A war economy is not a choice but a reality that democracies have to implement when under threat from authoritarian empires.
Russia’s invasion of Ukraine has brought war to Europe, and the future of European democracy will largely depend on its outcome. The conflict has spiraled upwards: massive deliveries of weaponry to Kiev were followed by Vladimir Putin’s threats of nuclear attacks; the response to Sweden and Finland expressing their desire to join NATO was the destabilization of Moldavia.
This new strategy comes with a radical change in the economic system, which is looking more and more like a war economy, and killing off globalization. The war economy originated in 1914 when all-out warfare became reality.
A war economy puts society and all its production facilities at the service of defense under the aegis of the state. It means reorganizing trade and finance in terms of strategic alliances by means of blockades and sanctions, by sharing out scarce resources and managing shortages through government planning, and by resorting a great deal to creating money – and intrinsic high inflation.
A war economy is undoubtedly coming into effect, particularly in Europe, which is in the front line against Russia. But, for the time being, people are unaware of this and are not being told how to deal with it, and this needs to happen for it to be sustainable.
Globalization has been brought to an end by a series of events: the Covid epidemic, the Ukraine war, and the change from fragmentation to the world’s division into increasingly closed blocs. Trade, the financial system and digital networks no longer stretch worldwide but center on three major hubs: the USA, Europe and the Asian democracies; the partnership between China and Russia; and the emerging nations that refuse to align themselves and pursue independent policies, e.g. India, Indonesia, Brazil, Turkey and Saudi Arabia.
The defense of vital interests is supplanting multilateralism, and security takes priority over market optimization. Each hub prioritizes its resilience by seeking to gain control over its access to raw materials, energy and food, by making its financial system autonomous, and by making its own regulations for digital networks and services. Furthermore, nations are speeding up their rearmament, bringing global military expenditure up to $2,113 billion in 2021.
These developments are deep-seated and ongoing, even if there should be a ceasefire in Ukraine, because relationships between the major powers in the 21st century are based on confrontation and mistrust.
This has very serious consequences. With regard to the business climate, world growth is falling sharply under the effect of China’s major slowdown because of its lockdowns, soaring inflation (8.5%) and the rise in interest rates in the United States, stagnation in the Euro zone, hard hit by the explosion in energy prices, and the overt crisis in emerging countries that depend on imports of energy and food products. Inflation is exploding, forcing up interest rates and creating the high risk of a financial crisis.
A war economy is not a choice but a reality that democracies have to implement when under threat from authoritarian empires. It is a shock to the economy, but above all to the world of politics. And it is one-sided – the United States is benefiting from the war because of extra demand for its energy, weaponry and agriculture, whereas Europe is bearing all the risks and the all the costs.
Major changes are required in the context of a war economy, not only in certain policies like energy or agriculture, but also in the way public authorities are structured and, above all, in the way citizens behave. The need for these changes has already been seen during the 2008 crash, the epidemic and the challenges of the fight against global warming and of increasing threats to democracies since the 2010s.
Governments must rethink their strategy and get back the ability to define and pursue long-term objectives. The European Union has to change in order to deal with issues of sovereignty and security, and build partnerships with the other world democracies. But the public authorities cannot do everything or finance everything.
The key is the citizen. But leaders have to put denial behind them and bring the truth to light with regard to what people have to do in order for political freedom to survive. This is the big challenge of the 2020s.
(Column published in Le Figaro, 9th May 2022)