European policymakers have the tools and the intelligence to retain influence in Ukraine, but they would need to look to Mr Mario Draghi to find the right model for deploying them, write Jorge Mariscal and Nick Rice.
Jorge Mariscal is Emerging Markets Chief Investment Officer at UBS Wealth Management. Nick Rice is Executive Director in the Chief Investment Office at UBS Wealth Management.
Europe’s efforts to revive its flagging economy and confront the crisis in Ukraine may seem to be two entirely separate challenges. But policymakers, struggling to contain Russian designs and find an acceptable long-term settlement on the European Union’s eastern borders, could learn a lot from the way that European Central Bank President Mario Draghi has managed to stabilize the eurozone economy.
In early September, Draghi repeated his pledge “to do whatever it takes” to keep the eurozone functioning, announcing more innovative measures to revive the currency union. Although Draghi has not implemented the sort of far-reaching monetary-policy measures witnessed in the United States over the past six years, his approach nonetheless provides European leaders with some valuable lessons in policymaking, especially when faced with clashing national interests. Similarly, when it comes to marshaling a united approach to the Ukraine crisis, EU leaders could do worse than adopt the Draghi approach.
The first lesson of that approach is simple: Do not compromise on the essentials. This was demonstrated by Draghi’s original 2012 “whatever it takes” pledge to place a floor under the eurozone crisis, thereby creating the bedrock for recovery. Similar considerations are at play in Ukraine. Russia has clearly shown how far it will go to keep Ukraine within its sphere of influence, and prevent Ukraine from following Estonia, Latvia, and Lithuania into the EU and – more importantly – NATO. Europe needs to show that it, too, will do whatever it takes to defend Ukraine’s territorial integrity and prevent Russia from weakening and subordinating its neighbor. This may then set the tone for an agreement.
To achieve this goal, the EU must learn Draghi’s second lesson: Pre-empt, rather than react (which becomes even more important in the context of the current tenuous cease-fire). Instead of improvising sanctions in a belated response to Russian intervention in Ukraine, Europe should draw clear red lines, and set out concrete, effective punishments if those lines are breached. Tough rhetoric but moderate sanctions will not work. Draghi’s announcement in 2012 of the ECB’s “outright monetary transactions” program backed his bold pledge, restoring confidence so quickly that the OMT scheme never had to be deployed.
To unite Europe’s disparate interests behind such measures, policymakers should heed Draghi’s third lesson: Show leadership on issues that are not in dispute, and then mollify dissenters on marginal questions so that they, too, fully support the main strategy. Despite Germany’s opposition to the OMT policy, Draghi united the eurozone’s rival core and periphery countries by focusing on their one undisputed common goal – the preservation of the euro. As a result, he was able to present a common-sense plan to achieve it.
Today, Europe’s national wrangling during the eurozone crisis is echoed in the discordant negotiations over sanctions on Russia. The differences might be overcome if the EU’s major powers, along with some independent voices, were to forge a common front based on a single, non-negotiable point – the principle of territorial integrity. Those EU leaders might then find it easier to rally the rest of the EU around other common-sense measures, thereby creating a united and credible front against Russia.
In addition, Draghi kept some of his powder dry in case new threats emerged; for example, earlier this month, he announced asset purchases in response to low eurozone inflation. Draghi has proved that a comprehensive, pre-announced plan does not require deploying all of one’s firepower at once.
If the EU shows that it will do whatever it takes to prevent Ukraine from sliding toward the Russian-dominated Eurasian Union, while also acknowledging Russia’s own determination to check NATO and EU eastern expansion, Ukraine will have a chance of gaining a lasting peace. In 2008, after all sides recognized that Russia’s attack on Georgia had ended Georgia’s hope of joining NATO, Russian interference and domestic instability waned. Georgia even signed an EU Association Agreement earlier this year.
A least-bad scenario for Ukraine might resemble Georgia’s position, but only if European policymakers learn from and act upon Draghi’s lessons. While taking Russia’s strategic interests into consideration, the EU should also threaten to hit Russia’s economy hard, using both the carrot and the stick to persuade Russian President Vladimir Putin to agree to a lasting solution. Putin’s popularity rests on maintaining national pride and prosperity. If the EU were forced to carry out its threats, Russia’s economy would suffer far more than Europe’s (though this assumes that Russia would care as much about such hardships).
In any event, hardships suffered by EU citizens could be lessened if the eurozone followed Draghi’s final prescription – providing more fiscal and monetary stimulus in some areas to offset reform and fiscal consolidation in others. By selectively addressing the most dangerous risks, Draghi was able to minimize them. Policymakers should do the same when it comes to sanctions against Russia, mitigating their impact on those Europeans who stand to suffer the most.
European policymakers have the tools and the intelligence to retain influence in Ukraine. If they look to the ECB, they will find the right model for deploying them.