In terms of economic growth, Europe has for some time lagged behind other major world economic powers, the United States and China. It is therefore not surprising that the relative weight of the old continent in the world economy is declining rapidly. How vulnerable does this leave the European Union and what should European leaders do about it?
When the Iron Curtain fell in 1989, the countries that make up today’s EU, plus the UK, represented 27.8 percent of world GDP (in purchasing power parity). For the United States, this share was 22.2 percent. China, with a share of 4 percent, still little registered as an economic power.
Thirty years later EU, together with Great Britain, accounted for 16 percent of global production, still slightly ahead of America 15 percent. The big change was in the position of China, which had overtaken its Western counterparts with a share of 18.3 percent.
The Covid-19 pandemic is expected to accelerate these trends. Despite a brief recession, the United States is on track to exceed pre-crisis production levels as early as this year. More impressive still, China’s economic output could be 10 percent more in 2021 than in 2019. The EU, on the other hand, will not return to pre-pandemic GDP levels before 2022 as soon as possible.
In principle, the robust recovery in China and the United States is good news for Europe: EU industry, especially in Germany, is benefiting from strong demand from the world’s two largest economies. Nonetheless, Europe’s declining economic weight relative to the United States and China raises serious questions about its ability to defend and advance its fundamental interests.
Already, many fear that EU countries will be forced to make risky compromises. For example, Chinese investors bought out companies in Europe and even took control of critical infrastructure, such as ports, in countries like Belgium, Greece and Spain. Germany was accused to be slow to condemn Chinese human rights violations, in an apparent attempt to protect its economic interests.
Europe’s dependence on the United States, especially when it comes to security, was of course viewed less critically. Yet, as former US President Donald Trump made clear, this also comes with significant risks. And, in fact, calls for Europe to increase its “strategic autonomy”, that is to say to reduce its dependence on external powers, have multiplied.
But not all dependencies are created equal; only those that are one-sided are really problematic. Identifying the economic dependencies of the EU that fall into this category will require a more careful analysis than that which has been carried out so far.
To begin with, in international trade, is the importer dependent on the exporter, or vice versa? For goods and services with high fixed costs and high margins, the seller’s dependence on market access is greater than for goods with lower margins. Importers are more dependent on supplies from a particular country if the goods are essential and difficult to obtain elsewhere.
In 2020, the EU (excluding UK) imported 383 billion euros ($ 468 billion) in goods from China, more than any other country, and exported € 203 billion in goods to China. We do not know which partner achieves the highest margins or can more easily replace imported products. But the volume of two-way trade suggests that there is considerable interdependence, certainly sufficient to provide some protection against aggressive trade policies.
The same is true with the United States. When Trump threatened to impose tariffs on EU goods to fill the US bilateral merchandise trade deficit, the Europeans pointed out that the US had a similarly-sized surplus in services and primary income (for example, through licenses). And those American exports had high margins. With American companies being heavily dependent on the European market, the United States could not have won a trade war with the EU. This is probably one of the main reasons Trump ultimately didn’t pursue one.
Dependencies can also result from cross-border investments. But here, too, it can be difficult to determine which side is better off.
Overall, European companies invest much more in China than Chinese companies invest in Europe, despite stricter regulations. The main concerns, it seems, are the types of investments Chinese companies are making in Europe.
If Chinese investors buy a European port company, have Europeans become dependent on China? Not necessarily. On the contrary, given the vital importance of port facilities, it is relatively easy for a national government to bring them under its control, or even to expropriate them, if the operators are deemed to have failed in their duty of good management.
Technological dependencies raise other questions. For example, does the participation of Chinese companies in building telecommunications infrastructure, such as 5G networks, create serious risks for the EU? Again, the answers are open ended, not least because they may depend on factors, such as political influence, which are opaque and difficult to control.
There is no doubt that over-dependence can come with risks. So, in principle, the EU is right to strengthen its strategic autonomy. But, rather than relying on simplistic assumptions, it should conduct a full analysis of its economic relationships and associated mutual dependencies, to identify those that need to be reduced.
The EU must also carefully consider its options for doing so. Committing less may not be the solution. In fact, Europe could balance the scales, or even tip it in its favor, by deepening ties. For example, the promotion of Chinese investments in Europe could help reduce the disadvantages of European investors in China by giving more weight to the EU.
Europe’s share in the global economy may be declining, but the EU remains a major economic power with close ties to the rest of the world. If its quest for strategic autonomy turns into a push for protectionism or even autarky, it risks losing this status. If that happened, Europe would be really vulnerable.
—Project union