The attack on Ukraine has rendered it desirable to condemn Putin, to call for an end to energy dependence on Russia, and urge shipments of arms to Kyiv. Nato has replaced the phantasms of EU-based defence. Ukraine is given a path, albeit lengthy, into the Union. Our bemusement rises as we recall how ragingly this departs from the iron-clad, cross-party consensus under Angela Merkel and her predecessors.

No U-turn has been more radical than the pledge to end decades of de facto pacifism, and to spend seriously on the armed forces. Self-congratulations reverberated in early June when Germany’s parliament agreed a one-off fund of €100 billion, ostensibly to bring the painfully under-resourced Bundeswehr up to scratch. Virtual unanimity ruled. Olaf Scholz’s governing coalition was joined by the opposition CDU-CSU. At home and abroad, the vote was hailed as evidence of new geopolitical maturity.

But that for now is nonsense. There’s been no time for the Berlin state machine to develop a new security doctrine and to sell this to the population. In an echo of other unGerman instant shifts — remember Merkel’s departure from nuclear power, and her opening of the borders? — the decision has preceded the thinking.

What Germany does with its military is clearly crucial: for allies, neighbours, Putin, and the world. So as we monitor the evolving policies, we’d do well to remember how brittle the overnight epiphany might be. The war itself is hardly berechenbar, the impact of Putin’s squeeze on gas isn’t predictable, and the German body politic is deeply split on matters of defence.

Symptomatic of the divisions is the coalition‘s internecine war over weapons for Ukraine. The Foreign (run by the Greens) and Finance (the FDP) Ministries have fought against Defence (run by the SLD). At the core of the chaos has been the Chancellor himself, pathologically opposed to sending vital panzers and other serious kit.

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Germany's arrogant pacifism

By Maurice Frank

At the EU, G7, and Nato summits Scholz has again sworn to support Ukraine. His veracity has been undermined, however, by his chief foreign policy adviser, who blurted out that Germany’s main aim is to secure its future links with Russia. No surprise here, perhaps: the atavistic SLD apparat has long had a sadomasochistic fixation on Moscow. Scholz himself felt puppy love for Russia when senior in the SLD’s youth wing in the Eighties. He was a fanatical Marxist, rabidly pro-Soviet, and dead against democracy for Central Europe. He rose under chancellor Schröder, latterly legendary as a paid lobbyist for Putin. In this context a sally by Lars Klingbeil, head of the SLD, has raised eyebrows around the world. Germany must be a leading power, a Führungsmacht. The military implications were there but weren’t explained.

Which brings us to the Bundeswehr. The new fund is less than a third of the measly total spent by Germany on its military in the past six years. In 2014 all of Nato agreed a target of 2% of GDP on defence, but Germany brazenly refused to keep its word. It’s been spending around 1.3%. The target of 2% would have meant a total of around €520 billion; 3% would have equated to €780 billion. The US percentage has been around 3.5%. Sir Richard Shirreff, Deputy Supreme Commander of Nato in Europe in the mid-Merkel years, isn’t impressed. He tells me: “It’s likely that Putin would’ve been put off his adventures if the largest economies in Europe, Britain, France, but especially Germany, hadn’t freeloaded, and had invested properly in defence.”

In any case, we can’t be sure that the €100 billion will be spent sensibly. The numbers throw up many questions. €33 billion is to go on air systems such as 35 American F-35s, €21 billion on digital command and control, €17 billion on land capabilities, and €8 billion on vessels. But what about “sustainment” costs? In the US, initial outlays for F-35s are less than a quarter of forecast “through-life” costs, and similar arithmetic will apply to Germany’s other purchases. Modern military kit costs many times what you pay up front when operations and maintenance are factored in. So even if the shopping list makes sense in light of Ukraine, it’s pretty clear that in future Germany will have to spend close to 3% of GDP. But there’s no sign of support even for 2%, not from the Finance Ministry under the fiscally frigid FDP, nor from the pacifists in the SLD, or in the population at large.

Then take motivation and morale. The Bundeswehr has a mere 100,000 personnel or so in combat roles (total headcount is 183,000). Expansion will rely disproportionately on the eastern Länder, where unemployment is relatively high, but support for the extreme-right Alternative für Deutschland (AfD) is strong. This cannot be ignored: the military have been wracked by Right-wing penetration.

