I The diplomatic push looking for an end to the Russia-Ukraine war has heated up in recent days, and now seemingly also include BlackRock CEO Larry Fink joining the U.S: negotiating team to discuss rebuilding Ukraine. As discussed in earlier notes, it remains positive that the Trump Administration is once again fully engaged in finding a peaceful solution to the conflict, and in the process talking to both warring parties and European leaders. There remains, however, nothing to indicate that Russia is seriously considering entering into any ceasefire or peace agreement. Despite ongoing strategic messaging by all sides in the conflict through the global media about the status and possible success of negotiations, the strong base case remains that no breakthrough is imminent and the war is likely to rage on for the foreseeable future in 2026.
A number of “negotiating trial balloons” have been floated in the media in recent days, including that Ukrainian president Zelensky has now agreed to possibly holding elections shortly, in an apparent concession to the Trump Administration and Russia. However, Zelensky made this conditional on a guaranteed ceasefire during these elections, which Russia has already rejected. Another issue revolves around the status of Donetsk, where proposals for a demilitarized zone has emerged and allegedly not been dismissed by Zelensky, and as such could be spun as the first engagement by Ukraine on the issues of territorial concessions in Donetsk. Here, however, the issue is that Ukraine – quite reasonably – sees a demilitarized zone as a mutual issue that would require both sides to withdraw forces from the immediate frontline and see the introduction of foreign “peace keeping troops” to police it. Russia on its part insists that such policing be done only by Russian police and national guard troops, a position obviously unacceptable to Ukraine. Zelensky has also been open to a possible referendum about any territorial concessions to Russia, though this again can only be considered a poison pill to any such actual agreement, as it seems certain in recent polling that the Ukrainian people would reject it if asked.
Again, these types of negotiation hypotheticals discussed in the media do not give any real indication of willingness to compromise to reach a near-term agreement, and in reality only really serve one purpose for Ukraine and its European allies, namely to make it as hard as possible for Donald Trump to exclusively accuse Ukraine for being the obstacle to peace. In time, Zelensky and European leaders still hope to convince the US president that it is Vladimir Putin and not Ukraine, who is the real obstacle to the “quick deal” Trump so dearly wants. Whether they will succeed in this remains unclear, but their media engagement suggests their attempt is ongoing.
Importantly, however, Ukraine and its European allies are not only engaging with the Trump Administration’s peace process, but also taking other relevant measures to improve Ukraine’s position in the war. Here, Ukraine has in recent days scored a significant tactical battlefield victory in retaking the city of Kupiansk, despite Vladimir Putin previously claiming it was wholly under Russian control on live TV. Ukrainian president Zelensky wasted no time in visiting the frontline inside Kupiansk to publish Putin’s and Russia’s military failure. This morale boosting victory for Ukraine must not though be interpreted as if the general situation on the front is shifting in Ukraine’s favor, as Russian forces continue to make gradual advances elsewhere in the Pokrovsk area and in Zaporizhia in the South. Yet, retaking Kupiansk, one of Vladimir Putin’s publicly identified near-term operational goals for the Russian army, does illustrate that the “Russia’s imminent victory is inevitable” narrative – evidently very appealing to Donald Trump looking for any deal to end the war – is not the reality on the ground. Russia keeps making gradual and very costly advances, but Ukrainian defenses are not collapsing, and Kyiv’s forces retain the capacity for localized counterattacks. There is in other words no compelling battlefield reason for the Ukrainian government to quickly sign on to a very unfavorable peace deal.
The EU has on its side taken several small, but legally important steps to prepare for an eventual still overwhelmingly likely deal on the Reparation Loan to Ukraine at the next European Council meeting on December 18-19th next week. As always in high EU politics, many member states will want to push their own agendas when the toughest decisions are to be taken in Brussels, but most importantly, the EU has decided to eliminate any risk that Hungarian leader Viktor Orban might in the future refuse to agree to the continued immobilization of Russian assets in the EU. This was done through a legally extraordinary maneuver by using the EU Treaty’s Article 122 and declaring this situation a “European emergency”, enabling relevant decisions to be taken by qualified majority and hence effectively overruling Hungary’s national veto over the foreign policy topic of EU economic sanctions. This is a potentially far reaching and precedent setting decision that will in the future likely erode the political efficiency of the EU’s national veto on common foreign policy decisions, as individual members now know that if sufficiently many other member states feel strongly enough about a given issue – as today about Ukraine – they can use Article 122 to overrule their veto. This decision further legally and politically ensures that Russian assets immobilized inside the EU will remain so until Russia ends its aggression against Ukraine and compensates it for the damage caused by its aggression. Effectively therefore, this decision significantly affects the kinds of future peace settlement that can be achieved with Russia and de facto raises the bar for any peace settlement to reached.
That Russia has understood the significance of the EU’s decision has already been illustrated by the fact that the Russian government has now suddenly launched a lawsuit against EuroClear and threatened it with confiscation of the €17bn in EuroClear assets held in custodianship inside Russia. The EU’s proposed Reparation Loan, however, envisions provisions to indemnify EuroClear or any other EU entities from any legal ramifications from decisions taken by Russian or third country courts in this matter, and EuroClear’s Russian counterpart, the National Settlement Depository (NSD) has approximately €30bn held inside the EU, which would be eligible for retaliatory confiscation by the EU in case the Russian government acts against EuroClear inside Russia. In short, the EU is not likely to be intimidated by Russia’s sudden interest in lawsuits and litigation, though it also seems likely that the EU’s decision on using Article 122 might be brought before the European Court of Justice (ECJ) in the future. Such a lawsuit, however, will take a long time – likely years – to unfold, de facto rendering it irrelevant for Ukraine’s near-term financial situation.
Next week will be a crucial week in the war, but do not expect any breakthroughs in peace negotiations. Instead, Ukraine is likely to receive a lot of money and political support from the EU and other allied nations. Currently at the time of writing, Vladimir Zelensky is scheduled to meet German Chancellor Friedrich Merz (quietly emerging as the European leader on these issues today) in Berlin on Monday for talks, likely to be joined by a number of other EU leaders and the NATO Secretary General. It is unclear if Donald Trump will also join and in light of Italy’s last minute reservations about the Reparations Loan, whether Italy’s Prime Minister Meloni will be present also seems uncertain. The last part of the road will be politically rocky, but the EU (and likely at least the UK and maybe Canada too) looks likely to be good for the money in the end.
II The other major event in Europe in the coming week is the December meeting of the ECB Governing Council, and the related publication of the next Macroeconomic Forecast for the first time including data for 2028. Given the overall resilient – if not outright boring – macroeconomic outlook for the euro area, with growth around potential at 1.2-1.4 percent likely next year, near record low unemployment, and inflation at or near the ECB two percent target, no rate policy or rhetorical changes should be expected from the Governing Council or President Lagarde. Instead, the focus is likely to be on what the macroeconomic forecast tells us about the ECB’s expectations for the coming years. Recent economic data in the euro area has clearly been better than expected in the September forecast, and President Lagarde recently pointed to the prospects of the new forecast upgrading euro area growth numbers.
A higher growth forecast should almost mechanically serve to limit the risks of material HICP inflation undershooting in the coming years, which in turn should lower the risk of the ECB implementing an additional “insurance rate cut” in early 2026 to avoid such risk arising from for instance a political decision to postpone the EU’s coming ETS2 carbon pricing expansion. Hence, recent economic data will have strengthened the modal case for no changes in ECB rates in the coming quarters and likely through 2026, while it at the same time seems premature to begin to speculate about whether stronger euro area growth will compel the next ECB rate change to become a hike.
Jacob
