Cementing Europe’s Recovery

Mohamed A. El-Erian

APR 8, 2014
Newsart for Cementing Europe’s Recovery

BRUSSELS – During my current trip to Europe, I have been encouraged by the hope and deeper sense of economic and financial calm that has arrived this spring. With risk spreads compressing markedly, the region’s financial crisis has been relegated to the history books, and the region is again attracting the interest of foreign investors. Consumer confidence is recovering as well, and businesses are again looking to expand, albeit cautiously. Economic growth has picked up and unemployment, while still alarmingly high, has stopped increasing in most countries.

Remarkably, all of this is occurring in the context of a major geopolitical crisis to the east, following what the Financial Times rightly pointed out constitutes “the first annexation of another European country’s territory since the Second World War.” Equally disturbing, Russia’s annexation of Crimea has occurred with stunning ease – indeed, simply “with the stroke of a pen,” as the FT put it. And neither Western Europe nor the United States can even pretend to provide a military counterweight to Russian actions in Ukraine.

Yet, rather than disrupt its growing confidence and composure, the Ukrainian crisis has been a catalyst for renewed political cooperation and solidarity within Western Europe. It has also fostered closer relations with the US at a time when political leaders face inevitable headwinds in completing historic negotiations on the proposed Transatlantic Trade and Investment Partnership (TTIP), aimed at boosting economic ties in a manner consistent with a strengthened multilateral system.

Europe badly needs all of this good economic and financial news. The region has only just exited a recession that has devastated many livelihoods. Far too many citizens are still trapped in long-term unemployment, while a distressing number of young people struggle to secure a job any job.

The region’s ongoing recovery is also good news for a global economy that has yet to rebalance properly and fire on all available growth cylinders. US growth, while edging up, is still below its potential, let alone high enough to offset prior shortfalls. After a short burst, Japanese growth has begun to sputter. And several systemically important emerging economies (including Brazil, China, and Turkey) have slowed, while their transitions to new growth models remain incomplete.

But Europe’s renewed sense of hope and confidence, however encouraging, is not sufficientat least not yet – to produce appreciable welfare gains for current and future generations. A few things need to happen rather quickly specifically, over the next several weeks and monthsif the continent is to minimize the risk of slipping into another prolonged period of under-performance and additional asymmetrical downside financial risk.

Let us start with the immediate geopolitical threat. To put it bluntly, Europe’s economy, and even more so the economies of Russia and Ukraine, is not particularly well positioned to weather a further disorderly escalation of tensions

Enlightened diplomacy needs to replace the Cold War-style posturing and rhetoric that have re-emerged. Further escalation would mostly likely cause the West to impose deeper economic and (critically) financial sanctions on Russia, followed by Russian counter-sanctions that would disrupt the energy flow to Europe. All of this would tip Europe as a whole into recession and renewed financial turmoil.

Second, the European Central Bank needs to pivot from financial-crisis prevention – an area where it has performed impressively – to striking the delicate balance of supporting growth (and countering currency over-appreciation) without fueling excessive risk taking. This may well involve renewed experimentation, which would again take many policymakers outside their comfort zone.

Third, with European institutions acting as catalysts, political leaders will need to reinforce efforts to place the eurozone as a whole on a firm footing. This requires complimenting monetary union with deeper political integration, better fiscal coordination (where progress has been painfully slow), and a proper banking union (last month’s agreement should be treated as a stepping stone, not the ultimate destination).

Fourth, at the national level, individual countries need to continue to rebalance their policies with a view to achieving the trifecta of structural reforms, solid aggregate demand, and fewer debt overhangs.

Finally, anti-establishment parties must not dominate the European Parliament election in May. Most of these parties are committed to greater national isolation and, at least initially, would work hard to halt and reverse recent gains made on regional economic and financial integration.

That is quite a to-do list, to be sure, especially given that it only covers the next few weeks and months. Yet every item on it is achievable, and progress on each would help to ensure that Europe’s encouraging spring leads to a bountiful harvest of economic opportunity, growth, and jobs, while reducing the risk of a hot political summer and a more frigid economic winter.

