Europe
Quo Vadis World Economy-III: The EU’s test with the interventionist state
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.
Europe
Fico accuses Merz of blackmail over threat to veto EU budget
Slovak Prime Minister Robert Fico has hit back after German Chancellor Friedrich Merz threatened to veto the EU budget unless funding for Ukraine is secured.
Merz said he would block the EU’s seven-year budget if no agreement is reached on financial assistance for Ukraine.
The chancellor’s intervention has angered Central European leaders who are net beneficiaries of EU funds but do not want to take part in the next round of funding to support Ukraine’s war effort.
“What the chancellor is doing is typical blackmail, and I will not bow to it,” Fico told reporters in Bratislava.
Fico spoke alongside his Czech counterpart, Andrej Babiš, whose government has refused to participate in a future loan to Ukraine.
“I do not know why he said this,” Babiš said, referring to Merz’s stance.
Merz wants EU leaders to discuss Ukraine’s financing needs at a summit in Dublin on Friday.
In a letter to European Council President António Costa, who will chair the meeting, obtained by The Guardian, Merz wrote:
“We must maintain our support for Ukraine in its struggle to defend itself. This is our shared vital interest. Yet bilateral aid provided to Ukraine is distributed unevenly, with the burden shouldered mostly by only a few member states.”
The EU agreed last year to provide a €90 billion loan to Ukraine, intended to cover two-thirds of its military and civilian spending for 2026 and 2027.
Since then, however, Russia’s relentless bombardment has placed a heavier financial burden on Kyiv, prompting President Volodymyr Zelenskyy to ask for €70 billion to plug the budget deficit.
The EU has endorsed Zelenskyy’s figures and pledged to find €45 billion. Ukraine’s other allies, such as Britain and Canada, are expected to cover the rest.
Last year, Merz launched an initiative to tap €210 billion in frozen Russian state assets held in the EU, but the plan fell through due to opposition led by Belgium, which holds most of the funds in Brussels.
The €90 billion loan was the backup plan. Having opted out of that loan, Hungary, Slovakia, and Czechia indicated that they would not take part in the next round either.
Bulgaria joined these three member states following the election of Prime Minister Rumen Radev last April.
The question of funding for Ukraine is now spilling over into the fraught negotiations on the 2028-34 EU budget.
Germany, the largest net contributor, wants substantial cuts to the proposed budget and opposes the EU providing generous funding to member states that refuse to contribute to Ukraine’s financial needs.
Merz states in his letter that a “collective commitment without exceptions” is a “fundamental prerequisite” for closing Ukraine’s financing gap and for “discussing other matters, particularly those with financial implications.”
He also notes that, in the context of the EU’s next seven-year budget, known as the Multiannual Financial Framework, all member states must contribute to a “robust” financial perspective for Ukraine from 2028 onwards.
A German government official said:
“For the Multiannual Financial Framework (MFF) to be successfully concluded, it is vital that all EU member states provide financial support to Ukraine.”
Berlin is also aiming to shift decision-making on funding for Ukraine from unanimity to qualified majority voting, in an effort to prevent a single government from blocking EU decisions.
The letter reflects mounting frustration among the EU’s northern member states, Ukraine’s most generous backers, over lower contributions from other EU countries in Central and Southern Europe.
The task of brokering an agreement on the budget falls to Costa, the former Portuguese prime minister.
Costa wants a deal by the end of the year, ahead of elections in France, Poland, and Italy in 2027 that could complicate the process.
A spokesperson for Costa confirmed receipt of the letter without elaborating on details. “President Costa will dedicate time to the Ukraine issue at the informal European Council meeting in Dublin this week,” the spokesperson said, adding that funding for Ukraine would be addressed at a dedicated summit on the EU budget scheduled for 26-27 November.
Europe
EU expects next Israeli government to adopt less aggressive posture
The EU expects the next Israeli government to mend its “difficult relationship” with Brussels and adopt a more constructive approach toward Gaza and illegal settlements.
Israeli President Isaac Herzog tasked Gadi Eisenkot, the leader of the anti-Netanyahu bloc, on Sunday with forming a government.
Eisenkot stated that the country faces a “catastrophic diplomatic crisis” as traditional allies begin to reassess their relations with Israel.
Speaking to Rapporteur, several European diplomats stationed in Tel Aviv said they expect ties to get back on track.
“Whatever government comes in, we can try to revitalize relations because Israel is clearly a very important partner,” one European diplomat said, adding that Brussels expects the next administration to be “less aggressive”.
The diplomat noted that relations with Europe are currently “not very good”.
Israel cut off communication with Kaja Kallas, the EU high representative for foreign affairs and security policy, after Rapporteur revealed in June that she had compared Israel to apartheid-era South Africa during a visit to Mexico.
The diplomat stated that this decision, taken ahead of elections, was political in nature. A second European diplomat based in Brussels explained that the announcement came only a few days before an official visit by Dubravka Šuica, the European commissioner for the Mediterranean.
“This could have been interpreted as a tactic to divide Europe, but Israel had asked Kallas to deny the report; she did not do so,” the second diplomat said.
Brussels has repeatedly voiced its frustration with Israel over the humanitarian crisis in Gaza and the expansion of West Bank settlements.
However, EU governments blocked almost all sanctions proposed by the European Commission.
A third diplomat said opposition parties would “almost certainly take the issue more seriously” when it comes to tackling violence by West Bank settlers:
“We see Palestinians being expelled from their homes and new illegal settlements being built in the West Bank. There is a reluctance on the part of the current government to address this issue, which causes problems in our relations.”
