Rym Momtaz, Rosa Balfour, and Erik Jones examine how Europe is striving to refine its economic statecraft to adapt to the shifting geopolitical landscape.
Trade wars, the contestation of neoliberalism, and the weaponization of interdependence have prompted the EU to adjust its political economic model.
Rym Momtaz sat down with Rosa Balfour and Erik Jones to discuss how the EU is changing its economic strategies and what challenges lie ahead for the new European Commission.
[00:00:00] Intro, [00:01:29] The EU’s Political Economic Model, [00:15:37] Europe’s New Economic Statecraft, [00:23:40] Priorities for the New European Commission.
Rosa Balfour, Sinan Ülgen et al., November 19, 2024, “Geopolitics and Economic Statecraft in the European Union,” Carnegie Europe.
Rosa Balfour, Sinan Ülgen, November 28, 2024, “Europe’s Fledgling Economic Statecraft and the Trump Challenge,” Strategic Europe, Carnegie Europe.
Rosa Balfour, November 27, 2024, “Europe Under Trump: Strategic Challenges and Opportunities with Rosa Balfour,” Europe’s Futures.
Rosa Balfour, November 4, 2024, “Europe is trapped between technocracy and democracy,” Financial Times.
Erik Jones, November 2024, “How Draghi and Letta may help in dealing with Trump,” Encompass.
Rym Momtaz et al., November 7, 2024, “Taking the Pulse: Can Europeans Significantly Reduce Their Security Reliance on the United States?” Strategic Europe, Carnegie Europe.
Rym Momtaz
Hello and welcome to this episode of Europe Inside Out, I’m your host Rym Momtaz.
Today we’re delving into the transformation of the Geopolitics and Economic Statecraft in the European Union.
That’s also the title of a thought-provoking and insightful report by colleagues here at Carnegie Europe that we’ve just published. And so I’m delighted to be able to discuss this eminently strategic issue with two of the authors, Rosa Balfour, director of Carnegie Europe, and Erik Jones, nonresident scholar at Carnegie Europe.
We’ll start with a bit of glossary to clarify a few of the framing concepts we’ll be discussing and then delve into the historical context – what has the EU been doing, what has the context been internationally, and how is it now evolving?
We’ll discuss whether COVID was a watershed moment, what the current state of play is and how the war in Ukraine, the rising tensions with China, and the reelection of Donald Trump in the US will impact this question.
And finally we’ll get Rosa and Erik’s assessment of what the EU needs to prioritize now and in the immediate and medium term.
Rosa, Erik welcome.
Rym Momtaz
Rosa, Erik, welcome.
Rosa Balfour
Hi, Rym.
Erik Jones
Hi, Rym.
Rym Momtaz
So I want to just start with a glossary because I really enjoyed this part of the beginning of your report, where you take the time to explain to a reader who may not be an expert on these issues what we're talking about. So let's do a quick run through. I have five terms. Maybe, Rosa, I'll start with you. Geoeconomics.
Rosa Balfour
Geoeconomics, we talk a lot about geopolitics as the new way of looking at international relations. But actually, geoeconomics play a huge role as well because they're the forces that are unleashed by the global markets. It's really about the degree to which economics is shaping global politics.
Rym Momtaz
Erik, what about economic statecraft?
Erik Jones
Well, economic statecraft is when the state, or any political authority, but usually the state, decides to use economic instruments for political objectives. They do that in view of using other instruments, like warfare, for example.
Rym Momtaz
Rosa, this was one that really stomped me. What's open strategic autonomy? Because I know what strategic autonomy is, but what's open?
Rosa Balfour
To be honest, strategic autonomy has been going through quite an evolution in the debates in the European Union. It actually started off as a concept that was related to security and defense, and it was really about Europe's role within NATO. Then gradually, it started embracing all sorts of other areas, including, with COVID, health. At that point, when strategic autonomy became a sort of all-comprehensive concept, some people, especially on the trade front, started to think that maybe strategic autonomy was a little bit protectionist. And that's where the compromise with open strategic autonomy comes up. And we see this, for instance, in a joint published by the Spanish Prime Minister and the then Dutch Prime Minister, Mark Rutte, who's now the Secretary General of NATO. So a liberal and a socialist, Pedro Sánchez, agreeing that open strategic autonomy was the way forward to make sure that the EU still has an open attitude towards global markets. And also the Commission adopted it. So it's the compromise solution for the European Union, divided between those that are perhaps slightly more protectionist-bent and those who are more keen on open and free trade.
Rym Momtaz
So how does it contrast with European sovereignty, Rosa?
