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Economy

European Debt? The First Question For Merkel's Successor

Across southern Europe, all eyes are on the German elections, as they hope a change of government might bring about reforms to the EU Stability Pact.

Photo of a people in front of a TV screen displaying Chancellor Angela Merkel waving

Auf wiedersehen, Frau Merkel

Tobias Kaiser, Virginia Kirst, Martina Meister

-Analysis-

BERLIN — Finance Minister Olaf Scholz (SPD) is the front-runner, according to recent polls, to become Germany's next chancellor. Little wonder then that he's attracting attention not just within the country, but from neighbors across Europe who are watching and listening to his every word.

That was certainly the case this past weekend in Brdo, Slovenia, where the minister met with his European counterparts. And of particular interest for those in attendance is where Scholz stands on the issue of debt-rule reform for the eurozone, a subject that is expected to be hotly debated among EU members in the coming months.


France, which holds its own elections early next year, has already made its position clear. "When it comes to the Stability and Growth Pact, we need new rules," said Bruno Le Maire, France's minister of the economy and finance, at the meeting in Slovenia. "We need simpler rules that take the economic reality into account. That is what France will be arguing for in the coming weeks."

Europe's north-south divide lives on

The economic reality for eurozone countries is an average national debt of 100% of GDP. Only Luxemburg is currently meeting the two central requirements of the Maastricht Treaty: That national debt must be less than 60% of GDP and the deficit should be no more than 3%. For the moment, these rules have been set aside due to the coronavirus crisis, but next year national leaders must decide how to go forward and whether the rules should be reinstated in 2023.

The debate looks set to be intense. Fiscally conservative countries, above all Austria and the Netherlands, are against relaxing the rules as they recently made very clear in a joint position paper on the subject. In contrast, southern European countries that are dealing with high levels of national debt believe that now is the moment to relax the rules.

Those governments are calling for countries to be given more freedom over their levels of national debt so that the economy, which is recovering remarkably quickly thanks to coronavirus spending and the European Central Bank's relaxation of its fiscal policy, can continue to grow.

Despite its clear stance on the issue, Paris hasn't yet gone on the offensive.

The rules must be "adapted to fit the new reality," said Spanish Finance Minister Nadia Calviño in Brdo. She says the eurozone needs "new rules that work." Her Belgian counterpart agreed. The national debts in both countries currently stand at over 100% of GDP. The same is true of France, Italy, Portugal, Greece and Cyprus.

Officials there will be keeping a close eye on the German elections — and the subsequent coalition negotiations. Along with France, Germany still sets the tone in the EU, and Berlin's stance on the brewing conflict will depend largely on what the coalition government looks like.

A key question is which party Germany's next finance minister comes from. In their election campaign, the Greens have called for the debt rules to be revised so that in the future they support rather than hinder public investment. The FDP, however, wants to reinstate the Maastricht Treaty rules exactly as they were and ensure they are more strictly enforced than before.

This demand is unlikely to gain traction at the EU level because too many countries would still be breaking the rules for years to come. There is already a consensus that they should be reformed; what is still at stake is how far these reforms should go.

Mario Draghi on stage in Bologna

Prime Minister Mario Draghi at an event in Bologna, Italy — Photo: Brancolini/ROPI/ZUMA

Time for Draghi to step up?

Despite its clear stance on the issue, Paris hasn't yet gone on the offensive. That having been said, starting in January, France will take over the presidency of the EU Council for a period that will coincide with its presidential election campaign. And it's likely that Macron's main rival, right-wing populist Marine Le Pen, will put the reforms front and center, especially since she has long argued against Germany and in favor of more freedom.

Rome is putting its faith in the negotiating skills of Prime Minister Mario Draghi, a former head of the European Central Bank. Draghi is a respected EU finance expert at the debating table and can be of great service to Italy precisely at a moment when Merkel's departure may see Germany represented by a politician with less experience at these kinds of drawn-out summits, where discussions go on long into the night.

The Stability and Growth pact may survive unscathed.

Regardless of how heated the debates turn out to be, the Stability and Growth Pact may well survive the conflict unscathed, as its symbolic value may make revising the agreement itself practically impossible. Instead, the aim will be to rewrite the rules that govern how the Pact should be interpreted: regulations, in other words, about how the deficit and national debt should be calculated.

One possible change would be to allow future borrowing for environmental investments to be discounted. France is not alone in calling for that. European Commissioner for Economy Paolo Gentiloni has also added his voice.

The European Commission is assuming that the debate may drag on for some time. The rules — set aside during the pandemic — are supposed to come into force again at the start of 2023.

The Commission is already preparing for the possibility that they could be reactivated without any reforms. They are investigating how the flexibility that has already been built into the debt laws could be used to ensure that a large swathe of eurozone countries don't automatically find themselves contravening them, representatives explained.

The Commission will present its recommendations for reforms, which will serve as a basis for the countries' negotiations, in December. By that point, the results of the German elections will be known, as well as possibly the coalition negotiations. And we might have a clearer idea of how intense the fight over Europe's debt rules could become — and whether the hopes of the southern countries could become reality.

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Geopolitics

Inside Putin's Deal For Iranian Drones

Outgunned by Ukraine's Turkish-made Bayraktar drones, Russia has reportedly started importing armed drones from Iran, which may have explained Vladimir Putin's recent visit to Tehran, which is looking to flex its muscles internationally. But it could prove to be a dangerous turning point in the war.

