Holger Schmieding: Under the spell of geopolitics

Putins war has Europe hit hard. The high prices for energy and food reduce the purchasing power of citizens and increase costs for companies. The outlook for the economy and markets beyond the onset of the winter recession depends crucially on geopolitical issues. The sooner Ukraine can push back the Russian attackers, the greater the chance that the war and its aftermath will be less of a burden in the coming year and that energy and food prices will fall again somewhat.

Luckily this has already started. Even as Europe struggles to live up to the hard geopolitical facts, the big decisions are mostly made elsewhere, primarily in Washington, Moscow and Beijing.

The midterm elections in the US have lived up to the ex-president’s dreams donald trump put a damper on a return to power. But his Republicans may have managed to secure a slim majority in one of the two houses of Parliament. The impending deadlock between the President and Congress would hardly have any effect on economic policy. In any case, we do not expect any major economic policy initiatives in the USA.

Fatal signal to China

On the other hand, it is important whether the current cross-party consensus on the Ukraine continues to hold. There is also an isolationist tendency among Republicans. Not only Trump stands for “America first, America alone”. If, contrary to expectations, the new US Congress cuts back on aid to Ukraine, this could prolong the war. It would also harm the European economy, which is particularly exposed to Russian risks.

A shift in US policy, which we consider unlikely but not impossible, could also send a fatal signal to China. A fickle West could encourage the Red Emperor to attack Taiwan in a few years. This would probably be even more serious for world politics and the world economy than Putin’s war against Ukraine.

Much is at stake for Europe. It is all the more important to calibrate your own policy correctly. First, Europe should send more money and arms to Ukraine, including for the United States to show that Europe is paying its fair share of the costs. Secondly, politicians should now give our citizens and companies sufficient support so that they can survive the hard times – and so that the mood does not change. A weakening of Europe’s will to help Ukraine could also prolong the war. In the long run, that would cost Europe more than the costs of the aid programs.

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