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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.

Europe

German officials urge fighter jet alliance with Sweden and Spain

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German Defence Ministry officials have advised Berlin to form a new fighter jet partnership with Sweden and Spain rather than join an existing UK-led consortium.

Internal ministry assessment notes obtained by Politico state that a trilateral arrangement among Germany, Sweden, and Spain represents a “more advantageous and promising” approach than joining the Global Combat Air Programme (GCAP) run by the UK, Italy, and Japan.

The proposal outlined in the document does not yet represent a final government decision, nor does it contain any indication that German Defence Minister Boris Pistorius has approved the recommendation.

The advice was drafted after Germany’s flagship project with France to build a next-generation fighter jet collapsed in June following years of industrial infighting.

Initiated in 2017 and later joined by Spain, the Future Combat Air System (FCAS) was conceived as a showcase initiative for European defence cooperation. The partnership aimed to develop an aircraft to replace Germany’s Eurofighter fleet starting in 2040.

However, the initiative foundered on disputes over operational control and workshare between France-based Dassault and Germany-based Airbus Defence and Space. Following unsuccessful rescue attempts at the political level, Berlin withdrew from the joint fighter project this year.

UK Prime Minister Andy Burnham raised the prospect of Germany joining GCAP during an 8 October meeting in Berlin with Friedrich Merz. The two leaders agreed that officials should continue discussions.

For Berlin, the choice carries implications that reach far beyond which model its air force will fly. The decision will determine who controls future military technology, which countries secure production contracts, and whether a new European partnership can avoid the frictions that dismantled FCAS.

Ministry assessment keeps distance from UK-partnered GCAP project

The ministry assessment listed several reservations regarding the GCAP project. The report argued that the existing programme focuses on operations beyond Germany’s capability requirements, whereas Berlin needs an aircraft better suited for missions over continental Europe.

The document also noted that German manufacturers would struggle to secure a significant share of development and production work within an already established partnership.

Invoking past experiences with the Eurofighter programme, which was developed in the 1990s and entered service in the early 2000s, the document took direct aim at British defence contractor BAE Systems.

The German Defence Ministry assessment accused BAE Systems of prioritizing exports over the development interests of Germany and Italy, warning that British dominance would prove incompatible with an equal partnership.

By contrast, the document stated that the military requirements of Germany, Sweden, and Spain align closely and that their starting positions are well balanced.

The assessment proposed an industrial partnership between aerospace giant Airbus and Sweden’s Saab, while recommending that the Saab-manufactured Gripen E fighter jet serve as a technological stepping stone until the new aircraft is developed.

The German Defence Ministry declined to comment on the matter. A separate ministry note, however, recorded British efforts to integrate Germany into GCAP as an observer or participant, asking German officials to examine potential industrial roles and military requirements.

An Airbus spokesperson said the company was “generally open to cooperation”, provided that German and Spanish industry secured a “substantial and equal role” across development, production, and operational phases.

“Purely political decisions without an industrial foundation remain insufficient,” the spokesperson said, urging authorities in Berlin and Madrid to clarify the path forward swiftly.

In an interview published in Handelsblatt on Monday, Airbus defence chief Michael Schollhorn pointed to ties with Saab, noting that the two companies have always worked well together.

A Saab spokesperson also indicated that the company is receptive to broad defence cooperation, including in fighter aircraft.

Emphasizing that large-scale collaborative projects are handled at the political level and that participation decisions rest with the respective governments, the spokesperson said: “All questions regarding potential Swedish participation should be directed to the Swedish government. Saab stands ready, as always, to support Sweden’s future fighter aircraft requirements.”

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EU reopens debate on naming envoy for Ukraine talks with Putin

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The European Union has returned to the idea of appointing an envoy to hold talks on Ukraine with Russian President Vladimir Putin.

According to sources familiar with the matter who spoke to Politico, this search gained fresh momentum following a visit to Russia by Steve Witkoff, the US special envoy.

During his trip, Witkoff proposed to Putin that Russia, the US, and Ukraine hold trilateral talks.

European countries, meanwhile, fear that Washington could accept terms unfavourable to Kyiv in negotiations that exclude them.

Sources speaking to Politico said the names being discussed for the envoy role include European Commission President Ursula von der Leyen, European Council President António Costa, and EU High Representative for Foreign Affairs and Security Policy Kaja Kallas.

Some European diplomats believe Finnish President Alexander Stubb may be the most suitable candidate for the post.

Stubb’s good relations with Trump and Finland’s experience in dealing with Russia are cited among the factors setting him apart.

An unnamed EU diplomat described Stubb as the only European politician so far to have demonstrated senior-level leadership.

Another group of diplomats argues that Costa should lead the talks. European leaders asked Costa during last week’s EU summit in Brussels whether the time had come to speak with Putin.

Politico’s source recounted that exchange: “Costa said no, saying he would not speak to Putin right now. But if we want to play a role in the negotiations, Costa still needs to initiate dialogue with Putin.”

According to an assessment by another source, the European Council president could serve as a more neutral mediator than von der Leyen or Kallas, who are seen as overly focused on supporting Ukraine.

“Three or four people cannot go there with each of us speaking on behalf of the European Union,” one of the sources told the publication. “Ultimately, the choice of who represents the EU must be based on maximum efficiency, not on a personal power struggle or someone’s narcissistic ambitions.”

Politico previously reported in January that the EU was considering appointing a special representative for Ukraine negotiations. At the time, the initiative drew support from several European leaders, including French President Emmanuel Macron and Italian Prime Minister Giorgia Meloni.

Putin said he was ready to negotiate with European countries, but asserted that Europe had “no peace agenda” and stood “on the side of war”.

