Stranger in Balaklava by CEBImagery (2013). Modified. License: CC BY-NC 2.0.

Economic consequences of the cold peace with Russia

in Economics/International Relations & Defence by

Russia finds itself in a similar situation as interwar Germany. A war is not imminent, but a cold conflict could arise and impoverish the Russians and the Europeans alike. It is symbolic that nobody else but the Germans offer today an open hand towards Russia with an EU-Russia free trade deal. Russia should accept it. Otherwise, both Europe and Russia will severely lose out. History teaches us how and why.

In 1919, in one of the two most important opuses of his lifetime, Economic consequences of the peace, John Maynard Keynes described the Versailles peace talks as a catastrophe for the European economy and the future peace prospects. His was arguably the first prominent voice predicting that such uneven distribution of the responsibility for the WWI costs would lead to a fundamentally unstable peace settlement. This “Carthaginian peace” imposed by the victors at a great expense of not just the defeated side’s but the whole continent’s economic capacity would trigger a far-reaching and more dangerous conflict in the very near future. Based on the harsh measures that the victors took against the loser, Keynes achieved no smaller feat than predicting the Second World War.

When, in the aftermath of the Second World War, the allied powers thought of finding a way to avoid a Third World War, Keynes’ vision was probably crucial for shaping the perception that a Carthaginian peace stalemate needs to be avoided in order to prevent increasingly dangerous conflicts on the European continent in the future. The conviction that Europe as a whole needs recovery (and that people who endup on the wrong side of the barricade cannot be punished until they financially bleed out) was one of the main motivations for the establishment of the Marshall Plan. Opposed to it wasthe concept of “ultimate humiliation”, in other words, a belief German society has to be transformed into a rural backward black hole in the middle of the continent. This latter idea was then mostly promoted by an important part of the Soviet establishment and by Germany’s Eastern neighbours.

I do not think I need to underline that large-scale projects, such as the Marshall Plan, primarily aimed at avoiding the kind of revenge realised after WWI by Adolf Hitler. His rise to power in the 1930s had been nothing else than an attempt to get a perceived just revenge on the victors and had been based in thinking there had been a need for durable domination of one people over others. Hitler worked within the Carthaginian logic, giving it nonetheless a new and horrifying dimension. Faced with the technological progress and even with the possibility of new and unseen weapons of mass destruction, the international community saw that “just one another” Carthaginian conflict, following those that have savaged the European continent for centuries, could be the last for the whole of humanity.

Along with the Marshall plan (which primarily aimed at mitigating the economic imbalances between Europe and USA that were accumulated during WWII) there was another, a long-term solution to avoid similar permanent alterations of war and peace periods in Europe: the European Coal and Steel Community (ECSC). Different from the plan, the ECSC was still even more inspired by the needs to avoid the mistakes of the Versailles talks. The real durable solution was one of sharing key economic resources in Europe, so that they could benefit all, rather than dividing them to prove the supremacy of the victors in some egomaniac sort of fashion.

Ultimately, ECSC as an association that took a lesson from the problems resulting of the uneven and, above all, inefficient division of economic resources after WWI, led to the establishment of a more comprehensive and ambitious European Economic Community (EEC).

After sharing key resources in the period, i.e. coal and steel, it continued in sharing and joint management of trade benefits. It drew upon the force of trade, this new coal and steel of the 20th century, which had previously been used both to foster prosperity and unleashed to use it in a destructive way in military conflicts. Albeit the discourse might have been different, the aim of embedding the German industrial potential in a peaceful way in the European Community was the most important and decisive factor for its establishment and, ultimately, for the European Union. It was therefore grounded in the need to fully integrate Germany and prevent the sentiment of a humiliating defeat, which could trigger another and even more dangerous backlash in the long-term.

Yet lessons that we have learned and solutions that we devised seventy years ago, seem to suddenly evaporate if one were to suggest their application to the current situation, albeit with different actors. The Carthaginian logic of humiliation and of “the more you lose, the less dangerous you become” has again dominated the discourse after the Cold War. Reasons for why we commit the same mistakes are many. The potential catastrophes are numerous. The solutions are few and one of them is Angela Merkel’s offer of the free trade deal.

Lessons learned and lessons forgotten

After WWI, Germany was stripped of its colonies, Alsace-Lorraine was re-annexed by France, and coal resources of Saarland and of Silesia were temporarily confiscated. Many specific conditions damaging and dividing the German economy were imposed and sanctions crippled the rest of the German economy with consequent negative spill over effects on the economies surrounding it. A large foreign debt incapacitated Germany’s ability to manage its own money base and led to the catastrophic hyperinflation of 1923. As a result, the external shocks from the Great depression were not countered with a healthy enough economy that could withstand them. Rising to power in 1932, Hitler drew upon the masses simmering with anger and used that emotional state for his benefit and, ultimately, channelled it into the biggest conflict of humanity, the Second World War.

