With EU countries now facing greater fiscal constraints, the bloc needs to either further amend them or find a way to have more common European debt. Only then will EU member states be able to make the increases in defense spending that are necessary to bolster security on the continent and deter further aggression from Moscow.

The EU’s fiscal rules

The EU is a partial monetary union (not every state uses the euro) and is not a fiscal union. Twenty of its twenty-seven member states use the euro, but they maintain their own public accounts. The EU’s budget amounts to just 1 percent of the bloc’s entire gross domestic product (GDP). Brussels levies few taxes and spends little for the bloc, and that relatively small budget is the sum of the EU’s fiscal union. The real power of the EU resides in the supervision of the member states’ fiscal policies.

This is why some countries with high levels of debt or deficit—France, Italy, Poland (which spends 4.1 percent of its GDP on the military), and several others—might be under special supervision by the European Commission under the Excessive Debt Procedure (EDP). The EDP requires the country in question to provide a plan of fiscal consolidation that it will follow, as well as deadlines for its achievement. Countries that do not follow up on the recommendations may be fined. Of course, many EU countries are in debt, and most of them run a deficit even in good times; in bad times, they just run even bigger deficits. The European Commission will take into account additional military expenditures in the assessment, but only on military equipment, not on increasing the number of soldiers.

In 2023, the average debt-to-GDP ratio in the EU reached 82 percent, and it was even higher in the eurozone, at 89 percent (with France exceeding 110 percent and Italy going beyond 137 percent). The highest deficits were recorded in Italy (7.4 percent of GDP), Hungary (6.7 percent), and Romania (6.6 percent). Eleven EU member states had deficits higher than 3 percent of GDP. In comparison, the United States has a debt of around 123 percent of GDP and ran a deficit of 6.3 percent in 2023.

The original EU fiscal rules implemented thresholds for each country’s deficit and debt at 3 percent and 60 percent of GDP, respectively, and they required cutting national excess debt-to-GDP ratios by one-twentieth each year. These restrictive rules contributed to the eurozone’s prolonged recession from 2011 to 2013, and some rules have since been relaxed. In response to the COVID-19 pandemic, for example, the bloc activated its general escape clause, which allows for deviations from the EU’s Stability and Growth Pact in times of crisis. Moving forward, however, the rules will likely turn restrictive again, though less so than the old ones. In April 2024, EU institutions agreed on a consensual change to the fiscal framework, making the path back to a debt of 60 percent GDP and a deficit below 3 percent of GDP a matter of negotiations between each member state’s government and the European Commission.

Treat military spending differently

Some EU countries, such as France and Poland, argue for military expenditures to be treated differently, as some member states have different needs in the current geopolitical climate. Not all EU member states are in NATO; for example, Austria is neutral. But under the current EU rules, the fiscal space for military expenditures is one-size-fits-all. After Russia’s full-scale invasion of Ukraine in 2022, defense expenditures incurred that year were within the escape clause, but this does not address the underfunding of the military within the EU.

In 2024, the average military expenditures of NATO and EU members is expected to reach 2.2 percent of GDP, with a group of countries far below the threshold of 2 percent. More importantly, these are big economies with relatively large armies, such as Italy (1.49 percent of GDP), Belgium (1.3 percent), and Spain (1.28 percent). All of these countries have high levels of debt and issues with deficits. Germany is set to reach 2.12 percent of GDP on defense spending this year, but it is held back by its constitutional debt brake, which does not allow for an annual deficit higher than 0.35 percent of GDP. This has created tensions within Germany’s coalition government, since spending more on weapons might mean having to spend less on climate change mitigation and social services.

Meanwhile, the United States spends 3.38 percent of its GDP on defense. To put that into perspective, the total expenditure of all European NATO members is $380 billion, almost three times lower than that of the United States (nearly $968 billion). At the same time, Russian military spending this year is estimated to reach $140 billion, or 7.1 percent of its GDP.

Common debt

European capitals need to treat the need for a stronger military in Europe as urgent and serious, but their accountants in the finance departments are not going to make it easy. Unless Brussels changes its fiscal rules to allow for greater defense spending, common EU debt might be the only solution.

The bloc can issue EU debt outside of national fiscal rules, which it did for the first time in response to the COVID-19 pandemic. Some analysts argue for common debt for a European air defense system, which is a good starting point. EU debt funding could include spending on the further development of European defense industrial capacities. EU leaders such as former Estonian Prime Minister and future EU High Representative Kaja Kallas, French President Emmanuel Macron, and European Commissioner for Internal Market Thierry Breton have supported some version of common debt for defense purposes.

Utilizing common debt should not aim solely to expand the power of the European Commission, as some critics in various capitals fear. Instead, it should transform this measure from a temporary crisis-management tool into a standard policy instrument, enabling Europe to develop a meaningful defense industrial strategy, which has been lacking since the EU’s inception. After the failed attempt to establish a European Defence Community in the 1950s, the European project has primarily focused on economic issues. Unfortunately, it’s time to revisit that discussion.

Europeans must now prepare for a challenging geopolitical environment by investing in European defense, whether through changes in fiscal rules or by taking on more European debt.

Whichever path forward the EU chooses, it must do so quickly. There’s no time to waste.

Piotr Arak is the chief economist at VeloBank Poland.

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The high rate of dropouts ahead of the second round make the number of three-way races favoring National Rally much lower and a hung parliament more likely. An absolute majority for National Rally cannot be fully ruled out yet, but an absolute majority for the New Popular Front already can. This shift in probabilities has led to diverging reactions in bond yields, which have remained slightly higher than before the first round, and stock prices, which have rallied.  

Following Macron’s announcement of the snap election on June 9, French ten-year bond yields increased more than in any other week since 2011. In other words, it was the worst week for the rate at which France borrows from markets since the heart of the eurozone crisis. 

While he was admittedly in campaign mode, French Finance Minister Bruno Le Maire’s warning of a possible “Liz Truss-style” event if National Rally wins—referring to the 2022 bond market meltdown in the United Kingdom that forced the then-prime minister to reverse course on her fiscal plans—was more than a mere talking point. Increased yields arise from falling demand for government loans, reflecting a diminished faith in a government’s finances. The market could see both the extreme right and the extreme left promising to reverse cost-saving measures taken by the incumbent government (such as pensions reform) without offsetting these with new sources of income. 

This graph shows that the “spread” with German bonds has yet to fall significantly despite the greater likelihood of a hung parliament. Why? 

France’s finances are already fragile. Two weeks ago, the European Commission named France as one of seven countries in violation of its new fiscal rules due to high debt levels and no expected reduction in spending. With no tradition of broad coalitions in France, the assumption at this point is that no government will be able to conduct more cost-cutting or efficiency measures. 

Still, France’s bond yield increases thus far remain far less severe than the UK gilt crisis in 2022. 

On the other hand, the results of the first round prompted stock market prices to rally from their initial steep drop following the announcement of the snap election. France’s private sector seems to have taken comfort from the central scenario of a hung parliament and the elimination of a New Popular Front majority scenario. The likelihood of punitive taxes and other major economic changes businesses would need to contend with is now much lower, but not gone.

While France’s CAC 40 index noticeably increased on Monday and Tuesday, it hasn’t fully recovered the losses made following Macron’s decision to dissolve parliament. Clearly, investors are still waiting to see how the second round and its aftermath play out. In a hung parliament scenario, Macron’s party would have to negotiate with all parties that reject the far right. The strongest bloc among these will be the left. This is enough for investors to remain in wait-and-see mode for now.

Charles Lichfield is the deputy director and C. Boyden Gray senior fellow of the Atlantic Council’s GeoEconomics Center

Sophia Busch is an assistant director with the Atlantic Council GeoEconomics Center.

Clara Falkenek contributed research to this piece.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email
SBusch@atlanticcouncil.org.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The EU’s economic weight in the world has declined substantially in the past few decades and its strategic position has weakened seriously as the geopolitical rivalry between the United States and China intensifies. Against that backdrop, one of the report’s main recommendations is to transcend the Capital Market Union to promoting a Savings and Investments Union instead. The aim is to mobilize savings and investments in EU countries, and the report proposes launching a variety of investment vehicles to facilitate retail and institutional investments in the EU economy and especially its green energy transition efforts. These include an EU-wide auto-enrollment Long Term Savings Product leveraging tax incentives by member states; enhancing the Pan-European Personal Pension Product; a European Long-Term Fund; as well as a European Green Guarantee facility to support bank lending to green energy projects. Unfortunately, this well-meaning proposal fails to tackle the underlying causes of the EU’s fragmented capital markets.

