Defending Europe’s Economic Sovereignty: New Ways to Resist Economic Coercion

Written by | Tuesday, November 10th, 2020

Europeans have been among the biggest advocates and beneficiaries of a rules-based, open economic order. By promoting the idea of free and fair trade, EU governments and institutions hoped that globalisation would benefit everybody. But, even before COVID-19, this order was coming under enormous pressure. The most important structural feature of our world today is not multilateralism, but rather a bipolar competition between China and America – Europe’s two most important economic partners. As a result, the nature of globalisation is changing. Because neither China or America wants a conventional war, their most powerful weapon is to manipulate the architecture of globalisation.

Both China and the United States are merging geo-economics with geopolitics. The Chinese are using investments strategically, manipulating markets through state aid and undermining the European Union’s voice on the world stage by deliberately weakening multilateral institutions and undercutting the EU in third countries. But America, too, is increasingly politicising things we once thought of as global public goods: the US financial system, SWIFT, the World Trade Organization, the internet, and the International Monetary Fund. Rather than being a barrier to conflict, interdependence will increasingly be weaponized.

There is a real danger that Europeans will be squeezed in the middle of the Sino-American competition. Europeans are likely to increasingly face extraterritorial sanctions, forced sensitive data transfers, and extraterritorial export controls that distort the European market and global competition. The Chinese government has tried to pressure European states into making political concessions by threatening to withhold medical supplies during the pandemic. Donald Trump has undermined Europe’s diplomacy on Iran – and international law – with secondary sanctions on European companies. An already heterogeneous global monetary and financial system is now confronted with a real risk of fragmentation, if not an eventual break-up. Consequently, if we want to prevent the rules-based order from fragmenting, we need to build European strategic sovereignty and better integrate economic and geopolitical policy. However, to do this, Europeans will need to overcome some barriers in our thinking, our capabilities, and our institutions.

Firstly, the intellectual barrier. The EU must learn to think as a geopolitical power, define its goals, and act strategically. In a very small number of areas, the EU may want to limit its dependence on others or make it less one-sided but, on most issues, European autonomy is not possible or even desirable. European sovereignty should mean being able to decide for ourselves about our interests and bargain effectively within an interdependent system through credible counter-threats against threats and hostile actions. It is not about giving up our liberal values or further undermining the rules-based order. But, sometimes, the best way to stop people from undermining these things is to raise the costs for rule-breakers by implementing effective countermeasures. This is something that Europeans have learned well in trade, where the European Commission is empowered to take countermeasures against sanctions from others, even our closest allies. However, the ultimate goal in this is to preserve the rule of law and deter others from undermining an open system.

Secondly, the institutional barrier. Building economic sovereignty requires the EU to stop thinking and acting as a ‘fragmented power’. Currently, European economic governance effectively ignores geopolitical considerations. Because of a division of tasks in which Brussels deals with international economic concerns such as trade, while related geopolitical issues belong largely to EU member states, the EU has behaved as a fragmented power. This prevents Europeans from being able to respond effectively when other powers instrumentalise economic tools to achieve political ends.

And, finally, the EU needs to develop some capacities to deal with specific vulnerabilities. The European Council on Foreign Relations outlined an ambitious agenda for how Europe can strengthen its economic sovereignty in its earlier report, Redefining Europe’s Economic Sovereignty. The ten papers in this series focus on how to deal with some of the disparate risks of economic coercion. The European Commission has the tools to respond to punitive tariffs. And the EU’s investment screening framework helps it address worries about foreign investments in strategic sectors of European economies. But there are also other forms of economic coercion Europeans do not know how to respond to or how to disincentivise. Therefore, this series puts forward concrete proposals, including building a digital euro, establishing an EU Resilience Office, issuing personal sanctions as a reciprocal reaction, and creating a level playing field instrument, a collective defence instrument, and a positive trade agenda.

The guiding star for Europeans is to have an open, rules-based order; and our goal should always be to defend and advance that. But – as with trade – sometimes the best way to defend that order is to deter others from undermining it. That is why we need to develop a toolkit: so that we know (and everyone else knows) what our options are. The enclosed papers are creative ways of thinking about achieving this. Hopefully, we will never have to use them.

‘Defending Europe’s Economic Sovereignty: New Ways to Resist Economic Coercion’ – Policy Brief / Preface by Mark Leonard – European Council on Foreign Relations / ECFR.

The Policy Brief / Preface can be downloaded here

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