Economically a superpower – not in foreign policy

Holger Schmieding

Schmieding is the chief economist at Berenberg Bank.

(Photo: Berenberg Bank)

Europe is a superpower in foreign trade and a dwarf in foreign policy. For a long time the European Union could live comfortably with it. But this is history. It is becoming increasingly difficult to separate the economy and foreign policy. Under Xi Jinping, China is increasingly using its economic strength for political purposes; under Donald Trump, the US is proceeding similarly. In addition, Vladimir Putin’s Russia challenges Europe and its values ​​more and more openly.

Economists cannot conclusively answer the political question of the extent to which the EU should use its economic strength for political and humanitarian goals. But they can provide decision support.

First of all, it is worth looking at the strength of the EU. For almost all important countries in the world, the EU is the largest sales market beyond its own borders. The US, China, Russia and Turkey also sold more to the EU in 2019 than to any other of their partners.

While the EU and the USA can stand up to each other thanks to their similar size, other EU partners are more dependent on access to the large EU market than vice versa. Economically, the EU almost always has the longer lever.

Of course, the EU cannot act against all the blatant injustices in the world. As a cosmopolitan economy, it has a particular interest in rules and multilateral institutions. Where a country is obviously breaking international treaties, as China is doing in Hong Kong, the EU shouldn’t shy away from economic pressure.

And where Europe has to put a stop to a country that could become more and more a threat to neighbors or even members of the EU, this should apply even more. Putin’s Russia has not only been part of it since the Navalny case.

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Weigh options

The use of economic power for goals beyond pure trade policy has two limits in the EU. First, a common foreign policy must be decided unanimously. This cannot be changed for the time being. But the new 750 billion euro aid fund already gives the EU the opportunity to remind potential people who understand Russia or China of the value of intra-European solidarity.

Second, Germany, even at Nord Stream 2, has shown a lack of due consideration for its neighbors. According to Navalny, Berlin could now correct this and sanction Russian misconduct in such a way that Moscow also feels it.

In business and politics it is always about weighing up possibilities against each other. The economy as a whole can bear individual burdens well. But the more economic levers are used for political or humanitarian purposes, the more likely it is that this will impair the performance and attractiveness of Europe as a location for investment and good jobs.

Anyone who rightly wants to put Russia in its place should also think about whether, in return, for example, the supply chain law or some other well-intentioned but cost-driving intervention could be somewhat defused.

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