While the proposed funds and products may be worthwhile, it is difficult to assess their contributions to reviving EU economic growth until more operational details are forthcoming. Meanwhile, by emphasizing the use of tax incentives and guarantees, the report has downplayed the unglamorous but crucial tasks of harmonizing laws, regulations, market structures, and practices in twenty-seven member countries to forge a seamless European capital market where savings can flow to the best opportunities without internal barriers. The harmonization job is far more complicated than it sounds—involving the development of common rules or at least common and consistent standards for corporate laws. That includes bankruptcy and reorganization provisions, creditors’ ease in seizing and liquidating loan collaterals, tax procedures, supervision of markets and entities, accounting standards, trading rules including for shorting, investment rules for institutional investors such as pension funds, insurance companies and mutual funds, listing requirements including the languages used for prospectuses, etc. Turning all these national rules and regulations into a common EU rules book has run into strong resistance from vested interests in various countries, explaining the slow progress to date in advancing the Capital Market Union. However, without making much more headway in these nuts-and-bolts issues, the proposed European Savings and Investments Union will likely be slow in taking shape as well.

The report also singles out practices which hinder the channeling of savings to investments in the EU but does not get to the root causes of the problems or suggest ways to overcome the impediments.

Firstly, the report bemoans the fact that while the EU is home to €33 trillion ($35.4 trillion) of private savings, annually €300 billion ($321 billion) are being diverted to overseas financial markets, primarily to the United States, due to internal fragmentation. However, it does not recognize, and does not suggest ways to rectify, the fundamental factor attracting European savings to the much larger US stock market, which accounts for 54.5 percent of world market capitalization compared to large European markets at 15.7 percent. Investment flows to the United States primarily because of superior returns on American equity markets compared to those of the EU. Specifically, for the period 1900-2020, the average annual nominal return on US equities was 9.6 percent compared to 7.2 percent for Europe. So long as this remains the case, savings from the EU and the rest of the world will continue to be attracted to the United States, where foreign investors own 40 percent of the stock market. So the EU need both reforms and investment: structural reforms to make the EU economy more productive and its corporations more profitable will create more investment opportunities to deploy European savings at home—while more investment now could help improve EU productivity and growth prospects. Thus, while it is wise to find ways to increase investment in the EU, the problem is more fundamental than just the efficiency of capital markets.

The Letta report also points out the fact that EU households keep 34.1 percent of their savings in bank deposits, not investing those in stock and bond markets. It is important to realize that this behavior of European households reflects their cultural and traditional preference for loss avoidance over capital gains with risk.  As such, a more developed Capital Market Union may encourage somewhat more allocation from bank deposits to portfolio or direct investments, but that would not substantially change the loss-avoiding investment behavior in the near term. Instead, it is more useful for policy makers in the EU to find ways to create a business environment for EU banks which receive an important part of its funding from retail depositors to invest the proceeds more productively.

Relative to US peers, EU banks have posted very low returns on assets (ROA) (of 0.4 percent vs. 1.4 percent for the United States) as well as low returns on equity (ROE) (fluctuating between 2-6 percent, about half of the US level). Consequently, market valuation of EU banks has been much lower than that of US banks: the price to book ratio of EU banks in 2014-2021 averaged 0.79x compared to 1.53x for US banks. In short, helping EU banks become more efficient and profitable—for example by launching the European Deposit Insurance Scheme (EDIS) to complete the Banking Union—would probably do more to support EU economic growth than trying to get EU households to change their investment behavior from bank deposits to market investments.

In conclusion, in highlighting the inefficiency of EU capital markets and proposing several products and policies for improvement, the Letta report has focused attention to the need to complete and upgrade the Capital Market Union, and the Single Market in general, to help the EU improve its economic performance in an era of geopolitical rivalry. However, much of the work requires attention to the detailed harmonization of economic and financial rules and regulations across the membership to promote a seamless market for savings and investments. These are unglamorous and painstaking tasks, but they need to be done.

Hung Tran is a nonresident senior fellow at the Atlantic Council GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

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It starts with Draghi’s forthcoming report on EU competitiveness, at the request of European Commission President Ursula von der Leyen, to be published after the June 6-9 elections for the European Parliament. According to a source close to Draghi, who shared early details on condition of anonymity, the report will likely include a frank appraisal of Europe’s weaknesses. Brussels should pay close attention, and lawmakers should elevate Draghi to be the next European Council president to help make his report’s prescriptions for a more integrated and competitive EU a reality.

Time to compete

The most important things that happen in the world don’t happen in Europe; this is especially true regarding the economy and technological innovation. Draghi is strongly convinced of this, and the competitiveness report will likely dive into Europe’s limited creative and productive capacities.

Draghi is set to deliver a cold, hard dose of reality: Right now, Europe lacks both the resources and the will to compete with the rest of the world, especially considering the capacity of the United States and China to stimulate the economy through government spending. But the report will also likely highlight the fact that Europe has tremendous opportunities to correct for these shortcomings.

One reform that the document will promote is the establishment of interconnections between national production systems, with a view toward creating a single European system of integrated continental supply chains—an ambitious aim, to say the least. “The geopolitical, economic model upon which Europe has rested since the end of the second world war is gone. The European Union has to become a state,” Draghi said at the end of November. His vision for Europe entails the establishment of public debt, fiscal policy, and defense as the pillars of the new EU. He is also convinced that the EU needs five hundred billion euros per year to lead environmental and digital transitions and to provide social protection to its citizens.

As Draghi said in Washington in February, European countries will require “more investment even at the cost of higher public deficits to stimulate growth and fight inequality without forgetting the importance of raising productivity and to assign a new role of budgetary policy that reaches where monetary policy alone cannot reach.”

Draghi is widely regarded as, above all, a defender of European interests and an Atlanticist. As Italian prime minister, he was a key player in aligning Europe with Ukraine. Moreover, he personally developed the system of sanctions placed on Russia’s central bank. This demonstrates a strong track record for defending the EU’s freedom and democracy against any threats.

Draghi’s vision could be the source of inspiration for a government program for the EU for the next five years. And Europe needs his engagement to realize these aims.

The next Council president?

How might Draghi engage with the European institutions? Many observers in Brussels and across the continent think that he could be the next president of the European Council. Even though this institutional office is often criticized for being largely symbolic and lacking a cabinet, it’s the person that makes the office. The president sets the agenda of the Council and could be more than an honest broker between national leaders. A president with Draghi’s vision could truly lead. For example, as European Council president, Draghi would be able to start the process of reforming the EU’s founding treaties by proposing items in formal and informal discussions, as well as crafting plans to realize the policies he will suggest in his report. As he said in Brussels at the High-level Conference on the European Pillar of Social Rights on April 16, “we will need a renewed partnership among member states—a re-defining of our union that is no less ambitious than what the founding fathers did seventy years ago with the creation of the European Coal and Steel Community.”

The problem is that, for now, Draghi has said publicly that he is not interested in assuming any European office, and no political leaders are asking him to get involved.

The campaign for European Council president will start after the elections in June. The new balance of power between the European parties will be determined, together with their agreement on who will hold the main European offices. Three parties that are likely to contend for a leading role in the EU institutions are the European People’s Party (EPP), the Socialists and Democrats (S&D), and Renew Europe (Liberals).

The EPP is expected to be the largest group in the European Parliament. Draghi has a strong influence on the EPP’s leader, von der Leyen, who could ask him at the very least to go on with his work on competitiveness. However, the EPP—mainly the northern European members—are not too keen on the idea of “good debt” that Draghi proposes.

S&D is likely to nominate former Portuguese Prime Minister Antonio Costa as president of the European Council, but he might not be proposed by his country, in which case the nomination would not move forward. During the Socialist Congress in Rome, one of the main leaders, secretary of the Italian Democratic Party Elly Schlein, publicly supported Draghi’s plan to spend five hundred billion euros per year for environmental and digital transitions. And the former Italian prime minister is highly respected by two other influential S&D members: Spanish Prime Minister Pedro Sánchez and German Chancellor Olaf Scholz.

