By János Allenbach-Ammann | Euractiv.com

Est. 11min

06-10-2023

Economy Brief

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The EU is showing off its muscles by developing trade defence tools and ramping up its investigations and risk assessments. But whether those muscles are good for anything but flexing will depend on the political will and unity that is currently lacking among member states.

This week was a show of force for the EU’s new, more geopolitical approach to trade.

On Tuesday (3 October), the European Parliament gave its final approval for the EU’s anti-coercion instrument that should help it take countermeasures in case a third country tries to use its economic leverage to blackmail the EU or a member state to do its bidding.

Also on Tuesday, the European Commission proposed investigating ten important technology areas for their supply chain risks. For four of these areas, advanced semiconductors, artificial intelligence, quantum technologies, and biotechnologies, the EU Commission will start “collective risk assessments” that should be finished by the end of the year, and could lead to de-risking measures by spring next year.

On Wednesday, the Commission made its investigation into the Chinese electric vehicles subsidies official by publishing the notice of investigation in the Official Journal, after Commission Vice-President Valdis Dombrovskis had defended the move in the European Parliament on Tuesday.

It all looks great from the perspective of a new, less naive EU trade policy. But for now, much of this is still show, like a bodybuilder more focused on Instagram aesthetics than functional fitness.

One can’t help but wonder: Will those muscles ever be used for anything?

Ukraine grain dispute undermines credibility

Will the risk assessments for the strategically important technologies lead to actual measures? According to the Commission, such measures could be “protective”, “promoting”, or “partnering”, but all three possibilities come with significant challenges.

“Protecting”, for example through stricter export controls or outbound investment controls will cause resistance from the industry and from exporting member states. “Promoting” in any serious way will require a lot of money that the EU currently finds hard to organise. And “partnering” would require new trade agreements or similar international partnerships that would require the EU to give something in return, which usually means agricultural market access, which usually means no.

Moreover, the EU’s most recent geopolitical trade episode is not very encouraging.

In September, the Polish-Ukrainian fight over grain imports significantly deflated the EU’s trade muscle as the Commission did not prolong the temporary import ban for Ukrainian grain to Poland, Slovakia, and Hungary, leading those countries to reimpose national import bans.

The Commission is now in a position where it has to battle with Poland and co. to somehow respect EU trade law, while at the same time having to defend them against Ukraine at the WTO.

“The case of Polish grain indicated above all that the Commission was willing to let politics trump its trade policy laws and principles, even if that risked damaging the credibility of the common commercial policy,” Tobias Gehrke of the European Council on Foreign Relations (ECFR) told Euractiv.

Von der Leyen’s political courtship

Meanwhile, Bruegel’s David Kleimann reminds us that “the use of trade instruments heavily depends on internal and external economic and political factors that vary with every given situation.”

And, luckily for the credibility of EU trade policy, the current situation might be a special one.

“Much of the current arbitrariness of decision-making may well be explained with a Commission President who seeks reappointment,” Kleimann told Euractiv, arguing that the trade chaos with Ukraine was a consequence of President von der Leyen not daring to go against either the Ukrainian or the Polish government.

Thus, once the leadership of the Commission is refreshed as the old mandate passes the mantle to the new, the EU might be able to lead more forcefully on EU trade policy.

“Von der Leyen’s current political courtship, as concerning as it is in light of its consequences, should not necessarily give strong indications of EU political resolve generally in post-election times,” Kleimann said.

Post-election times, however, are still some months away. And in these months, much can or should happen – such as the formulation of the specific de-risking measures for strategically important technologies.

According to ECFR’s Gehrke, the investigation into Chinese electric vehicle (EV) subsidies could also fall into that pre-election trap.

“The internal politics of the anti-subsidy investigation will be equally fraught [as the Ukrainian grain dispute] as it pitches German carmaker interests against their French counterparts,” he told Euractiv.

“However, the external environment may be more conducive this time,” Gehrke said, arguing that the danger of an escalation with China was limited due to the current weakness of the Chinese economy and the fact that the EU was not alone in building up trade barriers.

We might thus still see the bodybuilder use his muscles. But don’t expect it just yet.

By the way, not only the EU has a de-risking strategy, Euractiv’s Economy Hub has also started de-risking… our social media profiles! We have not yet fully de-coupled from Twitter, but some of us are diversifying their presence towards Bluesky. You can find Jonathan Packroff under @packroff.bsky.social, Silvia Ellena under @silviaellena.bsky.social, Euractiv’s account under @euractiv.bsky.social and myself under @janosallamm.bsky.social.

