COMMENT: Did the EU just blink?

By bne IntelliNews November 20, 2014

Mark Adomanis in Washington DC -

 

Compared to some of the bellicose rhetoric that has come out of Brussels in recent weeks, Federica Mogherini's declaration on November 17 that "Russia is for sure part of the problem, but is also for sure part of the solution" sounded amazingly accommodating.

The former foreign minister of Italy, Mogherini's appointment as the chief of EU foreign policy was roundly criticized by hawks who predicted that she would be unnecessarily soft in her dealings with Putin. While it would be unfair to put all of the credit (or blame, depending on your point of view) on Mongherini herself, her comments are an unambiguous departure from the EU's previous narrative, which held that so long as Russia continued to interfere in Ukraine sanctions would become gradually more severe. 

As if to avoid appearing overly indecisive and weak, the EU did agree on November 17 to place an unspecified number of additional Ukrainian separatists under asset freezes and travel bans. If you've seen any of the photos out of Donetsk and Lugansk, though, you'll be aware that the people doing the fighting there aren't going to throw down their weapons over the prospect of being unable to shop in Paris.

The EU, facing the opportunity to place Russia under even more severe economic strain, blinked.

So what explains the change in tone? To borrow a famous expression from Marx: a spectre is haunting Europe, the spectre of recession.

No great shape

The EU was arguably never in a particularly great position to sanction Russia. Even before Ukraine exploded, Europe still hadn’t fully recovered from the global financial crisis, and was lumbering along in a low-growth, high-unemployment funk. But European policymakers were nonetheless optimistic that even in their relatively weakened state they could easily shake off any of the economic damage that might result from a big push for anti-Russia sanctions.

It is clearly the case that the total impact of anti-Russia sanctions fell more heavily on Moscow than on Brussels: Russian growth has declined more quickly, inflation spiked more dramatically, its currency depreciated more rapidly and capital exited more rapidly. But, in retrospect, what was clearly missing from the sanctions debate was any real discussion of pain tolerance, of which side would be willing to suffer more to ensure its preferred policy outcome.

Fast forward a few months and it’s becoming increasingly clear that even the rather modest negative impact from anti-Russian sanctions could drive the Eurozone into outright recession, its third in less than a decade. There is increasing resistance within the EU to any policy that will have short-term economic costs, not just among countries that have traditionally been modestly pro-Russian in their orientation (like Austria and Greece), but even from countries that have traditionally been highly critical of Russia like the Czech Republic and Slovakia. Openly pro-Russian policies are still politically toxic in most of the continent – outside of Hungary’s Viktor Orban few have dared to publicly support the Kremlin’s position – but there is a growing reluctance to match vague denunciations of Moscow’s conduct with concrete action.

If Europe’s economy were in a healthier state, there is little doubt that it would follow a more hawkish policy towards Russia. But Europe’s economy isn’t healthy at the moment and it’s anyone’s guess as to when it will be. So long as the Eurozone is limping along with a stagnant economy, any more anti-Russia sanctions will be a tough sell politically.

Absent a dramatic deterioration in Eastern Ukraine (which unfortunately is a genuine possibility), the EU’s new policy course seems clear: continue to publicly criticize Moscow, but stay away from doing anything that could tip the continent’s economy back into a free fall.

 

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