In addition, Draghi has a strong relationship with French President Emmanuel Macron, the leading voice of the Renew Europe group. According to a source close to Macron, his support for Draghi will depend on the outcome of French president’s talks with other European leaders after June 9. The sense is that Macron considers von der Leyen a good choice for a second term as commission president, despite the two campaigning against one another and having disagreements on specific issues. And if von der Leyen backs Draghi, that will bring Macron along, too.

Concerning the other parties, it looks like it will be difficult for the Conservatives and Reformists Party (ECR) to enter into a coalition together with the Socialists. But ECR leader and Italian Prime Minister Giorgia Meloni already has a strong relationship with von der Leyen, and proposing the pro-European Draghi for president of the European Council might be a way to strengthen her accountability with EU partners. Whatever happens after June 9, Europe will need, to paraphrase a quote often attributed to Henry Kissinger, a leader able to carry the European Union from where it is to where it has not been. Draghi could provide that kind of leadership as president of the European Council.

Mario De Pizzo is a nonresident senior fellow at the Atlantic Council’s Europe Center. He is currently a journalist at TG1, Italy’s flagship television newscast program produced by RAI, Italy’s national public broadcasting company.

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The quarterly meeting of the heads of state or government of EU member states sets the political direction for the European Union. The European Council meeting that ended on Friday offers new insights about EU support for Ukraine, EU enlargement plans to Bosnia and Herzegovina, and a wide range of other issues. Below, Atlantic Council experts answer five pressing questions about what just went down in Brussels and where the twenty-seven-member bloc is headed next. 

1. What is the biggest takeaway from the meeting?

The European Council meeting and its conclusions showcase a number of important decisions from the past few weeks. The biggest development was the nod to open accession talks with Bosnia and Herzegovina, a geopolitical move with some caveats intended to provide incentives for further reforms in Sarajevo.

The other big items were either already agreed to at the working level, such as the top-up of the European Peace Facility, or previewed ahead of time, such as the invitation to the European Investment Bank to adjust its rules for defense investments. Yet, it is worthwhile to note two things. First, security and defense was central in these conclusions. This is a welcome signal from leaders that shows Europe’s security remains top of mind among EU member states, though we’ll need to see more tangible progress more quickly soon. Second, support for Ukraine remains strong, but we do see the results of competing domestic political pressures seep into the conclusions. This was most evident in the move, driven by Poland, to establish a cap for tariff-free agricultural imports from Ukraine. It will be worth keeping an eye on these issues. 

—Jörn Fleck is the senior director at the Atlantic Council’s Europe Center.

2. What was decided about EU defense?

The conclusions put wind behind the sails of the Commission’s proposals for a European Defense Industrial Strategy and a European Defense Industry Programme. Leaders pushed the Commission, High Representative Josep Borrell, and the Council of Ministers, where EU member states are represented, to “swiftly advance work” on the initiatives. That’s a good sign of the strong appetite among the EU’s members that greater and more collaborative efforts are needed for things like research and development, sustaining demand for companies to produce kit, and ensuring supply. 

The conclusions also, as expected, invited the European Investment Bank to adapt its lending rules to increase investments in defense projects. European Investment Bank rules now require the bank to invest in dual-use goods. These conclusions allow for a more liberal reading of the rules and thus provide more flexibility for investment. This cuts to the heart of much of the defense saga: Europe needs cash to fund any defense transformation. Assuming politicians won’t want to take more money away from other spending priorities on things like social issues, there are a few options. You can raise taxes (unlikely now in an election year or ever), borrow the money via joint debt (an interesting proposal, but not happening in the near term with opposition from the more frugal members), or find new money (by leveraging European Investment Bank funds or using Russian windfall profits). This is the question to keep in mind going forward. 

—Jörn Fleck

3. What’s the status of EU support for Ukraine?

Like all European Council conclusions or speeches since February 2022, Ukraine is rightly a first-order priority. The conclusions stress the EU’s continued support for Ukraine and its self-defense. Importantly, they effectively endorse initiatives to get Ukraine more materiel and faster. Specifically, they highlight the Czech proposal to buy ammunition from outside the EU as a laudable effort and note the agreement on the top-up of the European Peace Facility agreed earlier this month. However, there will still be bumps in the road. 

A potentially significant detail comes buried near the end of the conclusion on the EU’s trade with Ukraine. Agricultural trade has become a topic of concern for many countries, as farmers’ protests continue throughout the bloc. Allegedly unfair and undue impacts on European producers from Ukrainian products entering the bloc have prompted the EU to take action and enact instruments to control the rate of goods from Ukraine that can enter member states. Earlier this month, the EU effectively capped tariff-free movement of certain grains from Ukraine into the single market at 2022 and 2023 levels, and will implement tariffs if imports go beyond those levels. To be clear, this isn’t the EU abandoning Ukraine, but it does show the reality of domestic politics. EU leaders need to balance economic concerns from their electorate while not bowing to the notion that Ukraine fatigue has overrun the continent. 

—Jörn Fleck

4. Where do plans for EU enlargement stand?

Bosnia and Herzegovina’s EU accession journey has begun, but the road ahead is challenging. While the EU’s conditional invitation opens the door to negotiations, Bosnia and Herzegovina must undertake significant reforms, particularly in addressing ethnic divisions, strengthening institutions, and combating corruption. This conditional approach provides a clear incentive for progress. However, success will hinge on the EU offering targeted support to ensure these reforms are sustainable. Only through a combined effort can Bosnia and Herzegovina and the EU achieve a truly unified and stable European future.

It’s important to note that the EU’s approach to Bosnia could have positive spillover effects. The olive branch offered by the European Council should be a catalyst for concrete results in the ongoing Kosovo-Serbia normalization dialogue, also facilitated by the EU. This, if successful, could pave the way for granting Kosovo candidate country status soon. This is crucial for the full integration of all six Western Balkan countries into the EU, and for fostering good neighborly relations and regional cooperation. 

Furthermore, the EU’s emphasis on internal reforms is a welcome development. It ensures that both the candidate countries and the EU are well-prepared for accession. Clear and timely conclusions on internal reforms by summer 2024 will provide a much-needed roadmap for a more efficient accession process, guaranteeing a smoother integration for future members and the EU as a whole. Importantly, the EU is signaling a shift in its tolerance for regional leaders. The “Jekyll and Hyde” approach, in which leaders project a positive image externally while exhibiting problematic behavior internally, seems to be no longer acceptable for prospective members.

—Ilva Tare is a nonresident senior fellow at the Europe Center and was most recently a broadcaster with EuroNews Group.

5. What should EU watchers look for next?

There will be one more extraordinary European Council meeting in April before the European elections in June. The continent and the Brussels bubble are already in campaign mode. The Commission and the Council will continue their work, but things may slow down in the run-up to June. Keep an eye on the EU’s appetite for coordination on defense and movement on proposals to use the windfall profits on frozen Russian assets to buy ammunition. 

—Jörn Fleck

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While the United States is well on its way to building the next generation of facilities to produce the integrated circuits, solar panels, and batteries needed to supply its digital and green transitions, the EU is struggling to connect its companies with state financing. In theory, the EU’s 27 members have matched US efforts through the European Commission with the NextGen EU recovery fund, a debt-funded program worth around $880 billion. However, because the commission lacks a permanent fiscal union with centralized taxation and borrowing powers, it has had to rely on member states to design and implement plans for NextGen funds. This decentralized approach, in conjunction with stipulations attached to its disbursements, have made it far harder for EU companies to access funding. 

NextGen EU funds are contingent on governments meeting performance targets set by the Commission. As of early 2024 just 18 percent of the Commission’s targets have been met, meaning that only about 30 percent of available grants and loans have been released to member states. Some member states, such as Poland and Hungary, have been blocked from accessing a bulk of their allocation because of the Commission’s rule-of-law concerns. Others, like Germany, have been stopped by their own constitutional court from releasing the funds to industry. These funding lags and uncertainties have stymied EU manufacturers’ investment at home. In contrast, the scale and accessibility of funding in the United States has meant that some major European manufacturers such as Volkswagen, BMW, Enel, and Norwegian battery group Freyr, are opting to instead prioritize investments in the United States.