Chart of the week

When the Russian invasion started, we often criticised the EU and its member states for being too slow and stingy with their support for Ukraine, leaving the US to do the heavy lifting.

That criticism was and still is fair, but it should now be pointed out that the EU has upped its game in the meantime. Data encompassing all commitments that have been made before 31 July that the Kiel Institute for the World Economy compiled and published in September shows that the EU has taken the lead now.

It is important to point out, however, that the EU financial aid encompasses an announcement of €50 billion in long-term aid that has not yet been approved by member states and the EU Parliament, although it is likely to get the approval.

Moreover, the German support, especially its military support stands out compared to the other European powers. While its size and economic power mean that its leadership would be expected, the amount of military aid Germany has committed is remarkable compared to other countries. France does not even figure in the top ten.

If we look at the total amount of assistance committed relative to the economic power, the Baltic states, Norway, and Denmark are the most impressive contributors as the chart below shows.

In general, Central and Eastern as well as Northern European countries are prepared to commit more aid than Western and Southern Europe.

The fact that the EU is taking the lead is all the more important now that the US aid for Ukraine is more in question than ever, as Republicans have forced the Democrats to cut the aid for Ukraine in order to circumvent a government shutdown. Moreover, the possibility of Donald Trump’s reelection next year forces Europe to shoulder even more of the burden.

You can find all previous editions of the Economy Brief Chart of the week here.

Economic Policy Roundup

German MEP warns of trade conflict with China. In view of the EU Commission’s investigation of new tariffs against Chinese electric cars, Bavarian EU lawmaker Markus Ferber (EPP) warns of possible backlash from China. “If Brussels provokes a trade war with Beijing at this point in time, it will help no one – least of all our economy,” the MEP of Manfred Weber’s CSU party said. “A trade war with China could quickly become the next nail in the coffin for Germany as an automotive location.” EPP chief Weber, in contrast, has welcomed the investigation, saying that “we don’t want to see Chinese electric vehicles benefiting from our ambitious climate approach” in a response to the announcement by von der Leyen.

EU auditors concerned over increased irregularities in EU budget spending. There were increased irregularities in the spending of the EU budget and recovery funds in 2022, according to a new report by the European Court of Auditors (ECA) published on Thursday (5 October). In their report, the auditors warned that errors in the 2022 EU budget spending, which amounted to €196 billion, increased significantly, from 3% to 4.2% compared to 2021. Moreover, they expressed concerns over irregularities in the spending of recovery funds and the EU budget’s ability to cover EU debt costs due to high inflation rates.

EU Parliament urges member states for EU budget top-up, speedy negotiations. On Tuesday (3 October), EU lawmakers called on member states to increase the Commission’s proposal for the revision of the EU long-term budget by €10 billion and start negotiations as soon as possible. EU countries have yet to agree on their stance on the review and remain divided over the proposal to increase national contributions to the EU budget. The matter will be discussed during the EU Council at the end of October.

Former prime ministers, EU officials, and economists call for a fiscal union and “gradual federalism.” In a manifesto for “the European Union at the Time of the New Cold War” published on Wednesday (4 October), former EU prime ministers, EU Commission presidents, European Council president, ministers and central bankers have called for further fiscal integration, a capital markets union, as well as the completion of the banking union. Short of a fiscal union, the signatories argue, “the EU will not be successful in pursuing its green and digital agendas and will continue to be at the mercy of external events, thus remaining vulnerable domestically and on the global scene.”

French industrial production faces new downward slope. Both manufacturing and industrial production was down -0.5% and -0.3% respectively in August compared to the month before, the French statistics body Insee found on Thursday (5 October). This contrasts with a general +0.7% increase in the June-July period. ‘Severe decreases’ can be seen in the steel (-33.7%), paper (-18.4%) and chemical (-10.6%) industries in the past three months compared to last year. According to Insee, this is in large part driven by energy costs, which have caused a production slow-down in energy-intensive sectors.

EU parliament adopts Anti-Coercion Tool, facing claims of hypocrisy. With an unusually large majority, the European Parliament on Tuesday (3 October) adopted a new instrument to fight economic blackmail, enabling the bloc to react to external coercion with countermeasures. At the same time, however, the EU itself is facing accusations of forcing its rules onto other countries by means of its environmental policies, such as the anti-deforestation law and the new carbon tariff, a test period of which started this week. Read more.