EU-Mercosur: The global alliance of herbivores starts today

With the 25-year-long incubation of the EU-Mercosur trade deal concluding on Friday (6 December), the EU is moving forward to build alliances in a world where two of its biggest trading partners, the US and China, are becoming increasingly unreliable.

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When Donald Trump won a second term as US president in November, pessimism took hold among many European observers. Not only did his return upset established international political balances and deal a blow to the global fight against climate change, but it also posed new risks to the EU’s economy – particularly to ailing export giant Germany.

His campaign pledge of 10-20% new trade tariffs on all imports threatens to further hit the stagnating German economy, which is already at risk of losing its main export industries  –  cars, machinery, chemicals – to China.

Always keen on dramatic rhetoric, French President Emmanuel Macron reacted by relaunching the European sovereignty agenda, declaring: “I have no intention of leaving Europe as a stage inhabited by herbivores, only for carnivores to come and devour according to their agenda.”

He suggested Europe should be a market of “at the very least… omnivores” – meaning it should care less about international trade rules and start protecting its own industries.

Several politicians (including former EU chief diplomat Josep Borell) have said that one “cannot be the only herbivore in a world of carnivores” to encourage European policymakers to surrender their loyalty to a rules-based international trade order when the two largest economies in the world – the US and China – are increasingly less favourable to such rules.

However, this week, the European Commission has shown it is willing to go a different route.

Against Macron’s explicit will – a leader who recently lost his majority and remains immobilised by upheaval from domestic farmers – President Ursula von der Leyen and Trade Commissioner Maroš Šefčovič travelled to Uruguay to single-handedly conclude the “groundbreaking and historic” EU-Mercosur deal.

On Friday, the Commission confirmed it had sealed the deal, creating one of the largest free-trade areas in the world.

Instead of further weakening global trade by replicating the protectionist policies of the US and China, Commission President Ursula von der Leyen doubled down on the need to boost it.

“We believe openness and cooperation are the true engines of growth and prosperity,” the EU’s executive president said in Uruguay’s capital, Montevideo. “We know strong winds are blowing in the opposite direction… but this agreement is our response.”

Ignacio García Bercero, a non-resident fellow at Bruegel and a former Commission official, told Euractiv the agreement will give a “boost of confidence” to the EU’s trade policy.

Faced with new trade threats from Trump, the EU “really needs to be much more active in terms of looking into alternative markets, alternative partnerships,” he said.

If anything, Europe should preserve its credo of openness, the trade lawyer said: unlike the US and China, which seem headed for a full-scale trade war, “we have a fundamental interest in rule-based trade, and we should really try to strengthen our partnerships with those countries that believe in rule-based trade,” he said.

To continue with the metaphor, instead of becoming a carnivore itself, Europe can aim to build a coalition of herbivores and let the US and China do their thing – a strategy also recently recommended by Adam Posen, president of the Peterson Institute, a US-based think tank on trade policy.

With a slightly less diplomatic tone, Posen similarly warned that Europe should not give up on rules-based international trade “too easily” and urged its politicians to stop “whining”.

“I think there is a tendency for a lot of governments, including in Europe, to get too caught up in what the US State Department or the Chinese foreign ministry are doing,” Posen told a Geoeconomics conference in Berlin in October. “They can’t hurt you that much.”

Conversely, EU policymakers could take advantage of US and Chinese trade moves by turbo-charging collaborations with partners from around the world.

By going ahead with the Mercosur deal, the Commission has proven that it aims to do exactly that.

“We need to work with a broader set of third countries – middle powers who do not want to take sides in today’s geopolitical confrontation and who we want to co-operate with, to diversify access to inputs,” Sabine Weyand, head of the Commission’s trade department (DG TRADE), told an event by the European Policy Centre (EPC) on Thursday (5 December).

“Europe is very good at talking itself down, and I really don’t think that this is necessary,” Weyand also said. “I would warn against looking at ourselves only as if we were dependent on others and didn’t have agency ourselves,” she added.

For the upcoming EU economic policy agenda, it seems that exerting agency will sometimes require moving forward even if not all EU leaders are on board.

