For decades, the European Union quietly consoled itself with the belief that it held the key to the future. It is true that China dominated manufacturing and America had the largest armies, but in the realm of law and regulation, the world superpower was in Brussels. In the era of globalization, only the EU understood the alchemy of transforming nation-states into blocs greater than the sum of their parts.
Today, there is no such consolation. China not only drives down export prices and subsidizes its companies, but also outperforms major European industries, including the automotive industry, in both competitiveness and innovation. Last year, Germany's trade deficit with China was 66 billion euros; this year it could widen to more than 85 billion, or about 2 percent of GDP.
Worryingly, China is exploiting European dependence, weaponizing embargoes or threats to them on chips and rare metals. All this comes at a time when President Donald Trump is questioning America’s commitment to NATO’s security. As if that weren’t bad enough, Trump has also exploited Europe’s longstanding military dependence to impose a trade deal that the Europeans despise.
The EU was created to thrive in a predictable world of rules and procedures. Today, however, it finds itself squeezed between two aggressive powers that impose the law of the jungle. It is being treated with contempt in the negotiations between America and China, which have enormous consequences for the European economy. If Europe is to avoid becoming irrelevant, it urgently needs to find a new, more decisive way to wield power.
For now, this ambition is generating two very different reactions – and, unfortunately, both could backfire. In Brussels and some capitals, there is talk of trade protectionism and industrial policy as a way to shore up strategic production. Some industries are indeed strategic, but invoking national security threatens to put everything from grain to timber under protection, which would only accelerate Europe’s decline. Even when tariffs are justified, they are a burden on already overburdened European consumers, and, as the levies on electric vehicles have shown, they may not even achieve the goals they were introduced for.
The EU was created to thrive in a predictable world of rules and procedures. Today, however, it finds itself squeezed between two aggressive powers that impose the law of the jungle.
On the other hand, populist right-wing parties in Europe are riding a wave of discontent with the continent’s elites. Brussels, populist leaders argue, is robbing European economies of both dynamism and sovereignty. They believe that the cure for Europe’s lethargy lies in the national capitals. Yet even if no country follows Britain’s path of exit, the breakdown of cooperation in Brussels would create a toxic mix of stagnation, mutual recriminations, and fragmentation. That would lead the EU down a dangerous path: in a world without rules, strength lies in numbers.
So what should Europe do? For a start, it can still benefit from being a defender of the rules. Even if America and China, in breaking global rules, act on the principle that might is law, many smaller countries are realizing that they would be better served by a world with less uncertainty. The EU, thanks to its huge market and expertise, has the power to rally, especially in trade. It should position itself as a champion of like-minded countries that want to prosper without America, which accounts for just 16 percent of global trade.
Negotiations with India and the five Mercosur members have been agonizingly slow until recently. Initial talks with the CPTPP, whose members are natural allies of the EU, deserve a much greater sense of urgency. Exporters from Germany's Mittelstand are already seeing growing markets like India and Brazil making up for the decline in Chinese demand.
Europe can still be decisive. It can take action against Chinese dumping and subsidies under trade rules. It was reckless for European carmakers to rely on a single chip supplier - especially after seeing the damage Germany's dependence on Russian gas has done. Ursula von der Leyen, the president of the European Commission, has promised to respond after China imposed restrictions on rare earth metals, although this will take time and money.
China could retaliate against companies that stockpile rare earth components, another reason to diversify suppliers as quickly as possible. If necessary, the EU should use its “anti-coercion instrument,” which allows for countermeasures, including export restrictions, which are vital to China.
The second task is for European countries to make better use of the power they already have by integrating their economies more deeply. The centrist parties still in power fear that this could play into the hands of the populist right. But inaction is also politics, and the bickering and timidity of leaders only reinforce the observation that the ruling elites have run out of ideas and lack the competence that should be their main asset.
By not integrating, the EU is leaving a lot of money on the table. The single market, designed for goods, is failing to help economies that are now predominantly service-based. Europe talks about deregulation with much fervor, but the push for new regulations is usually stronger. Governments are hesitant about plans to boost European competitiveness, especially a report last year by Mario Draghi, one of Italy’s most respected economists, for fear that such moves would diminish their influence or upset this or that interest group.
And with Europe still having a long way to go in connecting financial services and energy markets, politicians should resist the fashionable fetish for industrial production. Deindustrialization is not an unfounded fear, but factory jobs would be shrinking even without Chinese competition.
For these measures to have the greatest impact, reforms at home will be needed. The social protection system is too expensive and bureaucracies are too inefficient. Growth and competitiveness are hampered by excessive regulation. Spatial planning is often too vulnerable to challenge. The cost of energy acts as a tax on producers.
To many in Brussels, all of this will sound like a daunting task. It is easy to list what needs to be done, but much harder to remove the obstacles that stand in the way of 27 independent states acting together. And that brings Europe to its final, perhaps greatest, task. Faced with the threat, Europe’s leaders must convince their voters that change is coming, whether they like it or not. Either Europe will take control of its own destiny, or China and America will impose changes that will be more painful and difficult. The choice is Europe’s.
Translation: A.Š.
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