It just makes cents: Why the EU needs to step up its geoeconomics game

Economic statecraft is in fashion. Sanctions, export controls, tariffs, investment screening mechanisms, and trade agreements have become go-to tools for Western states to pursue geopolitical goals. This trend is fuelling the rise of geoeconomics, a term that has two definitions. In a broad sense, geoeconomics analyses the interplay of economics and geopolitics in the areas of trade, technology, or finance. In a narrower sense, geoeconomics refers to the use of economic tools to implement foreign policy – fuelling a merger between geopolitics and economics.

The European Union has long been a big player in geoeconomics, leveraging its economic and financial might to advance its interests. Yet the bloc is proving increasingly ill-equipped to deal with growing geoeconomics-related issues, mostly because of scattered responsibilities between the European Commission and member states. Sanctions, for instance, are adopted at the EU level, but implemented by member states – opening loopholes as European capitals interpret EU-wide rules differently. Conversely, it is up to EU member states to design foreign investment screening regimes – fragmenting the European investment landscape. This situation calls for a bold remedy: the appointment of a vice president for geoeconomics in the next commission.

It’s (almost) all about geoeconomics

The EU and its member states are increasingly using economic tools and leveraging the activities of private firms to pursue foreign policy goals. This is clear when looking at the bloc’s response to three of the most pressing challenges of the day: the war in Ukraine, China’s aggressive behaviour, and the green transition. The implementation of sanctions on Russia, for instance, depends on the private sector. These measures curb the activity of private companies and it is up to banks to check the compliance of the transactions that they process.

The EU’s response to Beijing’s increasingly confrontational stance also relies on economic policies. Brussels’s strategy currently focuses on de-risking, that is to say reducing economic reliance on Chinese firms for critical goods and preventing the transfer to China of technology that could fuel advances of the Chinese military. To implement its de-risking ambitions, the EU mostly relies on export controls (for instance on semiconductors) and on policies to develop Europe’s domestic production of critical goods (such as medicines, clean technologies, or critical raw materials).

The EU’s economic dependency on China is particularly acute for green technology, which will be crucial for the bloc’s energy transition – a third existential challenge that merges economics and geopolitics. To reduce reliance on China for the supply of critical raw materials that are key for the manufacturing of green goods, the EU is cajoling domestic mining firms to invest in resource-rich countries. The EU is also thinking hard about how to become a preferred partner for economies that hold vast swathes of critical raw materials, for instance via technology transfers or concessional financing.

Why the EU is on its own

The harsh reality is that the EU is on its own to face the challenges that the war in Ukraine, de-risking, and the green transition pose

On all things geoeconomics, collaboration with allies is crucial. The impact of joint Western measures on, say, China or Russia is greater than that of unilateral policies. But the harsh reality is that the EU is on its own to face the challenges that the war in Ukraine, de-risking, and the green transition pose. Europe is bearing most of the cost of Western sanctions on Moscow, for instance, as its trade ties to Russia and reliance on Russian hydrocarbons have always been higher than those of other Western economies. Looking ahead, Europe would shoulder most of the burden of supporting Ukraine if former US president Donald Trump comes back to the White House in 2025.

The EU will face distinct challenges to de-risk from China, too. The bloc’s trade reliance on China is higher than that of many other Western economies, with Chinese firms supplying around 20 per cent of EU imports. Besides, European stances towards China are fragmented, hindering the emergence of a common European strategy.

Boosting the EU’s green competitiveness will not be easy, either, as the bloc is increasingly squeezed between America and China. While Beijing is flooding the world with its massive production of cheap green goods, the United States is adopting protectionist policies like the Inflation Reduction Act to develop its own clean technology sector. Washington’s strategy highlights how, on many economic issues, Europe’s military allies will also remain its economic competitors.

The case for a geoeconomics vice president

The EU needs to build some geoeconomics muscle. The first task is to build an overview of how geoeconomics challenges are interlinked. As Russia-China ties grow, export controls on Beijing (a de-risking issue), for instance, also have an impact on Moscow’s military capabilities (a Ukraine war issue). Creating a general directorate for geoeconomics would support the EU’s efforts to comprehensively map out the interlinkages between several geoeconomics issues and to analyse the trade-offs of various policy options.

The second task facing Brussels is to strengthen channels of communication with the private sector on geoeconomics issues. Private firms lament that sanctions, for instance, are handled by at least three different general directorates at the commission.[1] Companies also often first hear about new measures from the media. Here again, a geoeconomics vice president would come in handy, serving as a first port of call for private firms on EU policies and reinforcing the outreach efforts of member states towards the private sector.

On the international scene, appointing a geoeconomics vice president would boost the EU’s credibility towards its allies. In a second Biden presidency, the US will take Brussels more seriously if the bloc has a clearer direction of travel on geoeconomics. If Trump takes office, European unity will be severely tested on geoeconomics-related issues, as he will likely impose tariffs on the EU and possibly water down sanctions on Russia. Both scenarios call for greater unity before the storm travels across the Atlantic and reaches Europe’s shores.

The US is not the EU’s only ally: a geoeconomics vice president would also help boost engagement with other like-minded partners such as Australia, Canada, Japan, South Korea, and the United Kingdom. These countries are key counterparts on geoeconomics topics, including semiconductors, clean technologies, or critical minerals. In a second Trump term, these economies would also represent key coalition-building partners to counter aggressive US policies.

Beefing up the EU’s geoeconomics game would also be a useful strategy towards foes. Market access is the EU’s greatest asset: perhaps China would have thought twice before engaging in a trade row with Lithuania if the bloc had threatened retaliatory measures curbing the access of Chinese firms to the entire EU market. Greater EU cohesion also reduces the risk of seeing adversaries play member states against each other. This is critical at a time when Russia and China are seeking to foment divisions across Europe on topics like sanctions.

Finally, countries that are neither friend nor foe are increasingly adopting transactional positions in a bid to play sides against each other. Again, a more geoeconomically savvy EU would be in a better place to benefit from this new context. For instance, a vice president for geoeconomics could spearhead the bloc’s work on inking narrow trade agreements with countries that are key players in priority sectors, such as raw materials, critical medicines, or advanced technology.

There is much work to do to define the job specifications of a geoeconomics vice president. Truth be told, convincing member states to give up some of their geoeconomics prerogatives will also not be easy. Yet the bigger picture is that the appointment of a geoeconomics vice president would be a critical first step for the EU to strengthen its geoeconomics core in a bid to avoid fragmentation and, therefore, dilution at the global level. If the bloc and its member states are serious about their willingness to avoid being squeezed between the US and China, they must step up their geoeconomics game.

[1] Author’s interviews with private companies, 2021-2024, various European capitals and online

The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.

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Author: euro news

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