What’s driving the US manufacturing construction boom

In line with IRA and CHIPS and Science Act priorities, construction is overwhelmingly concentrated in the computer, electronics, and electrical manufacturing sectors. This broad sector covers manufacturers producing computers, communications equipment, similar electronic products, as well as products that generate, distribute, and use electrical power. In other words, the goods needed to facilitate the green and digital transitions. Since the start of 2022, spending on construction for this sector has approximately quadrupled.

This surge in spending has transformed the computer and electronic segment into the dominant driver of US manufacturing construction. In 2023, the sector contributed some 64 percent of all construction manufacturing spending. Just five years earlier, its share stood at a meager 11 percent. The growth in computer and electronic manufacturing has not come at the expense of other sectors. Chemical and transportation manufacturing construction spending is also up 4 and 21 percent respectively from 2022 to 2023, and food and beverage manufacturing construction spending has remained steady.

While this historic expansion in US manufacturing construction is the first step to the reshoring of domestic production, concerns remain over whether the framework will be able to deliver the manufactured products. Labor force bottlenecks remain as the most immediate risk to the Biden Administration’s success. The US Bureau of Labor Statistics’s Job Openings and Labor Turnover Survey (JOLTS) notes that there were 601K open manufacturing jobs and 449K open construction jobs in December 2023. With US unemployment currently sitting at 3.7 percent, well below the average rate of 5.8 percent of the past two decades, the Biden administration’s main challenge will be to find workers to build and staff these new manufacturing facilities. One way to do this will be to support the transition of workers away from declining industries through the upskilling domestic workers. However, this alone will likely be insufficient. The US will also need to bring in skilled workers from abroad through reforms of its immigration system. 

With US industrial policy implementation well underway, the White House should now shift attention toward how it can best bring along the US’ allies and partners. Delays around NextGen EU, the elevated energy costs and economic uncertainty stemming from Russia’s invasion of Ukraine, and structural differences between the the US and EU’s governance structure mean that the Commission will not be able to galvanize investments in manufacturing production facilities at the same scale or speed as the United States. This is further complicated by the EU’s surging green goods imports originating from China as Beijing attempts to export its production overcapacity abroad. If Washington wants to ensure the European green and digital transition is built by friendly manufacturers, it should aim to do more to directly support its partners in Brussels, Berlin, and beyond. 

Niels Graham is an associate director for the Atlantic Council GeoEconomics Center where he supports the center’s work on China’s economy and US economic policy.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The two men, who died on December 27 and 26 aged 98 and 81, respectively, were key figures in reshaping Europe’s post-Cold War architecture in the tumult of German reunification in 1989-1990 and the subsequent journey to a single European currency.

They depart the scene when the economic and strategic imperatives they espoused have fallen out of favor in their home countries—and their forcefully argued ideas on European integration are facing challenges on multiple fronts.

Delors, a one-time Banque de France official, was president of the European Commission for a decade from 1985. He was the institution’s most influential leader since the European Economic Community was established in 1957.

In 1988-89, under a plan masterminded by French President François Mitterrand and German Chancellor Helmut Kohl, he led the Delors committee, mainly comprising European central bank governors. This set recommendations for an independent European central bank and a unified currency, eventually launched as the euro in January 1999.

Delors, Thatcher, and the European single market

Delors, French finance minister between 1981 and 1984, was a Christian Socialist who could appear on a higher moral plane than power-broking politicians and financial technocrats. His was a pugnacious piety. Like Schäuble, Delors could wield morality as a sword.

Delors saw a European monetary union as a vital ingredient of the European common market, over whose birth he presided in 1993, with the crucial support of Margaret Thatcher, Britain’s quintessentially euroskeptical prime minister between 1979 and 1990.

But Delors alienated policymakers in Britain and elsewhere—and arguably helped spur the United Kingdom’s later European Union departure—by spelling out that the integrationist logic of the single currency would deeply constrain national decision-making.

Part of his credo was advocacy for a “social Europe” that Thatcher and other free marketeers believed overextended European regulation.

Schäuble’s role in healing a rift with Gorbachev

Schäuble held his Bundestag seat in for fifty-one years, the longest span in German parliamentary history extending back to 1848, and he was the German finance minister from 2009 to 2017. He finished his days as Europe’s most experienced politician.

He sparked criticism in southern Europe—and, most potently, from the administration of US President Barack Obama—for his insistence on orthodoxy during the 2010-15 European sovereign debt turmoil.

In 2011, he unsuccessfully urged Greece to leave the euro for a multi-year “pause” to allow the Greek government policy space for reforms. For all the dubiousness of the idea, he remained convinced to the end that it was right.

German archives reveal Schäuble’s key role in 1988 as Kohl’s trusted chancellery minister, along with another veteran of the early Kohl era, Horst Teltschik, in healing a damaging public rift with Soviet Union leader Mikhail Gorbachev. This was caused by Kohl’s spectacularly thoughtless comparison of the Soviet leader with Josef Goebbels, the Nazi propaganda chief.

Without this diplomatic maneuvering, German unification would likely not have become reality. When it did, Schäuble, as Kohl’s interior minister, engineered, negotiated, and signed the 1990 unification treaty with the East German government.

Four years later, with fellow Christian Democratic Union (CDU) politician Karl Lamers, Schäuble coauthored a celebrated report arguing for a flexible form of European integration around a “hard core” centered on France and Germany. The concept has attracted many adherents over the years, seen most recently in a Franco-German expert document published in September on the future of Europe. Yet it now appears an oversimplistic model to meet the current challenges.

Home-spun rectitude of the “Swabian housewife”

Schäuble, who was from southeastern Germany, made a show of upholding the home-spun financial rectitude of the classic “Swabian housewife” (a phrase often invoked by Chancellor Angela Merkel). Unusually for a German finance minister, he garnered impressive popularity among the German public.

Schäuble’s high domestic reputation was one of the factors persuading Christian Lindner, the current finance minister in the ill-starred three-party coalition of Chancellor Olaf Scholz, to take the post. The results have so far been disastrous tor Lindner’s liberal Free Democratic Party (FDP). Lindner has received little credit for success and much blame for the coalition’s shortcomings. The FDP has lost ground heavily in regional elections and opinion surveys.

In 2009, marking a high point of Germany’s assumption of moral authority over the rest of the eurozone, Schäuble and Merkel helped introduce into the German constitution a stipulation for a near-balanced annual budget—the so-called “debt brake.” Formal responsibility lay with Schäuble’s finance minister predecessor, Social Democrat Peer Steinbrück, but it bore Schäuble’s stamp.

It seemed like a good idea at the time. But a landmark November 2023 judgment by the constitutional court in Karlsruhe has now plunged Scholz’s government into disarray by ruling that the three-party coalition had failed to honor this legal requirement. Schäuble died with the political, judicial, and economic ramifications of this notorious debt brake still far from resolved.

Sharp intellect and mordant humor

Delors and Schäuble were men of sharp intellect and mordant humor. Their conversations in public and private could be sardonic and withering. Yet both made convincing, often deeply emotional cases for policies furthering European understanding.

Part of Schäuble’s charm was that he was often far more polite than expected to foreign government representatives in one-on-one meetings. “How could I be rude to your prime minister?” he once asked me.

Political circumstances and, in Schäuble’s case, a life-changing injury in a 1990 assassination attempt that left his lower body paralyzed, prevented the two men on several occasions from holding their countries’ highest offices, but reinforced their independence and penchant for plain speaking.

Blame for the European Central Bank

The Bundesbank’s website to this day sports Delors’s timeless bon mot from 1992: “Not all Germans believe in God, but they all believe in the Bundesbank.” (This is placed next to a 1993 quote from Thatcher: “If I were German, I would definitely keep the Bundesbank and the D-Mark.”)

In 2012, Delors publicly stated that the European Central Bank (ECB) should share the blame with wayward politicians from Europe’s periphery for allowing the buildup of the sovereign debt crisis through lax southern-state economic policies.

In 2016, Schäuble castigated Mario Draghi, the ECB president, for the central bank’s low interest rates and quantitative easing—blaming Draghi for half of the success of the newly formed anti-euro Alternative for Germany (AfD) party.

As finance minister in Paris, although initially only number sixteen in Mitterrand’s governmental hierarchy, Delors was already stiffened by experience as a social policy adviser in 1969 to Jacques Chaban-Delmas, French President Georges Pompidou’s war-hero prime minister. In March 1983, Delors rescued Mitterrand’s presidency by introducing economic rigor into an administration rocked by three franc devaluations. Passed over by Mitterrand for promotion to prime minister in 1984, he switched to the European Commission with Kohl’s backing.

