Rising costs of war are exposing cracks in EU unity from which the project may never recover

The EU will spend a lot of money. Emergency relief programs for refugees across the Union are needed, as well as funds for Ukraine’s reconstruction when this is all over. Make no mistake, the EU will end up paying for this war.

Bloc-wide defense spending has become a new and expensive priority. Germany has committed to upgrading its military with an initial investment of 100 billion euros. This is just for starters. Funding the green transition in response to climate change is another massive and costly program.

How can these three big problems be financed and what are the consequences for the union as a whole if much of this burden is shared?

Just last summer – a world away – an EU Barometer survey found that optimism about the future of the EU had reached its highest level since 2009, when the financial crisis was at its peak. The majority of Europeans expressed their satisfaction with the measures taken by the EU and national governments against the coronavirus pandemic.

Citizens’ top three priorities were economy, climate change and immigration. Energy security, defense or a refugee crisis were miles away from people’s minds.

Now, pressures are building across the EU that are destroying their official motto, “United in Diversity”.

Eastern border members like Poland, Estonia and Latvia want a broader response to the conflict. They want more penalties and faster. Countries dependent on Russian oil and gas, like Germany and Italy, are much more cautious about tightening sanctions affecting their economies’ vital energy supplies.

The EU has been unanimous in its condemnation and acknowledgment of the need for a comprehensive economic response, but there are real differences of opinion about what that response should look like.

The Union’s origins in the 1950s lay in creating an interdependence on vital resources such as coal and steel to contribute to peace. Now the war on the EU’s borders is fueling internal tensions over access to similar vital resources.

Decisions on how to share the financial pain of this crisis will become a major EU focus in the coming months. Pressure is mounting to announce a total ban on Russian oil imports to the EU.

The EU, UK and US together account for 55 percent of all Russia’s oil and petroleum products exports by volume.

Despite Germany’s enormous dependence on Russian gas and oil imports, Lithuania is the country with the greatest risk. Still, it has stopped its gas imports from Russia and is one of the biggest supporters of an oil and gas embargo.

The fault lines are emerging elsewhere, and Hungary is edging closer to Moscow’s plan to insist that gas be paid for in rubles rather than dollars or euros. The cost of this war for EU members is increasing. How much of this should the EU bear in total? One possibility is that the Recovery and Resilience Facility created by the EU to combat the costs of the Covid-19 pandemic becomes permanent.

It is funded through the joint issuance of debt and provides loans and grants to member states. This or a new similar fund could be set up to cover the costs of Ukraine’s refugee and energy crises.

The proposal was discussed at a summit in Versailles, but Germany is firmly opposed. It is very difficult to quantify the cost of this war to Europe in euros. However, Goldman Sachs indicated that it could cut economic growth in the euro zone by about 1.4 percent. That doesn’t sound like much, but 1.4 percent is around 220 billion euros. The ECB opted for 0.7 percent or 110 billion euros.

If there are actual energy shortages instead of higher energy prices, the number is likely to be significantly higher.

There is a strong feeling that the EU will not emerge immediately from this crisis. New divergences are emerging, for example with Poland’s decision to veto the new corporate tax rate of 15 percent agreed by the OECD.

Longer-term solutions to all of these problems involve sharing the cost of this crisis. This could mean moving towards a sustainable fiscal union. Very few will agree on that.

A common European military capability and some kind of energy union with joint procurement of energy from third countries are seen by some as long-term solutions.

A UCD study concluded that an integrated European energy grid could reduce energy costs by 32 percent.

But an energy union and a defense union raise the very legitimate question of who would have political control over this entity. Such a union would come very close to a federal Europe, with no commitment from members or citizens.

The EU has mastered enormous challenges in the past. Splits emerged during the financial crisis. Vaccine nationalism rose early in the pandemic, only to make way for a more unified response.

Brexit has been touted as a potential hammer blow, but has been more of a duster for the EU as a whole.

EU countries agree on the need for a comprehensive economic response to the barbarism of the Russian invasion. They have shown that clearly. There is a chance that the EU will show its resilience and come through this even more united, but it is unlikely to go back to what it was before Putin’s first shot.