Economic News Roundup

The European Commission is developing a new “doctrine” to strengthen the EU’s economic security amid rising geopolitical tensions between China and the US, a top Commission official said on Thursday (5 December). Sabine Weyand, director-general at the Commission’s Directorate-General for Trade, said this doctrine would propose a more “coordinated and coherent” approach to foreign direct investment (FDI) screening and export controls on dual-use items (i.e. those with both military and civilian applications). Read more.

European Central Bank (ECB) President Christine Lagarde staunchly defended her ‘Buy American’ proposal for dealing with Donald Trump on Wednesday (4 December), arguing that her call to purchase more US gas and military equipment is consistent with boosting the EU’s domestic energy production and defence industry. Speaking to the European Parliament’s Committee on Economic and Monetary Affairs, the ECB chief also denied that her plan, laid out in an interview last week with the Financial Times (FT), is tantamount to waving a “white flag” at the protectionist US president-elect. Read more.

Germany should adopt some key laws to relieve its struggling economy ahead of February’s snap elections, Chancellor Olaf Scholz said in the Bundestag on Wednesday (4 December), urging the conservative opposition to vote accordingly.   “We must defend industrial jobs and, first and foremost, we must ensure that there is security in energy prices,” Scholz said, urging the CDU/CSU (EPP) to support a €1.3 billion package to subsidise grid fees to prevent rising electricity prices. Scholz lost his majority in the German parliament in November and is expected to hold a vote of no-confidence on 16 December, which enables the German president to arrange snap elections on 23 February 2025. Read more.

EU policymakers must urgently enact measures to address the “reality” of Europe’s ongoing deindustrialisation, the head of one of Europe’s leading industry lobbies warned on Tuesday (3 December). Anthony Gooch Gálvez, secretary general of the European Round Table for Industry (ERT), also noted that recently announced closures at German auto and steel plants demonstrate that industry executives are increasingly finding Europe an unattractive place to invest—a process he referred to as the “de-Europeanisation” of the global economy. Read more.

France’s budgetary woes and general political instability are cause for concern, but are unlikely to lead to a full-blown eurozone crisis similar to the one triggered by Greece’s financial collapse more than a decade ago, according to analysts. Prime Minister Michel Barnier’s suggestion that the eurozone could “explode” if his deficit-cutting budget is not passed has little evidential support, experts said – pointing to the fact that Paris, unlike Athens, has neither lied about its fiscal deficit nor defaulted on its debt. Barnier formally resigned on Wednesday (4 December) after left-wing and far-right MPs joined forces to oust him in a no-confidence vote. By Friday afternoon, French 10-year bond yields were trading at 2.87%, slightly below the start of the week. Read more.

Europe’s beleaguered steel industry is urging Brussels to force carmakers to buy climate-friendly steel for vehicles sold in Europe, backed by the French hydrogen industry and climate think-tank T&E. The European Commission should “introduce green steel quotas,” says a letter dated Monday (2 December) and addressed to the incoming executive, suggesting that such quotas should be placed in the EU’s rules on circularity requirements for vehicle design and end-of-life vehicles. ‘Lead markets’ were a core promise of Commission President Ursula von der Leyen, who said they are part of her vision to ensure EU industry is clean and competitive. Read more.

Security will be a core tenet of the upcoming Polish Presidency of the Council of the EU, starting in January, guiding the country’s work split among seven dimensions, according to the government in Warsaw. Poland’s presidency, which will start in January 2025, comes at a “very special moment,” Undersecretary of State Magdalena Sobkowiak-Szarnecka said. “The first issue is how to finance the ‘East Shield’ […] and also financing defence industry,” she added, which will see a thorny debate ahead, as EU countries are still divided on whether the new situation warrants new joint borrowing, known as “eurobonds”, to finance joint defence programmes. Read more.

Facing the highest level of job insecurity in 30 years, Volkswagen employees started striking across Germany on Monday (2 December), yet experts warn that even if an agreement is reached with industry unions, it is unlikely to resolve the car manufacturers’ deeper issues. Plummeting profits and production overcapacity have driven the German car manufacturer to announce cutbacks among its workforce. On 21 November, the Union IG Metall’s chief negotiator, Thorsten Gröger, therefore threatened that the strikes would be “industrial action like the country had not seen in decades.” Read more.

[Edited by Anna Brunetti/Rajnish Singh]