Mohamed A. El-Erian is Chief Economic Adviser at Allianz and a member of its International Executive Committee. He is Chairman of President Barack Obama’s Global Development Council, and previously worked as CEO and co-Chief Investment Officer of the global investment company PIMCO. He was named one of Foreign Policy's Top 100 Global Thinkers in 2009, 2010, 2011, and 2012. His book When Markets Collide was the Financial Times/Goldman Sachs Book of the Year and was named a best book of 2008 by The Economist.

04/07/2014 06:00 PM

Searching for Deterrence

Ukraine Crisis Exposes Gaps Between Berlin and NATO


Photo Gallery: Searching for Deterrence

Once the Cold War ended, Western militaries reduced their focus on military deterrence in Europe. As a consequence, the Ukraine crisis has caught NATO flat-footed as it rushes to find an adequate response to Russia. Germany has been reluctant to go along.

Frank-Walter Steinmeier wasted little time after returning to Berlin from the NATO foreign ministers' meeting in Brussels last week. He went straight to parliament to inform German lawmakers of the decisions reached. And he did so in the manner which he would like to be perceived as he negotiates the ongoing Crimea crisis: calm, reserved and to-the-point. Indeed, the only time he showed any emotion at all during last Wednesday's meeting of the Foreign Affairs Committee was when he spoke of NATO General Secretary Anders Fogh Rasmussen.

Earlier, Rasmussen had published an op-ed in the German daily Die Welt saying that the path to NATO membership was fundamentally open to Ukraine. "The right of sovereign states to determine their own way forward is one of the foundations of modern Europe," he wrote. That, though, marked a significant departure from Germany's own focus on de-escalating the burgeoning confrontation with Russia. "NATO membership for Ukraine is not pending," Steinmeier huffed. He said that foreign policy was in danger of becoming militarized, adding that it was about time for political leaders to regain the upper hand.

Steinmeier, though, is fully aware that the course Rasmussen is charting won't disappear any time soon. Already, preparations have begun for the next NATO summit of alliance heads of state and government in September. Thus far, there is only one item on the agenda: a new strategy for NATO. Berlin is skeptical. And concerned.

The alliance's cooperation with Russia -- which took years to build up -- has been on ice since last week. And Moscow is no longer seen as a partner, but as an adversary. The logical next step is clear: How does military deterrence function in the year 2014?

It is a term that hasn't been heard in Western Europe for some time. Prior to the fall of communism and the disintegration of the Warsaw Pact, deterrence was based on the destructive potential of atomic weapons, hundreds of thousands of soldiers posted in Europe, heavy weaponry and tanks

The West German army alone had some 495,000 troops, 4,100 Leopard battle tanks and 600 warplanes. The soldiers were the core of an Allied defensive force defending the border between the two power blocks -- a frontier that ran right through Germany.

A Third Path?

Since then, Germany's defense budget has shrunk from 3 percent of gross social product to just 1.2 percent. The country's army, the Bundeswehr, now has 185,000 soldiers -- a number that is set to fall even further -- and is focused less on defending Germany than it is on participating in select foreign missions. Instead of tanks and howitzers stationed at the Fulda Gap, the emphasis is now on paratroopers and helicopters for places like Kosovo, Afghanistan or Africa.

Nobody is interested in reversing the trend. And arming for both scenarios would cost billions of euros that aren't available. But is there a third path?

The new debate within NATO is no doubt music to the ears of aging cold warriors who have always felt that integrating Moscow into alliance structures was dangerously naive. But it is also the logical consequence of a reconsideration of Russian President Vladimir Putin's long-term goals. If Russia is now planning its future against the West rather than with the West, then the question regarding a "modern deterrence" must be posed, a senior Defense Ministry official told SPIEGEL.

