for this shift. A state that provides only fiscal discipline and austerity is no longer acceptable. Therefore, without German-French intervention, the goal of “strategic autonomy of Europe,” which has been brought up specifically by France, is unrealistic.

Moreover, the EU is still far away from the ‘clean technology’ investments and initiatives flowing to Asia and North America. In other words, the challenge comes not only from the United States but also from Asia, particularly China. In the next article, I put an end to the with a piece focusing on Asia and ‘developing countries,’ especially China.

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F-35 debate intensifies across Germany and Europe

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The debate over a potential withdrawal from the US F-35 fighter jet program is heating up in Germany and other European countries.

The background to this is that the jet can only be used with the approval of the US government, and restrictive provisions, for example regarding spare parts and software, make it impossible to escape dependence on the US in military operations with the F-35.

In Berlin, former “transatlanticists” in particular are pushing for withdrawal from the F-35 procurement program to achieve military independence.

Last week, a copy of the purchase agreement for the 35 F-35 fighter jets that Berlin decided to procure in March 2022 was leaked to the German magazine Stern. Details of the framework conditions for the purchase, which will cost €8.3 billion, thus emerged.

This purchase is being handled as part of the Foreign Military Sales (FMS) process, which is subject to strict rules. The F-35 purchase agreement grants Washington the authority to “terminate or suspend performance in whole or in part” without further notice “if required by the national interests of the US.” This means the US can unilaterally change the delivery time and quantity at any time. Contractual penalties are generally not provided for in the FMS procedure; legal recourse is excluded.

Once an F-35 fighter jet is delivered, no further modifications are permitted; spare parts and regularly required software updates are only available from the US manufacturer Lockheed Martin. According to the wording in the purchase agreement, “The customer is not authorized to carry out repair and maintenance work beyond the unit maintenance level.” This already guarantees that the German Air Force’s F-35s will only fly when the US administration wants them to.

Furthermore, the F-35’s basic software is kept secret. Therefore, it is impossible to check whether the jet can be influenced externally, but many assume this is possible. Data generated during operation, and especially during any mission, is collected and subsequently stored on Amazon Web Services, making it easily accessible to US authorities.

Finally, the US Foreign Assistance Act allows the US to “monitor the end-use” of the F-35 “at any time.” A “well-informed” source told the magazine Stern, claiming, “Targets, routes, indirectly tactics… US technicians are always on the plane.” An insider with “intelligence service knowledge” also explicitly confirmed this to the magazine, stating that “all mission planning is monitored in the US.”

Since last week, calls have been growing louder in Europe to avoid procuring F-35 jets if possible, or to withdraw from the agreement if a contract has already been signed. This was triggered on the one hand by the Trump administration’s decision to prohibit Ukraine from using US satellite data, and on the other hand by Washington’s continued efforts to acquire the autonomous Danish territory of Greenland.

For example, Danish conservative MP Rasmus Jarlov stated on X that he now regrets supporting Denmark’s decision to purchase 27 F-35 jets for its air force. Jarlov said, “I can imagine a situation where the US demands Greenland from Denmark and threatens to disable our weapons.” Jarlov argued that Copenhagen would then no longer be in a position to defend itself, making the purchase of US weapons “a security risk we cannot take.” He contended that Denmark will invest heavily in armaments in the coming years and should avoid American weapons wherever possible.

Some NATO countries are now considering abandoning the F-35. For example, Canada plans to withdraw from the F-35 purchase, but has already paid for 16 fighter jets due to be delivered early next year. According to Defense Minister Nuno Melo, Portugal, which previously planned to buy the US fighter jet, is also changing its mind. The French company Dassault Aviation has now offered to supply Rafale jets to the Portuguese government.

The Rafale is a fourth-generation fighter jet, unlike the fifth-generation F-35, but it is cheaper and requires no US components, thus offering independence from the US. French President Emmanuel Macron argued on March 16 that European countries should, in principle, switch from the F-35 to the Rafale; furthermore, the new Franco-Italian SAMP/T air defense system could be used instead of the US Patriot air defense system.

One challenge stems from the fact that a number of European NATO countries, such as the United Kingdom, Norway, the Netherlands, Belgium, and Italy, already possess F-35 jets. Many other countries, including officially neutral Switzerland, have placed binding orders for the aircraft.

