Europe already ‘at war’ with Russia, says central banker

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Latvia’s central bank governor, Martis Kasacs, urged European policymakers not to be “naive” to the fact that the bloc is already “at war” with Russia.

Kazak, a member of the Governing Council of the European Central Bank and candidate for the position of Vice-president of the European Central Bank, stressed that central banks and the financial system need to prepare for further escalation.

“It is naive to think that we are not at war [with Russia]While the conflict was not unfolding “actually on our soil,” he said in an interview with the Financial Times.“, He pointed to cyberattacks that happen “all the time,” sabotage of underwater cables in the Baltic Sea, and violations of Danish airspace by suspected Russian drones.

“We need to be flexible to deal with this,” Kazaks said.

The 52-year-old trained economist, who has headed Latvijas Banka since December 2019, is one of six contenders to become Luis de Guindos’ successor as vice president of the European Central Bank.

De Guindos’ non-renewable eight-year term is set to expire in May, and the finance ministers of the eurozone’s 21 member states could decide on his successor on Monday.

Kazak, who is competing with rivals including Finnish central bank governor Olli Rehn and former Portuguese governor Mario Centeno for the position, has been one of the most hawkish voices on the ECB’s board. It was too early to warn about the risks of inflation after the Covid-19 pandemic and the start of the comprehensive Russian invasion of Ukraine in 2022.

In recent years, NATO has strengthened its military presence in Latvia, a former Soviet republic that includes a large Russian minority and has a 280-kilometre border with Russia.

Over the past four to six years, the Central Bank of Latvia has been working on “various emergency planning issues,” Kazaks said.

One focus area was ensuring the continuous availability of cash and digital payments in the event of a crisis, requiring commercial banks to operate networks of “critical” ATMs, including some equipped with their own electricity generators.

The country has also developed an “offline physical card payment” system at pharmacies, gas stations and food retailers.

“We are in many cases best in class and other countries are emulating our solutions,” he said, adding, “We are happy to share them.”

He said the central bank’s contingency plans relate not only to the “risk of a Russian attack” but also to scenarios such as floods and other risks linked to climate change.

If a euro member faces military conflict on its territory, it could lead to “financial stability issues” and problems in the banking system, as well as concerns about debt sustainability, Cazacs said. “You might have spreads that move,” he said.

However, the central bank governor stressed that those risks are “marginal” and can be addressed by the European Union.

“It is in our hands to make this a possibility [of direct conflict with Russia] Increasingly declining, he said, whether by supporting Ukraine in such a way that Moscow “doesn’t win in Ukraine” or by bolstering European military forces “to create a view in Russia that Russia will not win in Ukraine.” [any attack] “It is a huge risk and not even worth thinking about.”