At an underground drone base, in an unknown location in Iran

Christine Kensche

The satellite images show a hangar. The rough outlines of two geometric shapes are visible — a triangle and an elongated object with wide wings. According to intelligence information from the United States, this is the Kashan airfield south of Tehran, where Iran is training its regional militias.

Stay up-to-date with the latest on the Russia-Ukraine war, with our exclusive international coverage.

The geometric objects are drones: the Shahed-191 and the Shahed-129, both considered capable of carrying weapons. Their name translates to martyr. According to U.S. information, the picture also shows a transport vehicle for visitors from Russia. If what the White House recently said is true, the "martyr" drones could soon be circling Ukraine, controlled remotely by Russian soldiers.

Tehran's drone army

According to national security adviser Jake Sullivan, Iran wants to deliver "several hundred" drones to Russia and train Russian soldiers on the devices. Training may have already begun, Sullivan said. In June, Russian delegations traveled to the Iranian airfield twice. Russian President Vladimir Putin was in Tehran in person on Tuesday.

It's a turning point for Iran as an international arms dealer.

"This is a significant turning point for Iran as an international arms dealer," says Israeli drone expert Seth Frantzman, who has published a book on the subject (Drone Wars). So far, outside the circle of its allies in the region, Tehran has only sold its technology to Venezuela and built a drone factory in Tajikistan. "The deal with the world power Russia finally makes Iran an international player in the drone business, with its influence reaching as far as Europe."

In terms of technology and trade, the world's drone powers are the U.S., Israel, China and, by some margin, Turkey. Indeed, the Turkish-designed Bayraktar drones are deployed by Ukraine against Russia, which initially gave Kyiv important strategic successes.

There are two key reasons why Russia is now apparently buying from Iran: its own drones cannot keep up. And Iran's drones are technically less sophisticated than those of Western competitors. But they do the job – and are quicker and cheaper to make. Even Iran's nemesis Israel recognizes the powerful potential of Tehran's drone army.

"Iran has massively upgraded its drone program in recent years," says Frantzman. The Shiite regime introduces new types of drones almost every week. According to information from the Israeli army, Iran has a complete production chain, from missiles to navigation systems. The parts are often copied — for example, from U.S. drones that Iran shot down in the past. It now has a variety of different series and types — from unarmed reconnaissance devices to combat drones and those called kamikaze drones (small unmanned aerial vehicles with explosive charges that ram their target). The damage Iranian technology can do has been demonstrated by the regime's devastating attacks in recent years.

Iranian Supreme Leader Ayatollah Ali Khamenei receiving Russian President Vladimir Putin in the presence of his Iranian counterpart Ebrahim Raisi (right) in Tehran

Iranian Supreme Leader's Office/ZUMA

Attacks by Iranian drones

Iran's arsenal of remotely piloted aircraft stretches from Lebanon, Syria and Iraq to the Gulf and Yemen. The technology is used by Iranian allies — by Hezbollah and Hamas against Israel, by Yemen's Huthis against Saudi Arabia, by Shiite militias against the U.S. Army. Or, indeed, by Iran itself.

The "Pearl Harbor" of the drone war happened three years ago: Iran used drones and rockets to attack the Abqaiq refinery of the world's largest oil company Aramco in Saudi Arabia. The Saudi air defenses were powerless. The attack shut down Saudi Arabia's oil exports for several months. Global oil production collapsed by six percent.

Iranian drones were used in the last Gaza war.

Since then, Iran has systematically relied on weapons. Drones are said to be responsible for at least five attacks on U.S. bases in Syria and Iraq in May and June last year. Iranian drone technology also played a role in the last Gaza war. Hamas not only fired 4,000 rockets at Israel last May. It also deployed a new explosive-laden drone.

Last year, Iranian drone attacks claimed human lives for the first time: Kamikaze drones attacked the Mercer Street oil tanker in the Strait of Hormuz, one of the world's most strategically important choke points between the Persian Gulf and the Gulf of Oman. Two crew members died, including the captain. Then, in the spring, drones attacked tankers and Abu Dhabi airport. Three people lost their lives. The Houthi rebels in Yemen, who are supplied with weapons and technology by Iran, said they were responsible for the attack on the U.A.E.

A military unmanned aerial vehicle (UAV or drone) launched from an Iranian navy vessel in the Indian ocean

Iranian Army Office/ZUMA

No war is won by drones alone

There is no precise information on exactly which drones Russia could acquire. The types shown by the U.S. on the satellite images are among Iran's most important reconnaissance and combat drones. The Shahed-129 is the country's oldest combat drone. It can stay in the air for up to 24 hours and can be armed with eight guided missiles. Also known as the Saegheh (Thunderbolt), the Shahed-191 is a combat drone whose specialty is great mobility. It can be mounted on the back of a truck and launched while the vehicle is in motion.

Kamikaze drones are easier and cheaper to produce.

This combat drone, which can be equipped with two remote-controlled anti-tank missiles, is therefore extremely flexible. However, it is doubtful that Iran can actually deliver hundreds of these types in a hurry. A deal with Russia is therefore likely to include kamikaze drones, which are easier and cheaper to produce.

If Russia were to use Iranian drones in the near future, it would not be a turning point in the Ukraine war, says expert Frantzman: "You don't win a war with drones." However, Russia could use them to damage Ukraine's strategic infrastructure comparatively cheaply, without having to put expensive war equipment at risk.

And another target could become the focus of Iranian drones — Western war equipment, such as the HIMARS multiple rocket launchers, which the U.S. supplied to Ukraine and which play a central role in defense against Russia.

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