Europe and America move closer

Following Russia’s invasion of Ukraine old alliances have been reinvigorated – and self-sufficiency and economic nationalism have moved up the agenda. But these are inflationary too.

| 5 min read

Russia is starting to count the cost of the sanctions, with more Russian goods shunned in the West. The United Nations General Assembly showed 141 countries voting against the Russian action with China, India, Pakistan and South Africa part of the 35 abstaining. Only Belarus, North Korea, Eritrea and Syria supported Russia.

Oil and gas prices have risen sharply again as buyers are reluctant to purchase Russian energy whilst sanctions and settlement systems are being clarified. Talks are underway but the two sides remain far apart. Russia is looking for a win of territory and promises about future conduct whilst Ukraine expects the aggressor to leave.

This week the President of the European Commission made an important speech to the European Parliament and President Biden gave his State of the Union address to Congress. The two speeches taken together showed a new resolve of these old allies to work together to deal with the Russian assault on peace and democracy.

Old alliances strengthened

The Europeans moved closer to the Americans in wanting to increase their contribution to NATO and in looking to an important future for a military alliance where their enthusiasm had been waning. The US President spent the first part of his speech praising his allies in Europe and the wider world and stressed the need for joint action and a united response.

The European speech was highly significant, revealing the EU’s wish to supply lethal weapons to Ukraine and to increase the EU’s role in the defence of Europe. President of the Commission Ursula von der Leyen announced a €500m supply of weapons to Ukraine, financed from the European Peace Facility financing. It was paralleled by the German government’s decision to make a large increase in their budget for defence, to hit the 2% of GDP NATO target soon – and to start to backfill the gaps in their vehicles, weapons and military personnel.

The EU will join NATO and other allies in stopping the Russian Central Bank getting access to some of its reserves.

The EU imposed a ban on Russian flights and on Russian state media broadcasts. It promised asset freezes, export bans on some products to Russia and actions against some Russian banks using Swift. The EU will join NATO and other allies in stopping the Russian Central Bank getting access to some of its reserves. Europe is turning its attention to how to reduce reliance on Russian energy. Russia has had to double its interest rates to 20% and impose foreign exchange controls and levies to husband limited supplies of foreign currency.

Russian miscalculations cost

Vladimir Putin is getting the opposite of what he wanted. He probably assumed Germany and the EU would allow him to take over parts of Ukraine or displace its government and put it under Russian influence. Instead, NATO is immediately reinforcing its eastern borders with troops and weapon systems and is planning to rearm. Sweden and Finland, neutral countries, both attended the latest NATO meeting to send a warning that they could apply to join if Russia continues to attack and provoke.

The US speech addressed the world audience on Ukraine at the outset. Mr Biden repeated that NATO will not go to war with Russia but will do everything it can otherwise do to help Ukraine through sanctions and the supply of arms. The bulk of the speech was about domestic matters which have been largely ignored this side of the Atlantic.

The two great motifs were the need to control inflation and to rebuild American capabilities in many sectors to supply itself. The lessons from past wars and periods of tension related to the need for each country to design and build more items at home – and domestic food and energy production as supply can become disrupted from elsewhere. A series of trade disputes and interruptions to international supply chains has prompted many nations introducing policies to rebuild domestic competence in a wide range of key areas for national security.

President Biden wants to stress the need to invest in technology, to make large increases in electronic-chip capacity and to keep US self-sufficiency in energy. He highlighted recent investment wins in microprocessors and electric cars. He wants to see more onshoring of investment in everything from steel to digital equipment.

Inflation still tops economic agenda

Mr Biden is also very conscious of the dangers from high and rising inflation, pledging an agenda of measures to help curb prices – whilst asking the Senate to get on and ratify his appointments to the Federal Reserve Board to continue the fight. He is considering measures against drug prices, general healthcare costs and care home fees. He is looking at ways of helping get home heating bills down. President Biden also wishes to increase competition where companies are using market power to force up prices. He complained that: “Inflation is robbing them of the gains families might otherwise feel.”

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Europe and America move closer

Read this next

Commodity surge adds to inflation problem

See more Insights

More insights

The wisdom and madness of crowds
By Rob Morgan
Spokesperson & Chief Analyst
26 May 2022 | 7 min read
Markets and governments adjust to a world of food shortages and high prices
By Charles Stanley
25 May 2022 | 6 min read
Slowdown fears hit global stock markets
By Garry White
Chief Investment Commentor
20 May 2022 | 9 min read
Unpicking the frenetic market action of recent weeks
19 May 2022 | 29 min listen