The sentiment of a humiliating defeat and of Carthaginian peace felt by the post-Soviet population has not been present immediately at the end of the Cold War. Instead, it has grown slowly with the disintegration of the Soviet Union, the liberation of Soviet satellites and the dismantling of the economic basis of the Soviet economy. It has been felt during the reorientation to an increasingly primitive resource-based development and the effort to find a place in the global economy in which it had never been meant to function when it had been constructed, basically from scratch, after the 1917 October revolution. The fall of the COMECON left the Russian economy as a body without members, able to breathe, but not able to walk properly or to serve its citizens.

This economic humiliation, ostracising as well as dismantling of former economic and colonial ties and flows ominously remind us of the conditions of the Versailles peace, which led Germany’s economic mechanisms and flows to dysfunction. It lost crucial coal areas, all the colonies, their resources and property. It was cut in two in the East, reduced in the West, its inner consumption and production was disabled through sanctions and confiscation of productive capacity and resources.

Just as the inter-war Germans who had to grapple with nostalgia for the glory of the era after the Franco-Prussian war, in the last 25 years the peoples living on the territory of the Russian Federation have been increasingly confronted with the feelings of nostalgia for a world power that lasted almost four decades. Yet, the reality they are facing is becoming an increasingly primitive economy overrun by emerging countries of Asia and South America. The Russians have gradually become more insulated, more radical, and more hateful towards the mechanisms, principles and even the nations, which, in their eyes, were the perpetrators of this humiliation.

This is where a second and arguably more important and dangerous parallel arises. Humiliating a country economically incentivises the creation of scapegoats that can be laid on larger moral grounds, going beyond economic argumentation.. In the inter-war Germany, the sentiment of economic humiliation and a rising need for revenge was fed politically with the belief in moral and physical supremacy of the Arian race. In Russia, this role is today overtaken with the discourse of the moral supremacy of the Eastern Orthodox Church. To some extent, the “morally corrupt and blasphemous Europeans” are the new French and the “sodomites” are the new Jews.

Contemporary interpretations regard the inter-war appeasement as the main strand of the West European diplomatic strategy and give it the epithet of a naïve underestimation of the Nazi brutality. In reality, the discourse against the Germans after WWI was not at all prone to downplaying German capacity for war-making. On the contrary, in France and the US it was held openly that Germans understand “pure force and nothing but pure force”. To negotiate with them means to be forced into corner. This is something strikingly similar to today’s stances towards Russia that come from the hawkish elite of Europe and the US.

Both Daladier and Chamberlain were faced with a fierce opposition from the public and media as a reaction to the Munich agreement. Their appeasement strategy towards Hitler was to a large extent dictated by the necessity for a Realpolitik (or the impossibility to declare a war over the German demands, which unfortunately to a large extent adhered to Wilson’s Fourteen Points) rather than by the wishful thinking that Hitler would be able to keep peace in a long-term perspective.

In reality, the public opinion back then, especially in countries surrounding Germany, was much more resembling the feelings of Eastern European countries and the US diplomacy vis-à-vis Russia. It underlined the Germans’ incompatibility with the values of other Western European countries. It showed that negotiation is futile and that a second and a more decisive defeat must be imposed on Germans so that the (Carthaginian) peace could continue. Not by accident, this is exactly the same discourse we hear today in many parts of Eastern Europe from the large pool of hawkish and war-minded elite towards the Russians.

Solutions are rare

If WWII could probably not have been avoided in the late 1930s, the same can be said about a new Cold War. Many did not realise that the Cold War was a war and that the Soviets lost it. Instead, we saw it as a victory of the liberal democratic model and, therefore, also as a victory of the peoples living in the Soviet Union, which could thereafter thrive and grasp their potential for healthy socio-economic development. Observing the catastrophic economic aftermath of the dismantlement of the Soviet-Union, the rage and humiliation that arose in Russia and the disenchantment from the empire’s fall, this thinking of “victory of the people within a losers’ camp” is not justified. Indeed, Russians feel today as much anger as the Germans did between the two World Wars.

Unless there is a similar, while not necessarily as big, a change in the European approach towards Russia, one that would offer the same opportunities as the Marshall plan or the ECSC did to Western Germany in the WWII aftermath, we will face a new, global conflict. We can wait and hope it will be a “cold” conflict rather than a “warm” one. Or we can still try to avoid it.

The rhetoric of brinkmanship and of making threats towards Russia will lead as far as it they did with the Germans before the WWII. The recent constructive, peace-centred offer that Angela Merkel made in Davos for a common free trade area with the EU gives Russia a way out of the crisis and out of the Ukrainian conflict. It should not be ignored. It is probably the last chance to safeguard peace and prosperity both in Europe and in Northern Asia.

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