Prior to the Ukraine crisis, there were many asking what purpose NATO would serve once the alliance's troops had withdrawn from Afghanistan. But now that Putin has taken over the Crimea -- leading countries on the alliance's eastern edge to feel threatened -- the mood in NATO's Brussels headquarters has changed dramatically. General Secretary Rasmussen, one NATO source said, has "positively blossomed." And the US, Britain and most Eastern European member states support him.

Senior officers within NATO are demanding internally that the readiness of Western ground troops and air forces be increased. Currently, it would take 180 days for the requisite forces to be moved into place ahead of any operation. That time lag, argue military leaders, needs to be shortened, a proposition that would also affect up to 10,000 German troops. In addition, say military leaders, tank units should be strengthened and munition depots filled. Polish Foreign Minister Radoslaw Sikorski even proposed stationing two NATO brigades (up to 10,000 troops) in his country. That, however, would require the construction of barracks, depots and equipment storage facilities to house them.

The Chancellery in Berlin is wary of such proposals. "We shouldn't give the Russians any cause for accusing us of breaching treaties," officials there say. In 1997, NATO committed itself to refrain from stationing large numbers of troops in former Warsaw Pact member states. Doing so now would be a provocation of a new dimension.

A Military Aspect

As such, Foreign Minister Steinmeier is focusing exclusively on diplomacy. His ministry is currently developing an "Action Plan for Ukraine," which is to elucidate all of Berlin's support for the new Ukrainian government

All of the ministries involved in that support are taking part in creating the action plan, the Foreign Ministry says. But the Ministry of Defense is not one of them. Steinmeier also provided the impetus for last week's trip of several state secretaries to Ukraine, one for each ministry involved in Berlin's support for Kiev. Again, the Ministry of Defense was not represented.

Yet there is certainly a military aspect to the issue. Already, Ukraine has sent a request to NATO headquarters for the delivery of radios, weapons and munitions from alliance stores. At the same time, Defense Minister Ursula von der Leyen has asked senior German generals to examine what the alliance could do to provide additional support to NATO member states in Eastern Europe. NATO has asked alliance members to make additional contributions over and above the already agreed to increase to air-policing sorties and AWACS surveillance flights

Proposals are to be submitted to NATO headquarters by mid-April. Von der Leyen is likely to propose joint military maneuvers involving Germany, Poland and the Baltic states. A NATO maneuver planned for 2015 in Southern Europe could also be moved up and shifted to the east. But the minister has rejected sending heavy equipment or troops for an extended period.

Poland, for its part, would like to see even more shows of NATO solidarity. Not to put too fine a point on it, Poland is afraid of Russia, as are its Baltic neighbors. Some of that fear stems from the Soviet era. But Russia's recent show of power on Ukraine's eastern border -- and Putin's evident refusal to withdraw forces as he recently promised -- has also raised concern in Warsaw.

The West long snickered at the dilapidated state of Russia's military. But it has since been dramatically modernized and analysts in Western armies and intelligence services are concerned about the capabilities Russia has put on display in recent maneuvers. Operation Sapad 2013 is a particularly stark example. Sapad is the Russian word for West and the exercise could certainly be understood as a threat pointed in that direction. Officially, fewer than 13,000 soldiers took part in the exercise, falling below the threshold that would have required observation by the Organization for Security and Cooperation in Europe (OSCE). But part of the exercise took place in Kaliningrad, the Russian exclave on the Baltic Sea that shares borders with Poland and Lithuania

Special forces were involved as were officers from the FSB, Russia's domestic intelligence agency. It total, Western military leaders estimate, some 60,000 people took part in the maneuver -- one which even interfered with a NATO radar facility in the Baltics. The Russian military also fired a short-range "Iskander" missile. It was armed with nothing more than a practice warhead, but drills for arming such missiles with nuclear warheads were also apparently carried out.

"It is clear what the Russians showed us with the maneuver," says one Western military leader with knowledge of the exercise. "They can escalate a conflict on their western border and then contain it again." Nobody doubts today that Russia would be able to overrun and occupy eastern Ukraine. The German government believes that preventing such an eventuality is the task of diplomacy. In any case, the erstwhile Western military deterrent has been weakened considerably. It was thought to be superfluous.

