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Capital IdeasTM

Investment insights from Capital Group

Categories
Politics
Will the war in Ukraine outlast European unity?
Talha Khan
Political Economist
August 24, 2022
KEY TAKEAWAYS
  • Europe is not likely to pull back from its stance of non-appeasement.
  • While polling has shown that the public leans toward ending the war as soon as possible, there are significant divergences among countries.
  • The energy price shock arising from the war continues to weaken consumer sentiment, fuel inflation and place Europe at risk of recession by the end of the year. But a lot of this downside risk appears to be reflected in asset prices already.
  • From a long-term perspective, investors need to consider the impact of sustained higher energy costs in Europe. 

August 24 marks six months since Russia invaded Ukraine, unleashing a geopolitical crisis that is still reverberating through the global economy. Europe has been on the frontlines of the war, taking in Ukrainian refugees and committing financial and military support as part of the Western alliance for Ukraine.


But Europe’s economy is heavily exposed to the negative impact of the spike in global energy prices, which is partly due to the European Union’s embargo of Russian energy and the threat that Russia may choke off gas supplies in coming months. This has squeezed the real incomes of European residents, who regularly cite the cost of living among their top concerns.


Furthermore, Europe’s unity of purpose at the onset of the war has started to give way to the usual squabbles over member states’ national interests. For instance, there are differences of opinion on both the level and types of sanctions on energy. And some European Union (EU) member states are questioning burden-sharing in the event of a gas supply shortfall this winter.


How long can the EU sustain a united front?


I am being asked by clients, my colleagues and other observers if Europe will withdraw from the current policy of backstopping Ukraine financially and militarily, and show a greater willingness to appease Russia — including by rolling back sanctions.


I do not expect Europe to pull back from its stance of non-appeasement. I believe Brussels will paper over the EU’s emerging cracks and navigate a bumpy road. Europe’s solidarity was never as great as the initial emotional response to the war may have led us to believe, nor is it likely to wilt quickly in favour of a negotiated settlement that doesn’t hold Russia to account.


In my meetings with key European policymakers, I am struck by the extent to which they see this moment as a strategic opportunity to pivot away from Russia, which has long been a source of division among EU member states.


Several of Europe’s actions, including the agreement to send arms to Ukraine, its unprecedented sanctions (including a seventh round just weeks ago), the looming accession of Finland and Sweden to the North Atlantic Treaty Organisation (NATO), and the decision to give Ukraine candidate status for the EU all underscore Europe’s commitment and agreement on key issues.


Russian President Vladimir Putin may be banking on EU ruptures to yield an eventual land-for-peace settlement on his terms. Western leaders know this and, despite differences over the appropriate strategy to force an end to the war, are buckling down. Notwithstanding domestic political pressures, they don’t see appeasement as an option. The current sanctions mix on Russia is therefore likely to remain, regardless of how or when the conflict ends, and I believe that Europe’s decision to end its dependence on Russian energy is irreversible.


European majority supports stance against Russia


European policymakers recognise they are in for a tough war of attrition and are trying to communicate resolve, warning against the perils of failing to hold the line. Meanwhile, concerns around energy and food supply serve to heighten the European public’s anxieties.


Talha Khan covers the euro zone and broader political issues as a political economist. Talha has 14 years of industry experience. He holds a master's in international political economy from the London School of Economics and a bachelor's in economics and political science from Macalester College.

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