The war in Ukraine is a turning point and will accelerate five existing trends.
Russia’s war in Ukraine is brutal, illegitimate, chaotic, and above all traumatic and disruptive for the population. Russian President Vladimir Putin had counted on a short war and a quick regime change. Opposition to his invasion has quickly escalated, and his own army is driving itself into the mud, suffering from lame logistics, lack of motivation and unreliable equipment with the reputation of the “Lada-army”.
This frustration causes Putin to revert to a neo-stalinist strategy of blind terror and general destruction that does not spare the civilian population. The strategy of the burnt earth under the eye of millions of cameras carried around by citizens these days.
This is the third major crisis in Europe in 15 years, and each crisis had a completely different cause. The financial crisis came unexpectedly and led to reforms that are still not completely finished. The corona crisis spurred Europe to make improvements in its health system, but above all to catch up in digitalization and climate investment. This Ukrainian crisis is also a “tipping point” and in turn accelerates a number of trends that were already underway:
The power of ESG
The massive Western corporate exodus from Russia would not have happened 15 years ago. Today, it is a logical consequence of the importance that companies have come to place on their ESG policies. The opening of the first McDonald’s in Russia was historic, and a sign of hope for economic fraternization after the fall of the Berlin Wall. The closure of the 800 restaurants and the continued payment of the 62,000 unemployed workers was a courageous decision that was widely emulated.
The shockwave sent by the hundreds of businesses through the Russian economy hits the Kremlin hard and even scares China. You cannot participate in a global economy without accepting a minimum of essential values. Yes, that’s a face of capitalism we hadn’t seen yet, and it’s enormously powerful.
The End of Lean Production
The last thirty years in manufacturing were dominated by lean production, with low inventories, fast supply and efficient global production chains. In all boardrooms the consequences are now being dealt with. People are thinking about the new post-Covid and post-Ukraine reality. Lean production will give way to a new production model based on buffers and alternatives, but also circularity and climate impact which is more sustainable.
Accelerated energy diversification
European energy policy in recent years has been a failure. The over-dependence on fossil fuels has always been a weakness, but replacing the dependence on the Middle East with that of Russia is a strategic blunder, which may be put mainly on the German account. An acceleration of investments in all kinds of renewable energies (wind, solar, but also geothermal, hydro, tidal…) is inevitable, as a revival of nuclear energy in Europe. The Netherlands, France and Germany have already shifted. Belgium will come last and pay the price.
THE EUROPEAN UNION realizes its vulnerability
With each crisis, Europe realizes its unpreparedness and its vulnerability. First the European banking system, the euro, the health system, and now defense and energy. But Europe is also starting to catch up in cyber defense and in semiconductor manufacturing. It would also do well to structure its immigration policy a bit, because without a solid plan and without proper integration, the current enthusiasm will get bogged down in a further rise of extremism and populism.
Bigger government, more inflation
Europe tackled the corona crisis with huge public funds which have not only contributed to enormous waste and corruption but also to little innovation and entrepreneurship. France and Italy are already calling for similar emergency funds to alleviate the war impact. As Europe’s government grows, so does its rigidity, government debt, taxes, inflation and reduced competitiveness.
If Europe wants to dampen inflation, raising interest rates will not help. European Central Bankers in Frankfurt and Parliament politicians in Strasbourg need to do something about it before the next crisis.
Macro-economist and founder of Econopolis