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German pacifism is dead

By Giles Fraser

Worryingly, the Bundeswehr has itself been fostering distortions of the Nazi past. The extent of the disease was shown in a survey for the elite newspaper Die Zeit: half the population is convinced that the Nazis were a small group who captured their country, so most Germans were innocent of war and Holocaust (among supporters of the AfD, 84% think so). Meanwhile, 30% believe, insanely, that their relatives resisted. Around two-thirds believe the country was not defeated but liberated in 1945. Almost 60%, and over four-fifths of AfD supporters, hold that other countries are just as guilty as Germany for Nazi wars and crimes. As the Bundeswehr expands, this kind of thinking may be more rife than ever in its ranks.

So as we watch how Berlin rearms, we’d do well to monitor the narratives and doctrines it develops as closely as the technology it deploys. Nowhere will scepticism be greater than on the Nato and EU front line in Central Europe. There’s consternation there over Germany’s recasting of its history. There is existential worry, too, about Bundeswehr fulfilment of Article Five of the Nato treaty, under which each member is to fight if any is attacked. Before the Ukrainian war only 34% of Germans would have helped if Russia invaded the front-line states.

We don’t know if more (or fewer) would today. Whatever the number, what would it mean for the nascent Führungsmacht? In places like Warsaw and Prague many are already convinced that the whole German deep state, not just the SLD, is with Russia in wanting Ukraine to fail. This is because a successful Ukraine (plus Moldova and Georgia) would soon be in the EU. With Poland and others, they could form a pro-Atlantic block with one-third of the Union’s population, and so scupper Germany’s hegemonic plans. When Jarosław Kaczyński, head of the ruling party in Warsaw, wondered publicly the other day whether Germany is arming against Putin or Poland, he was making a joke. Not a very good one, perhaps, but one whose bitter core is clear.

For decades, the EU has been providing heroic floods of funding for peculators, perhaps the greatest such flows the world has seen. From 2014 to 2020, the bloc spent €960 billion, and to 2027 has plans for €1,820 billion more. Of these scarcely fathomable sums, around two-thirds goes on various forms of regional and industrial support.

Estimates in the relatively well-policed UK suggest you can expect anything from 2% to 10% of project money to be syphoned off via fraud, collusion, or bribery. But Brussels has long been reluctant to exert central control over its cascades of cash. Only this year has it established a European Public Prosecutor’s Office to pursue malfeasance: despite a tiny budget, in its first few months EPPO has accumulated more than 300 cases. Yet the value encompassed, €4.5 billion, is microscopic compared to the scale of the problem.

This is largely a result of the lack of central oversight, which means you can’t disaggregate skewed spending from theft. You’ll never tally which eye-watering sums have been misallocated, misappropriated, or simply stolen. The best you can do is survey the mechanisms that foment intellectual corruption, and can lead to all the criminal ills.

Take one of its biggest programmes: agriculture, fisheries, and environmental good works, which account for €774 billion of the 2014-27 totals. Leave aside, if you can, the “small scale” rural defraudations over many decades, which by now must total many billions. It’s the essence of the EU’s rural policy that’s obscene, for it’s built on tariffs around food that are passed onto the consumer. Development economists will tell you that, even as latterly reformed, this costs Europe’s consumers over €20 billion a year. This number is a good surrogate for the income denied annually to the poor farmers in the global South who would love to feed the EU’s people.

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Angela Merkel was no saint

By Maurice Frank

Astronomical sums are also spent on space, where the EU works with outfits such as the European Space Agency. The numbers here are deliberately obscured, but in recent years, upwards of €36 billion has been budgeted. The EU’s space policy amounts to a me-first system of outdoor relief for a charmed circle of giant French-controlled firms, with others involved for cosmetic decoration. Step forward Arianespace, run by Airbus (France-Germany-Spain) and Safran (France). Offshoots of Leonardo (Italy’s state-run defence champion) and Thales (France) are also prominent. The Union’s space trajectories reached their apogee with the Galileo scheme to send GPS satellites whizzing above the earth. As far as the numbers tell you, this wheeze has so far absorbed over €10 billion. The bizarre rationale was to rival the perfectly adequate American system, which reserves its tightest accuracy for military use by the US and its allies. Was the EU expecting America to invade? In a further moment of madness, the Chinese were asked to join, though they were later disinvited. After Brexit, Britain was scandalously expelled, though non-EU members Israel, Norway and Switzerland are kept in.