The Russian leader also named former German chancellor Gerhard Schröder as Moscow’s preferred negotiator from Europe.

Kallas ruled out such an appointment, noting that Schröder was “a lobbyist for Russian state companies” and would sit “on both sides of the negotiating table”.

Stubb details obstacles to talks and Oslo diplomatic drive

Finnish President Alexander Stubb said the principal obstacle to ending the war between Russia and Ukraine was the territorial issue.

Stubb took part in talks in Oslo with US envoy Steve Witkoff, who subsequently travelled to Saint Petersburg to meet Vladimir Putin.

As reported by the newspaper Helsingin Sanomat, Stubb stated that advancing the peace process required either bilateral talks between Russia and Ukraine or trilateral negotiations involving the US.

The Finnish president listed the other major items to be addressed within a settlement as US security guarantees for Ukraine and the construction of a new European security architecture after the war ends.

Without stating it outright, Stubb implied that the core issue within this framework was Ukraine’s NATO membership. The Finnish leader pointed to monitoring the ceasefire, establishing the line of contact, ensuring energy and food security, and exchanging prisoners as practical tasks.

Stubb also detailed the talks held in Oslo on 20 October, which included Witkoff, Ukrainian President Volodymyr Zelenskyy, and Norwegian Prime Minister Jonas Gahr Støre.

The discussions, which spanned approximately eight hours across various formats, had three objectives: to lower tensions in public discourse, to convey European and Ukrainian proposals to the US envoy before his visit to Russia, and to determine the next steps toward a peaceful settlement. Stubb announced that these goals had been achieved.

Moscow ready to resume trilateral talks in November

Witkoff met Putin in Saint Petersburg on Wednesday.

Following the meeting, Russian presidential aide Yuriy Ushakov announced that Moscow was prepared to resume trilateral negotiations with the US and Ukraine during the first half of November.

Ushakov also said that the EU and NATO had begun to “take a more serious approach” to Kremlin proposals on Ukraine, adding that “matters” were moving toward an end to the conflict.

Witkoff described the meeting as “constructive”.

Sources told Bloomberg in September that Putin continued to insist the Donetsk region must come fully under Russian control, expressing confidence that the territory would be captured within the next six months.

Putin previously set conditions for ending the war, demanding that Ukraine abandon plans to join NATO, maintain a neutral and non-nuclear status, and that anti-Russian sanctions be lifted.

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Trump midterms calculus halts Israeli strike plan against Iran

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A comprehensive military operation planned by the Israeli military for 10 October did not take place because US President Donald Trump chose to avoid a broad conflict before the 3 November congressional midterm elections.

Preparations had been made on the orders of Prime Minister Benjamin Netanyahu for an aerial bombardment meant to last several days, according to a report by the Financial Times citing sources familiar with the matter.

The list of targets included nuclear facilities and locations associated with the Iranian leadership, along with power stations and other civilian infrastructure sites.

The planned strikes were projected to exceed the joint operation launched by the US and Israel in February in terms of intensity.

White House Deputy Press Secretary Anna Kelly told the newspaper: “The United States is not going to strike Iran at any point before the midterms.”

Kelly argued that the administration in Tehran was in distress both economically and militarily, adding that the blockade imposed on Iranian ports and US efforts to secure oil shipments through the Strait of Hormuz were producing results.

Speaking to the newspaper, one source addressed the possibility of strikes resuming in the coming weeks, saying: “There’s either going to be a deal or a strike.”

The same source reported that Washington aims for a comprehensive settlement that resolves the conflict over both the Strait of Hormuz and the nuclear programme, although it remained unclear whether the US would have participated directly in the cancelled operation.

Another source said the preparations for the operation might have served as leverage to pressure Tehran in negotiations, adding that the final decision on any new military step rests with the US president.

Hegseth reviews updated target list in Israel

An Israeli official said US Secretary of War Pete Hegseth visited Israel on 19 October to meet with Netanyahu and senior representatives.

Another source stated that the Israeli side presented an updated target list to its American counterparts, compiled with fresh intelligence and incorporating civilian infrastructure sites that had not been struck earlier this year.

The Pentagon did not respond to questions regarding the meetings, while Netanyahu’s office and the Israeli military declined to comment.

Despite the postponement of the operation, Trump and Netanyahu continued to issue military warnings to Iran in public.

In a video released on 19 October, Netanyahu addressed Trump, saying: “Donald, you said we need to finish this, and we will finish it together.” Speaking on speakerphone, Trump responded: “You’re a great warrior, and we’re going to prove it very soon.”

These engagements between the leaders coincide with critical election cycles in both countries.

Parliamentary elections in Israel are scheduled for 27 October, one week before the vote in the US.

Most public opinion polls in the country show the opposition bloc holding a narrow lead over Netanyahu’s coalition, though neither side commands a clear majority.

Axios, a US-based news outlet, previously reported that the Pentagon instructed military planners to finalize strike plans against Iran, though the directive specified no date and Trump had not reached a final decision.

On 15 October, CNN reported on plans to use the GBU-43/B munition, known as the “mother of all bombs”, against Iranian nuclear facilities, with US officials who spoke to the broadcaster expressing scepticism about the weapon’s ability to destroy deep bunkers.

While Tehran announced that it remains open to a diplomatic solution, it declared that any potential operation would draw a fierce response.

Iranian Foreign Minister Abbas Araghchi stressed that if its adversaries chose military conflict, the response would be “much harsher than before”.

Following the joint operation launched by the US and Israel on 28 February, Iran retaliated by striking targets across the region and restricting maritime passage through the Strait of Hormuz.

Although the parties reached an agreement in June covering a ceasefire and negotiations to lift the blockade in the strait, reciprocal strikes between the US and Iran have not ceased.

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