Is Europe’s Economic (In-)Security a Growing Concern?

Economic security refers to the ability of economies to weather risks and shocks, withstand economic pressure and coercion, manage strategic dependencies, protect critical infrastructure, deter cyber-attacks and misinformation, and maintain economic leverage and technological edge. The EU should aim to avoid fragmentation of the global economy and support multilateral institutions while preparing for protectionism, fragmented value chains, a global subsidy race, and weaponization of interdependencies. To address economic security risks, the EU should deepen European integration, including the single market and EMU, maintain openness, and narrowly define interventions.

The EU must address geopolitical and economic-military risks, using stress tests and a data-driven approach to identify critical vulnerabilities in high-risk events. Addressing hard security risks, such as R&D for dual use, export controls, critical infrastructure, cyber-security, resilience to hybrid attacks, and inbound investment screening, requires clearer and stricter government intervention. A European Economic Security Committee should be formed to define security risks and translate them into a European economic policy strategy.

The EU needs to enhance its resilience to economic coercion and global trading system shocks, focusing on maintaining open markets, forming trade agreements, particularly in Asia and Latin America, and enhancing industrial policy to build technological leads. To ensure economic security, investments in European public goods are needed at the EU level, joint resources are needed to address economic coercion, and strengthening the euro, banking union, and EU capital markets would enhance Europe’s financial power.

The European Union (EU) has traditionally focused on the link between security and economics, but recent developments have forced it to reevaluate its approach. The COVID-19 pandemic exposed risks of supply chain disruptions, and Russia’s invasion of Ukraine highlighted the dangers of energy dependence. Rising trade tensions, subsidies, and economic coercion have forced the EU to prepare for disruptions to multilateralism, recalibrate its relations with other great powers, and revise its dependencies on non-EU jurisdictions.

Despite recent initiatives to deal with shocks, increase internal resilience, and learn to “speak the language of power,” the EU remains poorly prepared for a world of geopolitical rivalry and great power competition. This is due to the EU’s institutional setup for a rules-based world, where foreign policy and hard security questions are largely in the hands of Member States. EU treaties foresee openness to international trade, investment, and finance, but do not contemplate a breakdown of multilateralism and the rules-based liberal order.

The EU’s economy and growth model could be more jeopardized by deglobalization and decoupling from China than other regions. This paper argues that European Economic Security needs to focus on addressing hard economic security risks, maintaining openness and competition, addressing institutional weaknesses, and financing European public goods to increase the EU’s economic security. Hard economic security risks are more complex and require a more comprehensive approach than simple economic vulnerabilities. These risks can generate rapid and high economic and societal risks, such as cyber-attacks. For instance, the EU’s solar industry is not a particularly hard-security question, but rather R&D critical for dual military use, critical infrastructure, cyber-security, and resilience to hybrid attacks.

The US-China rivalry has led to the use of export controls and outbound investment screening in certain national security technologies, particularly semiconductors, quantum information technologies, and artificial intelligence. The rules focus only on China, with investments in a narrow set of technologies prohibited while reporting requirements are established for a larger set. China has focused on building its own semiconductor industry since 2014, but self-reliance has not yet been achieved.

The US proposal on outbound investment control may be a compromise between preserving security interests and avoiding economic costs, but a wider definition of security-relevant technology risks could undermine trade and commerce and be difficult to manage due to additional bureaucratic burden. The EU’s approach to build a high-tech cluster for semi-conductors with the Chips Act is welcome to strengthen its economic security. However, reducing dependency on the highly concentrated production of high-end chips in Taiwan is a step towards increasing economic security. Sanctions policy is another hard security question, as sanctions are effective ways of limiting economic activity and technological development. The EU needs to be prepared for sanctions against the EU or individual Member States.

