Phew! Europe now has enough gas to see it through the winter and energy prices are starting to drop. Employment is more or less stable. Interest rates and inflation appear to be plateauing. The Ukraine War is settling in for the winter. NATO and the EU are united against Putin who shows signs of starting to unravel and Christmas is a coming.
Now, inhale and draw that sigh of relief back in. All the above is a temporary reprieve. Another metaphor could be the eye of the storm or false dawn.
The Ukraine War still rumbles on and millions of Ukrainians are without power and water this winter. The threat of dangerous escalation is a constant concern.
The EU and Britain appear to have more or less weaned themselves off Russian gas, but only for the coming winter and at a cost which – combined with Covid and inflation – are likely to hamstring European economies for years to come.
The total cost of the pandemic bill is only just starting to be totted up – and it is staggering. The direct cost to the UK government is reckoned to be in the region of $450 billion, according to the National Audit Office. But that is nothing compared to what the RND (Germany’s spending watchdog) reports was spent by state and Federal German governments – $1.8 trillion. On top of that there is the $800 billion EU Covid Recovery Programme.
On energy, an estimated $600 billion, has spent by EU governments on subsidising energy prices, according to the Brussels-based think tank Bruegel.
Then we come to the war in Ukraine. Back in July President Volodomyr Zelensky estimated that it would cost $750 billion to rebuild his country. Then there are the current ongoing costs for humanitarian, economic and military aid which has so far easily exceeded $10 billion for the EU and UK. And, to paraphrase the American Revolutionary War hero John Paul Jones, the Russians and Ukrainians appear to have just begun to fight.
A big chunk of all this money has been borrowed which means that it has to be paid back. And with the rise in interest rates the cost of that borrowing has risen significantly. Already several countries – including the UK, Spain, Italy, Greece, France and Slovakia – already have borrowings at around the 100 percent of GDP level or above. The EU has waived its requirement that borrowings be kept below 60 percent of GDP.
All of the above means that the UK government and EU governments will have to spend less and tax more for the foreseeable future to pay off mounting debts. So there will be less money for investment in climate change projects, education, public services, physical infrastructure, overseas aid…. All of which is required for economic growth which is the preferred source of governments increased revenue.
Many international financial commitments – such as defense spending and aid – are tied to a percentage of GDP. In a recession GDP decreases and so the commitments are reduced in real terms. This means less money for developing countries which will only increase migration to Europe from the Middle East and Africa as well as creating greater instability in the developing world.
At the moment NATO – Europe and America – are totally committed to the defense of Ukraine. In fact, they are more united then many pundits forecast. But that may change with a Republican-controlled House of Representatives holding the congressional purse strings.
Europeans have other concerns about their relationship with America which can be summed up in two words – China and protectionism. Washington regards Beijing as big threat as Russia, if not bigger, and wants a European commitment to oppose Chinese expansion equivalent to America’s commitment to oppose Russia. The problem is that neither the UK nor the EU have historically shared America’s antipathy towards Communist China; they are much more closely tied to the Chinese economy; and China is a faraway country.
The Ukraine War and fear of over-dependence on Chinese manufacturing has spurred a bout of global protectionism (aka economic security). This is especially the case in the US. It started with Trump and has been continued by President Biden with his $430 billion bill for massive subsidies to promote the semi-conductor business and bring offshore companies home. Brussels is seriously worried that the bill will drain European companies, capital and brains, and that this will put a strain on Trans-Atlantic relations and, by association, the NATO alliance.
* Tom Arms is foreign editor of Liberal Democrat Voice and author of “The Encyclopaedia of the Cold War” and “America Made in Britain".
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19 Comments
The 450 billion was “printed” money by the BOE that normally would have tanked Sterling but as other countries joined in the madness the damage was limited, this is not money that ever needs to be paid back (ditto about half the UK’s debt). The money used to subsidise energy will need to be paid back but it will be done by increasing energy prices once they go back to “normal” levels and will not be on the worse case scenario as most of the populace have drastically cut back consumption – the LibDems should be rejoicing at this forced Greenness.
On a political note, calling for the abolition of energy standing charges would be time well spent!
The Bank of England began its quantitative tightening (QT) program last month selling back £750m of the debt it has bought up Bank of England successfully kicks off QT with over subscribed £750m bond sale
The Bank still owns over £837bn of government debt. How much of that will need to sold back to the market (unprinted) will depend on how long inflation remains above the 2% target.
QE debt does not have to be repaid only so long as the central bank does not sell the bond and so long as it rolls it over when the bond matures. To roll over the bond the debt needs to be refinanced in capital markets.
Fiat money creation on a large scale historically has caused very high rates of inflation, or even hyperinflation. It hasn’t in recent decades because it has taken place at the same time that globalization has been driving down the cost of labor in the developed economies.
Under the Bretton Woods system, when trade between nations had to balance, aggressive fiat money creation would have over-stimulated the economy quickly leading to full employment, full capacity utilization and wage-push inflation. Under the dollar standard, trade no longer has to balance, so domestic bottlenecks can be circumvented by buying from low-cost producers abroad as long as sterling maintains its purchasing power. As Capital inflows to the UK from Russia and elsewhere dry up and sterling devalues this becomes less sustainable.
