Oct 09, 2023

A European Strategy of Economic Statecraft 

The EU was built on openness to trade and finance, and not designed to cope with great power competition and the weaponization of interdependence. Now rapid change is needed.

Aerial view of a container terminal in the port of Hamburg, Germany November 14, 2019.
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It is a fuzzy concept, but in the world’s major capitals, economic security is much talked about. Depending on the speaker, the concept covers a country’s ability to cope with external threats and unforeseen shocks, to defend against economic duress, manage strategic dependencies, protect critical infrastructure, deter cyberattacks, and maintain and strengthen economic influence, especially through the mastery of technology and finance; it may also simply mean the capacity to deal with climate change.

Until recently, economic security did not feature very high on the agenda. Countries were supposed to follow the rules of the liberal multilateral order: Globalization and economic interdependence were considered to ensure lasting peace and good relations between the West and countries like Russia and China.  

Since Russia’s full-scale invasion of Ukraine and against the background of growing antagonism between the United States and China, pandemics, and climate change, governments around the world are racing to define new strategies to enhance their national security—and economic security appears to be one of the key aspects of modern statecraft. The task is a challenge for all, but for the European Union it is a particular one. The EU was not designed to cope with great power competition and the weaponization of interdependence, as competences for security reside largely with member states. Moreover, the EU treaties foresee openness to trade and global finance.

But despite its liberal and trade-oriented DNA, the EU must act quickly and prepare a strategy to deal with economic security risks. Its economies are among the most open to trade and investment, making them vulnerable to a fragmentation of the global economy. Moreover, given the absence of a fiscal union in the EU, its member states need to articulate a common response to the current global subsidy race triggered by new geoeconomic competition to prevent unilateral measures from seriously undermining the internal market.  

Two False Options

Some initiatives have been put on the table and the EU has proposed achieving strategic autonomy, but the fact is that there is no agreement on the objectives, the means, the priorities, and the way forward to achieve economic security. Two positions can be distinguished. One holds that geopolitical tensions can be dealt with as they arise and stresses the need to preserve openness and multilateral rules. It therefore advocates a continuation of the EU’s traditional “herbivorous” attitude. The other position argues that the EU needs to make a U-turn and adapt to the new reality of geoeconomic competition by prioritizing industrial policies, rearming, subsidizing, protecting strategic sectors, and reducing trade with countries not considered “like-minded.” The idea is to become a “carnivorous” power to avoid being devoured by others.

Both visions are wrong. The first underestimates the possibility of a major geopolitical confrontation. The risks are real, and facing them unprepared would entail significant costs. But those who advocate radical change are naïve about the feasibility of restructuring supply chains: Subsidies cannot change long-term comparative advantages and the cost of trying to do so could become prohibitive. Moreover, politicians and citizens often have a poor understanding of the costs of fragmenting the world economy into warring blocs, which the IMF estimates would be 7 percent of global GDP and which would hit Europe especially hard. They also do not appreciate how openness is a source of resilience thanks to greater diversification. 

A Three-Pronged Response

A finer-grained response is therefore needed, which should focus on three areas: on taking “hard” security risks more seriously, on better preparing for external economic threats, and on reforming the euro to be able to use monetary power as a geopolitical tool. 

First, EU member states must agree to Europeanize mechanisms for controlling both exports and outward investment in dual-use technologies, i.e., those that have both civilian and military uses and that some hostile countries wish to appropriate. This would enhance European security and protect the single market from differentiated national measures based on different security considerations but should be limited to very specific sectors (semiconductors, quantum computing, and artificial intelligence) to avoid an intensification of the ongoing de-globalization.

But since each country has a different perception of the risks to its security and this is still a national competence, it would be necessary to create a "European Economic Security Committee" to avoid unilateral actions and ensure coordination. Likewise, the European policy of inward investment screening needs to be rigorously applied to safeguard the security of critical infrastructures. A discussion on broadening criteria for investment rejection based on lack of reciprocal market access would enhance the EU's negotiating position vis-à-vis China.   

Second, the EU must be able to better cope with external economic threats and be less affected by geopolitical shocks or unforeseen events such as the COVID-19 pandemic. It must prepare for high-risk events that could have major repercussions on the global economy, such as a confrontation in the Taiwan Strait or Donald Trump’s return to the White House. Data-driven stress tests are good tools to prepare for such situations, as they detect vulnerabilities and overdependencies. Moreover, instead of protectionism and re-shoring, priority should be given to new trade and investment agreements, especially with Latin America and Asia. This would create opportunities for diversification and make the EU economy more resilient.   

But as increasing diversification with trade agreements will not solve all supply chain risks, more industrial activism is justified. Focusing on innovation, energy, and new technologies with a data-driven approach would help avoid massive subsidies covering entire sectors that could distort the global economy and render subsidies more focused on products where distinct comparative advantages could emerge. Moreover, to avoid fragmentation of the single market, such subsidies should be financed by the EU.   

Third, increasing economic security requires investment in European public goods, which will be cheaper if they are jointly financed. Expanding EU funding in defense R&D would boost innovation and help build an integrated European defense market. Joint resources are also justified to rebuild Ukraine and should be considered investments in the EU’s future security and economy. For both, a European debt instrument would be the right way forward. In addition, the EU budget should be adjusted to focus more on economic security and be the main vehicle for financing industrial policy initiatives in technology and decarbonization. And a stronger euro and greater financial integration would not only benefit the euro area economy, but would facilitate strategic autonomy, increase political leverage and even be an instrument of economic coercion and sanctions. But to use monetary and financial power the way the United States or China do, the EU must be willing to accept the political nature of money and promote the euro as an international currency.   

Economic security will play a major role in the international political economy. The EU has learned that interdependence can entail significant risks and is not institutionally designed for a less liberal and less cooperative world. It must therefore adopt a new approach based on new strategic alliances, the identification of the most serious security risks, a selective industrial policy, and greater economic and financial integration to increase its geoeconomic power.     

Federico Steinberg is a visiting fellow at the Center for Strategic and International Studies (CSIS) in Washington, DC, and a senior analyst at the Elcano Royal Institute.

Guntram Wolff is director of the German Council on Foreign Relations (DGAP) and a professor at the Willy Brandt School of Public Policy.

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