Reframing economic interdependency

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The war in Ukraine revealed the EU’s strategic energy dependency on Russia and its vulnerability to authoritarian political pressure. Grzegorz Lechowski and Monika Köppl-Turyna discuss related challenges and possible steps towards a greater geopolitical resilience of the EU.

The Russian attack on Ukraine represents a fundamental challenge to the way in which both the EU and its individual member states shape their relations with authoritarian powers. From the German perspective, the key question concerns the sustainability of the country’s long-established pragmatic approach called “Wandel durch Handel” (“change through trade”). Central to this strategy is the idea that close economic integration will limit unaccountable behavior of authoritarian regimes and, in the long run, encourage societal change. This is consistent with some theoretical literature, which assumes that economic opening may have a positive effect on democratization. It turns out, however, that the Russian political system and societal institutions have stubbornly resisted the pressure for change. If anything, by enabling an unconditional inflow of foreign capital, economic integration has nourished the authoritarian regime and reinforced its earlier political path. In addition, through various measures, Putin has also managed to“weaponize” Russia’s close economic ties to the West – making Germany, and in fact the entire EU, critically vulnerable to political pressure.

The EU’s most acute economic problem following the outbreak of the war in Ukraine is energy supply. Currently, imports from Russia account for around 40 percent of the EU’s overall gas consumption. A rapid substitution of this supply is difficult, because strategic energy infrastructure – such as interconnectors or Liquified Natural Gas (LNG) terminals – remains underdeveloped in Europe. Many countries from the EU’s “eastern periphery” have long highlighted the geopolitical risks of energy dependence on Russia, but these concerns have been largely ignored by the key West European partners. Gazprom, the Russian majority state-owned energy corporation, was able to benefit from the fact that gas supply contracts were not managed at the EU level. Against any economic logic, the EU member states located geographically close to Russia paid higher gas prices than the prices offered to the highly developed economies in Western Europe. Moreover, Russian entities supplying gas and oil were shown to use price and physical volume manipulation to create ad-hoc political pressure.

Both EU governments and national economic actors were unwilling to abandon bilateral agreements in 2014

A short window of opportunity to change the status quo emerged after the annexation of Crimea. Around 2014, the Juncker Commission initiated the so-called “European Energy Union”, which aimed, among other things, to stimulate the diversification of supplier countries, to improve the interconnection of national energy infrastructures, and to strengthen the EU’s bargaining power through joint procurement. Back then, however, the EU governments and national industry actors were not yet ready to give up their bilateral energy-supply arrangements and to reframe their energy policies in terms of a common geostrategic interest. An important factor in this process was the approach of the German government – representing the EU’s largest energy market – which involved resisting the EU’s joint procurement initiatives, supporting the divisive “Nord Stream” pipeline projects, and neglecting own investments in energy infrastructure critical for the EU’s diversification efforts.

Yet, the assault on Ukraine in February 2022, the artificially created energy-price crisis directly preceding it, and the current threats to cut off gas supply have pushed the question of energy security back to the center of the European political debate. Considering the statements and actions taken by the EU leaders during the first few weeks of the war, one could argue that some signs of a significant policy change are already visible. For instance, the so-called “Versailles declaration” from March 2022 defined terminating the dependency on fossil-fuel imports from Russia as a common strategic goal of the EU. However, it remains to be seen how radical and how quick this transformation will actually be. The key problem is that short-term political and economic costs seem to be currently more important in the debate than long-term benefits – especially in some of the EU member states. While the exact macroeconomic implications of further sanctions are still highly contested, a rough assessment presented by the European Central Bank suggests that a 10 percent cut in gas supply would reduce the value added in the Eurozone countries by around 0.7 percent – however, with a significantly greater impact on the relatively more gas-dependent countries, like Slovakia or Austria. Some available country-level simulations for Germany and Austria indicate a 2-3 percent drop of the gross domestic product (assuming a further gas price increase and a negative supply shock). Although this impact would be still lower than the impact of the COVID-19 pandemic, the recession could be more severe in case of a full energy embargo. In addition, more pessimistic scenarios are currently being discussed by experts.

Proposals for a long-term solution

But while the current controversies largely focus on these relatively short-term economic effects of sanctions, we need to stress that moral, strategic, and geopolitical dimensions need to remain central in the debate. Apart from the question of the much-needed immediate support for Ukraine, ending the energy dependency on Russia is a necessary step to reduce the EU’s current vulnerability to the authoritarian political pressure. In this regard, also a broader and more long-term agenda will be needed in order to enhance the resilience of the EU’s entire energy system. At this point, we can contribute three more concrete suggestions to this important discussion. First, a common approach to energy security will have to be developed at the EU level. Perhaps most importantly, a closely coordinated procurement strategy is needed to give the EU more weight in its transactions on the increasingly competitive global energy markets. Second, the EU needs to pool its resources and strategically prioritize relevant technological innovation in renewable energy. The key geopolitical reason for this is that the risks of strategic dependency are not limited to fossil fuels. For instance, in renewable energy systems, the EU currently relies on China for much of its demand for photovoltaic cells, wind turbine components, or electric batteries. In order to reduce this dependency, the EU should strengthen domestic technological capabilities by applying relevant existing policy tools – such as the Important Projects of Common European Interest (IPCEIs) – and by developing new frameworks to further stimulate strategic public-private collaboration in the energy sector. Third, and finally, both the EU-level policies and innovation efforts should be more closely coordinated with strategic global partners willing to support the liberal international order. An important step in this direction are the current initiatives to revive transatlantic technological and trade partnerships. One interesting case is the Trade and Tech Council (TTC), which explores such issues as transnational technological standards or supply-chain security in key technology sectors. Based on this kind of coordination frameworks, the EU may be better able to respond to the growing marketpower and technological capability of the increasingly assertive global authoritarian regimes.

April 5, 2022