The EU’s inbound investment screening mechanism needs strict implementation to protect critical infrastructure security. More coordination is needed to monitor security concerns and debate expanding rejection criteria. International coordination of security-related outbound investment and export controls is crucial. The G7 countries are considering measures, but the EU and G7 need to clarify their stance on US technology measures and prepare for extreme scenarios. Fully Europeanizing the outbound and inbound investment screening and export control mechanisms would help protect the single market from differentiated national applications and strengthen European power. However, it would require a shared understanding of security risks.

The EU must continue defending the rules-based international order, as global trade in goods, services, and data is crucial for the prosperity of the EU and the world. Protectionism, ill-guided subsidy races, and fragmentation of the global economy into blocks could result in substantial costs and reduced economic output. Many countries of the “Global South” are worried about trade deglobalization and seek flexible partnerships to avoid being drawn exclusively to the US or China. The EU should find ways to sustain multilateral trade openness and reform the WTO.

To increase the EU’s resilience, two approaches are widely discussed: reorganization of global trade patterns and increasing the attractiveness of the domestic market, and industrial policy and trade-defense instruments. Trade and investment policy can play an important role in strengthening the EU economy by prioritizing trade agreements with third countries and investments from a more focused Global Gateway. Such agreements and investments create opportunities for diversification and render the EU economy more resilient.

Ratifying the Mercosur agreement rapidly would be particularly beneficial, as it would give access to more than 260 million consumers, lower tariffs substantially, and increase the EU’s regulatory cloud. It would also create the second biggest free trade zone, including 770 million people, providing ample opportunities for diversification and access to important critical raw materials. To conclude the agreement, the EU needs to accept Mercosur as an equal partner, become less demanding, and be ready to open its market.

The EU should pursue additional trade agreements in Asia, such as India, ASEAN, CPTPP, and RCEP, to avoid disadvantages in the Asian market. A stronger, more integrated EU market encourages diversification, reduces regulatory barriers, and enhances convergence. The Delors program is crucial, and competition drives innovation. Public policy intervention should focus on systemic supply-chain risks, using data-driven work and stress tests instead of relying on sectors like health.

Industrial policy, protectionism, neo-mercantilist policy, and domestic demand suppression have led to significant distortions in global markets and costs for the EU economy. Aggressive state subsidies and predatory pricing in the green sector can trigger uncooperative responses, leading to a full subsidy race. The EU and China’s trade relationship has been influenced by Chinese policies, leading to distortions and shifts in trade patterns. The EU must insist on fair trade and reciprocity in market access, building pressure points to achieve this. Public subsidies have become a policy tool to boost domestic industries, but they can create costs and lead to a global subsidy race. The US inflation reduction act may slow down green transition and productivity growth. The EU faces risks from relaxation of state aid rules, potentially fragmenting the single market.

The EU could implement anti-dumping measures in the WTO spirit to address global dumping issues. Industrial policy can increase resilience by focusing on R&D, human capital, and new technologies. Energy security and transition to a green economy are crucial for economic security. The EU’s Net-Zero Industry Act and Critical Raw Materials Act should prioritize LNG diversification, while cooperation with the US, G7, and “Global South” could reduce costs.

The new geopolitical realities have highlighted the need for European public goods in areas such as R&D, defense, security, innovation, energy, sustainability, and technology. Traditional skepticism towards deeper economic, monetary, and financial integration is changing, opening an opportunity for ambitious reforms. Two crucial areas are equipping the EU with joint public resources to address economic security risks, such as joint spending on R&D in defense and re-building Ukraine. A joint European debt instrument would be the right way forward, as both constitute truly European public goods and investments that will generate EU economic growth.

The EU should jointly fund industrial policy for decarbonization, green technology, and energy security from a dedicated budget to avoid a fragmented single market. This will enable more coherent foreign policy positions. The EU should use its financial power strategically to enhance growth and economic autonomy. Monetary power can facilitate economic coercion if the currency is used. To use monetary power, the EU must accept money’s political nature and promote the euro as an international currency. Creating a permanent safe asset and committing to limited common debt issuances can reduce financing costs and increase the use of the euro as a reserve currency.

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