Until today we have seen the rise in inflation, especially in energy and food, sanctions against Russia, aid to families and companies by the State, and increased defense spending. There is great uncertainty, as shown by widely varying predictions for the future performance of the economy, which are better than recently forecast (there was no catastrophe last fall), but the suspense remains.
We have been lucky in Europe with a not very cold winter, but we have high and persistent underlying inflation, and uncertainty continues because the war is predicted to be long and not very foreseeable. It is a war of attrition determined by the resistance of Ukraine, which depends on the Western coalition that supports it, and by the resistance of the Kremlin apparatus with the possible help of China.
The legacy of the conflict will depend on how it ends. If Zelensky hadn't held out (“I need ammunition, not a ride”) on February 24, 2022, Russian tanks would be on the Polish border. The EU needs a democratic Ukraine as much as the Kremlin wants to prevent it. In Ukraine, the EU is at stake for survival as a geopolitical entity.
The Eastern countries will accentuate their tendency to tilt towards the US, since Brussels does not guarantee their security. The EU needs to have a self-defense policy, without that the concept of strategic autonomy is empty and Germany, in its existential crisis, drags its feet.
The conclusion is that the EU cannot forget the primacy of politics over the economy, as it did when deciding to go ahead with the single currency thinking that monetary integration would bring political integration.
The repercussions of the conflict will be profound in the medium and long term. The war accelerates previous trends of protectionism by putting security of supply at the forefront, above considerations of cost and ecology. It is evident in the field of energy, that it has to be obtained at any price and even if it is burning coal.
Companies seek to diversify and bring their suppliers closer, and that makes the process more expensive. As a consequence, geopolitical risk now enters the investment calculation. In an autocratic country there is a greater chance that the investment will be expropriated or that the country will be subject to sanctions. In addition, the US wants to prevent China from gaining technological leadership that may have military implications.
Countries seek to protect their industry by subsidizing and requiring a lot of local content, as Biden has done with the Reducing Inflation Act. The result, most likely, will be a decrease in productivity due to the reduction of global competition. It is also possible that the reduction in inequality between countries may be halted, and even reversed.
However, the war could accelerate the energy transition because renewable energies ensure supply without depending on fossil fuels in the hands of autocracies. But they do need critical minerals that Europe does not have, and that China, for example, controls. This acceleration will only happen if there is adequate planning and renewable energies are prioritized even though they are close to home. Finally, keep in mind that sanctions on Russia, and potentially on China, may erode the dollar's dominance in the global payments system, but that's another matter entirely.
