The main new European economic data this week – GDP, inflation and unemployment – were uneventful and broadly in line with expectations. Flat GDP in Q4, marginally falling HICP inflation to 2.8 percent in December, and December unemployment stable at record low levels of 6.4 percent in the euro area will not have changed the ECB’s collective mind much, and the strong base case therefore should, as discussed in earlier notes, still be that the first 25bp rate cut comes in June.
This week’s main European news are instead related to Ukraine. First the country received good economic news, as the EU leaders approved the EUR50bn in financial support from 2024-27, and further reached a political agreement on – details to be finalized by the next EU Council meeting in March – a EUR20bn commonly financed military assistance fund for Ukraine. In the end, as discussed in earlier notes, the threatened veto against these decisions from Hungarian Prime Minister Viktor Orban did not materialize and facing total isolation and the increasing political irritation of the other EU leaders, he essentially conceded to the demands of the other 26. Orban will now, despite his claims otherwise, not have any prospects of adjusting or blocking the disbursement of the EUR50bn to Ukraine by 2027. Decisions of this nature can only be taken by qualified majority voting in the EU Council, depriving Orban of his veto power. This does not though mean that the disbursements are certain – other things might intervene, but it makes it clear that Viktor Orban’s ability to singlehandedly obstruct aid to Ukraine has been removed. In general therefore future grandstanding by Orban on Ukrainian aid issues should be ignored.
In general, EU political and financial support for Ukraine remains firm, as attested by the EUR50bn decision, but also by the recent call in the Financial Times by key EU leaders from Germany, Netherlands, Chezhia, Denmark and Estonia (all traditionally “frugal countries” now instead choosing also commonly funded aid to Ukraine) for collective financing of more military aid to Ukraine and the public endorsement by Emmanuel Macron for the Eurobond financing of military aid to Ukraine. There are no real signs of “Ukraine fatigue” in Europe.
Secondly, this and prior weeks has once again shown just how fast Ukrainian drone technology is developing in this war. Ukrainian forces successfully attacked and sunk a Russian missile corvette at sea, using five remote controlled sea drones, relying undoubtedly on the communication connectivity provided by Starlink. This is in military sense pure innovation, and highlights how Ukraine – a country without a navy – has been to break the Russian Black Sea naval blockade of its ports and restore especially grain exports and other sea-based trade links with the rest of the world. At the same time, it must be expected that this new sea drone technology, just like FPV and other drones pioneered on the Ukrainian battlefields, will spread relatively quickly around the world and soon be in the possession of also potential non-state actors. As such, sea drone technology is likely in the near future to pose significant potential challenges for the world’s shipping logistics.
Recent weeks have also shown how Ukraine has begun to master long-range heavy drone technology, capable of hitting key Russian infrastructure across most of the European parts of Russia. Kyiv has evidently begun to target Russia’s energy infrastructure around the Baltic Sea and Saint Petersburg, as well as Novorossiysk on the Russian Black Sea coast. The aim is to seek to destroy Russia’s ability to earn money from sea-based exports of fossil fuels from these two regions. Given Russia’s geographic size and large losses of air defense equipment in Ukraine, it is seemingly not possible for Russia to effectively protect many of its most important energy infrastructure centers. With Ukraine’s long-range drone capacity likely to continue to improve fast, the base case is therefore in the coming 3-6months that Ukraine will be able to significantly damage Russian energy export infrastructure in the Baltic and Black Sea regions. This could have a price effect on global energy markets. It is however important to note that this is driven by the speed of autonomous domestic technological progress in Ukraine, and is not related to the current hold up of funding by the US Congress. Ukraine has had a long-articulated goal of taking the war to also Russia’s industries and cities, but is only now starting to have the technical capacity to do so. This is not an attempt to pressure the Biden Administration, which has an obvious political interest in not seeing global oil prices rise, into delivering more weapons to Ukraine.
Jacob Funk Kirkegaard