Delors’s fear of “being devoured”

Mindful of the fickleness of Mitterrand’s persona, Delors went to extreme lengths to keep his distance from the president. “When I was brought into the government as finance minister, I wanted to remain separate from Mitterrand,” he told me in 2007. “Otherwise, I would have ended up being devoured by him.”

In December 1994, toward the end of Mitterrand’s fourteen-year tenure, Delors rejected a call from his Socialist Party to run in the 1995 presidential elections. Opinion polls suggested at the time he could have won against right-wing Jacques Chirac, who succeeded Mitterrand.

Before and during Kohl’s fourth term between 1994 and 1998—coinciding with the fraught final steps toward introducing the euro in 1999—the German chancellor turned down the chance of making Schäuble his successor. Kohl seemed to believe that a chancellor paralyzed from the waist down would lack the strength to complete the single currency.

This was the beginning of a final break between Kohl and his erstwhile lieutenant that left abiding wounds. Kohl failed to grasp what became obvious to a later generation of international finance ministers: Schäuble’s intimidating intelligence, delivered from a wheelchair, gave him a formidable bonus in pathos, persuasiveness, and power.

When Kohl lost the 1998 general election to Gerhard Schröder from the Social Democratic Party, Schäuble became CDU party chairman. But in 2000 Schäuble gave up the position to Merkel following his embroilment in a party funding scandal.

Political maneuvering aimed at making him German federal president in 2004, and again in 2022, came to nothing.

Schäuble’s skin-deep loyalty to Merkel

Schäuble served for twelve of Merkel’s sixteen-year chancellorship as her interior and finance minister. Although he admired her intellect and respected her authority, his oft-protested loyalty to her was formalistic and skin-deep.

He pointedly refrained from endorsing her as one of Germany’s leading chancellors alongside Konrad Adenauer, Willy Brandt, and Kohl. And he habitually reminded interlocutors of his skepticism over many of her policies, for example what he regarded as mistakes over immigration and excessive compliance toward Russian leader Vladimir Putin.

Schäuble’s record shows some similarities to that of Edward Heath, Britain’s pro-European Conservative prime minister in 1970-74, whose spell in parliament, like Schäuble’s, spanned fifty-one consecutive years. After two lost general elections, Heath in 1975 gave way as party leader to Thatcher. On the backbenches for the rest of his twenty-six years in the House of Commons, he showed ill-concealed disdain for his successor, indulging in what has been called “the longest sulk in modern politics.”

But Schäuble did not sulk. He served in ministerial office under Merkel and reached the pinnacle as Bundestag president in 2017. But, in matters that counted, the final two decades of his parliamentary career gave him no shortage of opportunities for hinting at antipathy toward the powerful woman who superseded him.

Time of disarray

The demise of Delors and Schäuble comes at a time of disarray. French President Emmanuel Macron, who has championed many Delorsian policies, looks becalmed only eighteen months into his second term. The possibility of his replacement by far-right leader Marine Le Pen in the 2027 presidential election is looming larger.

Schäuble’s legacy of the constitutional debt brake appears to be an expensive mistake. It deprives Germany both of an important lever for revitalizing creaking infrastructure and—in view of the international fallout from the Karlsruhe judgment—of its sway over European economic policies.

Delors’s Socialist Party has disappeared as a French political force. Schäuble’s CDU, now led by ally Friedrich Merz, is performing well in the polls, but the anti-euro AfD now polls higher than any of the three parties in Scholz’s shaky coalition.

Many dangers, known and unforeseen, wait in the wings. Two intellectual titans leave the European stage with no one in charge.

David Marsh is the chairman and cofounder of the Official Monetary and Financial Institutions Forum (OMFIF), an independent research and advisory group in the United Kingdom.

A version of this article also appeared on the OMFIF website.

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Unfortunately, the document was vague on several major points. As has been emphasized by the EU itself, its June 2023 communication on economic security was just a first step. In the next phase, the EU’s leadership must provide clear guidance in three areas. First, in the short run, the EU’s understanding of economic security challenges needs to be fostered by clarifying what the key concepts of the strategy actually mean. Then, second, more coherence is needed between the EU’s approach to economic security, the EU’s official political goals and policy instruments, and Europe’s longstanding existential challenges. Doing so effectively depends on the third, more long-term element, which requires the adaptation of the EU’s institutions to the changing world order.

The EU’s reluctant shift away from multilateralism

The EU is reluctantly adapting its economic governance model to a world in which economic relations are increasingly dominated by geopolitical and security dynamics, and by national power instead of international rules. In this world, the logic of conflict dominates the logic of cooperation. Although the European Commission and the EU member states understand that the world has changed, many European policy makers remain attached to a belief in multilateralism, so this shift does not come naturally.

The way the EU is set up is geared towards a predictable, rules-based system. Furthermore, because of its inner make-up, which allows for deliberation between national capitals and EU institutions, the EU may be at a relative disadvantage compared to both the United States and China as it tries to strengthen its economic security in a context of geopolitical strategic competition and conflict.

Yet the EU also has more experience than its peers handling disputes when regulatory decisions become politicized. One of the Common Agricultural Policy’s underlying rationales was to ensure that Europe would always have sufficient access to food by controlling its own production. Also, the EU’s trade policies have often had a political component: many developing countries were granted EU market access in exchange for domestic reforms. EU competition law evolved, partially, in order to prevent American companies from dominating the European market.

The first challenge for the EU’s approach to economic security is to make it clearer what the text actually means. Doing so will also help to identify blind spots in the EU’s strategic approach. For example, what does the European Commission actually mean with ‘economic security’ and ‘strategic dependencies’? While the apparent conceptual vagueness allows room for maneuver, it also threatens to undermine more concrete, tangible steps. And the current strategy also fails to make it clear how the different instruments and tools listed relate to each other and to the notion of economic security.

The EU also needs to understand that the risks to its economic security may not be ‘narrow’–as the strategy states. In fact, as the world order is shifting, in financial, technological, and military terms, the entire structure upon which the EU’s trade and investment relations is built may be at risk. To understand this, the EU must consistently look through a historical lens at the world’s financial and economic system and appreciate how that relates to the world’s military balance. Looking at historical trends, the EU may be forced to acknowledge that it faces much more profound economic security challenges, which may not be remedied with some technology subsidies here, some trade mechanism there. These challenges include, on the one hand, Europe’s long-term economic growth rate, and on the other hand, Europe’s dependence on the US military power to protect Europe’s economic interests.

Second, if Brussels is truly serious about economic security, the EU will need to reconsider adapting its institutional structure. While DG Trade created an anti-coercion unit, that may not be enough considering the scope of the strategy. However, the theme of economic security spans almost all the Commission’s DG’s, from Culture to Space. And national security remains a member state competence, which requires the role of the Council.

The scope and importance of economic security require that it be coordinated centrally and that it become the key responsibility of a future Commissioner. Also, to implement and develop the strategy, more high-level and pan-European coordination is required. That could be a Commissioner, or ideally someone combining the economic competencies of the Commission and the security competencies of the Council—akin to the High Commissioner. Such political responsibility must go hand in hand with specialized support personnel, with intricate knowledge about economic security and geopolitics.

Not all EU member states will like greater reach of the European Commission in matters of economic security. It will therefore be up to the Commission to convince the EU member states that their core interests are at stake in the longer run if the EU lacks the competencies and capacities to confront the economic security challenges. However, to convince the EU member states, the Commission will have to develop a better vision on economic security; the current one fails to address why economic security should be at the core of European integration. That leads to the third and most important point.

Third, the EU’s approach to economic security needs to take into account Europe’s existential woes, economic and societal. Additional bureaucratic structures and policy initiatives for economic security will not suffice to address those. The most important discussion about Europe’s economic security is how Europe can sustainably increase its economic growth rate, while strengthening its democratic values and rule of law, its socioeconomic cohesion and cultural-historical heritage, and its global geopolitical position. That should be the guiding principle, the touchstone for all European policy initiatives, whether those are called ‘economic security’, ‘strategic autonomy’, or something else.

