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The promise of the EU’s new economic compass

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In June, the European Union published its first ever European Economic Security Strategyand this week the President of the European Commission, Ursula von der Leyen, delivered a powerful speech State of the Union address. Simply put, the world’s largest trading bloc has a new economic compass and has charted an ambitious new course.

Given these developments, it is difficult to imagine that just over two and a half years ago the EU was about to embark on its EU-China Comprehensive Investment Agreement. After seven years of negotiations and defended by German Chancellor Angela Merkel, the agreement was wisely frozen by the European Parliament. After a review of the new economic security strategy and detailed points from von der Leyen’s State of the Union speech, it is clear that the EU is on a very different path.

In our geopolitical world, nothing is static. As the EU is well known for its bureaucracy and deliberate methods of managing the affairs of the Union, it is interesting to see how quickly the EU has responded to a plethora of new challenges. The themes underpinning both the Security Strategy and the State of the Union Address are complementary and present a pragmatic vision of the responses required from the EU to today’s economic and geopolitical challenges. The State of the Union address was particularly poor in diplomatic ambiguity and remarkably rich in pragmatism.

Perhaps more than any other event, Russia’s invasion of Ukraine was a wake-up call for the EU. Efforts to suppress the inconvenient truth about Russia’s annexation of Crimea and half-hearted sanctions have only emboldened the bully Vladimir Putin. The looming clouds of war that preceded Russia’s invasion of Ukraine were also brushed aside with the desperate hope that it was a bluff aimed at extracting some type of concessions. At the same time, China’s role in supporting Russia was recognized for what it was: a threat to the world order, and in particular to the EU. The state of denial is now over. An unquestionable change in the world order has been accepted, requiring the EU to take a new and very different path.

In a changing global economy, the EU’s focus on strengthening competitiveness is intrinsically linked to economic security. Yet to be competitive, it is essential that risk reduction is part of the formula. Ensuring resilience across supply chains to achieve greater diversity in the types and sources of critical needs will be a fundamental part of moving forward. Promoting technological supremacy while seeking to maintain open markets will not be easy. As a result, a new initiative will be led by former Italian Prime Minister Mario Draghi to make Europe globally competitive.

The weight of the European market in the world economy has decreased over the last twenty years from 20 percent in 2001 to 14.5 percent in 2023, while the Chinese economy grew from 7 percent to 19 percent. Boosting competitiveness is essential as the EU economy is expected to grow less than 1% in 2023, compared to almost 4% last year. As von der Leyen acknowledged, there is a crucial need for policy changes to improve the ease of doing business for small and medium-sized enterprises (SMEs). The true backbone of the European economy, SMEs represent more than 99 percent of businesses and employs around 100 million people.

Solving the competitiveness problem will require action to address the skills shortages faced by 74 percent of SMEs. Only by investing in programs that develop human talent can innovation be realized and sustained. Research and development (R&D) is another area requiring immediate attention. Compared to the United States and China, which spend 3.45 percent and 2.4 percent of their respective GDP on R&D, the EU spends only 2.2 percent, or $328 billion. Chinese spending on R&D has increased eleven-fold since the start of the 2000s. reach $439 billion in 2022. New European investments in automation, robotics and artificial intelligence will pay off in the long term by ensuring security and prosperity within the community. However, R&D investment must be structured as an exclusive investment for the benefit of the EU. In this regard, reducing risks related to R&D activities requires a zero-based review of all ongoing R&D agreements between China and EU member states in order to protect EU competitiveness.

When it comes to reducing supply chain risks to China, there is clear alignment between The new economic doctrine of the Biden administration and EU proposals to establish export controls on specific technologies. These controls are based on the American model, particularly in areas such as clean technologies, the solar industry and electric vehicles. While the EU Regulation on Foreign Direct Investment (FDI) was created to make European economies better equipped to identify and mitigate the security and public order risks of foreign investments, it was a direct response to China’s growing influence in the European market in using unfair practices and state subsidies. It remains to be seen whether the EU will also follow the example of The United States establishes a mechanism to control foreign investments, as was the case for the IDE input filtering mechanism. In 2022, we saw a sudden increase in European FDI into the Chinese market, despite an overall slowdown in FDI into China, as EU investment has increased by a staggering 92 percent.

Although the development of an economic security strategy and narrative seems timely, other challenges affect the State of the Union, some of which are acute. The impact of illegal immigration in Italy and Greece has been neglected for too long and requires a quantifiable solution. There is no doubt that the Western Balkans are the soft underbelly of Europe and a hot spot where bad actors with ill intentions can cause problems. It is time for the EU to step up its efforts and play a strong role in resolving disputes in the Western Balkans. The EU has the expertise and capacity to help candidate countries comply with accession protocols and accelerate their accession to the EU. At the same time, the EU has unlimited tools to promote the rule of law and hold accountable leaders who fail to take actions that support their citizens.

Von der Leyen stressed that a new generation of voters is coming on the scene. This new generation, guided by the wisdom and experience of the current generation of leaders, can achieve great things. This could be a decisive point for the EU. Difficult and exciting times lie ahead.

Dr. Valbona Zeneli is a nonresident senior fellow at the Atlantic Council and a visiting scholar at the Minda de Gunzburg Center for European Studies at Harvard University.

Joseph Vann is a national security expert and former Deputy Director of NCIS.

Picture: Alexandros Michailidis / Shutterstock.com

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