What the EU Doesn’t Get About Economic Security – DNyuz

What the EU Doesn’t Get About Economic Security

Though they differ on a definition, the United States, Japan, and now the European Union have all in recent times embraced the need for “economic security.” Economic security is an imprecise term that refers to the shoring up of national interests from an economic perspective. While the United States and Japan have embraced industrial policy in service of this end, the EU’s approach has largely ignored it.

In June, the European Commission and the High Representative issued a communication on “an EU approach to enhance economic security” that “focuses on minimising risks arising from certain economic flows in the context of increased geopolitical tension.” This was followed up by a recommendation published in October calling for a risk assessment of four technology areas, which present “the most sensitive and immediate risks related to technology security and technology leakage,” namely artificial intelligence, semiconductors, quantum computing, and biotech. These statements, and a prior speech in March by European Commission President Ursula von der Leyen, mark the starting point for an EU economic security strategy to be developed with the member states over the coming months.

Yet already, a troubling trend can be discerned in how the EU is envisioning economic security. Economic security involves both protection and promotion of technologies, but the EU is focused on the former, paying only lip service to competition—perhaps because this would contradict its neoliberal underpinning. Rather than use the promising policy framework of economic security to rethink the organization of the economy and improve economic competitiveness, the EU’s approach is too narrowly focused on risk reduction.

In contrast, the United States and Japan have emphasized industrial and competition policy in service of economic security—though Washington, too, may be falling into the same trap as the EU in its evolving understanding of the concept. As a result, in both the EU and the United States, a promising policy framework risks becoming prematurely calcified.

Economic security is more than a technocratic exercise, and for the EU, there are many potential friction points along the way about which direction it should take: To what degree should the EU deviate from its founding free trade principles in the name of economic security? How closely should the EU align with the United States? Or align against China? It’s notable that although President von der Leyen’s economic security speech in March was specifically about EU-China relations, China was absent from later European Commission messaging.

There are additional political complexities, even tensions, that are brought to the surface when it comes to addressing economic security. These derive from the unique structure of the EU. They concern the balance of power between the EU member states and the European Commission and are at the center of the policy discussion. In EU speak, the question is who has the so-called competencies to implement and control these new economic security policies: the commission (whose mandate includes international trade policy), or the member states (whose mandates include defense)? Who will have the budget? Who will really govern?

Amid these swirling debates and power plays, plans for growing critical technologies through industrial policy are largely missing in any concrete way. Though competitiveness is referenced in the commission’s communications, it is vague about how to achieve this, unlike the recommendations for risk assessments. With its emphasis on de-risking, the developing EU framework for economic security is essentially defensive rather than offensive. It is largely attempting to protect the technologies of today through controls over technology transfer or similar tools, rather than to promote the technologies of tomorrow through new industrial policies and financing.

For this reason, the EU’s prosperity, and ultimately its economic security, are still vulnerable in the long run.

Both Japan and the United States have, in many ways, informed the EU approach—often literally, through briefings. However, there are key distinctions when it comes to the overall policy goals of their plans.

Whereas economic security policies in Japan include the promotion of critical industries of the future through subsidies, this is not true in the EU. Japan embraces such policies “without reservation unlike the EU,” wrote Mathieu Duchâtel, a resident senior fellow and the director of international studies at the Montaigne Institute in Paris, in a policy paper.

The pro-industrial policy steps in the EU’s economic security strategy are, according to Duchâtel, “timid.” The emphasis is instead being placed elsewhere, with the debate centering on how much the commission, as opposed to member states, should take the lead in drafting the list of critical technologies and coordinating export and outbound investment controls—which are traditionally sovereign national competencies in the EU. “The debate is intense,” Duchâtel said.

There is also an ideological debate that involves the ordoliberal premise of the EU, which holds that the market, as long as there is sufficient competition, should dictate economic outcomes. The EU is also distinguished by its neoliberal “four freedoms”: the free movement of goods, services, people, and capital. Today, because of economic security considerations, all of this is being reexamined.

“Using trade restriction as a geopolitical instrument is a huge policy shift,” said Tobias Gehrke, a senior policy fellow at the European Council on Foreign Relations. “The EU has been the defender of the liberal trade order. A founding ideal was [that] you had to separate trade policy from politicization. So, it is a paradigm shift.”

Placing restrictions on trade for political and security purposes is certainly a reversal of the long-standing German approach, where trade with authoritarian regimes was cloaked in sanctimony through the policy known as Wandel durch Annäherung, or “change through trade.” This was the principle that left Germany highly dependent upon Russia for energy. “The phrase ‘change through trade’ is toxic and has been retired,” Gehrke said.

The question is how far this economic rethinking will go, he added. There is certainly convergence between the EU and United States about the importance of addressing supply chain resiliency or the need for new trade policies, but this isn’t true when it comes to maintaining technological industrial advantage for national security purposes, said Gehrke. “The Europeans don’t feel so comfortable mixing the two, this is the biggest divergence from the U.S.”

