Good morning and welcome to Europe Express.
It’s EU summit day and one of the important issues on the leaders’ agenda is fear that Russia could invade Ukraine. Leaders are not expected to discuss specific measures they might take in case of renewed aggression, but we look at some of the options under consideration.
While this will be the first EU summit for the new German chancellor, his Dutch counterpart Mark Rutte has been a member of the European Council since 2010. Now, he is starting his fourth term in office, and we will profile Rutte’s latest political incarnation — as leader of the most progressive coalition government yet.
Meanwhile, in Frankfurt, the European Central Bank holds its governing council meeting. Top of many minds is the topic of accelerating inflation, and we will look at where the ECB thinks it will go next.
Marathon summit
EU leaders are back in Brussels today for a last get together before winter break, write Sam Fleming, Henry Foy and Valentina Pop. The organisers have insisted on keeping the European Council to one day, starting at 10am, given that several leaders were already in town for the Eastern Partnership summit yesterday.
Given the breadth and depth of topics to be discussed, officials expect the meeting to run late into the night. One of the most highly charged will be the discussion on Russia and the troops it has massed on the border with Ukraine. Diplomats expect leaders to put aside their mobile phones to have a candid conversation over lunch about how to respond to Vladimir Putin’s provocations.
The European Commission has been in discussion with member states and allies including the US as it considers how to deter Russia from escalating the situation. Brussels has prepared an options paper containing a broad range of potential sanctions that could be deployed.
However, diplomats do not expect detailed discussions today on specific measures given the prevailing uncertainty over exactly what Putin will do next. Capitals are also divided over how much economic pain they are willing to bear in order to punish Putin’s behaviour.
Potential sanctions that have been explored by Brussels range from the most extreme, such as disconnecting Russian banks from the Swift global network, to targeted sanctions against private-sector Russian banks, according to people familiar with the subject.
Other options include restrictions on exports of certain technologies to Russia as well as more familiar steps such as the imposition of individual sanctions against more oligarchs. (The options are along the lines of what Washington has also been considering.) The commission declined to comment.
Kyiv worries that the Europeans are missing the point of a deterrent. President Volodymyr Zelensky, who met EU leaders yesterday, said the bloc needed to make abundantly clear to Putin what the consequences of an attack would be, rather than just punish him for it afterwards.
“For us, it is important for them to be applied before, rather than after a conflict . . . which would basically make them meaningless,” he told reporters yesterday evening. “We have had a war for eight years. We understand that only if the sanctions are applied prior to an armed conflict they can be a prevention mechanism.”
Ukraine is just one of a host of topics that leaders will chew over in Brussels. Here are some of the other ones:
Covid restrictions: Leaders are expected to discuss the surge in Covid-19 infections and the latest measures adopted against the Omicron variant. In the lead-up to the summit, Italy irked member states and the commission by giving no advance notice on new measures requiring even vaccinated travellers to take Covid tests before entering the country.
Energy and carbon markets: Leaders will again discuss rising energy prices and the commission’s latest proposals — which include a ban on long-term gas contracts — as well as suspicions of market manipulation, which also concern the bloc’s emissions trading system.
Inflation: A eurozone dinner with European Central Bank chief Christine Lagarde could see leaders linger on the topic of rising inflation (more below). The banking union, capital markets union and reform of the bloc’s fiscal rules are also on the agenda — and there is nothing approaching a consensus on any of them.
Rutte, reincarnated
Mark Rutte arrives at this morning’s EU leaders’ summit boasting a new domestic coalition that will equip the Dutch leader with something he has rarely enjoyed: an avowedly pro-EU, progressive majority, writes Mehreen Khan in Brussels.
Known as “Rutte IV”, the government is made up of the same four parties that comprised the last coalition. But the latest incarnation marks a decisive break with years of penny-pinching, an obsession with a small state, and even opens the door towards greater EU federalism.
Here’s the FT’s take on the 50-page coalition agreement that commits the Netherlands to tens of billions in spending on climate, housing and defence policy, expanding the country’s borrowing and budget deficit.