The legitimacy of the EU and of its strategic approach to economic security depends on whether they serve Europe in the long run. Therefore, instead of focusing on technical details and institutional set-ups, the EU’s approach to economic security ought to be guided by more profound debates about the EU’s long-term political objectives. To what extent does the EU want to reinforce its liberal democratic values and internal rule of law? To what extent does the EU want to reinforce Europe’s middle classes and socioeconomic cohesion? And which security and defense strategies are needed to ensure that the EU can successfully attain its internal political objectives in an inherently unstable and uncontrollable international environment?

In the end, however, the EU’s approach to economic security can only be successful if it is tied to Europe’s long-term political objectives. This will also require that the EU’s policy makers consider how the evolving approach to economic security will benefit the values and interests of Europe’s citizens.

Dr. Elmar Hellendoorn is a nonresident senior fellow with the Atlantic Council’s GeoEconomics Center and former advisor to the Government of the Netherlands

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Flagship Event Tue, November 14, 2023 • 1:00 pm ET

EU-US Defense & Future Forum

The third annual EU-US Defense & Future Forum gathers policymakers from both sides of the Atlantic to discuss how the EU-US relationship can further strengthen collective prosperity and security. This Forum will take place from Nov 14 – 15, 2023.

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Amid global crises and great-power competition, there is a renewed urgency to trade cooperation between the United States and the European Union (EU).

“If we can align and have our industries working together, it means that we don’t cede the economic ground to competitors who are undermining our value system and our way of life,” said US Deputy Secretary of Commerce Don Graves at the EU-US Defense & Future Forum on Wednesday.

He was joined by European Commission Deputy Director-General for Trade Denis Redonnet, who said there has been “a tremendous upgrade” in EU-US contacts and cooperation in recent years. “We’ve turned the page on some issues we have had in the past,” said Redonnet, which has “enabled the transatlantic relationship to turn its sights to the long-term, toward trade and technology issues.”

Below are more highlights from this discussion on transatlantic trade policy, supply chain resilience, sanctions coordination, and other crucial aspects of the US-EU relationship.

Trade and industrial policy

• “Frankly, the EU had been ahead of us” on technological investments to combat climate change, said Graves. Now, he said the United States is working toward building a “clean tech green-oriented industrial base.” This does not mean, however, that the United States should “make everything here” he said. “It’s why we have to partner with our friends in the EU.”
• “The concerns [from the EU] that had been in place when the Inflation Reduction Act passed,” said Graves, “we’ve mitigated a lot of those concerns.” He said this is an example of “why we have to have these bilateral and multilateral conversations on an ongoing basis, so we reduce concerns” and “make the necessary investments at the right time.”
• Redonnet said there was a need to act against “distortions generated, in a large part, from nonmarket policies,” from countries such as China. This is why, he said, the EU launched an anti-subsidy investigation against China for its importation of electric vehicles. “This is not protectionism,” said Redonnet. “This is a leveling of the playing field that is, in our view, legitimate.”

Supply chain resilience

• Graves acknowledged that US and EU work to build supply chain resilience will take “a significant amount of time.” For example, he said, given China’s control of 90 percent of critical minerals, “it’s going to take some time to strengthen and refocus our supply chains around those issues.”
• Graves also highlighted the importance of US and EU engagement on supply chain issues beyond the bilateral partnership. “A lot of the supply chains are outside of our countries, and so we have to be engaging with our partners around the globe as well to rebuild these supply chains.”
• Redonnet said the fact that the United States and EU have yet to reach agreements over critical minerals, the steel and aluminum sectors, and state subsidies for green tech “should not overshadow” the areas of agreement on those issues. “On steel, I think there is a lot of agreement on the challenges that are thrown at us by nonmarket excess capacity,” he said. He also said there was “an increasing understanding on why we want to support decarbonization of the steel and aluminum sectors.”

Sanctions against Russia

• “We are, crucially, working on the export side of the equation,” said Redonnet on the upcoming twelfth EU sanctions package against Russia for its invasion of Ukraine. “By depriving Russia of a number of technology items and industrial items,” he said, “we are degrading Russia’s capabilities on the battlefield” as well as beyond it.
• “We are also coordinating very, very intensely now on the question of evasion, circumvention, backfilling,” said Redonnet of an area where US-EU cooperation is essential to successfully “tightening the screw on Russia through sanction regimes and making sure that the impact increases over time.”
• Graves said the United States and EU are working on more closely aligning their sanctions enforcement on Russia, including on tariff codes targeted to hurt Russia’s ability to wage its war on Ukraine. “If we can tackle those, then it’s going to create real problems” for the Russian military to be able to prosecute the war, he said.
• Graves reiterated that the United States and EU are cracking down on third-party sanctions evasion. “If you’re a third-party actor,” he said, “be on notice that we are after you, we will find you, we will shut you down, and you will face pretty severe consequences.”

Daniel Hojnacki is an assistant editor on the editorial team at the Atlantic Council.

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Speaking in Kyiv, Ukrainian President Volodymyr Zelenskyy underlined the significance of beginning negotiations on EU membership before the end of the current year, calling it a “top priority” for Ukraine. “If we can get rid of gray geopolitical zones, we must do so,” he stated on October 24 during a video address to EU colleagues.

The start of official talks would not make future Ukrainian EU membership a formality. Indeed, negotiations could conceivably last for many years with the potential for major obstacles along the way. Nevertheless, the opening of negotiations would represent significant progress for Ukraine and would enable Kyiv to accelerate a geopolitical process that has repeatedly left Ukrainians frustrated or disillusioned for almost two decades.

As the world watches the Russian invasion of Ukraine unfold, UkraineAlert delivers the best Atlantic Council expert insight and analysis on Ukraine twice a week directly to your inbox.

Discussions over a possible EU-Ukraine association agreement first began following Ukraine’s landmark 2004 Orange Revolution, a popular uprising that represented the country’s first post-independence attempt to exit the Kremlin orbit and reintegrate with the wider European community. By 2013, both Ukraine and the European Union were poised to sign off on a deal that would take the bilateral relationship to a new level. However, Russia intervened at the eleventh hour, forcing Ukraine’s then president Viktor Yanukovych to perform a dramatic U-turn.

Thousands rallied in downtown Kyiv against Yanukovych’s decision. When they were brutally dispersed by riot police, these street protests escalated into a national uprising. What became known as the Euromaidan Revolution lasted from November 2013 until February 2014. By the time it was over, dozens of Ukrainians had been killed and Yanukovych had fled to Russia. Days later, Russian troops invaded Crimea and began a war that would eventually lead to the full-scale invasion of February 2022.

Throughout the past decade of escalating military hostilities with Russia, EU membership has become something of a talisman for Ukrainians, symbolizing their commitment to a democratic form of government and a European future. At a time when the Putin regime’s imperial aggression has poisoned attitudes toward Russia, more and more Ukrainians have embraced their country’s quest to join the European Union, with polls now consistently indicating 80 percent support or higher.

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Ukraine’s advance in Kursk: What’s next and implications

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Following the Euromaidan Revolution, Ukraine initially struggled to make any major progress in its bid to move closer to the European Union. The much-hyped EU-Ukraine Association Agreement was duly signed in summer 2014, but this highly technical document was then implemented in stages over the coming few years, leaving many observers distinctly underwhelmed. The only truly historic breakthrough came in summer 2017, when Ukrainians were granted visa-free access to the EU, ending years of widely resented visa restrictions that had often served as a physical barrier to European integration.

Ukraine’s EU membership bid has gained considerable momentum in the twenty months since the onset of Russia’s full-scale invasion. Four days after the start of the invasion, President Zelenskyy made headlines by signing an official application to join the EU. This clear stance on Ukraine’s European future was echoed by EU leaders, who were among the first to visit the Ukrainian capital during the early months of the war. In June 2022, Ukraine was granted official EU candidate country status in a move that was hailed as “historic” in both Brussels and Kyiv.

This week’s news of the latest potential milestone toward future Ukrainian EU membership comes at a time when Ukraine’s European partners are playing an increasingly prominent role in the international coalition supporting the country’s efforts to resist Russia’s ongoing invasion. By September 2023, Europe had “clearly overtaken the United States in promised aid to Ukraine.” In early October, this commitment was underlined when all 27 EU foreign ministers traveled to Kyiv in an unprecedented show of support for Ukraine.

Even if Ukraine moves closer to joining the European Union in the coming weeks, Kyiv will still need to win the war against Russia and reach comprehensive security agreements that will deter the Kremlin from repeating the current invasion. Few believe the EU is capable of providing such guarantees. Even so, further progress toward future EU membership will bring a range of practical advantages while providing Ukrainians with a timely morale boost and a clear indication that their country is moving in the right direction.