To whom do we owe money and with which terms and conditions?
Might any harm done to E. U be seen by some in the USA as making the USA relatively greater?
Was the 2014 coup which overthrew Mr. Yanukovych a good idea?
Who was behind that coup?
@Steve
It wasn’t a coup. There were widespread protests against Yanukovych given his corruption, and going against parliament by signing a deal with putin rather than the EU. Netflix film “winter on fire” shows the sacrifice made by Ukrainians to protect democracy and human rights.
Ukraine voted overwhelmingly for independence in 1991 and under the 1994 Budapest Memorandum their sovereignty was guaranteed by Russia, the USA and the UK in exchange for giving up the nuclear arsenal on their territory. The 2004 orange revolution and 2014 Maidan protests were popular revolts against what was effectively Russian control of Ukrainian politics and its economy.
In the Victorian era we would have understood Russian claims to control of Ukraine as the natural desire for expansion of the Czarist empire. Indeed for much of the 19th century, Britain was propping up the Ottoman empire as a buffer against Russian expansion in the Balkans that threatened the Eastern Mediterranean and the British empires trade routes through the Suez Canal.
Since the creation of the UN Charter or at least the 1956 Suez Crisis in Britain’s case, imperial wars of aggression of the kind Russia is waging against Ukraine have been condemned. The UN general assembly vote condemning Russia’s invasion was overwhelming at 141 to 5. The UN documentation of widespread atrocities and systematic war crimes is similarly extensive and growing day by day.
Gladstone effectively ended British support for the Ottoman empire when he published his pamphlet on the Bulgarian horrors. Were he able to speak on the Russo-Ukraine war today, I expect he would be every bit as forceful in condemning Russian atrocities in Ukraine as he was those of the Turks in 1876.
Those who believe that the Ukrainian focussed events of 2014 were totally without foreign involvement, might find the attached article of interest.
https://geopolitics.co/2022/03/01/ukraine-the-mess-that-victoria-nuland-made/
@Joe Bourke….
“The UN documentation of widespread atrocities and systematic war crimes is similarly extensive and growing day by day”
The chances of Putin entering a prison for his crimes are probably zilch ..
They seem to house African dictators or Balkan warlords…
And yet the west turns a blind eye to the equally repressive regime in Saudi – which has been conducting a murderous air campaign in Yemen leading to the deaths & displacement of thousands of civilians.
Same with Israel….Whose crimes go on unabated with hardly a whimper of condemnation…
The EU continues to do business with them both …
Sanctions on Russia just impoverish the already poor in Europe . With China , India, & many other countries it’s business as usual with Moscow….
Yanukovych served two custodial sentences for robbery and assault in his youth.
He was backed by Putin in the 2004 Presidential elections. However, the election was mired by overt electoral fraud and the opposition candidate, Viktor Yushchenko, was poisoned. The widespread protests that followed became known as the orange revolution that replaced Yanukovych as president.
He was elected in 2010 with the help of over $100 million of campaign funding. After the election, he signed the Ukrainian–Russian Naval Base for Natural Gas treaty, whereby the Russian lease on naval facilities in Crimea would be extended beyond 2017 by 25 years in exchange for a multi-year discounted contract to provide Ukraine with Russian natural gas.
In 2013, Yanukovych changed his mind on an Association Agreement with the European Union, deciding to strengthen economic ties with Russia instead. What began as student protests were attacked by riot police resulting in civil unrest and escalation of violence in central Kiev. Yanukovych passed anti-riot laws and the shooting started soon after. Yanukovych has been widely criticized for “massive” corruption and cronyism. He amassed a great fortune during his time as president and eventually fled with all the loot he could carry.
Diplomatic missions are there to stay informed about the politics of the country where they are stationed. If a change of government is likely they are going to want to build relations with likely successors that are well disposed to their nation. That is not engineering a coup that is doing your job as a foreign diplomat.
I did read the article suggested by Steve Trevethan – and was interested about the idea that Big Pharma has a huge influence behind the scenes. I am not sure what any of it has to do with Russia being transformed into a society refusing basic human rights to its own people.
I could be wrong but I believe the government does not borrow long-term from the Bank of England but from the financial markets through an agency of the Treasury, the UK Debt Management Office, which took over this function from the Bank in 1998. The debt to the markets has be be paid back, though this is largely done by re-borrowing, hence the public sector deficit. I may also be wrong but I believe that the Bank holds government debt to stabilise the financial markets through such mechanisms as QE, not directly to fund government expenditure.