Rosa Balfour
European sovereignty, to be perfectly honest with you, Rym, I've never been convinced by the concept of sovereignty. I see sovereignty as a bit of a legal concept. Therefore, the EU does not have sovereignty. To speak of European sovereignty is a bit of a contradiction in terms. But it has been used as an alternative to the strategic autonomy. In fact, if you look at the speeches of Emmanuel Macron, who was one of the drivers behind imposing this notion of strategic autonomy in the European debate, he gradually shifted towards a preference for European sovereignty?
Rym Momtaz
Because Germany liked it more, right?
Rosa Balfour
Good question. I'm not entirely sure why he decided to do that, but you can definitely see a shift in his rhetoric. If he reads his speeches, he favors European sovereignty. I think actually it's a think tank. The term, the concept, the idea actually comes from think tank narratives and the search for catchy sentences and phrases. Now it's used and abused, I would say, all over the place. I mean, now there is even talk of technological sovereignty, which to me seems a contradiction in terms. I mean, technology is by definition without borders. But that is one of the framing concepts around the notion that Europe needs to get its act together. I mean, the bottom line is this. This is all about trying to project and encourage Europeans to take their fate in their hands.
Rym Momtaz
Erik, the last concept that I'd love to get a bit of a clarification on is this idea of management of interdependence. What does that mean?
Erik Jones
Well, I mean, if you think about it, all of our economies work together, and that's because we choose to produce one bit of a car there and another bit somewhere else, and then we have to bring them together in order to build a car. The question is, when they work together, do they work together in a coordinated fashion, or do they work together at cross purposes? The management of interdependence is all about making sure that there is as much coordination as we can achieve in how these economies fit together.
Rym Momtaz
So let's just jump right into it. I want to get, Rosa, from you a sense of where you think we are coming from to get to the point where we're at today. So to me, in the way I think about the evolution of this, I really think that COVID is a watershed moment. I feel like there was a before and after. Do you agree with that? Should we go further back?
Rosa Balfour
No, I think we need to go further back, actually. I mean, COVID was a really critical juncture because it stimulated the notion of joint borrowing in the European Union, which was taboo. But I'm not amongst those who think that this was a Hamiltonian moment. And indeed, it was a one-off. And now there is a discussion over potentially joint borrowing for defense, but we're still early days. But it hasn't been something that has fundamentally changed the way in which the European Union works. What I think, conversely, I think we should look perhaps slightly more long term. I think Erik can say something in this respect. But from my point of view, COVID, the Russian invasion of Ukraine, which were the turning points that people tend to look at, they were actually a culmination. The way in which Europe reacted to these were a culmination of a long crisis that started in 2007, 2008, perhaps even earlier, from a political point of view, I would say even 2005.
Rym Momtaz
But 2007, 2008, the subprime mortgage crisis in the US that then infected Europe.
Rosa Balfour
Exactly. And the way in which it was handled, the types of responses that the EU provided to that, which were generally below what was needed. It was muddling through, it was crisis management, it was an accumulation ofproblems that were never really solved. That created the momentum for a situation in which Russia could invade Ukraine and feel that it could do so with impunity, and that when the first weeks of the COVID outbreak, member states were really going in all sorts of separate directions before deciding that actually they needed to respond together. The reason for which the European Union struggled in the first instance was actually an accumulation of missed opportunities for reform that were very obvious, in my view, at least since the impacts of the financial crisis on the Eurozone. We can look further back, and I think maybe Erik will do that. But I do think we need to have a long-term rear view window in order to understand where Europe is now.
Rym Momtaz
But so before I turn to Erik, can you just give me a sense of what you think before COVID? What was it that the EU was doing badly that they hadn't figured out how to do? And what is it that they've learned to do better now?
Rosa Balfour
I think essentially, what happened with the Eurozone crisis, it reveals the weaknesses of the construction of the Eurozone. The Euro did not achieve one fundamental goal, and that was to reduce the differences between center and periphery in the European Union. The years of muddling through, the EU did not collapse. Eventually, European states decided that they needed to support the periphery at huge costs, the cost of austerity, you know the imposition of austerity. So the construction was saved, but without actually addressing the fundamental reasons for which the Eurozone crisis hit so badly and for such a long time, especially by comparison to the United States. I think, to be honest, only now is this question beginning to be addressed not so much by politics, but by the various reports and studies that we have seen during 2024, which are very much a response of COVID and Russia.
The Draghi report, the Letta report, the Niinistö report. They're all saying that the EU needs to change the way it is organized from the economic point of view, from the point of view of economic governance, from the point of view of economic security. They're all saying the same thing.