Also among the big boondoggles are central allocations to R&D under programmes dubbed Horizon. From 2014 to 2027 they will total €176 billion. Here, too, the beneficiaries are mainly an established club of “Old EU” companies in France and Germany, plus selected chums in academia. (Britain was a major taker until it left.) The in-built bias was underscored during the latest seven-year spending round, when the newish 11 members in Central and Eastern Europe, despite having a fifth of the EU’s population, were vouchsafed a mere 5% of the largesse available. Meanwhile, famous EU states such as Israel and Switzerland received much more. And has anyone monitored the real-world sales and profits resulting from all that spending? What do you think?

Ensconced in Luxembourg is the European Investment Bank. This is a huge machine for channelling financial subsidies to the Union‘s banks and projects. The EIB does this by borrowing ultra-cheaply on the back of guarantees from the member states. As of the middle of this year the EIB had €179 billion out to financial institutions and €342 billion to other borrowers. The EIB is forever trying to reconcile bankerly professionalism with massive political pressures. It often fails. It’s especially lax in its subsidies to financial institutions, as the modus operandi is to offer overall funding lines that the entities in question use to on-lend at will. Full disclosure: I spent some time as a Head of Division at the EIB, and saw the political machinations first-hand.

Many peculative possibilities come from the plethora of mainstream EU schemes for regional and industrial spending. Even when the goal is a worthy hospital, road, railway or factory, abusive opportunities abound. Start with the local or central governmental satrapies which sponsor many of the projects. They have an inherent tendency to over-specify (the EU’s grants are “free”, after all) and to mismanage the implementation. Greedy advisers and construction firms egg them on. Contractual fiddles can cut links between performance and payment. Central governments (which provide counterpart financing) and EU bureaucrats are complicit, as it’s in everyone’s interest to get the money out of the door. As we’ve seen, when it’s embroiled, the EIB is often swayed by the politicians too.

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Ireland's Brexit blackmail

By John Lloyd

Yes, public tenders are stipulated by the EU for most procurement: there are €1,900 billion-worth each year. But it’s easy to fiddle the specifications and the criteria for selection. In particular, Italy, Austria, Spain, Greece, and Portugal have long had poor reputations with their public tenders. In recent years, Hungary, Cyprus, Romania, and Bulgaria have come galloping up the track, and are poised to overtake. Hungary has already won some sort of prize, as PM Viktor Orbán notoriously rewards his chums via hand-steered EU contracts; the country is to receive €22 billion in regional funds to from 2021 to 2027, and more in post-Covid aid.

For decades, the resultant cases of waste and theft have been scattered across Europe. Among the thousands of suspect schemes, notable clumps are in southern Italy, Spain, and in Germany’s once new Länder. A classic of over-investment is Spain’s high-speed rail network. It has absorbed €56 billion over the past 35 years, €14 billion from the Union, but remains chronically underused. One external report put the inappropriate allocation of public funds (to 2016) at €26 billion. The euphemistic plea was voiced for “Transparency in hidden agendas behind public works”. Compared with such herculean Hispanic achievements, the case of Berlin’s new airport seems modest. Supported by the EIB, its cost has exploded from €2.8 billion to €10.3 billion or more. Finally open after 14 years, it’s still not fully functional.

The cases keep coming. Just the other day, the Financial Times revealed to a shocked German railways and to bemused German public prosecutors that the prized scheme for rebuilding the central Stuttgart station, part-funded by Brussels, was allegedly riddled with peculative ills. The original cost, €2.5 billion, has more than tripled to €8.2 billion (and counting). The FT suggested that much of the inflation was due to glaring mismanagement and corruption, one source putting the scale of the peculation so far at €600 million.

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Europe's war on sex

By Debbie Hayton

Until EPPO came along the Union’s only policeman was the notoriously feeble control body OLAF, which was supposed to work with another weak entity, the European Court of Auditors. They might as well not have bothered: last year, OLAF itself recommended recoveries of a paltry €293 million. However glaring the case, OLAF was duty-bound to pass it to the given country’s justice system. And all too frequently, local jurisprudence has proved ineffective. This is down to incompetence (Germany) or design (the newish East have underinvested in their legal systems, in many countries prosecutors and courts have been suborned).