It is a radical departure from previous iterations of frugal Rutte-led governments and cements the 54-year-old’s reputation as a political shape-shifter extraordinaire.
The former Unilever executive entered office in 2010 as a hyper-individualist, pro-market climate change sceptic. Rutte IV is likely to be defined by mass social spending on childcare and housing, a higher minimum wage and radical emissions-cutting ambitions. The motto for the new coalition is “take care of each other and look to the future”.
The agreement bears clear hallmarks of the pro-EU liberal democrat D66, which made big gains in the March elections and is the second-biggest party behind Rutte’s VVD. The spending plans will mean the Netherlands is on course to overshoot the EU’s 60 per cent debt to gross domestic product ceiling for the first time since the aftermath of the eurozone crisis.
After spending the post-Brexit years as the EU’s frugal chieftains, the government has made some surprising interventions on EU matters. They support giving the European parliament stronger powers to sack individual commissioners. It was only a few years ago that Rutte dismissed the parliament as a talking shop.
The shift will please Brussels and southern EU capitals that have gone head to head with the Netherlands over eurozone reform, the EU budget and recovery fund spending.
But a big test of the government’s pro-EU credentials will be in its personnel changes.
There are 20 ministerial positions up for grabs, with the finance ministry being fought over by the conservative Christian Democrats and D66. Should it change hands from hawkish incumbent Wopke Hoekstra to progressive former diplomat Sigrid Kaag, the sea change in Dutch politics may well live up to its billing.
Inflation predictions
When Christine Lagarde presents the outcome of the European Central Bank’s meeting today, one number will be of particular interest to investors and economists: its first inflation forecast for 2024, writes Martin Arnold in Frankfurt.
Economists expect the ECB to forecast 2024 inflation of 1.8 per cent.
Cynics may say that number is too convenient. If it was much higher, the “hawks” would argue it was on track to achieve its 2 per cent target and the central bank should stop buying bonds and raise interest rates soon. If it was much lower, the “doves” would argue it needs to buy even more bonds to push inflation up to its target, which would be difficult to explain after eurozone inflation rose to 4.9 per cent in November — a record since the euro’s launch 23 years ago.
But most economists agree with Lagarde’s prediction that inflation will follow a “hump” shaped trajectory — falling back below the ECB target in the next few years — justifying it maintaining bond purchases and negative interest rates for at least another year or two.
“Policymakers should continue to be relaxed about inflation and not take the eye off the recovery ball,” said Christian Odendahl, chief economist at the Centre for European Reform. “The real risks from high energy prices are weakness in consumption and a potentially weaker economy in 2022 and 2023, not inflation.”
Nevertheless, rising prices are causing political concern — notably from Germany’s new chancellor Olaf Scholz, who said recently his government would “have to do something” if inflation in the country does not drop from its recent 30-year high of 6 per cent.
Consumers are expecting higher prices, according to a recent Bundesbank survey of German households, which found the proportion expecting inflation to “increase significantly” over the next 12 months had more than doubled in the past year to 40 per cent.
Other central banks — including the US Federal Reserve and Bank of England — are preparing to withdraw their stimulus policies. But Lagarde says Europe is different because its economic recovery is still fragile and wages have shown few signs of shooting upwards.
Lagarde can expect EU leaders, who know voters are feeling the pinch from rising prices, to ask more questions about inflation over dinner when she joins them at the summit tonight.
What to watch today
EU leaders meet in Brussels for their last summit of the year
The European Central Bank holds its governing council in Frankfurt
Notable, Quotable
Berlin-Moscow irritant: A German court has convicted a Russian man to life in prison for murdering an exiled Chechen rebel leader in a Berlin park in 2019 on the orders of the Kremlin. Annalena Baerbock, Germany’s new foreign minister, called the murder a “serious breach of German law and Germany’s sovereignty”.
Brazilian beef, out: Several European and UK supermarkets, including Delhaize and Sainsbury, are removing certain Brazilian beef products from their shelves after an investigation tracked deforestation-linked products to the retailers.
Recommended newsletters for you
Source: Economy - ft.com