If anything, Duchâtel said, “there is a backlash from member states who are favoring free trade or who think the commission is moving too quickly.”

The EU does have existing financing tools for industrial policy at the EU-wide level, but they are scattershot. Their ad hoc quality is because they are exceptions to the general EU regulatory—and ideological—prohibition against state financing, as well as lack of resources. And even though the commission’s economic security communication mentions such tools, there is very little new European money for a common industrial policy.

Instead of a pan-European funding solution, national spending for industrial policy dominates. This is allowed under the intriguingly named “Important Projects of Common European Interest” (IPCEIs). Projects that meet the criteria are allowed an exemption from the usual regulations against member state aid.

In practice, the practice of using IPCEIs favors nations that are already wealthy, said Andreas Eisl, a research fellow on European economic policy at the Jacques Delors Institute. In the past, some of their financing was Europe-wide, but national funding will dominate going forward, Eisl said. “The important thing about IPCEIs is where the money will be coming from—individual member states, not the European Commission. This creates all sorts of questions regarding a level playing field inside the single market between member states with a lot and little budgetary space.”

So far, IPCEIs have been used predominantly by Germany, France, Italy, and Sweden, which indicates it is hardly a pan-European or fair tool. Eisl was critical of this member state-centered approach, which undermines both fair competition and European solidarity. “We need to have a European-wide dimension to funding industrial policy,” he said, “one with greater European solidarity.”

Which is where economic security, and specifically a “promote agenda,” could come into the picture. It could be a way to “Europeanize” the funding of industrial policy, through the European Commission itself rather than individual governments. This would lead to a more level playing field within the EU as well as the possibility for corrective measures offered to industrially lagging Southern European countries. EU-wide pooled funding for industrial strategy under such a framework could improve both EU growth and internal competition. Such a solution would therefore be politically attractive and is a way around the ideological impasse plaguing attempts to combine security, trade, and markets.

However, moving to a promote agenda requires more than just pooled funding. New tools and a new analytical framework are both needed. Rather than just undertaking risk assessments, this would entail the development of a forward-looking analysis of the strategic bottlenecks obstructing the scaling of new technologies in the EU.

The EU’s risk-based approach to economic security, and its focus on preventing technology leakage, rest on questionable assumptions about Europe’s continued leadership in critical technologies. These assumptions could be tested by Chinese technological advances. Though Russia, too, poses threats to the EU, it is China’s strength in manufacturing, as well as its use of economic coercion, that could devastate Europe.

China may face economic headwinds, ranging from youth unemployment to an aging population to a meltdown in its real estate sector, but so far, its strength in manufacturing isn’t one of them. China has the largest manufacturing sector in the world by far. It dominates heavy industry and advanced manufacturing, too, and has deployed more industrial robots than all other countries put together. The one area it has struggled has been in semiconductors, where, not coincidentally, the United States and the EU have implemented industrial strategies.

China is channeling massive amounts of money to support technological growth and manufacturing, and in increasingly inventive ways. These industrial policy efforts should not be dismissed out of hand but rather assessed for strengths and weaknesses.

“China is attempting to become an ‘incubator’ state and is accelerating its drive to achieve tech supremacy,” said François Chimits, an analyst at the Mercator Institute for China Studies, a key European think tank that has been sanctioned by Beijing.

A particular focus in China is on pushing forward innovation in strategic manufacturing sectors by growing technologically innovative small and medium enterprises, or SMEs.

“Scores of innovative SMEs now receive a plethora of government benefits as part of the newly formed acceleration system,” Chimits and his co-authors wrote in a research report on this new approach. Those benefits include “access to finance, direct subsidies, research funding, collaboration with state entities and so on.” And the “mission for state-backed SMEs,” the analysts added, is “innovation, manufacturing strength and self-reliance.”

Europe, under the framework of economic security, has attempted nothing of the sort so far. It is not redesigning its financial or innovation system in ways to promote advanced manufacturing, and the same holds true for the United States.

While the recent EU recommendation about risk assessment for critical technologies offered nothing concrete on the growth side, the EU’s embrace of economic security nonetheless marks a sea change from past practice. Many internal battles lie ahead—between the commission and the member states, as well as with industry—in terms of fully developing and implementing a strategy. And as these policies become clearer, the EU may still find that it will ultimately need to implement industrial policies promoting new technologies if it is to achieve economic security. It can look to allies such as Japan for guidance here.

But there are other countries worth examining for new financing tools and policies to promote critical technologies. The EU has been distinguished by its inventive euphemisms around economic security that avoid maligning China, such as “strategic autonomy” and “de-risking.”

As the EU searches for economic security, it should also consider another approach, which is not just unsayable but unthinkable: that is, “learning from China.”

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