Peter Dickinson is editor of the Atlantic Council’s UkraineAlert service.

Further reading

UkraineAlert Oct 19, 2023

Zelenskyy should say a Churchillian “no” to wartime elections in Ukraine

By Alan Riley

If Winston Churchill were still with us, he would surely be advising Ukrainian President Volodymyr Zelenskyy to ignore mounting international pressure to call elections in wartime Ukraine, writes Alan Riley.

Civil Society Conflict

UkraineAlert Oct 4, 2023

Putin’s fleet retreats: Ukraine is winning the Battle of the Black Sea

By Peter Dickinson

Putin was already struggling to account for his army’s evident inability to conquer a nation that he insists does not exist. He must now also explain how his once vaunted Black Sea Fleet is being defeated by a country without a navy, writes Peter Dickinson.

Conflict Defense Technologies

UkraineAlert Oct 24, 2023

Battle of Avdiivka: Putin’s new offensive continues despite heavy Russian losses

By Olivia Yanchik

Russia has returned to the offensive in Ukraine in recent weeks with a major assault on the town of Avdiivka. The Russian offensive continues despite reports of catastrophic losses, underlining Putin’s determination to secure victory at any price in Ukraine, writes Olivia Yanchik.

Conflict Defense Policy

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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UkraineAlert is a comprehensive online publication that provides regular news and analysis on developments in Ukraine’s politics, economy, civil society, and culture.

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Public Event Fri, September 22, 2023 • 3:30 am ET

Transatlantic Forum on GeoEconomics

The goal of this year’s Transatlantic Forum is to outline a way forward on the use of tools of economic statecraft.

Economic Sanctions Economy & Business European Union Financial Regulation

“The old world is gone, a new world is rising,” Germany’s Federal Minister of Economics and Climate Action Robert Habeck said on Friday. “This is a new world where the economic question alone can’t be the political leading question.”

Amid Russia’s invasion of Ukraine, populist backlashes to globalization throughout Europe, and intensifying US-China competition, Germany has shifted its traditionally free trade and export-oriented economic approach. “Globalization, as known in the past, is changing,” said Habeck, “and a new period—some call it geopolitics—is coming.” The Green party politician spoke at the Transatlantic Forum on GeoEconomics in Berlin, hosted by the Atlantic Council and Atlantik-Brücke.

Germany’s new approach has included a pursuit of what Habeck called “economic sovereignty” as well as stricter investment screening to protect critical German industries, and it’s not without challenges. “This shift in the global policy framework is a difficult situation for open-market economies like Germany’s,” he said. Given the ongoing shifts, Habeck argued “we have to create a political idea of Europe,” rather than just an economic one. “We have to look to the future.”

Below, find more highlights from Habeck’s keynote talk at the forum, which was moderated by Julia Friedlander, a nonresident senior fellow with the Economic Statecraft Initiative at the Atlantic Council’s GeoEconomics Center and the chief executive officer of Atlantik-Brücke.

Globalization and its discontents

• “Globalization has fulfilled its promises in many, many areas,” said Habeck, citing reductions in poverty and severe hunger. But, he argued, the backlash to the “losses” of globalization has led to “an all-time high of right-wing populism since World War II” and “a shrinking number of liberal democracies.”
• Habeck argued that “to fight right-wing populism, we have to understand the source of it,” which he said is “disappointment with the promise that if you try hard, you can make it always on your own. This is not true, actually.” To fight back against this brand of populism, said Habeck, “we have to solve our problems.”
• “Globalization, as we knew it in the past, let’s say, three decades is now at a tipping point,” said Habeck. Now, he said, “all major economies are trying to build interest spheres around their economic model.”
• As an export-driven economy, “fair rules are to our advantage,” Habeck said, citing the World Trade Organization’s (WTO) rules. But, he said, “I sometimes have the feeling that we are the last ones doing it. Nobody’s playing to the rules anymore.” Germans, he said “are the last romantics of WTO.”

German—and European—economic security

• Habeck pointed to the “harsh discussion” on Germany’s economic model, which until now “relied on cheap Russian gas and the Chinese market.” Moreover, he said, “we haven’t done our homework” on making Germany more economically competitive, arguing that “digitalization is not at the forefront,” and “our permitting processes take too long.”
• Habeck said Germany is not seeking “economic independence” from the rest of the world, which he called a “stupid idea” that isn’t possible to achieve. Rather, he advocated “economic sovereignty,” which means that Germany should have “some resilience” and that some raw materials for production should be “within our own hands.”
• Within the finance ministry, that means increased investment screening. “In a lot of cases,” said Habeck, “we have stopped Chinese investment in Germany because they go into critical areas,” including satellites and semiconductors.  
• But, argued Habeck, this approach to economic security “must be done on a European level.” This means that “cooperation in the defense industry” among European countries, he said, is “more than necessary.”
• Germany is now adopting what Habeck called “selective multilateralism.” “We have to work for the multilateral institutions,” he said, but “we can’t be naïve.”

The US-Germany relationship

• Germany cannot overlook, said Habeck, that “the biggest defining relationship for the US is not Europe but China.” He argued that the Inflation Reduction Act (IRA) caused “a problem” to the European auto industry because the United States “thought not about Europe,” but “just thought about China.”
• Habeck argued that “the IRA is a problem for Europe” because it has led to a “subsidy race” between Europe and the United States in sectors like the solar industry. He said this “could be a problem for the US, because if the world is doing this subsidy race, you never know who will win.”
• Habeck expressed concern about how European industry would be affected if “the US-China conflict becomes more harsh, if they force us to make a decision” between trading with the United States or China.
• Speaking of the need to reinvent “the European idea of cooperation,” Habeck said that it is “in the interest of a democratic US government” to have “a strong European partner” working with Washington “hand-in-hand for liberal democracy.”

Daniel Hojnacki is an assistant editor on the editorial team at the Atlantic Council.

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Public Event Fri, September 22, 2023 • 3:30 am ET

Transatlantic Forum on GeoEconomics

The goal of this year’s Transatlantic Forum is to outline a way forward on the use of tools of economic statecraft.

Economic Sanctions Economy & Business European Union Financial Regulation

Peace and security are “not free of charge,” Sigrid Kaag, the Dutch deputy prime minister and finance minister, said Friday. 

“If we lose the war in Ukraine, we’re all lost. No peace and security on this continent,” she argued. “This is something we have to keep financing.” 

At the Transatlantic Forum on GeoEconomics in Berlin, hosted by the Atlantic Council and Atlantik-Brücke, Kaag said that Russia’s war in Ukraine is part of a trend of international conflicts “increasingly being fought on economic terrain.” That, she added, has brought a geoeconomic awakening for the European Union (EU).  

Before, the EU had previously focused closely on markets and trade, “but it didn’t spread its political wings,” Kaag explained. Now, the EU “needs to assert itself on the international stage,” to ensure liberal democracies come out on the winning side. 

Below are more highlights from her conversation with Atlantic Council President and CEO Frederick Kempe, which touched upon how the EU should navigate a geoeconomically fragmented world and a future response to Russia’s aggression. 

Wide awake

• Kaag said that the EU needs to assert itself in part because the international playing field has become more complex, for three reasons: first, technology such as artificial intelligence; second, the declining importance of the West; and third, a retrenchment of globalization, spurred by public backlash. 
• For the EU to assert itself, Kaag recommended using economic tools such as trade agreements, access to markets, and foreign investments. “Geoeconomics is a source of our strength,” she said. And, she added, the EU should use these tools “in a collaborative way with its partners.” 
• As the EU undergoes this awakening, it needs to “take a good look” at itself, Kaag said, to make member economies “more competitive, innovative, and resilient to shocks,” and to solve its own internal fiscal policy and political problems.  
• One way the bloc is “getting our own act together,” she said, is the EU’s Green Deal Industrial Plan, a “follow-up” to the US Inflation Reduction Act. 

