Draghi, Putin and economic warfare in Europe

It has yet to dawn on Europe’s leaders, Paul Mason writes, that the whole continent is implicated in Russia’s war on Ukraine.

As a lifelong Keynesian I should be ecstatic over The Future of European Competitiveness. At the request of the European Commission, the former president of the European Central Bank, Mario Draghi, has laid out a comprehensive strategy for Europe’s economic revival, including a major pump-priming stimulus of €800 billion a year. It marks the end of a long policy hiatus during which the neoliberal impulse in Europe had died but nothing had replaced it.

If the basic prescriptions of the Draghi report are implemented, we should see the integration and modernisation of Europe’s major industries, a sharp uptick in investment and a revival of productivity within a decade. If Europe is not to become the chessboard for the 21st century’s economic contest between the United States and China, Draghi intimates, it will have to become the third major player.

Economic warfare

Yet as Europe’s policy elites congratulate the author, and themselves, there is a big problem. For even as Europe learns to do investment-led growth, it also has to learn to conduct economic warfare—not out of belligerence but necessity.

Russia and its allies are conducting proxy warfare against the west in every dimension: information, energy, food, finance and organised crime. In the third year of its aggression against Ukraine, the Russian economy has become, substantially, a war economy. War-related output has grown by 60 per cent since the autumn of 2022, while the rest of Russian manufacturing has stagnated. War-related expenditure, meanwhile, is close to 40 per cent of the public budget.

The governance structures of the EU, and of its democratic neighbours such as the United Kingdom, are not however well adapted to respond in kind. So the Draghi report, brilliant though its prescriptions may be, needs to be the start of a rethink about Europe’s economic-management strategies, not the end of it.

Europe—including here the UK, so long as it remains under a centre-left government—is going to need not just a new breed of execution-focused technocrats for each of Draghi’s three big objectives: innovation, decarbonisation and security. It is also going to require a cadre of politicians prepared to reframe the task of Europe’s democratic survival around security and defence itself.

That would be a big ask of any nation-state, and it is an even bigger ask for a transnational body founded and structured on the prospect of peace—above all because much of Europe’s postwar economic policy has been premised on the idea that economic interdependence reduces the prospect of conflict. But the incoming commission must turn to the task, and quickly.

‘Setting Europe ablaze’

What can we learn from the last major period of economic warfare, beginning in the 1930s? Britain had emerged from the first world war convinced that blockade, as the primary form of economic warfare, was so effective that fear of it might deter German aggression. It set up the Advisory Committee on Trading and Blockade in Time of War as early as 1924 and by the mid-1930s was actively working on contingency plans for hostilities against Germany and Japan.

Its assumptions were however faulty. Even after the Anschluss of 1938, when Nazi Germany annexed Austria, British policy-makers could not believe that an effectively landlocked country would cope with a naval blockade simply by seizing the resources of eastern Europe and the Balkans. And, much as today with the Russian president, Vladimiar Putin, they were over-optimistic as to the prospect of a dictator falling due to popular discontent over wartime shortages.

But at the outbreak of war in 1939, the British set up a full-fledged Ministry of Economic Warfare, replete with departments for sanctions, soft power, financial pressure, contraband seizures and intelligence. It was from within this department that, from May 1940, the Labour minister Hugh Dalton began to follow the instruction of the Conservative prime minister, Winston Churchill, to ‘set Europe ablaze’ with a sabotage and resistance effort co-ordinated by the Special Operations Executive. As the conflict intensified, much of the ministry’s activities focused on disrupting German trade with neutral countries such as Sweden, using a mixture of soft power, financial disruption, legal action and outright sabotage.

Low thuggery

Since the west is not at war with Russia, offensive actions such as these cannot be taken. But every good intention for Europe in the Draghi plan will be matched with malicious intent by Moscow, using precisely such a mixture of high finance and low thuggery. The aim will be weaken the EU’s ability to secure key sources of critical minerals, for example, or to co-ordinate its defence industries.

In today’s Europe, the obvious place for an economic-warfare function to sit would be with the commissioner-designate for technology sovereignty, security and democracy, the Finnish member of the European Parliament Henna Virkunnen. Her letter of appointment from the continuing commission president, Ursula von der Leyen, overtly references Draghi and the coming report by her compatriot Sauli Niinistö on European defence and civil resilience in the face of Russian aggression. Given Finland’s particular 20th-century history with its big Russian neighbour—marked after the full-scale invasion of Ukraine by application with Sweden to join the North Atlantic Treaty Organization—it has well-developed competencies to combine economic, military and civilian efforts at self-defence.

What is needed above all at this stage is imagination. Most politicians, and many senior businesspeople, in Europe now speak privately of ‘when’, not ‘if’, Russian aggression begins to target NATO and EU states directly. But in public all discussion of Ukraine is steeped in euphemism. And, as with the Draghi report, the deteriorating security environment is spoken of as if the actual process of deterioration had no endpoint.

It may be that, with rapid rearmament and the co-ordination of Europe’s defence industries, the EU and NATO can collectively deter Russia from the aggression its state-television hosts threaten nightly. But if there is a non-negligible chance deterrence fails, the EU must prepare the structures, strategies and people to conduct economic hostilities designed to destroy Russia’s will and means to fight.

Trigger for change

Of course, even to make the case for such preparations, and the political framing needed to justify them, is to invite conflict with those who would ‘understand’ Putin—from the Hungarian prime minister, Viktor Orbán, to the conservative leftist Sahra Wagenknecht in Germany and the former Labour leader, Jeremy Corbyn, in Britain. But I would rather have that argument now than on the day Russian submarines begin openly dredging up the fibre-optic cables of the Baltic.

Draghi’s report shows what we need to do domestically: boost investment, divert skills, co-ordinate Europe’s defence industries and set ambitious goals for technological innovation.  But it is still, essentially, a strategy for economic competition, not economic conflict. Niinistö’s project, when it is delivered, should be the trigger for overt institutional change. But in the end we need governments—not simply the commission—to align on the need for economic self-defence.

In this context, the UK-EU security pact, much anticipated in Britain but with scant detail available, could be a useful forum for the next steps. Much of the ‘five missions’ approach to government of the prime minister, Keir Starmer, dovetails with Draghi’s intent—although the latter is much more focused on failures of co-ordination within the single European market.

But wherever it comes from, at some point Europeans have to adapt to a stark fact: we are no longer in economic competition with Russia, or in a position of friction. Russia’s kinetic war against Ukraine has triggered economic conflict with the west. It is not going to dissipate. We need politicians to adopt the mindset and create the institutions required to prevail.

This is a joint publication by Social Europe and IPS-Journal