I don't think the politics are there yet, and it might take some time and a few more shocks to actually get to the point where European governments can actually turn to their publics and say “Well, we need to double down on European architecture in order to make it effective. Otherwise, it's not going to be relevant. It's not going to survive in the current global context.”
Rym Momtaz
We're going to go back to these coming shocks in a bit. But Erik, I wanted to turn to you and get your assessment. I guess you want to go back even further back than what Rosa just did?
Erik Jones
I mean, every story has to have a beginning, and every beginning is equally arbitrary. I think what Rosa is pointing to is that what we have discovered over time, and we can decide how long that time is, is that in order to have effective coordination in order to generate effective policy responses, we have to lift some responsibilities all the way up to the European level, and we have to empower those EU institutions.
We talk about it as though it's only for member states. But let's not forget, we have a lot of federal countries that give a lot of responsibility to regional and local government. And somehow we have to get everybody to buy into the fact that there's going to be some coordination at the European level. As an aside, I would say this is where that notion of European sovereignty comes in, because it's all about where they locate the ultimate right to take decisions. And in the taking of decisions at the European level is critical to respond to some of these issues, not all of them, but some of them.
Rym Momtaz
On that, it's a highly political issue, deciding who the decision maker is, where the decision sits between the member states, and then between the member states and the EU institutions.
Erik Jones
Absolutely. I mean, it is the most political issue because we're also talking about how those decisions are going to be made, which means who gets ignored along the way. All you have to do is look at Macron's fury over Ursula von der Leyen signing this deal over the Mercosur Trade Agreement.
Rym Momtaz
It's a free agreement with a group of countries in Latin America.
Erik Jones
That's right. On the one hand, Macron says, I like European sovereignty. On the other hand, this is a situation where the European Commission has discrete competence.
Rym Momtaz
Yeah, he's getting attacked by his farmers. In Poland, they're getting attacked by their farmers because they're not happy with this deal. So yeah, I think actually Mercosur is such a good example of that clash that hasn't been resolved. So what have you seen in terms of an evolution on that level from the point that you want to start with up until today?
Erik Jones
Well, I hate to say this. I don't think there's been a lot of evolution. Everybody wants European sovereignty as long as Europe agrees with them. When Europe does not agree with them, everybody wants a national veto. And that has been a lasting characteristic since the start of European integration. Having said that, they have accepted that at some point, they will have to make concessions. This is where your COVID story becomes important because Angela Merkel had refused collective bargaining time and again. And then suddenly she realized she had to accept it. Are we going to do that again? Let's wait and I don't see it happening. But then again, I didn't expect COVID to push Angela Merkel over the line either.
Rym Momtaz
But Rosa, what are we seeing that is really changing on the level of economic statecraft? That you talk about in this big report?
Rosa Balfour
Yeah, I think there's one point that I'd like to make. Eric refers to the 1970s in his chapter in the report. I really think there are some interesting analogies to be drawn. Basically, in the 1970s, a period of turmoil, oil crisis, etc, ushered in a period of neoliberalism, and that was Ronald Reagan, Margaret Thatcher, and the single market in the European Union. These were foundational moments of change, which did not happen overnight. I think we're going through a similar period in terms of change, but we don't quite know what the end goal is, what the world will look like afterwards. We're using the idea of post-neoliberalism.
Rym Momtaz
Just on the change, how would you define the change that we're going through right now?
Rosa Balfour
Well, I think one thing is that with the neoliberal model was the primacy of economics and free markets over states and politics. There was a trust that neoliberalism would solve problems of inequality and make the world richer. And that the more you had global exchanges, global trade, the better it was for the economy. Then obviously, depending on where you lean politically, there will be issues with respect to redistribution and equality or inequalities. But that was the general idea, and it became a dominant idea that was embraced by all, from the free marketeers to, ultimately, social democracy in Europe and in the United States, the Democrats as well. That was the peak of globalization. I think over the past few years, we're seeing a lot of pushback coming from multiple sources.
Rym Momtaz
The big one has obviously been Trump and his America first protectionism. But where else are we seeing it? Are we seeing that in Europe as well?
Rosa Balfour
I think we are seeing it in Europe. We're seeing a return of radical right nationalism that is challenging the role that European states gave to the European Union in governing globalization and in managing globalization. I think we're also seeing it from other powers, such as Russia and China, because the neoliberal model works in a system where you had some rules, and the US has not supported those rules, not always, but China, Russia, etc., other big powers are big revisionists. We're seeing other revisionist powers also contesting those rules with a different standpoint because they're arguing that they're not inclusive of, for instance, developing countries around the world. We're seeing, of course, from the left, anti-globalist movements since the early 2000s. So there's been a lot of contestation of this. There's been a lot of pushback, but now it really has crept into governments with the surge of populism and the surge of the radical right. The system is being challenged. Then we have war, obviously, that is forcing states to use economic tools and coercion for political ends.
