The EU’s Top Challenges in 2021: COVID-19, Global Economy and Return of Power Politics

Written by | Monday, February 8th, 2021

At the annual Ditchley conference, organized by the Centre for European Reform earlier in January, the London-based independent think-tank asked 50 top policy-makers and thinkers in economics and foreign policy to consider how the EU should respond to the pandemic, US-Chinese rivalry and its unstable neighbourhood. There was consensus that the EU needed to be more assertive internationally and less slow-moving internally, but there were disputes about how far it should go to achieve those goals. The Macronistes wanted a Gaullist EU with governments clubbing together to be more able to quickly confront crises, and with the EU more nimbly dealing with the big men of modern geopolitics. Their more cautious opponents emphasized that member states should act together where possible, and focus on what was achievable with an EU of 27 leaders with different domestic political pressures.

On the recovery from the pandemic, the conference agreed that massive monetary easing and fiscal support were needed, and that furlough schemes and subsidised lending to businesses were the best way to ensure that viable companies did not go under. As for the recovery phase, when vaccines had been widely administered, disagreement broke out. Some experts argued that governments should continue to stimulate consumption to offset any increase in precautionary saving by households. Others said that high levels of saving by richer office workers would mean that consumption would jump anyway. And there were disputes about whether governments should seek to subsidise private investment, with some arguing that private sector borrowing costs were very low, suggesting that consumption was the problem. Others argued that capital and workers would have to be re-allocated from insolvent businesses to growing sectors of the economy, and fiscal and monetary support for the private sector would have to be reduced. Still others contended that the EU’s recovery fund was a sensible attempt to counteract stagnation in Europe, which preceded the pandemic, despite the risks of waste and corruption and the fact that most of the spending would happen after the pandemic was over.

The rise of China was both a problem and an opportunity for Europe, with the conference broadly agreeing that the balance had become negative as Beijing had become more assertive about its authoritarian model of government, and less willing to follow Western rules and norms. It was good for Europe’s economy if Chinese people continued to get richer, raising demand for European products. Europe could not seek to follow the US into a struggle for supremacy. But as it was not a unified state, the EU relied on international law to achieve its objectives, and would struggle in a world of great power competition. However, participants agreed that the EU should work with the incoming Biden administration to curb China’s intellectual property and subsidy policies and counter its strategic use of foreign investment for foreign policy aims. Some argued that the EU was unlikely to speak with one voice on China’s human rights abuses, to US annoyance, but governments should realize that Europe could only rebuild the frayed international order with the help of America.

On the US dominance in tech, the debate was divided on whether it mattered that Europe did not have tech giants. On the one hand, their contribution to productivity across the economy was not as big as the giant companies of yesteryear, and there was no reason why Europe could not import digital platforms just as the US imported German and Japanese industrial robotics. But on the other hand, it was proving difficult to regulate tech companies, and if they were European companies it might be easier to bear down on the bad effects of their algorithms. And because Europe lacked tech expertise, it did not come up with digital innovations that could do more to improve society. However, while the EU continued to be around 20% poorer than the US, a series of pro-competition reforms in Europe, starting in the early 2000s, meant telecom, flights and other services were far cheaper than in the US, raising living standards especially for poorer people. And the EU was having some success in exporting its internet rules internationally, and was winning the argument for better safeguards against hacking, disinformation and the abuse of personal data.

The concept of ‘strategic autonomy’ in trade and investment policy proved a controversial issue that was hotly contested. For some experts, the use of vague terms that overegged the EU’s power would do little to impress the Biden administration, which would want to know how the EU planned to help it achieve some of its concrete goals, such as curbing China’s foreign investment in strategic infrastructure and opposing expansionism in the South China Sea. Others were more positive, arguing that the EU had the power to set standards globally, because multinational companies had to sell into the EU’s large market and follow its rules. However, there was agreement that it was important that the EU avoid using strategic autonomy as a cover for moves to create European champions, and the bloc should limit the distortions to trade from its attempts to change the behaviour of other jurisdictions. The border carbon adjustment mechanism, for example, would be more efficient if it were a carbon tax that was levied indiscriminately on European polluters and carbon intensive imports.

Finally, there was consensus among the experts that the EU could offer more ways for countries in its unstable neighbourhood to integrate with the bloc. Most Eastern Partnership countries, such as Ukraine, Armenia, Georgia and Moldova, wanted a closer relationship with the EU and a more distant one with Russia. Liberals in Turkey, North Africa and the Western Balkans needed the promise of better living standards, which a closer relationship with Europe would bring, in order to defeat their corrupt and clientilistic opponents. The EU’s foot-dragging on Turkey’s accession had weakened the incentive for further reform of the Turkish state and had allowed Recep Tayyip Erdo?an to pull away from the Western model of governance. As for Sub-Saharan Africa, the EU was fearful that rapid population growth would raise migration to Europe, but the region should be seen as a source of opportunity for higher trade and investment. African immigration could also help provide workers as European societies continued to age. But the region needed more official lending to help it get through the pandemic, and more help with security, especially in the Sahel.

‚Ditchley Conference Report: COVID-19, the Global Economy and the Return of Power Politics‘ – Report by a Team of Authors – Centre for European Reform / CER.

The Report can be downloaded here

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