In view of growing geopolitical conflicts, the European states must move closer together financially, economically, politically, and militarily in order to stand as an independent actor in the world order. This view is put forward by former Bundesbank Executive Board member Andreas Dombret and former US General Ben Hodges in a conversation with Börsen-Zeitung.

However this no easy task when military expansion from Russia stands at the eastern border, rising China acts more aggressively, and the former world power USA increasingly pursues an isolationist course and turns away from partners. Dombret, a German-American, and Hodges, an American, agree that Europe must cooperate with the USA as much as possible, but also assert its own positions far more strongly.

In today’s world, Capital Markets Union – now known as the Savings and Investment Union – therefore holds not only economic significance but also security-policy importance. „Europe is facing an existential crisis,“ Dombret states. „We must therefore put an end to petty nationalism and think far more in European terms,“ he urges, a position shared by Hodges.

This includes finally tackling capital markets union, even if that is easier said than done. „We do not have a United States of Europe, but still sovereign countries with their own bankruptcy laws, national deposit insurance systems, and the like. So far, we have not even managed to introduce the simplest standardised securitisations across Europe,“ laments Dombret, who was an Executive Board member of the Deutsche Bundesbank from 2010 to 2018, and previously held management positions at European and US private sector banks.

There is no doubt that Europe is under attack, says Hodges, who most recently commanded the US Army’s European forces from late 2014 to 2017. „A hybrid war is already taking place before our eyes. The Russians are at war with us, even if we do not want to admit it.“

They rely on confrontation with the West, using a wide range of methods, including classic cyberattacks and fake news, as well as arson attacks or the disruption of navigation systems of planes and ships. There are alleged assassination attempts against Rheinmetall CEO Armin Papperger, and severed underwater infrastructure such as telecommunications and power cables in the Baltic Sea are likely due to sabotage by Russian vessels. Recently, a swarm of Russian drones flew over Polish territory for the first time, apparently to test reactions from politicians and the military and to instill fear among the population. „We in the West are still unclear about how to deal with this,“ says Hodges.

According to Dombret, this undeclared war is increasingly being fought economically. „The economy is increasingly used as a weapon,“ he observes, also referring in this context to the „weaponisation“ of financial markets. Russia has shifted to a war economy and has for years and decades been experienced in using oil and gas supplies as leverage. The countermeasures came after the Russian invasion of Ukraine in February 2022, when the European Union alone froze 210 billion euros of Russian central bank reserves. In total, around 300 billion dollars are said to have been frozen by Western states. Dombret and Hodges support this measure.

Even though this has so far been a unique event, similar actions must be expected in potential future conflicts: „Should there ever be a war between China and Taiwan, the first reaction of the USA would likely be to freeze Chinese assets denominated in US dollars,“ says Dombret.

Global frictions are increasingly preoccupying banks and regulators. Next year, the European Central Bank plans to conduct a dedicated stress test to examine the effects of geopolitical developments on the earnings of major European banks. „We must prepare for a prolonged period of geopolitical tensions – characterised by great uncertainty and increased volatility,“ ECB banking supervisor Claudia Buch warns – preparing for protracted confrontations. In a May interview with Börsen-Zeitung the President of the Sparkassenverband Rheinland-Pfalz, Thomas Hirsch, stressed the importance of preparing for crisis situations – such as those Russia could trigger with cyberattacks on critical infrastructure like financial services and food supply.

Dombret also considers it prudent to address how greater resilience can be built, closely examine how geopolitical risks spread, and try to mitigate their impact. He regards the three main consequences of geopolitical tensions for the financial sector as growing credit risks – increasing burdens on public finances – and, above all, market turbulence triggered by shadow banking.

Accordingly, escalating trade tensions or cyberattacks could, for example, burden companies and drive up banks’ credit risk provisions. A combination of lower growth and the need to spend more on defense could, in his view, further increase the already high burdens on public finances. Finally, sharp risk swings in the financial markets could create unrest and price fluctuations – especially if non-banks face liquidity shortages. „All of this can undermine financial stability – particularly when crises occur quickly.“

In view of the threat posed by sabotage and cyberattacks on critical infrastructure, Dombret advises holding on to cash. „Of course, electronic payment methods are also needed. But now is the worst time to abolish cash – doing so would make our society more vulnerable," he says. Dombret is not alone in this view. In Sweden, for example, a pioneer of digital payments, the central bank recently even recommended that the public hold cash reserves, as payment systems are vulnerable to cyberattacks.

Banks, like companies and institutions, are therefore urgently advised by Hodges to update and secure their IT systems, networks, and data. „In the case of Russia, you are dealing with a powerful state actor,“ he warns. To prevent attacks on critical infrastructure, whether energy supply, telecommunications, payment systems, or cash provision, he also relies on deterrence.

At least, in his assessment, this played a role in the administration of former US President Joe Biden. Hodges believes that Biden took a firm stance after a cyberattack in May 2021, most likely originating from Russia, disabled the Colonial Pipeline in the USA. The then-president reportedly made it clear to Russian President Vladimir Putin that the Russian financial system could be destroyed by British and US forces should such an event occur again. However, deterrence must be credible. „You only have it as long as the other side believes that you would use your means if necessary,“ says Hodges.

