Nov 22, 2021

Europe’s Next Geoeconomic Task

The European Union is increasingly leveraging its economic might as an asset in foreign and security policymaking. This complex “geoeconomization” of EU foreign policy will necessitate an improved focus on private sector involvement.

European Commission Executive Vice President Margrethe Vestager speaks as she and fellow EU Executive Vice President Valdis Dombrovskis participate in a Workforce Management into Tech Jobs roundtable during the U.S and European Union trade and investment talks in Pittsburgh, Pennsylvania, US, September 29, 2021.
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In the early 2010s—when Guido Westerwelle was Germany’s foreign minister and the BRICS (Brazil, Russia, India, China, and South Africa) were all the rage—I served as an embassy advisor in Berlin. Those were the times of skyrocketing Chinese and Indian growth rates, the unravelling of the euro crisis, and widespread punditry about an accelerating “post-Western” globalization. Concerned about the old continent’s future, European policymakers were in a constant search for successful strategies to regain lost ground in competition with a myriad of emerging global contenders.

Capitals across the European Union soon came to realize that this new economic race was not one to be won by the private sector alone. If European businesses were to be successful in foreign markets—particularly in cases like China or India where state-market independence would generally be lower than in Europe—an active governmental and diplomatic support for export and investment promotion would be needed. The task was clear: the public power of the state was to serve the ultimate goal of national prosperity and economic growth in Europe.

A Shifting Focus

In European governments’ search for best practices of engaging and cooperating closely with the private sector in international arenas, the views from Berlin came to be of specific interest to other capitals. Not because German civil servants were known to hold a strong tradition of engaging in economic diplomacy at the micro level, but because Germany, at the macro level, was about to solidify itself as Europe’s economic powerhouse: an aspiring “Exportweltmeister” and a primary trade partner of China and other vital emerging economies.

But the widespread acknowledgement in Berlin’s diplomatic circles of Germany’s impressive global trade performances was soon complemented by a recognition that this economic strength could also bring about benefits beyond a positive trade balance. International observers began depicting Germany as an emerging “geoeconomics” power, ultimately fostering and applying its own economic weight to obtain broader geostrategic objectives. This would, according to some commentators, often be at the expense of its European partners, as was allegedly the case when Germany sought to expand its trade and energy relations with Europe’s strategically most difficult neighbor, Russia.

The changing relationship between state and market power in the emerging multipolar environment was therefore also the subject of one particular exchange I had with colleagues from the German Federal Foreign Office of the time. In fact, it would be a rather casual remark by a younger policy planner, accompanying me to the exit gate, that would stick with me ever since: “It is quite striking,” he pondered, “that it is easier for the CEOs of Siemens or Volkswagen to get an appointment with the Indian minister of external affairs than it is for the foreign minister of Germany.” And paraphrasing a well-known dictum, he added: “It makes you wonder, if instead of only asking for what European governments can do for their businesses, we should also ask what European businesses can do for their governments.”

Whether the assessment of the Indian minister’s calendar management holds true or not; this somewhat loose contemplation came to encapsulate what has since become driving force for a gradually changing European approach to the relationship between the spheres of states and markets. In a nutshell, in European discourse, there has been a growing acknowledgment that prosperity is not just to be seen as an end, but that wealth and the actors who generate it are also a means for the EU to assert itself on the international stage.

Europe’s Longing for Relevance

Today, in the early 2020s, EU institutions and member states speak freely about the necessity for utilizing European wealth to obtain strategic objectives in areas such as trade, technology, energy, foreign policy, and security. The new task is clear: Europe’s mighty economic levers are to be translated into broader geoeconomic leverage—yet without reverting to a Trumpian protectionism that would undermine the very international rules-based order that Europe is so dependent on and committed to.

The task’s importance is not least reflected in the widespread European longing for reassurance about its geoeconomic capabilities and relevance. Last year’s warm reception—in Berlin and elsewhere—for the best-seller by Columbia law professor Anu Bradford, “The Brussels Effect: How the European Union Rules the World,” was indicative of this. The so-called Brussels Effect, Bradford argues convincingly, is caused by the centrality of the EU’s highly regulated and economically powerful single market, which transcends wider regulatory effects on value chains and market structures far beyond the EU’s borders.

In a similar vein, observers cherished the ambitious agenda of European Commission President Ursula von der Leyen, when she commenced her mandate by committing to a more assertive European approach to using its economic leverage. With an unconcealed hope for von der Leyen’s ambitions to materialize, some observers suggested that the new president would transform her body of commissioners into a veritable “geoeconomic commission.”

Looking back at the last two years, EU institutions and member states have indeed sought to deliver on the geoeconomic agenda, predominantly on two levels. On the first, the systemic level, the EU has expanded its vision for managing trade relations and market regulation. A case in point was the Commission’s recent trade policy review, presented as “an open, sustainable, and assertive trade policy,” formulating a range of broad objectives such as reforming the WTO, the promotion of green transition and sustainable value chains, a digital transition, strengthening the EU's regulatory impact, and deepening partnerships both in the EU’s immediate neighborhood and in Africa. Together with plans for enhancing Europe’s “open strategic autonomy,” von der Leyen’s promise for bolstering the EU’s economic assertiveness is steadily being substantiated.

