How Europe Found Itself Hooked On War

Every war is easy to start, but extremely difficult to end, the ancient Romans said. Remembering March 2022, when, at the instigation of Great Britain, the Istanbul negotiations between Ukraine and Russia were terminated, and Europe was drawn into the most intense military conflict of our time, we can say that our ancestors understood the problem better than us.

The reason is not only to be found the ambition of rulers or the righteous anger of peoples. As any large-scale crisis drags on (and not just military ones, as the COVID-19 pandemic has shown), it doesn’t just claim numerous victims, it also enriches numerous beneficiaries. This reflects the universal law on the conservation of energy: it doesn’t simply dissipate; it is distributed according to the efforts of those who are able to wield it.

It is obvious that since the beginning of the military conflict in Ukraine, the European Union has suffered significant financial losses. Energy-intensive industries are experiencing an acute crisis, combining a drop in profitability with a reduction in production volumes. This affects ferrous and non-ferrous metallurgy, the chemical industry, agriculture, and construction. Some concern is caused by the fact that reports of plant shutdowns, staff reductions, and even the start of bankruptcy proceedings in these industries have become routine and have ceased to cause public outcry.

GDP growth rates have fallen to new lows. In 2022, +3.75% European GDP growth was recorded; in 2023, it was +0.5%. This figure, by the way, was only one fifth the World Bank’s conservative forecast of a +2.5% rise in GDP.
This GDP growth, which is barely distinguishable from zero, was most likely noticed only by Eurostat specialists. The residents of all European countries, without exception, have experienced double-digit food inflation and an overall increase in the cost of living.

Direct losses to Europe’s GDP over 2 years of military conflict, according to calculations made by the Hans Böckler Foundation, are close to €900 per capita. Residents of the strongest economies have paid the highest price. The worst hit in the rating are Germany and Sweden, which lost €2,600 and €1,700 per inhabitant, respectively. In addition, residents of Europe and the G7 countries have found themselves subject to a “Ukraine tax”: the volume of confirmed EU obligations for the military and humanitarian needs of its eastern neighbour in the first quarter of 2024 approached €180 billion. Conservative calculation methods show that in Denmark, the “Ukraine tax” amounted to €1,652 per household, in Sweden – €688, the Netherlands – €602, in Germany – €351, in the UK €322, and in Poland – €296. Supporting the conflict in Ukraine cost each US household €519 as of February 29, 2024. After the approval of the most recent military aid package, this amount increased to €992 for each US household.

However, while the US economy continues to demonstrate resilience and growth exceeds forecasts, the EU’s overall losses are progressing as the conflict drags on.

The renunciation of cheap Russian gas has not only called into question the future of European industry, but also led to a new form of energy dependence – on LNG. Moreover, its main suppliers to the EU not only include those close to the United States in values, but also illiberal regimes such as Qatar.

For European countries, changing gas suppliers also entails significant costs for building new infrastructure. GEM estimates that total capital costs could be €44.4 billion for LNG terminals and €39.7 billion for gas pipelines. More than half of this amount comes from three countries – Germany, Italy and Greece. The European Commission emphasizes that LNG terminals, “like other energy infrastructure,” are financed through end-user tariffs.

The transition to LNG procurement has been accompanied by an increase in environmental risks. First of all, this concerns possible leaks both while it is being loaded onto tankers and during its transportation and pumping at the destination. Global Energy Monitor, a reputable environmental NGO, emphasizes that the LNG infrastructure projects currently under construction could result in additional annual greenhouse gas emissions equivalent to those of 50 coal-fired power plants. Taking into account all the planned projects, this figure will increase six-fold. However, ecological issues are the last thing that the forces who support the continuation of the conflict pay attention to.

The EU is losing its strategic advantage in being able to offer both high technology and cheap energy resources. Against this backdrop, investors are actively withdrawing funds from Europe’s industrial sector. Net annual capital outflow from the EU has reached a record €300 billion per year. Those who remain to conduct business “on the ground” have to contend with unprecedentedly high lending rates, which the ECB has increased nine times over the course of two years – from 0.5% to 4.5%.

Could it be because of the numerous advantages that the conditions of a “state of emergency” create for officials and lobbyists? The smokescreen of demands for solidarity and community cohesion in the face of dangerous threats hides many opportunities. For example, quick decisions are made without proper justification and existing regulations are bypassed, simplifying the distribution of government orders, reducing the transparency of expenses and the possibility of adequate public oversight.