From now, EPPO will have criminal law powers while OLAF will concentrate on administrative ills. But don’t expect them to do more than dent the peculation that travels along with the Brussels money juggernaut. They are a mere few hundred-strong. And the vested interests are simply too great, the huge sums of money too tempting. When, in the 19th century, Lord Acton famously said that power corrupts but absolute power corrupts absolutely, peculation was still in common use. In today’s EU, a variant of this still holds true: lack of control over spending corrupts, absolute lack of control can cause absolute corruption.

Against logic and justice, the EU’s 340 million western rich suck in wealth from the 103 million eastern poor. The elites in Central and Eastern Europe (CEE) rarely rock the boat as they hate to admit the facts; many have been co-opted or cowed. But now and then resentment bubbles up. “We’re not a colony, we’re not a second-class member”, Slovenia’s premier growled at the European Commission last year. Clotilde Armand, a Frenchwoman who is a mayor in Bucharest, has also been clear that “much of the wealth in Europe flows from the poorer countries to the richer ones”.

In the West, those in the know are not just quiet, they egg on the bien-pensants who are convinced that the Old EU keeps the East afloat. “See those pesky Poles, Czechs and Hungarians,” your typical Eurocrat will whine. “They’re lurching away from liberalism, even as their hot paws reach out for our largesse!” This kind of thinking is doubly skewed. The East’s purported nastiness merely matches supposed Western sins (compare Hungary on gender with Denmark on its Muslims, say). It’s the colonial status of CEE that really splits the EU, not any over-hyped cultural cleft.

To see what’s going on, start with the deal struck when the eleven joined in or after 2004. CEE was weak after communism but was forced to throw open its borders prematurely. Capital from the Old EU was to compensate. But as so often in history, the biggest impact was unforeseen. As frontiers fell, there was a human haemorrhage in CEE as the West hoovered in ten million of its workers. Up to a third had higher education; they’ve driven much of the West’s growth.

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In Brussels, however, it is taboo to talk of this epochal shift of wealth. No one dares claim the credit for capturing those diligent white migrants, Christian in culture and capable of quick assimilation. Imagine the howls of “ray-cist!” if they did.

In the East, meanwhile, the elites are shamed to silence, for they’re complicit in a population collapse of wartime scale. Croatia has lost almost a quarter of its people (an existential meltdown, one premier dared to moan). Romania, Bulgaria and the Baltic three of Lithuania, Estonia and Latvia have seen a fifth of workers go. Poland has lost over a tenth.

The social devastation has been horrendous. Hospitals have been hollowed out. Of the EU’s top ten countries for excess Covid mortality, eight are in CEE. You can be sure that the dearth of doctors helped cause the 315,000 extra deaths tallied up to June. Overall, the demographic disaster has probably put paid to hopes of ever catching up. Beata Javorcik, Oxford professor and chief economist at the region’s development bank EBRD, judges that “Eastern Europe could grow old before it gets rich”.

The other unexpected consequence was a radical recasting of CEE’s business landscape. This too is a taboo topic in Berlin, and points West. Cash-rich offshore companies swooped in and bought the leading firms at knock-down prices. They rescued some bankrupt red behemoths (think VW with Skoda in the Czech Republic, Renault with Dacia in Romania). But it went much too far; with new implantations which followed, most key sectors in industry and services are now dominated from abroad.

In Poland, foreigners own a half of the manufacturing and retailing industries, mainly in the form of larger firms. Non-locals account for half of Czech and Polish industrial exports. In Hungary, it’s four-fifths. This is unprecedented in countries with their competence. After all, the Czechs remember that in 1938 they were as prosperous as Switzerland and Sweden; the Poles and Hungarians recall that they were ahead of Spain before the latter’s civil war.

Unpick the statistical thicket, and the balance is bittersweet. Take the lost workers. The rich-country club OECD says that in educating them CEE donated a mind-boggling €400 billion or more. This far exceeds anything Brussels has sent. (Poland spent €160 billion to educate the 2.6 million who’ve gone, so far it has received €138 billion.)

