Autonomy, security or survival – the tough economics of the EU’s policy choices
Shortly after his election in 2017, President Emmanuel Macron gave a speech at the Sorbonne University in which he called for, among other things, “A Europe that protects”. The speech called for the EU to become a digital leader while safeguarding data rights; to lead in the low carbon transition; and to safeguard its citizens, farmers and industries from “unfair” competition and “social dumping”.
Late last April, seven years after his initial speech, Mr. Macron was back at the Sorbonne. This time the mood was altogether more urgent (“apocalyptic” according to The Economist). Whereas the 2017 speech was essentially about the EU adapting to the changing world and maintaining its sovereignty, the April 2024 speech came across as a summons to survival. Europe could not take its continued existence for granted. It’s economy had stalled and was chronically underperforming against the US, and exposed to China’s emergence. It needed radical reform to spur innovation. And it could not continue to “have it all”. By this he meant having a social and environmental model that “punctures the riches it produces”, while pursuing the growth needed to secure its future.
Whatever one makes of the terms used by Mr. Macron, many of his ideas have wider resonance. In 2010, the EU-27 economy was slightly larger than the US, at $17.2 trillion versus $16.9 trillion. By 2022, the positions had flipped, with the US at $21.5 trillion and the EU at $20.6 trillion. If we use real GDP per capita is no contest: at around $46, 000 per inhabitant, income per head is around 70% of that in the US. The EU lags noticeably in areas such as tech that are the drivers of economic growth. Faced with such numbers, the key question is whether the EU’s policy settings are fit for purpose to meet challenges on the scale it faces.
Incrementalism in action: from autonomy…
In 2021 the European Commission came up with the idea of “open strategic autonomy”. It defined this as “the EU’s ability to make its own choices and shape the world around it through leadership and engagement, reflecting its strategic interests and values”. Under this heading came a bundle of proposals and initiatives. While not a linear development of Mr. Macron’s 2017 thoughts, the bundle reflected their broad thrust of reacting and adapting to changing external circumstances.
Our research identified four main areas: 1) strategic trade and industrial policy objectives; (2) correcting market failures within the EU; (3) correcting market failures relating to supply chains, with extra-territorial reach: and (4) contingent measures responding to trade measures or behaviour by partners. Category (1) measures include things like the Chips Act and the EU’s New Industrial Policy, while Category (4) includes measures such as the foreign subsidies regulation or the Carbon Border Adjustment Mechanism (CBAM).
Policies related to data and digital markets constitute the bulk of category 2 measures. They largely seek to contain market power protect consumer rights in digital markets, while trying to leverage the EU’s internal market (and specifically the volume of data it generates) to establish the EU’s position in the tech market and capture some of the economic rents in these sectors.
Category 3 such are regulations on deforestation free products and ESG compliance require EU-based businesses to take responsibility for compliance across their entire value chain. That is also a feature of some category 2 proposals (e.g. on cybersecurity). Both these categories capture the core of what’s sometimes called the “Brussels effect”: the notion that the EU could be a leading exporter of rules and regulations and thus define norms at a global level.
Those lofty ambitions aside, our modelling of the proposals suggested that they had a net distortive effect on EU’s trade. The bulk of these effects coming from measures under categories 1 and 4, and from regulatory fragmentation in digital markets. Costs would, very conservatively, be around half to three quarters of a percentage point of GDP per capita growth per year. That may seem small. But compounded over a number of years, it is precisely that sort of effect that contributes to the what Mr. Macron was lamenting – the EU lagging behind other regions or countries that were already growing at higher rates.
… to economic security
The policy discourse in the EU has recently shifted from autonomy to economic security, with the EU’s economic security strategy published in 2023. This reflects an escalation in geopolitical tensions, and specifically worries about who controls value chains in sectors that are critical to industrial competitiveness – including in low emissions technologies – and that have strategic or military applications.
The details of what “economic security” looks like in practice have yet to be ironed out. But some of the broad contours are clear. Economic security largely picks up where strategic autonomy left off, with measures such as export controls and foreign investment screening. It also means a more aggressive targeting of “unfair practices” overseas, with China, and particularly, its green technologies and products, like EVs being the specific target (for good measure, the Commission published a 700 page document detailing China’s purported trade distorting policies that could warrant action via trade remedies). And finally, perhaps illustrating what an elastic notion it is, economic security involves repackaging other initiatives. Take the CBAM for example: initially proposed as a way of mitigating any adverse effects of ambitious greenhouse gas policies on the external competitiveness of heavy industry, it is now presented (along with the EU Green Deal, for that matter) as essential to the EU’s security because the industries it protects are deemed strategic.
New wineskins, same old wine?
The evidence to date does not favour the notion that this incremental accretion of policy positions and repurposing of instruments will deliver the sort of shake up that Mr. Macron sees as essential. The underlying drivers of low economic performance - low productivity, or insufficient innovation and commercial breakthroughs, - are not likely to be fixed by restrictive or more protective measures. The “Brussels effect” may represent a useful contribution to rule-making, but it is surely better to actually strive for leadership in tech sectors rather than in simply their regulation. Regulation may help to redistribute rents in sectors where market power is persistent; in the longer term a better bet would be to establish the conditions in which disruptors emerge to challenge incumbents. That still remains a tall ask. “Could there be a European Google” was genuinely a question the European Commission asked in 2016. In a 2018 article The Economist answered, “never” to the question, and observed the mirth it invoked amongst officials in Brussels.
In this light, one of the striking features about the discourse surrounding autonomy and security is how far an “old economy” feel it has. Concerns around manufacturing dominate, even though services account for 80% or so of EU countries’ GDP. Moreover, what’s often lost in the debate on competitiveness is that competitiveness is necessarily defined at the sector level. And favouring one sector tends to penalise others. It is revealing for example that the CBAM may offer succour to sectors like steel at cement, but it will act as a de facto export tax on services and tech sectors. Trade remedies, very much instruments of the 1980s and 1990s, largely favour the same sectors as those covered by the CBAM.
A charitable interpretation is that a more protectionist external stance provides political cover for deeper reforms within the EU, such as completing the single market for services, and generally reducing internal fragmentation that acts as a break for innovation and commercialisation at scale. But this too seems likely to run into political realities.
Far right, far out One of the key questions is what will be the consequences of the lurch to the hard right that is expected following the EU elections later this year. To a large extent, that swing is a consequence of the economic stagnation, and the insecurities they generate. But the prescriptions offered by the hard right will do nothing to address the underlying constraints on EU growth; indeed, they will likely worsen them. A penchant for national preference, for example, will aggravate the fragmentation that has placed a break on innovation. Moreover, the political constituencies of the hard right are deeply, almost reflexively, hostile towards tech sectors that could drive growth through innovation. They are seen as the preserve of the “globalist elite”, whereas farms and heavy industry are the backbone of traditional ways of life. A more hostile posture to international trade and cooperation will likely deepen the costs of the restrictive policy settings associated with “autonomy” and “security”. It will also scale back EU ambitions, and achievements, on matters like sustainability where it sees itself as a leader.
None of this bodes well for the sort of shift in paradigm that is needed to boost EU growth and living standards. Mr. Macron in his Sorbonne speech, was at pains to point out that the EU cannot “have it all”. The danger is now that it might soon be left with nothing.
Authors
Amar Breckenridge
Amar’s work on trade spans trade policy analysis and modelling, support to dispute settlement and litigation, and trade negotiations. He has worked on these issues for clients in Europe, Asia, Africa and Australia. Clients value Amar’s combination of economic skills with his knowledge of trade rules, which he honed through five years as a staff economist at the World Trade Organisation prior to joining Frontier.