Western sanctions are crushing the Russian economy. Introduced in response to Russia’s all-out war on Ukraine, these measures are currently making it far more difficult for Moscow to retaliate through disruption of energy supplies, which are one of the Putin regime’s last lifelines. But there is still a great risk for the European Union that Russia will implement countermeasures, including in areas other than energy. China, too, has imposed significant costs on the EU through its economic coercion of Lithuanian and other European businesses (in response to a political dispute over Taiwan). Both retaliation and Europe’s own sanctions could impose, or are imposing, huge costs on Europe’s economies. The broad destruction of the EU’s non-energy economic relations with Russia has had major ripple effects for these economies, including through a rise in energy prices. The stand-off between the West and Russia will continue to take a financial toll on EU member states as they try to reduce their energy dependence on the country in the coming months and years.
All this has the potential to divide Europeans at a time when they need to adapt to a long-term economic war with Russia over Ukraine and the European security order – and to prepare for a potential economic war with a country such as China. The damage inflicted by such conflicts always varies across EU member states and sectors. As became clear in the days leading up to Europe’s massive sanctions on Russia, some European countries were more hesitant to take these measures than others – most often out of fear for their energy security. Rather than focusing the public debate on such hesitation, Europeans should establish a strong solidarity mechanism to help shield the sectors, regions, and member states that sanctions hit hardest.
This week, the EU announced a plan to end its energy dependency on Russia. But, to address the asymmetric and divisive costs of economic warfare, it could also set up a European Solidarity Fund. This mechanism could cushion the impact of such measures by spreading it across member states. It could draw in a large amount of money to help preserve the EU’s unity at the particularly grave moment for the security order that Europe is experiencing. Most of the financing provided by the mechanism could support a transition away from Russian energy, with the remainder directed towards efforts to build up the EU’s resilience against economic coercion. This would help the EU preserve its unity in the weeks and months to come. The fund would make it much more difficult for third countries to weaken Europe – and for Europeans to weaken themselves.
How the fund could work
A European Solidarity Fund could have the following key components:
- A special financing mechanism to support EU sanctions on Russia and the geopolitical transition away from Russian energy. When the coronavirus pandemic induced an external shock on European countries’ economies, they set up vast support mechanisms for profitable businesses and sectors that were badly affected by the disruption. Now, Europeans need to adapt to another external shock – a geopolitical one – by rapidly reducing their energy dependence on Russia and boosting their capacities in areas such areas cyber-security in the private sector. Their necessary but unprecedented sanctions on Russia might come at a great cost to their own economies. In theory, a new financing mechanism could allow the EU to raise additional funds through bonds as it did for NextGenerationEU, which supports the recovery from the pandemic. As a fund for a geopolitical energy transition would be much smaller, it should not create too much worry about Eurobonds or joint European debt. It would also benefit EU countries that tend to be sceptical about European debt much more than NextGenerationEU does. Still, issuing EU bonds again so quickly after NextGenerationEU – which was meant to be a one-off – might call for a drawn-out debate in the EU. Member states do not have as much time to debate such issues as they did in 2020. Instead, they could establish this fund as an inter-governmental mechanism rather than one that falls within the EU’s institutional structures. The union could also modify its industrial policy and add a geopolitical dimension to its Important Projects of Common European Interest. This would allow for exceptions to EU competition policy on state subsidies – which a group of member states could use to provide substantial financial support to projects that decrease Europe’s energy dependence on Russia.
- A permanent fund to support critical economic functions and companies’ liquidity. Europeans could set up a facility to act as a lender of last resort for businesses, sectors, regions, and member states that have been hit particularly hard by third countries’ economic coercion or by the effects of EU sanctions. In certain conditions, member states could intervene with financial assistance to find alternative markets for businesses that were threatened by illiquidity or long-term damage to their capacity for innovation, or that perform a function critical to the EU’s interests. For instance, Lithuanian firms have faced disruptions due to Chinese pressure on other European companies to stop trading with them. The EU could set clear criteria to determine which types of businesses should be supported in these ways.
- A solidarity mechanism for European countermeasures. As discussed, the EU’s economic measures in response to security threats, energy blackmail, trade embargoes, and secondary sanctions (such as China’s on Lithuanian and other European businesses) may impose direct or indirect costs on European companies and sectors – as is currently the case for many non-energy businesses that have significant exposure to the Russian market. The EU could foster solidarity through special financial support for them. This would strengthen European unity, creating a credible deterrent.
Of course, there are limits to the potential of a European Solidarity Fund. In many cases, companies’ losses from sanctions will be far bigger than any compensation the EU could provide. In 2020 non-energy trade between the EU and Russia was valued at €110bn. Most of this trade is now being disrupted. Nonetheless, a European Solidarity Fund could be effective in protecting certain important industries, and could help the EU complete the difficult geopolitical transition it has started. At a time when Germany has found an extra €100 billion to rebuild its military, the EU can be similarly ambitious in reducing its energy dependence on Russia – by setting up a fund of perhaps half that amount as a geopolitical complement to measures for the green transition.
A long-term mechanism to fully compensate European firms for sanctions-related losses would be neither realistic nor desirable (especially in relation to, for instance, a lack of access to the Chinese market). And there is a risk that European compensation could reward high-risk behaviour by companies. A European Solidarity Fund would be unable to comprehensively offset such costs even in the areas discussed above. Its compensation mechanisms might never be self-sufficient, thereby placing a burden on taxpayers. But partial compensation for damages could make a big difference. This approach would send a powerful signal to European firms and third countries that the EU is willing and – thanks to its unity – able to throw its political and financial weight behind its economic sanctions. And it could help facilitate a united European transition away from energy dependence on Russia.
This is the second commentary in our series on Europe’s new economic statecraft. Read the second one here.
The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.