The “Geoeconomization” of Foreign Policy

This assertiveness can also be identified at the second, yet often less acknowledged, level of European geoeconomic engagement, namely the intensifying use of economic levers for foreign and security policy purposes. A primary example of this is the Commission’s proposal, to be presented this fall, for a new Anti-Coercion Instrument (ACI). Acknowledging a critical development in which third states increasingly try to undermine or alter EU policymaking through coercive applications of trade and investments instruments, the ACI is meant to be a series of tools to counter such coercive attempts. Even if not solely emanating from China, but also from the United States—before and after US President Trump—,Russia, and others, it is particularly Beijing’s bold actions and divisive tactics that remain of key concern. And although Commission representatives have repeatedly underscored that the ACI will be designed to deter third countries from even attempting malign geoeconomic attacks against European interests, and hence ideally will never come into use, it would not come as a surprise if China, the US, or other geoeconomic players sought to test whether the barking European dog also bites.

Another example of the EU’s expanding use of geoeconomic foreign policy instruments is the joint effort by the Commission, the EU’s diplomatic service the EEAS, and member states to improve the enforcement of EU sanctions. In the past decade, European policymakers have only increased their appetite for using so-called “restrictive measures” as default answers to almost any strategic concern. Be it in response to the major strategic conflicts with Russia, Syria, and Iran, to thematic issues such as human rights violations or cyber-attacks, or to internal developments in Belarus and Lebanon: the loud and swift calls for sanctions are always among the first to be heard.

To ensure that the political demands are also implemented coherently and comprehensively, EU institutions and member states have recently launched a series of functional ideas for improving the European sanctions system. A new “Sanctions Information Exchange Repository,” a Brussels-based sanctions focal point, and an EU-wide whistleblowing mechanism are among the novelties to be instated for facilitating knowledge sharing, harmonization, and violation-detection across member states. This, so it is hoped among sanctions practitioners, will help to reduce the risks of sanctions evasions and the exploitation of legal loop-holes, which ultimately undermine the sanctions’ effectiveness.

Evidently, the state-led disruption of trade relations and value chains always comes with a cost, which—in stark contrast to other aspects of foreign and security policymaking—are ultimately felt in the same export-oriented private sector that the European policymakers wish to support. While creating global market opportunities for European businesses on the systemic level, the “geoeconomization” of EU foreign and security might reduce them. So far, this somehow odd duality has not attracted much attention, possibly because the economic costs of Europe’s coercive measures have been moderate because business interests, in most cases, have either not been massively exposed to sanctioned markets or have been diverted to alternative markets.

Engagement with Private Sector

While the economic power instruments in the EU foreign and security policy toolbox are being sharpened, the debate on the wider consequences remains rather blunt. Here, the German policy planner’s decade-old remark presents a valuable pathway toward considering how this trend of European foreign and security policy will, and should, impact the engagement and dialogue between state and private actors.

A prominent German example of the difficulty of striking this balance dates back to 2014 when the EU adopted economic sanctions against Russia in the wake of its annexation of Crimea and the downing of passenger flight MH17 over Ukraine. Initially, the German government successfully secured the public support of the Federation of German Industries (BDI), for imposing sanctions on the important Russian market for German exporters. But private sector support also had its limits. After a meeting with President Vladimir Putin in 2015, the CEO of Siemens prominently called for the EU sanctions to be dismantled.

Whereas it obviously remains in the hands of EU institutions and governments to decide on the legal regulation of markets and trade relations, it will only become more apparent how attempts to steer and manipulate global markets and value chains are complicated and dauting tasks that cannot be solved without close state-market cooperation. As geoeconomic interventions grow in number and magnitude, Europe’s next geoeconomic task is clear: It won’t be enough to regulate the private sector, it needs to be engaged and integrated into core discussions about European foreign and security policy interests. This is important because the challenges to be solved will not only revolve around the for-or-against the use of such instruments. Every trade regulation will have a flaw, every sanctions enforcement will have a gap. Large or small, if such legal cracks are exploited by private actors, they will ultimately undermine the coercive economic pressure policymakers seek to exert on their targets.

In a similar way to the way in which European capitals used the financial and economic crises to kick start the sharing of best practices on how the state could support business interests through an effective economic diplomacy, in the future the task will be to explore possibilities for establishing a two-way street between state and private actors, with the ultimate aim of building a robust European geoeconomic diplomacy. A starting point could be an exchange about the widely varying approaches to diplomatic state-market involvement, which—in my own experience —span broadly: From German diplomats’ light-touch engagements with particular business interests and the French diplomatic tradition of fostering strong ties to major exporting companies to the Danish model, where the provision of trade services is an integral part of the foreign ministry’s core business.

As the path toward the 2030s is paved with further geoeconomic confrontations, which will both emanate from and be targeted against Europe, there is nothing to suggest that the relevance of engaging private sector in foreign and security policy deliberations will decrease anytime soon. European policymakers should not only recall the impetus that led them to restructure their private sector collaboration a decade ago. They should seize the EU’s geoeconomic momentum to expand this engagement and seek answers to the difficult questions about how grand policy declaration are meaningfully translated into the operative machinery of diplomatic involvement in the complexities of market affairs.

Kim B. Olsen is an Associate Fellow with the German Council on Foreign Relations (DGAP) and serves as a Senior Adviser to the Danish Ministry of Foreign Affairs. The views expressed are his own.

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