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How the Battle for Ukraine Might Change Europe

Analysis

Graphic by Adam Radosavljevic / Shutterstock.com

Ever more signs point to a significant Russian offensive in Ukraine in the spring, including another possible attack on Kyiv. Corporate finance columnist Les Nemethy discusses how a major Russian campaign or an outright Russian victory would challenge the European Union.

Should a new offensive materialize, given that the Russians have recently mobilized large numbers of conscripts, they will probably throw far more manpower and resources at Ukraine than at any time during the first year of the war.

Despite the delivery of HIMARS, Leopard 2 tanks, and other sophisticated weaponry supplied by the West to Ukraine (albeit in limited quantities, and the tanks have not yet arrived), the Russians will attempt to overwhelm with sheer numbers.

Throughout Russian history, the military had a tradition of using masses of relatively poorly equipped and untrained men as cannon fodder. Russia may also have a few surprises up its sleeve in the form of military technologies. Nuclear conflict should not be ruled out, be it an attack on a Ukrainian nuclear reactor or the use of tactical nuclear weapons.

Should any of the above scenarios materialize, the trillion-dollar question will be whether the West will step up its supply of weapons and financial aid to Ukraine. Several multiples of past levels of assistance could be required just to maintain the existing balance.

Political Tensions?

Stepping up support would strengthen the antagonism between those who supported Ukraine in the past and would wish to defend the already substantial investment made against the pacifists (not least, some of the German opposition) and those who were more friendly towards Russia/less friendly to Ukraine (such as the Hungarian Government). They would argue that supporting Ukraine was a lousy bet all along, and there is no use in throwing good money after bad. 

The European body politic will be immersed in a massive argument between those wishing to centralize power (taxation, borrowing, military spending, and control) and defend Ukraine versus a coalition of those who have always resisted centralization within the EU and pacifists who will claim it is not worth paying the price to keep Ukraine from being absorbed into the Russian sphere. 

This struggle between what I call the centripetal versus the centrifugal forces has already been evident during the first year of the war; in the event of a major offensive, the political arguments may be about to become even stronger.

A Russian victory would constitute a wake-up call for the European Union, as the Russians may not stop at Ukraine. The Russian Foreign Minister recently stated that Moldova might be “the next Ukraine,” and the Baltic countries have also been feeling the heat.

Just as the first year of the war forced Europe to rethink its energy strategy (to which, in my opinion, the response was beyond expectation), a Russian victory in Ukraine during the second year of the war would force Europe to rethink its geopolitical position in the world. That will entail basic questions, such as:

• Is the NATO defense shield sufficiently reliable? 

• Does the EU need to integrate its armed forces to form a more credible deterrent to Russian aggression?

• Does the EU need to increase its defense spending dramatically? (It currently spends about one-third of what the U.S. spends).

Doubling Down?

If the answers to the above questions take it in a centripetal direction, this will likely require a further transfer of sovereignty from nation states to the center, with a much higher share of tax collection, spending (particularly military spending), and indebtedness happening at a centralized level. 

It may unleash the most significant push towards centralization since the formation of the EU, while there remain widespread concerns about bureaucracy, poor governance, lack of accountability and political legitimacy. Pressures for broader reform may grow.

The U.S. has the option of retreating into Fortress America. Europe, however, is a different matter, as Russia and Ukraine are right on the EU’s doorstep. Ukraine is a candidate for EU membership. The union would seem weak if it “lost” Ukraine, or a substantial part of it, to Russia.

The Russo-Ukraine war has the potential to catalyze the integration of Europe into a much more cohesive political and economic entity. It also has the potential to tear it asunder. Will centrifugal or centripetal forces prevail? How will the European Union rise to the challenge? 

To paraphrase historian A.J.P. Taylor about the 1848 revolutions that swept Europe, will the Ukraine war prove to be a “turning point in history that failed to turn?” Or will George Washington’s vision prevail? He predicted: “Some day, following the example of the United States of America, there will be a United States of Europe.”

Les Nemethy is CEO of Euro-Phoenix Financial Advisers Ltd. (www.europhoenix.com), a Central European corporate finance firm. He is a former World Banker, author of Business Exit Planning (www.businessexitplanningbook.com), and a previous president of the American Chamber of Commerce in Hungary.

This article was first published in the Budapest Business Journal print issue of February 10, 2023.

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