The Promise of the EU’s New Economic Compass

An indisputable change in the global order has been accepted, demanding the EU navigate a new and very different course.

In June, the European Union issued its first-ever European Economic Security Strategy, and this week, European Commission president Ursula von der Leyen delivered a powerful 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.

Considering these developments, it’s hard to fathom that just over two-and-a-half years ago, the EU was on the precipice of launching into its EU-China Comprehensive Agreement on Investment. After seven years of negotiations, and having been championed by Chancellor Angela Merkel of Germany, the agreement was wisely frozen by the European Parliament. After an examination of the new economic security strategy and the detailed points in von der Leyen’s State of the Union speech, it is clear the EU is on a very different course.

In our geopolitical world, nothing is static. With the EU being well known for its bureaucracy and deliberate methods for administering the business of the union, it is interesting how fast the EU has responded to a plethora of new challenges. The thematics behind both the security strategy and the State of the Union speech are complimentary and outline a pragmatic view of the EU’s required responses to today’s economic and geopolitical challenges. The State of the Union address was notably short on diplomatic ambiguity and remarkably high on pragmatism.

Perhaps more than any other event, Russia’s invasion of Ukraine has been an awakening for the EU. Efforts to wish away the inconvenient truth of Russia’s annexation of Crimea and half-hearted sanctions only encouraged the bully in Vladimir Putin. The ominous clouds of war preceding Russia’s invasion of Ukraine were equally dismissed with the desperate hope that it would be a bluff designed to gain 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 specifically to the EU. The state of denial is now over. An indisputable change in the global order has been accepted, demanding the EU navigate a new and very different course.

In a changing global economy, the EU’s focus on strengthening competitiveness is inherently related to economic security. Yet to be competitive, it is essential that de-risking be part of the formula. Ensuring resilience across all supply chains to achieve greater diversity in types and sources of critical needs will be a foundational element for 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 competitive globally.

The weight of the European market in the global economy has shrunk in the last twenty years from 20 percent in 2001 to 14.5 percent in 2023, while the Chinese economy has grown from 7 percent to 19 percent. Boosting competitiveness is key as the EU economy is forecasted to grow less than 1 percent in 2023, compared to almost 4 percent last year. As von der Leyen acknowledged, there is a critical 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 make up more than 99 percent of businesses and employ around 100 million people.

Tacking the issue of competitiveness will require actions to address the skills shortages that 74 percent of the SMEs are facing. Only by investing in programs that develop human talent can innovation be achieved and sustained. Research and development (R&D) is another area needing 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 only spends 2.2 percent or $328 billion. Chinese spending in R&D has increased eleven-fold since the early 2000s,reaching $439 billion in 2022. New European investments in automation, robotics, and artificial intelligence will prove to be cost-effective in the long term by providing security and prosperity within the community. However, investment in R&D needs to be structured as a proprietary investment for the benefit of the EU. In this regard, de-risking R&D activities requires a zero-based review of all ongoing R&D agreements between China and EU member states to protect the EU’s competitiveness.

When it comes to de-risking supply chains vis-à-vis China, there is a clear alignment between the Biden administration’s new economic doctrine and the EU’s proposals to establish export controls on specific technologies. Especially in fields such as cleantech, solar industry, and electric vehicles, these controls are based on the U.S. model. While the EU’s Foreign Direct Investment (FDI) regulation was established to make the European economies better equipped to identify and mitigate the risks of foreign investment to security and public order, it was a direct response to China’s increased influence in the European market using unfair practices and state subsidies. It remains to be seen whether the EU will also follow the lead of the United States in establishing an outbound investment screening mechanism, as it did for the inward FDI screening mechanism. In 2022, we witnessed a sudden increase of European FDI toward the Chinese market, despite slowing overall FDI in China, as EU investment grew by a staggering 92 percent.

While laying out an economic security strategy and a speech may be timely, there are other challenges affecting the state of the union—some acute. The impact of illegal migration in Italy and Greece has been neglected for far too long and needs a quantifiable solution. Without a doubt, the Western Balkans are the soft underbelly of Europe and a flashpoint for nefarious bad actors to cause problems. It’s time for the EU to amplify its efforts and serve as a forcing function to resolve disputes in the Western Balkans. The EU has the expertise and capacity to help advance aspirant countries’ compliance with achieving accession protocols and fast-track their entry into the EU. At the same time, the EU has unlimited tools to promote the rule of law and hold leadership accountable for not taking action that supports their people.

Von der Leyen pointed out that a new generation of voters is entering the stage. This new generation, guided by the wisdom and experience of the current generation of leaders, can achieve great things. This might be a defining point for the EU. Challenging 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 of European Studies at Harvard University.

Joseph Vann is a National Security expert and former Deputy Assistant Director of NCIS.