New Europe

Outlook

Traders pretend to be able to put the Russia/Ukraine issue in perspective—meaning it’s not a con-tagion-worthy crisis and not likely to turn into one. Yesterday the EU foreign ministers beat back a proposal by the UK, Sweden and Eastern European countries to ban exports of military goods, but France prevailed (it has big sales pending). A small victory was the agreement that the EC consider broader “tier-three” sanctions against sectors, of which the most important is the capital market. Technologically sensitive sectors are in there, too, as well as the mili-tary. In the grand scheme of things, this is actually quite brave of Europe, considering its past performance in crisis situa-tions, where it stood back behind American skirts and twiddled its thumbs. Solidarity with the Dutch may have some-thing to do with it, and let’s not downplay the UK’s efforts at leadership.

Here’s the crux of the matter—Europe will back off a third round of sanctions if Russia “cooperates,” but we don’t have a hard definition of cooperation. The US asserts Russia is continuing to supply the separatists with big, advanced weap-ons, which are being massed along the border. It seems logical to define “cooperation” as not doing that anymore and withdrawing from supplying the separatists, but Putin would lose face if he does that. The key to a good resolution is pushing Putin back into place without damaging his domestic standing. One thing he could do is acknowledge that Rus-sia doesn’t have to defend all Russians, everywhere. In that basis, he should be invading Brooklyn.

So while various markets, even oil, are downplaying the crisis, the crisis is bigger than one downed airplane. It therefore has the potential to be deeply negative for the European economy. Again, the FX market is keeping a wary eye on it and we can’t say the euro is down because of it, but isolating and punishing Russia for bad behavior is a new thing and a very big deal. Maybe we can claim that the effectiveness of sanctions on Iran gets some credit, even if they were glacial-ly slow in S. Africa and of no use at all in N. Korea.

After the upcoming pullback in the euro, we expect it to fall again.