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By Robert Tombs

The boost to western GDP delivered by CEE’s migrants is more massive still. The Old EU benefitted by over €1,000 billion in just the three pre-Covid years, official figures state. Then there’s the corporate investment. It’s now mature, so foreign profits and dividends sent home from CEE often exceed annual transfers from Brussels. And in any case, much EU money is spent on infrastructure, where western firms recoup up to four-fifths of the flows.

On the plus side, the region is now a supply chain Powerhaus (so the German financial paper Handelsblatt calls it). The Old EU syphons out components and embeds them in exports to China and elsewhere. Poland outranks France, Italy and Spain as supplier to Germany. CEE is also the Old EU’s key, and wholly captive, market.

Its German hegemon depends on it. In 2020 Berlin exported €179 billion-worth to the eleven, compared to €103 billion to the US, €96 billion to China and a measly €23 billion to Russia.

The region’s economies have duly grown, but figures for real GDP per capita yield bitter reminders of the challenge still ahead. Poland generates only around one-half of the EU’s average, the Czech Republic two-thirds. Of course, this occludes the distance to the advanced Northwest. Your average Pole produces 26% of what a Dane does, your Czech, around one-third. Bulgaria generates a mere 14% and Romania 18% of Denmark’s output per head.

Will CEE ever catch up? The odds aren’t promising. Demography and China’s galloping self-sufficiency are brakes enough, but the colonial system could be the clincher. To enjoy advanced-country wealth you must match the productivity. Here CEE desperately needs to improve its pathetic innovation, but dominion status now is a major block.

In a branch economy non-local firms sit atop the best value chains. Foreigners skim the largest returns and send the profits back. Nothing guarantees they’ll reinvest. They do most development at home, and nothing forces them to share. The IMF confirms that increasingly they force their CEE offshoots to buy high-value inputs from outside. And foreign-owned firms are barred from classic routes to growth, such as building brands or buying out the competition.

So CEE depends on its native firms. They tend to be small and are hard pushed to innovate. They battle with EU bureaucracy and fight a plethora of extra ploys. Certification games can add a fifth to export costs (Northern Ireland ring a bell?). Public tender rules prevent you from favouring your own. You want your government to develop new sectors?  State aid rules are draconian. In one of those rare public outbursts Poland’s Premier Mateusz Morawiecki lamented: “The technology-rich EU sells us their VWs and Renaults. But when our truck drivers enter their markets, they go for protection”.

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By Ayaan Hirsi Ali

Dense webs of incumbents rig the rules. “In Brussels they feign surprise when no CEE companies turn up to plan standards,” a Czech official in charge of high-tech policy told me. “It’s pure hypocrisy. Our firms are too small, they aren’t in the old boy networks. Time and again the regulatory game’s been fixed before we get there, stitched up by the usual suspects”.

Lacking big industrial groups, the East is locked out of giant high-tech projects on which billions are lavished. The West hogs spending on space, defence and research and development (€120 billion is earmarked for these to 2027). Though it has over a fifth of the EU’s population, scandalously CEE received a mere one-twentieth of the €65 billion disbursed for R&D in 2014-20. (Compounding the insult, non-members Israel, Norway and Switzerland cashed in more.)

Things will get worse as the EU devotes more to chips, champions and other chunky goals which favour established players. Expect Old EU firms to grab most of the €56 billion in Covid recovery grants allocated to CEE (only 13% of the total, discrimination again). Then there’s the absurd net zero carbon target. The region can’t afford it. Nevertheless, cheap energy sources will be banned. CEE’s competitiveness will be squashed, and the region’s taxpayers will be made to subsidise western producers of green kit such as wind turbines and their ilk.

There’s little sign, then, that native firms can achieve global scale and productivity en masse. Meanwhile, foreigners will retain every incentive to milk their implantations and withhold the best technology. So CEE faces a “middle income trap”. It’ll be stuck behind for good, even as the Old EU’s anachronistic economies themselves battle to keep up with the US and Asia.

Of course, within the bloc the economic crevasse will still count. Too wide, and there’ll be a massive new mezzogiorno, festering with resentment, depopulating fast and prone to implode at any point. To minimise this threat Brussels must urgently cut a New Deal for its inland empire. It should free up its rules and help the region’s businesses to expand.

For their part, politicians in CEE should call out the colonialism and extract freedom for their firms. If there’s no radical change, the Old EU had better brace for the strange populisms and other ills that a chronically two-tier Europe would unleash.