Steve’s query on Euromaidan is interesting. It would be easy to dismiss people like Steve as merely Putin’s useful idiots. There is a propaganda war going on as well! In the “peace versus justice” debate on Ukraine, although 1991 and 2004 are also important dates, where one ends up on the peace/justice debate is largely formed by one’s understanding of the events around the revolution of dignity in 2013/4. There is no doubt that the west was encouraging democracy and human rights in Ukraine at this time. I see nothing wrong with that. The real outside meddling was from Putin. There’s been a lot of “whataboutery” on this issue (eg the war in Iraq). A lot of left wingers (Corbyn, Russell Brand, Lula) say the west bears as much responsibility for the war in Ukraine as Russia. To which I’d say, even if there are some similarities between Iraq and Ukraine wars, 2 wrongs don’t make a right and Ukraine didn’t invade Iraq. Simon Shama’s history of now (bbc) is an amazing personal film which shows clearly how important it is that we support Ukraine all the way in their fight against Russia.
I thank Russell for his comments. RT propaganda has pervaded widely into global media and social media sites. We should remember that Ukraine was being rebuffed in its desires to join both NATO and the EU prior to the Russian invasion, entirely to satisfy Russian desires that Ukraine should not become allied with the west. There is little more that could have been done to meet Russian demands. There is only one party to blame here.
We should also remember that Yanukovich fled. He could have stood his ground.
Ukrainian membership of NATO would be an absolute bitter pill to swallow for any Russian president – despot or not ….
The flouting of that idea by Western powers should never have been considered…
https://www.rferl.org/a/ukraine-parliament-abandons-neutrality/26758725.html
Martin Gray,
I imagine any Russian president will not be overjoyed by Sweden and Finland applying for Nato membership. The question is should the Russian President have a veto over the sovereign decisions of these countries or Ukraine. Russia does have an effective veto over who can join the Collective Security Treaty Organization.
Lavrov, the Russian foreign minister claims Russia is at war with the collective west and that Nato counties are effectively puppets of the USA. He is speaking the language of great power interests. The collective west in this case being Europe, North America, Australasia and those Asian countries that are allied with the USA or imposing sanctions.
After WW2 the USA introduced the Marshall plan for the reconstruction of Europe and Japan. The level of direct funding aid was relatively modest, but of greater importance was the security blanket that the US provided to Western Europe that allowed for economic revival. The Marshall plan served the interests of the USA by reconstructing the economies of its trading partners on which American prosperity depended then and now.
Most European leaders would not have advocated Ukrainian membership of Nato prior to the Russian invasion. Now there is going to have to be some form of binding security guarantee as part and parcel of any negotiated settlement that might be reached.
It would be wholly unrealistic to expect Ukrainians to agree to any annexation of their territory (if they are able to resist it) after the brutality that has been experienced by the residents of those areas occupied by Russia.
Mark Frankel,
I think you are broadly correct that the Bank holds government debt to stabilise the financial markets through such mechanisms as QE, not directly to fund government expenditure.
QE helps to stave off deflation i.e. the collapse of asset prices that would lead to a debt and banking crisis leaving millions of homeowners with negative equity, countless firms bankrupt and widescale unemployment. It does not directly fund government expenditure, but allows the government to continue to issue new debt in capital markets as long as there are sufficient buyers for that debt.
Standards of living are governed by what we produce for domestic consumption or export and what we have to pay for commodities and what others produce abroad (our national income). National income is dependent on maintaining as near as possible full employment, a reasonably stable exchange rate (the terms of trade) and the absence of major disruptions to supplies sourced overseas. QE can help in maintaining full employment and stabilizing exchange rates in deflationary conditions, but if overused leads to asset bubbles in housing and stock markets and subsequent broad inflation. It is of little use in coping with higher imported energy prices or in meeting union demands for above inflation pay rises. For that we need tax-based redistribution.
To whom do we owe the debts mentioned in the article, by when and under which conditions?
@ Tom Arms,
“A big chunk of all this money (£750 billion) has been borrowed which means that it has to be paid back.”
All will be repaid unless the Government defaults on the debt. This is not to say that the total debt will reduce. It really depends on what the holders of the debt want to do with it. If they want to cash in their bonds etc and spend it, then it will. Otherwise it won’t. This happens only occasionally in countries like the UK and USA and always is sign of an overheating economy caused by a credit boom. If they do cash in their bonds and spend on too large a scale we could have an inflationary problem which could mean taxes will have to rise. High inflation is the only danger at the moment.
@ Frank W,
If we consider money to be an IOU of government, then the £400 bn, or the £750bn in total, or whatever the true figure is for QE, has to be considered to be part of the public debt too. The counter argument is that the QE debt is owned by the BoE which is owned by the Govt, so shouldn’t count. However this ignores the fact that the books of the BoE always have to balance. So if they were all square before the £750 bn QE and they are all square afterwards then the £750 bn debt has to exist on someone’s balance sheet! Guess whose that is!
@ Steve,
“To whom do we owe the debts mentioned in the article, by when and under which conditions?”
If you add up all the world’s National Debts they’ll total to about £90 trillion. We don’t owe it to the Martians. We owe it to ourselves. It is the sum total of everyone’s financial assets. So if the debt is reduced to zero by draconian measures of taxation so will everyone’s financial assets. We’d be reduced to a barter economy.
If I owe money to myself, is that an “internal debt”?
Are “internal debts” the same as debts we owe to others, personal and/or organisational?