Why now is the time to get real on EU economic security

The coronavirus crisis exposed quite a few shortcomings in how governments deal with crises. Managing the vulnerabilities of dependencies is one of them.

Pharmaceuticals, masks and ventilators are all in great demand – and were emblematic for the kind of security risks national health systems face when they are dependent on foreign supplies. China, for example, holds a central position in global supply chains and speedily politicized export of medical equipment to Europe. But even within the EU, supply to those Member States which are dependent on production outside their borders became heavily strained. Truly a poor EU performance in the early weeks of the crisis.But it is not only access to medical supplies which has been causing headaches to policymakers. In their competition, the great powers in Washington and Beijing instrumentalize everything: access to finance, the flow of investment, the export of technology, chemical inputs – indeed the export of live saving drugs or mask during the pandemic.

For without sufficient international rules and trust, interdependence is a power struggle, not a mutual aid society.

This reality impels states to intervene in markets to protect their strategic industries, for example by granting massive state R&D funding, directly subsidizing those industries, or building their defensive arsenal against foreign competitors. The winners of this struggle will have highly rewarding and controlling industries and technologies; the losers will only have assembly lines. Or so the logic goes.

To control this zero-sum logic, international rules are needed – “now more than ever”, many will pronounce in Europe. This statement is true in and of itself, of course. Bu the necessarily comprehensive new WTO-like deal to discipline governments looks all too distant. Without it, the economic arms race will likely intensify. Europe should better brace itself for this geo-economic era.

Now more than ever, the EU must draw the right lessons and reduce its vulnerabilities from an interdependent, great power world where international rules are flouted. Optimism that great powers will again miraculously refrain from further economic warfare because it would be too costly or not rational could prove an expensive belief to hold onto. A new approach to EU economic security must first of all alert policymakers to security risks the Union faces not from invading armies but from economic dependencies for strategic goods and sectors.

Risks are varied and include disruptions in the supply chain, compromised equipment, coercion, or the erosion of a strong industrial and technological base. These risks can spill-over into the EU’s long-term ability to defend and promote its interests. Where that is the case, economic security becomes a critical insurance policy.

To be sure, there are genuine concerns that economic security measures may become protectionist, offer shelter for vested national interests and reduce overall welfare. The goal must not be to brush these concerns aside, but to balance them with security interests – guaranteeing a functioning health system is obviously one; retaining a competitive technological base and autonomous economic policymaking must no doubt be another.

The EU has not been idle on that front. Creating an EU strategic stockpile for medical equipment and the new EU pharmaceutical strategy are good crisis initiatives. Beyond health, the EU also curates a list for critical raw materials, for which reliable and unhindered access is vital to the European economy and the development of digital technologies (cobalt for batteries, for example). An accompanying strategy brings together different policies to address this vulnerability, including trade agreements to diversify supplies, shoring up internal production, provide finance and R&D for innovation, and coordinate with other initiatives such as the Circular Economy Strategy.

Horizontally, dependency risks are also addressed in the recently published EU industrial strategy which seeks to reduce dependencies in “technologies, food, infrastructure, security and other strategic areas”. The EU investment screening regulation, the EU 5G toolbox, and other financial and regulatory instruments also exemplify this ongoing shift in EU economic security.

The groundwork has been laid and things are moving unusually fast in this crisis. For example, new EU guidelines urged Member States that still lack a mechanism for vetting foreign investments to acquire one and do everything to prevent “loss of critical assets and technology.” Germany, meanwhile, set up a bailout fund to “temporarily” take over struggling German companies, before foreigners snatch up strategic assets.

That is not necessarily only good news. Getting economic security right requires more than shooting from the hip, even though the crisis currently demands it. It will require a methodology for the assessment of risk, calculation of advantage, the availability of a defensive armour, and the coordination of various external and internal instruments. With this, the Union, as a whole, should also develop ideas on how to support strategic industries which want to reduce their dependency on China.

Economic security is on the rise. The EU must find a brand that supports its interests, without discarding international cooperation and rules. Finding a comprehensive strategy of self-assertion and economic security must guide Europe into this new era.