Does any of this seem uncharacteristic of Europe? Unfortunately, it isn’t. It is no secret that in 2021, when the peak of the pandemic was already behind us, the European Commission provided six pharmaceutical companies with contracts which lasted until 2024 – for the production of 3 billion vaccine doses. At the same time, Pfizer Inc. shareholders, between March 2020 and December 2021, were able to receive a “modest” 100% share price increase, and owners of BioNTech SE saw their stock grow in value by an unprecedented 1,000%. They all owe a debt of gratitude to the World Health Organization, local health authorities and, of course, the pharmaceutical lobby.

Simplified access to “emergency” money rapidly increases revenue and ensures explosive growth in the share prices of any corporations that politicians are able to appoint as saviours from a particular crisis. The reverse is also true: the main prize will be claimed by the lobbyists of those companies whose role as “saviour” can be explained rationally to the public. These justifications must be at least minimally plausible, because “the war will write off everything.”

Any opportunity to not only instantly maximize profits, but also to provide the business with long-term orders, causes euphoria among top management and investment fund managers alike. Wall Street sharks are transferring capital in real time from distressed industries to new profit centres.

The hype wears off, but long-term orders remain. Here again it is appropriate to recall the experience of the American Big Pharma company Pfizer: EU countries are required to purchase vaccines from it through 2027. Because of this, for the past 2 years, they have had to dispose of (that is, throw away) accumulated and unused vaccine stocks. After Poland and Hungary stopped accepting vaccines, Pfizer sued them for non-payment.

Just like a heroin addict will do anything for the sake of a new hit, the political and economic beneficiaries of a military conflict concentrate their efforts on maintaining the turbulence favourable to them for as long as possible. The return on investment in supporting the right public discourse exceeds all expectations.

The life cycle of the current military conflict would be much shorter if the industrial sectors of the European economy, which recorded the greatest losses, were able to express and defend their position. However, this does not happen due to the dominance of financial capital over industrial capital in the modern economy. In other words, the management of the largest companies is not sufficiently subjective and proactive; in difficult situations it completely relies on the will of the board of directors. At the same time, the investment funds that control the largest joint-stock companies are highly mobile, they may quickly transfer capital to the ecosystem of the military-industrial complex and not miss out on profits.

That is, former industrial leaders, for example ThyssenKrupp or BASF, which since the beginning of 2022 have lost about half of their capitalization, reduced production and shed jobs, are left alone with their problems. The same can be said of the thousands of associated companies which are their contractors and suppliers. At the same time, the European Aerospace & Defense Index (STOXX® Europe Total Market Aerospace & Defense) has doubled between February 2022 and May 2024. Shares of the German arms manufacturer Rheinmetall, the Swedish company Saab, Leonardo in Italy, and Polska Grupa Militarna have tripled the capital of their shareholders.

It is noteworthy that among the active investors in the military-industrial complex in 2022-23 were ESG funds designed to finance social development and responsible climate policy. European Commissioner for Financial Markets Mairead McGuinness rationalized this away by saying that defence is “a critical factor for the resilience and security” of the EU and therefore “peace and social sustainability.”

The arms business will obviously be supplied with orders in the long term. “A new decade of security policy has begun,” said Rheinmetall CEO Armin Papperger. Therefore, the current demands that Europe’s NATO members spend at least 2% of GDP on defence ($470 billion in 2024 alone) no longer seem sufficient to the arms lobbyists. There are proposals to double spending, to 4% of GDP.

Such an increase in spending will lead to additional depletion of public finances and a rise in the total public debt of the NATO member states to $10.8 trillion over the next 10 years. An increase in debt by this amount will occur if current and future spending on social and other programs are not reduced, according to Bloomberg Economics calculations. For the United States, under the first scenario, where the 2% military spending requirement remains unchanged, the level of public debt will not change. If it grows to an “extreme” 4%, the US debt will grow $3.3. For Germany, compliance with the 2% requirement would entail $272 billion in additional debt, and a 4% requirement would entail $1.6 trillion in additional debt. The other NATO countries also face additional debt under the 2% and 4% scenarios, including France ($189 billion and $1.1 trillion), Italy ($184 billion and $923 billion), and Spain ($213 billion and $745 billion). In the UK, under the first scenario, the debt will not change, but under the second it will increase by $757 billion. However, all six countries named here are among the TOP 10 largest arms exporters. Together they control about 65% of the world arms market (of which 40% is in the United States). Therefore, all additional expenditures from state budgets will essentially be redistributed among a short list of recognizable beneficiaries.