As a step in the right direction toward greater resilience, he and Dombret regard Germany’s 500 billion euros investment package for security and infrastructure as positive. Germany has also demonstrated leadership in Europe with this move. „I can’t remember when Germany received so much applause from the rest of Europe. Everyone said: The Germans are finally back,“ says Dombret.

Although he is broadly satisfied, he also sees risks. „As far as military spending is concerned, in my opinion there was no alternative. We had to make the money available for the Bundeswehr immediately. However, we could have waited a bit longer for the infrastructure financing.“ He considers it rash to loosen the debt brake without first determining how to manage the debt in the future.

Hodges points out that the often-cited turning point (Zeitenwende) comprises much more than just money for the Bundeswehr. „It’s not only about hundreds of billions of euros – it’s also about how the Germans view their military and overall security.", he says. Psychological and cultural aspects must also be taken into account – and Germany sometimes struggles with this.

Berlin should continue to lead by example and act confidently, even if some citizens find it uncomfortable. „Germany must take on a leadership role in Europe. It’s like a football team: the team leader may not be the loudest, but he is always present – and he delivers. In my view, that is Germany’s role.“ Investing in defense will exert pressure on other states that have so far hidden behind Germany. „They now have to step up and do what Germany does.“

In the context of the turning point, it should also be considered that defence companies need more planning security. They are only allowed to produce weapons if there is a government contract. If such contracts are absent or delayed due to slow procurement bureaucracy, manufacturers cannot scale up production capacities at their own risk. „That kills any business,“ says Hodges.

As a third point, Hodges mentions limited opportunities in research with military applications. At very few German universities is it permitted to make research findings militarily usable. „It restricts Germany’s ability to develop artificial intelligence and other capabilities needed for modern warfare if the brightest minds are not involved.“

Dombret also notes that the seriousness of the situation is not yet clear to everyone. That the world has been experiencing „extreme uncertainty and, at the same time, record stock prices“ for months surprises him. „The risks have not yet fully materialised in the financial markets. Despite the risks, the markets remain fairly relaxed. There is, therefore, undoubtedly a certain discrepancy.“

Hodges speculates that one reason for the financial markets’ nonchalance, despite the enormous geopolitical challenges, lies in the hesitation of many Western governments to do or say things that could trigger panic. In his view, European top politicians must make it unmistakably clear to their citizens what is at stake. „If we do not act, but simply continue as before, we will increasingly fall under the influence and control of authoritarian regimes such as Russia and China. And who knows – perhaps the USA will eventually be counted among these systems as well.“

Hodges regrets that Western states are unclear about what their actual objective is regarding Russia and Ukraine. He suggests that Germany join forces with like-minded European countries as well as Canada and move forward together. „Putin’s Russia will always cause problems as long as it is not defeated,“ Hodges concludes. „If the war against Ukraine ends while maintaining the status quo, Europe will find itself in an even larger war within one to three years,“ he warns.

If Russia were ever to attack NATO territory, he believes it would unfold very differently from the war against Ukraine. The objective would also be different. „For the Russians, it is less about conquering NATO territory and possibly advancing to Frankfurt as in the Cold War, and more about politically destroying the alliance – deepening the rift between North America and Europe and showing the world that NATO is not willing to respond decisively to an attack on one of its members,“ Hodges explains.

He considers a scenario like the following realistic: Russian forces march into a Baltic state such as Latvia under the pretext of protecting allegedly oppressed ethnic Russians in the country. Only a fraction of the troop strength used to invade Ukraine would be required. This would be accompanied by massive airstrikes on ports, airports, power supply, and other critical infrastructure in Germany and other NATO states through which supply lines to the Baltics run. After a few days at most, the Russians would then halt their attacks, and the Kremlin would confront NATO members with the question of whether they are truly willing to risk a nuclear war over a small Baltic country. The goal would thus be to deter NATO members from fulfilling their mutual defense commitments, which would mean the end of the alliance.

In his assessment, the Russian president and his team realize that they can manipulate Trump to their advantage and that Europe struggles to act in unity. „They therefore believe they can defeat Ukraine under these circumstances. The only way to stop them is economic pain,“ says Hodges, who relies on sanctions. „Russia must no longer be able to afford the war.“

The German-American dual citizen Andreas Dombret (born 1960) and the American Ben Hodges (born 1958) each bring decades of leadership experience – one in international finance, the other in the US military. Dombret, the new designated Chair of the Supervisory Board of online bank N26, served as an Executive Board member of the Deutsche Bundesbank for eight years from May 2010, with responsibilities including financial stability and banking supervision. Prior to that, he held management positions at Bank of America (2005–2009), Rothschild Germany (2002–2005), J.P. Morgan (1992–2002), and Deutsche Bank (1987–1991).

Hodges was commander of US Army forces in Europe from 2014 until his retirement in 2017. He joined the army in the late 1970s. He now works with the consulting firm FBH Geostrat Consulting and is involved with, among others, the human rights organization Human Rights First.

Hodges and Dombret also know each other through their involvement with the Atlantik-Brücke, an organization committed to transatlantic cohesion. Hodges is a board member, while Dombret recently stepped down after 15 years of service in the leadership body.