Conflicting voices are also rising in Germany. Former “transatlanticists” in particular are distancing themselves from the F-35 procurement. Former Airbus CEO Thomas Enders, now president of the influential think tank German Council on Foreign Relations (DGAP), said last week, “Nobody needs the F-35”; Enders added that he “would be the first to cancel it under these new geopolitical conditions.” CDU foreign policy expert Roderich Kiesewetter also called for a “review of existing contracts with the US,” such as the F-35 purchase agreement, stating, “It is now absolutely essential to look for alternatives.”

Defense Minister Boris Pistorius, however, favors continuing with the F-35 purchase. One of the reasons he cites for this is nuclear sharing, whereby German Air Force fighter jets could drop US nuclear bombs in a war scenario. Observers note that dropping US nuclear bombs is already only possible on orders from Washington, making it irrelevant whether the F-35s could be paralyzed by the US as long as they are available solely for nuclear sharing. However, nuclear sharing itself is no longer considered secure.

Berlin has already transferred approximately $2.42 billion to Washington for the F-35 and has begun costly modifications at Büchel Air Base, where the US fighter jets are to be stationed.

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AfD aims to expand influence in European Parliament

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Months after the European Parliament (EP) elections, the right-wing Alternative for Germany (AfD) is gradually establishing itself in Brussels and even seeking to expand the parliamentary group it leads.

A series of scandals during the European Parliament elections in June had caused the AfD to distance itself from other right-wing European parties, leading to more isolation in Brussels than ever before.

However, becoming the second strongest party in the recent general elections in Germany at the end of February, along with support from Elon Musk and a bilateral meeting with US Vice President JD Vance, has given the AfD international attention and, at least in some eyes, renewed legitimacy.

The AfD’s newfound prestige is particularly noticeable in the EP, where international cooperation is a daily routine. Once a solitary faction forced to form its own group after the EP elections, the party now wants to expand the European of Sovereign Nations (ESN).

Party sources speaking to Euractiv confirmed that the AfD is in talks with at least two potential new members. Greece’s far-right Niki (Victory) party and Spain’s “anti-establishment” SALF party have recently held discussions with the ESN.

A source close to the negotiations said, “We expect SALF leader Alvise Pérez to join as early as April or May.”

Just a few months ago, the AfD had been sidelined by like-minded colleagues in Brussels, citing espionage investigations and “inflammatory statements.”

Ultimately, the AfD was expelled from the Identity and Democracy (ID) group, the former right-wing group led by Marine Le Pen’s National Rally, who feared that their German friends could cost them votes ahead of the European and French elections.

Without its former allies, the Germans struggled to form their own faction in Brussels because most candidates had found places in more established structures.

Together with another group of right-wing groups, the AfD formed the ESN in the EP.

Subsequently, attitudes toward the AfD and ESN softened, particularly with the support of the Trump administration. Even the French felt compelled to approach the AfD again in Brussels, inviting them, along with the European Conservatives and Reformists (ECR) group led by Meloni’s party, to cooperate on issues of common interest.

Leaders of the AfD’s sister party in Austria, the Freedom Party (FPÖ), are also pleased with the end of tensions between the Germans and other right-wing groups.

“I think cooperation is extremely important, and I also think it is extremely important that at some point, perhaps one day, there will be a significant right-wing group in the European Parliament,” said FPÖ MEP Petra Steger to Euractiv on election night in Germany.

The two parties have always been close but recently split into two main groups in the EP: the Patriots for Europe (PfE) and the ESN.

The AfD now wants to stabilize and secure the ESN. “We do not provide information about confidential discussions. But you can be sure that at the end of the legislative period, the parliamentary group will be larger than it is today,” ESN Co-Chair René Aust told Euractiv.

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Calls for German nuclear armament grow louder

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Following some German politicians raising the idea of acquiring nuclear weapons, Frankfurter Allgemeine Zeitung (FAZ), one of the country’s most important newspapers, has launched a campaign advocating for Berlin to possess atomic weapons.

Although Germany renounced nuclear weapons, experts agree that Berlin has the technological capacity to produce its own nuclear weapons in the near future, stating that the necessary technology for uranium enrichment is available at research centers in Jülich and Gronau.