Against the backdrop of this large-scale military parade, EU residents have been presented with an existential threat for the second time in four years, and are required to accept a drop in living standards as the cost of self-preservation. Moreover, politicians, such as Danish Prime Minister Mette Frederiksen do not hide the fact that the financing of the Ukrainian conflict and the increase in the EU countries’ own military spending comes at the expense of social spending. According to her, “freedom has a price” that European countries must pay to ensure security.

At the same time, in contrast to arms spending, the volume of financial support for Ukraine, at first glance, should shock voters in European countries much less.

According to the Kiel Institute for the World Economy, the amount of aid being sent to Ukraine in most EU countries, except Denmark and the three Baltic states, does not exceed 1% of their GDP. But if we compare this charity with internal expenses, the picture changes somewhat. Italy spent twice on assistance to Ukraine what it sent to its own companies as compensation for the economic consequences of the Russo-Ukrainian conflict. France has allocated almost twice as much to helping Ukraine what it did on the national investment plan “France 2030”, which provides for renewable energy sources. Germany, similarly, spent 2.2 times more supporting Ukraine as it did investing in the development of future technology, incl. related to environmental issues, through the “Future Fund” (“Zukunftsfonds”). The costs associated with Ukraine are almost identical to the costs of Germany subsidizing, in 2024, the transition of its own industry to cleaner and climate-friendly production processes. Sweden has spent three times more than it budgeted for 2024 on measures to cut income taxes for low-income people. The Netherlands transferred 6.2 times more funds to pay for Ukraine’s needs than it provided for its own program compensating small consumers for higher electricity costs, which increased in 2022. For Poland, supporting Ukraine cost 1.5 times more than the cost of the program to support its own companies operating in the Polish gas market.

When it comes to support for Ukraine, Europeans are not merely concerned with the issue of ending hostilities. Of particular concern is the reconstruction of the country’s territories after the ceasefire: according to a Eupinions poll conducted in September 2023 (sample: 13,287 people from 27 EU countries), 56% of Europeans believe that the EU should contribute financially for the reconstruction of Ukraine, but 59% are confident that that this will place an economic burden on the EU and member countries of the association. The greatest concern is expressed by respondents from the leading countries providing financial assistance to Ukraine: Germany (70%), France (60%), and the Netherlands (60%).

On the eve of the elections to the European Parliament, Ipsos conducted a sociological study (sample: 25,916 people), which identified the highest priority areas of activity for the European Union. According to Europeans, these include:

Thus, socio-economic issues are considered first and foremost. At the same time, issues related to climate, defence and international affairs are relegated to the background, and support for Ukraine ranks 9th in terms of priority.

Research from 2024 shows that almost ⅔ of Europeans are dissatisfied with the functioning of the political system in their country, which indicates a high level of dissatisfaction with the policies being pursued. However, a reset of Europe based on a new political landscape and the growing popularity of Eurosceptics and right-wing conservative parties is unlikely. This trend will not lead to a significant change in the political landscape. Parliamentary and economic mechanisms make it possible to block non-systemic parties even if they are relatively successful in elections. The situation is a stalemate: the old elites remain in power, but cannot offer an alternative exit scenario.

The volume of funds invested in the war no longer allows the European establishment to write off costs without achieving convincing results. Prolonging the conflict increases the investment in its continuation and makes it even more difficult to pursue a “clean slate” strategy.

In this situation, we have to admit that the interests of the political class are divorced not only from the interests of the vast majority of people in society, but also from the interests of the basic industrial sectors of the economy. Political processes occur autonomously from a social and economic standpoint, appealing to “values” and relying on the support of narrowly-focused lobbying groups associated with the military-industrial complex, financial funds and energy companies.

The situation that has developed in Europe is not a dead end – it is still possible to go through the process of reassembling the system of relations between the European Union and its key stakeholders. However, the reboot will inevitably suffer from a lack of leadership and agency. Also, it will face powerful opposition from the economic beneficiaries of a protracted military conflict, as long as they manage to maintain their image as the only saviours of Europe.