The new government is expected to ease pressure on Palestinians and halt construction of the E1 settlement project, a controversial plan to build settler housing in the West Bank east of Jerusalem.
“They will probably try to deal with the problem of extremist settlers in the West Bank,” the diplomat added.
On Gaza, the diplomat described the situation as “a complete nightmare”, with two million Palestinians crowded into an area that accounts for roughly 35% of the territory.
“There are not enough tents for the winter, and not enough vaccines are reaching the area despite an increase in diseases,” the diplomat said.
The European official argued that Donald Trump’s peace plan met all the conditions for Europe. Although the EU had much to offer, neither the US nor Israel appeared interested in EU involvement in the process.
“We are currently training Palestinian police in the West Bank, and if permitted, we could do the same in Gaza,” the diplomat said.
The diplomat disclosed that Israel had agreed with Šuica that Europe would finance two projects aimed at improving sewage and water infrastructure in Gaza, continuing:
“However, none of these projects has started yet because there is a serious problem with dual-use goods. Getting materials into Gaza is very difficult because the Israelis say they could be misused if they fall into the wrong hands of Hamas.”
Israel insists that Hamas must be disarmed before subsequent phases of Trump’s plan can proceed.
With disarmament unlikely to happen in the near term, the EU argues that certain measures can be carried out in parallel.
“We can begin rebuilding sanitation systems in Gaza. We can start building desalination plants. We can begin providing energy and water to Gaza,” one diplomat said.
While Brussels hopes for progress on Gaza and the West Bank, it maintains that expectations regarding the establishment of a Palestinian state need to be “managed”.
The EU continues to advocate a two-state solution, yet most leading Jewish parties oppose the creation of a Palestinian state.
The diplomat noted that the next Israeli government will likely have “a very slim majority and not much room for manoeuvre”.
There is also a “major misunderstanding” between the EU and Israel that must be addressed. According to the diplomat, Europeans fail to recognize the “psychological impact” of 7 October on Israelis.
“This event changed the country and made the two-state solution even more distant than before,” the diplomat said.
In return, some Israeli politicians believe Europe has betrayed Israel despite what they view as a fight against “Islamist terrorism”.
“Their argument is that European politicians are somewhat afraid of the Muslim population in Europe,” the European diplomat said.
Europe strongly opposes Iran and the possibility of Tehran acquiring nuclear weapons, imposing sanctions in response.
However, the diplomat argued that the EU would not participate in a war because it lacks a common army:
“We are a diplomatic and economic power, which is why we resort to sanctions and diplomacy. The expectation that we would take part in a military operation is unrealistic.”
Europe
Germany threatens EU budget veto over long-term Ukraine aid
Germany has threatened to veto the European Union’s joint budget for the 2028-2034 period, which is currently under negotiation, unless every member state commits to providing financial support to Ukraine in 2027 and subsequent years, German Chancellor Friedrich Merz warned.
According to a report by the Financial Times (FT), Chancellor Merz set out Berlin’s condition for the budget talks in a letter addressed to European Council President António Costa.
In his letter, Merz wrote: “A collective commitment that every single one of us, without exception, will make a fair contribution to closing Ukraine’s budget deficit is an indispensable prerequisite for resolving this budget issue and, in particular, for addressing subsequent matters that carry financial implications.”
The German Chancellor stressed that a formula backed by all member states must be established to provide Ukraine with a reliable, multi-year financial perspective starting from 2028.
Merz also insisted that any agreed solution must cover the interest payments on debts incurred to finance the assistance provided to Kyiv.
Conversely, several countries within the bloc have cut financial aid to Ukraine, and the number of capitals adopting this stance is projected to rise next year.
In December 2025, Hungary, Slovakia, and the Czech Republic approved the EU’s 90 billion euro loan package for Kyiv only on the condition that they would not contribute to its costs themselves.
Alongside these three countries, Bulgaria has also stated that it does not plan to participate in subsequent financial assistance packages for Ukraine.
In France, far-right leader Marine Le Pen, who could potentially win the presidential election scheduled for spring 2027, recently told the FT that Paris has run out of funds.
Le Pen assessed: “The honest approach is to tell Mr Zelensky clearly, and even warn him: ‘Look, we cannot do more. We have already allocated the 90 billion euro EU loan, in which France’s share amounts to 18 billion euros. 18 billion euros is genuinely a huge amount of money.'”
The EU’s 90 billion euro loan, covering the 2026-2027 period, aims to meet two-thirds of Ukraine’s financing requirements.
Brussels expects the remaining 45 billion euros to be covered by other partners, including Canada, the UK, Norway, Japan, South Korea, and Australia.
Germany remains the largest net contributor to the EU budget.
In contrast, the four Eastern European countries seeking to avoid financing Ukraine rank among the largest net beneficiaries of the bloc’s budget.
Leveraging this balance, Chancellor Merz aims to use his influence in the EU budget negotiations to secure uninterrupted support for Kyiv in 2027 and the years beyond.
According to the FT, Berlin is also demanding that future aid packages be decided by qualified majority voting rather than unanimity, which is required under the current system.
A German government spokesperson told the newspaper:
“The issue of Ukraine’s financial needs must be resolved within the framework of the next EU budget. Financial support for Ukraine from all EU members is decisive for the successful conclusion of the budget talks.”
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