Rym Momtaz
How are they doing that?
Rosa Balfour
With sanctions, for instance, and trying to keep countries out of the global economy and try to weaken Russia in this case. But we've seen a lot of economic statecraft with respect to Iran, for instance, to try and reduce nuclear proliferation. It's not as if these tools are not anew. They're not, but they're being used in a more strategic way. They're being used in a more forceful way, in a more coercive way. But most importantly, the EU is beginning to use them far more than it did in the past, and that's where things are changing. What it's going to look like ultimately, I don't think we know yet because it is still a matter for big debate and big political arguments within the European Union. But we see that there is a push towards protecting the economy from these global forces.
Rym Momtaz
To build on that, Erik, because you started by talking about this push and pull between member states and EU institutions on who makes the decisions. I imagine that that has a real impact on this new desire at the EU level to be more strategic in the use of economic statecraft. How is that working out? How is that playing out right now?
Erik Jones
I think you've put your finger on the key issue, and it's not just the right-wing populace and the Donald Trumps of this world that are pushing this agenda. The Biden administration was pushing it in the form of the foreign policy for the middle class, the Draghi Report is pushing it as well. If you look at the Draghi Report, it does three things that are in many ways revolutionary in the context of the internal market. First, it says we have to use non-market instruments to direct the flow of private capital. That's because private capital cannot be trusted to invest in the right places. Second, if we're going to use these non-market instruments, by which I mean really subsidies and other incentives to get people to invest where we want them to invest, then we have to do it at the European level, at least in part, because not all national governments have the same ability to provide the kinds of subsidies we need to get the results we want. This is where your question becomes important. Then the third thing that he says is, as we do this, we need to think about combining these domestic subsidies and other non-market instruments with trade policy to get a combined economic statecraft, and he even uses the word.
This is Mario Draghi, a technocrat advocating something that 20 years ago, no serious economist would have advocated.
Rym Momtaz
When you say in certain particular sectors, what are we talking about here?
Erik Jones
The genius of the Draghi report is that he pushes us away from the traditional notion of competition as having lots of small firms that compete with each other because he recognizes that there are two other kinds of firms we have to pay attention to. One are firms that actually gain value the larger they become and the more their networks extend. These are firms that have increasing returns to scale. It's very difficult to compete with these firms. That's why we need government intervention to subsidize new entrants into the markets until they get big enough to begin to compete with these behemoths. The other firms that Draghi points out are defense firms, where we want defense firms to be big because we need them to be standardized, and we need them to produce stuff that we buy to blow up. In that context, we really need to have concentration, which is something the old rules for competition policy did not accept. We've got three different sectors of the economy now rather than one monolithic model for the way competition works. And that's a big change in how we think of the internal market.
Rym Momtaz
So throwing it forward, from where I sit, I see four big challenges. One, obviously, the tech challenge that Europe seems to be struggling with big tech AI. How do they compete with the huge monsters that are the American big tech companies. And then more politically, what Rosa was talking about in terms of the opposition within our populations in liberal democracies for more globalization. They want more protection, and they want more interventionism from their states and governments because they feel like they're losing out. And then there's Trump who's back with his America first tariffs-driven approach. And of course, China, asserting itself and trying to drive a wedge between Europe and the US.
So I'll start with you, Rosa. What do you think should be the two priorities on the EU level to deal with the coming challenges? And what other challenges do you see that I haven't mentioned?
Rosa Balfour
In terms of the challenges, and I think with Trump being elected, the impact on Europe is going to be of huge consequence. I would actually put it three. I mean, one is Ukraine because there is a war going on and Europeans are going to do more to protect the European continent. I would say the second is trade. I mean, for Europe, Europe relies on trade far more than the US needs to rely on trade.
Rym Momtaz
Because what? That's the way it actually has the biggest weight on the international stage.
Rosa Balfour
It's because of the European economy. It's much more tied to trade than the US is. The EU cannot be isolationist for its economy. The US can. We're in a completely different situation. How Europe decides to manage the threat to trade that Trump has been promising will be probably definitional for what Europe is going to look like. And then the third thing is China, because the US under Trump, I mean, the US has been pursuing a fairly hawkish policy towards China for some time now, but it's probably going to become even more hawkish. And there might well be demands coming from the United States for subsidence from his allies insofar as China is concerned. That it goes back to the second point I made is, how is Europe going to be able... Does it have to choose between China and the US? It doesn't want to, but those choices might be imposed on it. But ultimately, whichever line of action the EU takes or decides to take, the problem is that at the moment, there is no agreement on what line of action that may be.