Adjusted for Peace

The number of warplanes possessed by Germany's military has been more than halved since the fall of communism and hundreds of battle tanks were either mothballed or sold off. Instead, the Bundeswehr has built up a widely praised force that can be quickly deployed internationally and which is currently active on three continents. Now, some are viewing that strategy in a new light.

"Defense policy has been adjusted for peace missions under relatively favorable conditions, but the current crisis strongly illustrates that may have been too unidirectional and naive," says Joachim Krause, head of the Institute for Security Policy at Kiel University. "The Defense Ministry needs to conduct a fundamental review of its procurement plans." Rainer Arnold, the defense policy coordinator for the center-left Social Democrats, who share power in Chancellor Angela Merkel's grand coalition government, views the situation similarly. "We need to reflect on whether the uncontrolled reduction of the NATO tank fleet was the right thing to do," he says. "We should move toward developing a joint drone in Europe as quickly as possible

The decision on the 'EuroHawk' drones should also be reconsidered, he argues. All the alternatives appear to be a lot more expensive than it would be to just make a renewed and concentrated effort to get it certified," he says. Germany's former defense minister came under intense fire last year after he moved to cancel a contract for the surveillance drone after spending more than €500 million on it.

Volker Kauder, the head of the parliamentary group for Merkel's conservative Christian Democrats, opposes such ideas. "The current situation with the Crimean crisis has absolutely zero influence on the Bundeswehr's defense projects," he claims. So far, that's an opinion that has been shared by Defense Minister von der Leyen.

Newfound Optimism

Nevertheless, defense firms are already preparing for the possibility of new orders. They sense an opportunity to bring some shelved defense projects back to life. Three procurement plans are of particular interest to them.

The Eurofighter, for example, was long considered to be superfluous for the new Bundeswehr, which is largely an intervention army intended for foreign deployments. The German air force is already in possession of around 100 of the fighter jets; in total, it is planning the purchase of 143 at a cost of around €17 billion ($23.3 billion). However, the last tranche of deliveries was cancelled in 2013. At the time, manufacturer Airbus Defense promptly sent a €874.53 million bill demanding that the government pay for the cancellation

Today it appears to be less adamant about collecting that money though. Instead officials believe that the Defense Ministry could pour that money into other development projects with the company. "Losing the capacity to develop military aircraft in our own country," Airbus sources say, "would be a serious strategic setback for Germany."

Another defense project that Airbus executives are promoting, together with CEO Tom Enders, himself a paratrooper with the Germany army reserves, is the "Tiger" combat helicopter. Originally, the German army ordered 80 of the aircraft. Then the figure was reduced because the Tiger was designed technically to address outmoded scenarios conceived during the Cold War-era. It includes, for example, a roof-mounted device similar to the periscope on a submarine that enables the pilots to target and fire on approaching enemy tanks even as the helicopter itself is camouflaged.

Executives at the defense firm MBDA in Bavaria are also optimistic. The company is part of an international consortium that has been developing the MEADS missile defense system in recent years. Germany alone has already spent close to €1 billion on the project. The system is intended to replace the Bundeswehr's aging Patriot antiballistic missiles, but the ministry has been hesitant in placing a final order. "If a contract doesn't come together with the Defense Ministry in the coming months, then our engineers are going to quit," MBDA management sources say off the record. Many argue that MEADS would be ideal for defending the Baltic states against a possible Russian attack.

Despite their newfound optimism, defense industry executives have been careful not to be too open about promoting their projects. Still, overtures are definitely being made. "In terms of security policy, Germany has become a copycat country," one industry source said. "We have forgotten the language of deterrence." Lines like that almost sound like they come from the Cold War-era -- or at least one of the recent NATO Council meetings.


Translated from the German by Charles Hawley and Daryl Lindsey