Rainer Moormann, a former employee of the Jülich Research Center, notes that experts believe the construction of a much larger uranium enrichment facility is inevitable, and this would make it possible to produce “the necessary quantity for a few nuclear warheads within three to five years.”

However, delivering nuclear weapons to their targets requires missiles, and Germany is relatively weak in the construction of long-range ballistic missiles.

Nevertheless, it seems possible to produce cruise missiles that could be equipped with nuclear weapons. For example, it is said that Taurus could be used in this way. For this purpose, a maximum period of five years is considered realistic.

The legal and political situation is more challenging. On the one hand, the Federal Republic of Germany ratified the Treaty on the Non-Proliferation of Nuclear Weapons on May 2, 1975, albeit with a significant delay. Therefore, if the German government wants to start building its own nuclear weapons, it will first have to terminate the treaty.

From a purely legal point of view, this is possible without further ado, but it is likely to have serious political consequences, as other states may follow Germany’s example and try to obtain nuclear bombs for themselves.

The biggest examples in this regard seem to be Iran, Saudi Arabia, South Korea, and Poland.

On the other hand, the Two Plus Four Agreement, in which the Federal Republic of Germany confirmed its renunciation of nuclear, biological, and chemical weapons and also accepted the upper limit of 370,000 Bundeswehr military personnel, also constitutes an obstacle to Germany’s nuclear armament.

This treaty cannot be terminated; any changes require the approval of the four allies in World War II and the countries that occupied post-war Germany (US, Britain, France, USSR-Russia).

Ernst-Jörg von Studnitz, one of the former German ambassadors to Russia, recently ruled that the clausula rebus sic stantibus principle of international law could be invoked, according to which treaty provisions can be terminated if the basic conditions under which a treaty was concluded change.

This is the case for Germany because the US nuclear umbrella is no longer considered reliable and there is a possibility of escalating conflict with Russia.

The Frankfurter Allgemeine Zeitung (FAZ) also embraced the essence of this argument in a widely read editorial on Monday. The newspaper argued that there were “good reasons” to speak of the elimination of the basis of the Two Plus Four Agreement and wrote, “A ‘commitment’ that harms the country cannot continue.”

In the headline of the commentary, FAZ argued that Germany “must loosen its old shackles.”

The political turmoil that would result from the termination of the Two Plus Four Agreement could be enormous. The Federal Republic’s possession of nuclear weapons would not only lead to strong reactions from the four former allies, albeit for different reasons.

For example, a large majority of the public still opposes such a plan. However, the results of various polls fluctuate significantly; moreover, the reluctance to a ‘German bomb’ is decreasing.

A Forsa poll conducted about two weeks ago showed that 64% of the population rejected the Federal Republic’s nuclear armament; the proportion of supporters remained at 31%.

But this rate is four points higher than in 2024.

A survey conducted by the public opinion research institute Civey in the same period also concluded that only 48% of the population explicitly rejected a German nuclear bomb. A year ago, this figure was still 57%.

Also, the proportion of those who support Germany’s acquisition of nuclear weapons rose to 38%.

Both polls show that the proportion of those who support Germany’s acquisition of nuclear weapons is much higher among those living in the former Federal Republic of Germany than among those living in the regions of the former German Democratic Republic (GDR).

Two employees of the Helmut Schmidt Federal Armed Forces University in Hamburg, in their article published in FAZ yesterday, argued that the nuclear weapons debate in Germany is “still characterized by moral reflexes and historically transmitted narratives,” probably also taking into account the insufficient public support for increased nuclear armament.

The authors instead call for a “measured reassessment” of the issue. For example, while pointing to the importance of “maintaining state functions even after a nuclear attack,” they write that the current debate should be expanded “to include important aspects of civil defense and social resilience.”

The authors argue that the German people will have to “learn to live with the bomb,” and for this, they point out that “a comprehensive, socio-politically based strategy that integrates the relevant military, political and social dimensions” is needed.

In short, while it is necessary to “persuade its own people” about the necessity of nuclear armament and to bear its consequences, it is emphasized that “traditionally” this task falls to the leading media.

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