Rym Momtaz
There's no agreement between the member states.
Rosa Balfour
Between the member states. In different political situations, we have several governments that are led by political parties that are not socialized into this system do not necessarily have a view that we need to work with European partners in order to craft a policy that will make us survive. I think there's going be squabbling for the next few months. If the EU manages to find a common line, it might not be at EU-27, in my view. I think the potential for splintering or for coalitions of the willing are huge. It might well be that the choice of direction that the EU will take will be something that will not be particularly to my liking. That is also possible because I think there is a bend towards, not disengagement, because that's not possible, but towards focusing on national interests or European interests at the expense of the interests of others, at the expense of the multilateral world system. I think there is a risk that the EU will abandon its traditional position of supporting multilateralism and focus on closer to home priorities. So I think that is a risk.
Rym Momtaz
So if you had to send Ursula von der Leyen two bullet points on what you think she should be focusing on? What would you tell her, Rosa?
Rosa Balfour
To be honest, I think Antonio Costa's idea of doing retreats amongst the leaders is a very good one, because at the end of the day, the reason for which Europe struggles is because they really struggle to find a meeting point. And this has been a constant in the history of European integration. And now there is a need to take some large steps. And in order to do them, leaders need to come closer together and decide what is a shared strategy and then pursue it. The technocrats are there to pursue it. It really is a question of having the vision.
Rym Momtaz
Erik, I turn to you with the same question. What do you think is really the coming big worry point, and what would be your recommendation on what they should be prioritizing?
Erik Jones
I'm going to give you one answer from the Draghi report, which I don't want you to think I'm just drinking the Kool-Aid here, but I think it's worth.
Rym Momtaz
I feel like you're really in support of the Draghi report. Are you working with him, Erik?
Erik Jones
I know. I feel like a translator here. The thing is, when you started off, you said the tech challenge, and then alluded to these big platform industries. That's only one version of the tech challenge. The more important version of the tech challenge that Draghi is talking about is the way economists use the word technology to describe the way we combine labor and capital. His goal with that report is to push Europe to find ways to combine the same amount of labor with the same amount of capital and get more stuff. And that can only be achieved through technological innovation. And he writes about it in the form of this very jargony economics term, which is total factor productivity or total factor productivity growth. Now, this is another change in the way we think about competitiveness, because we used to think about competitiveness in the 1980s as getting labor and capital to come together at all. In the 1990s, we were trying to make sure that labor didn't fall out of the labor market. In the 2000s, we were worried about the way the welfare state imposed costs on the way we worked with labor and capital. But now Draghi says, “No, we need to focus on making labor and capital work together ever better.”
And that relies on innovation. I think he's right there. We need to focus on innovating because we're not going to get more labor or more capital. So that's priority number one. Priority number two is, and this is the part where I know Rosa is going to be unhappy with me. Ultimately, Europe is going to have to choose between the United States and China. The world right now is not offering us the opportunity to restore the old rules-based multilateral system. The United States doesn't want it. The Chinese only want it to beat up on the United States with. Then we have a choice. Do we try to play a middle role as Europeans between the United States and China? I don't think that the Trump administration is going to give Europe that luxury.
Rym Momtaz
And does it mean the EU has the ability to create that opportunity for itself?
Erik Jones
I mean, lots of countries, Indonesia, India, they're all going to try to play that role, but they're all going to do it differently. And this is the problem. We talked about the management of interdependence before. You cannot manage interdependence when everybody is doing something different, differently. And that's the situation that Europe is going to find and so ultimately, they're going to have to pick sides. And picking sides is not going to be fun because it's going to cost a lot of money to a lot of firms in a lot of parts of the European Union, and they aren't going to like it. But I just don't see the choice.
Rym Momtaz
Just some hard choices ahead. Such important strategic issues we discussed, we could obviously go on for another half hour, but unfortunately, we're out of time. I really want to thank both of you, Rosa Balfour and Erik Jones, for joining us on this episode of Europe Inside Out.
Rosa Balfour
Thank you, Rym.
Erik Jones
Thanks, Rym. It was great being with you.
Outro
Rym Momtaz
For those who are interested in learning more about Europe’s economic statecraft, I encourage you to follow the work of Carnegie Europe on X and LinkedIn.
Our producer is Mattia Bagherini. Our editor is Futura D’Aprile of Europod. Sound engineering and original music by Jeremy Bocquet.