A fragmented world

• Kaag argued that in facing today’s geoeconomic challenges, the EU should employ “a mix of defensive and open policy instruments.” Defensive measures, she noted, “remain important” because they can help countries avoid creating dependencies on other countries, which “can all too easily be weaponized” by leaders with ill intentions.  
• But those instruments have drawbacks. Kaag warned that fragmentation could cost 7 percent of the global gross domestic product; it would also impede “our ability to address global issues such as climate change” and poverty, she added.  
• While Kaag said it is vital to focus on strengthening and enhancing global economic cooperation, she acknowledged that multilateral cooperation “is not always… effective” when alliances are shifting and countries are changing. That means working with countries beyond the “usual suspects,” even when it’s difficult and there’s less common ground. “We consider a new approach to the Global South essential,” she said. 
• Cooperation is central to “open strategic autonomy,” a concept that Spain and the Netherlands promote in strategic autonomy discussions at the EU and which calls for cooperating whenever possible, while ensuring that the bloc can cope on its own when it must. “We see our security also strengthened through an investment in shared prosperity.” 

Keeping up resolve

• With elections approaching on both sides of the Atlantic—and with some politicians calling for an end to supporting Ukraine—Kaag said she is not “entirely optimistic” about the ability of the EU, its member countries, and the United States to continue their military and financial support until the war’s end.  
• She explained that it will depend on countries’ abilities to foster economic growth and support their citizens’ purchasing power. There’s a “false choice” between financing the war in Ukraine and keeping costs of living from spiraling at home, Kaag argued.  
• Sanctions have had “a significant effect” on the Russian economy already, Kaag explained, pointing to Russia’s declines in consumer spending and arms production, coupled with rising inflation. But sanctions are really “long-haul” mechanisms, she said. 
• “Sustain the pace,” Kaag told the audience of financial policymakers and experts. “Look for loopholes to avoid sanctions diversion,” to find ways the Russian economy is still accessing “financial avenues.” 
• “We will always find new packages, more sharper and so-called ‘smarter’ sanctions” to disrupt Russia’s procurement of the instruments of war, Kaag said. She noted that the Netherlands is willing to explore additional sanctions, in addition to having discussions about using frozen Russian assets to assist in Ukraine’s reconstruction. “We should not leave any avenue unexplored,” she said. 

Katherine Walla is an associate director of editorial at the Atlantic Council.

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Public Event Fri, September 22, 2023 • 3:30 am ET

Transatlantic Forum on GeoEconomics

The goal of this year’s Transatlantic Forum is to outline a way forward on the use of tools of economic statecraft.

Economic Sanctions Economy & Business European Union Financial Regulation

The United States signaled its support for the European Union (EU) in its anti-subsidy probe against China on Friday, as Europe asserts that Beijing has flooded global markets with electric cars at prices artificially driven down by state subsidies.

“This is one of the ways in which the EU is waking up to the fact that global trade today is not happening on a level playing field, and therefore there are things that we market-based democratic economies need to do in order to defend our interests and to defend the space to have fair and free trade,” US Trade Representative Katherine Tai said while speaking at the 2023 Transatlantic Forum on GeoEconomics in Berlin, hosted by the Atlantic Council and Atlantik-Brücke. 

Tai referenced the importance of managing the US-China relationship on numerous occasions in the half-hour discussion with moderator Stephanie Flanders, the senior executive editor for economics at Bloomberg News.

“It is one of our most profound responsibilities,” Tai said. “At the core of this exercise, is that the US and the Chinese economies, for their size and their weight and significance in the world economies, are very structurally different, based on very different philosophical underpinnings. And so the issue—of how we can achieve a coexistence that can be productive and constructive for the world—is not an easy question.” 

Read on for more highlights from their conversation.

On the European Union

• Tai said that the US and EU are “linking arms” to take on challenges around the global marketplace, as their 2021 steel and aluminum agreement is poised to expire if a new deal isn’t struck by the end of October. The new deal aims to address global market distortions and “the negative impacts to our producers that come from nonmarket excess production and capacity—so, unfair trade,” Tai said.

• She also said the Biden administration is working with the EU to create more incentives for cleaner energy production globally, not just in Europe and the United States. “If you are producing as cleanly as we are, based on our metrics and our data, then the concept is that you will have easier access into our markets,” Tai said. “The more fairly you are producing your steel and aluminum, again, the more we treat you the way that we will be treating each other.”

• Tai projected optimism that a deal will be struck. “This is one of the most consequential engagements and negotiations that we are engaged in, one of the most important between the US and the EU, and I remain very hopeful that we will have something to show the rest of the world in the next six-week period.”

On China

• Last year, the United States announced that it would review the impact of the Trump administration’s Section 301 tariffs against China, taking in around 1,500 public comments to weigh in on the tariffs’ effectiveness and the possible effects of their continuation. Tai said the administration’s goal was to “wrap this up hopefully by the end of this year.”

• Flanders pointed to an interview she had conducted earlier this year with Michael Froman, who served as US trade representative in the Obama administration. When China joined the World Trade Organization in 2001, Froman said, there was the expectation that China would “become more like us,” but “instead we have become more like them—focused on subsidies, playing one country against another, state-directed investments in different sectors.”

• When asked about that characterization from her predecessor, Tai said “I don’t think that’s fair.” She argued that “the global economy, the terms of competition have changed, and we need to adapt. We’re not trying to embrace the Chinese model; we’re trying to embrace a model that stays true to our market orientation, to our democratic principles, that is going to allow us to compete.”

• While Tai has yet to meet Chinese Vice Premier He Lifeng since he took over the key finance post in March, she said the strength of the US-China relationship shouldn’t be measured by the number of stakeholder visits between the world’s two largest economies. “The most important thing is whether or not we are communicating,” Tai said. “It’s less about the active visiting and more about the substance of the engagement. I have, from the very beginning, stood by my openness to engage with my counterparts in Beijing.”

On the TTC

• Tai said she believed the US-EU Trade and Technology Council (TTC) has already proven itself to be valuable since being launched in June of 2021, noting that it played a key role when Russia invaded Ukraine and will continue to be another critical economic lever. “This structure of communication and relationships that we had built through the TTC … immediately facilitated the ability for the US and the EU to coordinate its response on the economic side.” 

• The United States plans to host the next TTC meeting “sometime this fall,” Tai said. “And with all of the challenges that we continue to face, I expect it to continue to serve a great deal of our transatlantic interests.”

Nick Fouriezos is a writer with more than a decade of journalism experience around the globe.

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The post US trade representative backs EU in China anti-subsidy investigation appeared first on Atlantic Council.

Public Event Fri, September 22, 2023 • 3:30 am ET

Transatlantic Forum on GeoEconomics

The goal of this year’s Transatlantic Forum is to outline a way forward on the use of tools of economic statecraft.

Economic Sanctions Economy & Business European Union Financial Regulation

Event transcript

Uncorrected transcript: Check against delivery

Speaker

Katherine Tai
US Trade Representative

Moderator

Stephanie Flanders
Senior Executive Editor for Economics; Head, Bloomberg News; Bloomberg Economics

STEPHANIE FLANDERS: You use words like homestretch when you’re just trying to get people to stay in the room, but I think we’ve got the perfect speaker to get people to stay in the room. And I can assure you that your advisor, Beth, has already done you proud in the preceding session. I don’t think she made too much new policy though, obviously, my colleagues will be examining everything she said.

We’ve had an, I think, admirable mix of high-blown rhetoric and very existential discussion today, but also concrete specifics. And I hope that we’re all fine with sort of continuing that with this session, because obviously your life is a lot about concrete specifics and ongoing arrangements, as well as the big picture, which I know we’ll get to. So I will ask you a little bit about some of the sort of things in your in-tray, but I think that could also lead us quite nicely into some of these broader discussions.

So I guess the obvious one to start with is the Trump-era Section 301 tariffs on China. You’ve been reviewing the necessity of those for a year. Have you decided?

KATHERINE TAI: Well, it’s wonderful to see you, Stephanie. And it’s delightful to be with all of you. And I know that—I was looking at the schedule, and I think you and I, and maybe a short closing session, are what separates the audience from a reception and beverages. So it’s always a tough place to be in the agenda.

But to start with your question, a year ago, under our statute, we were asked to begin a process to evaluate not the necessity of the tariffs, but the effectiveness of the tariffs. It’s important to be really specific about the statutory requirements, because we’ve got to follow the law. And so we began that just about a year ago. We are engaging in a very robust interagency process. We requested comments from the public across our economy. We had an open public comment period that closed earlier this year. That generated about 1,500 comments that we are going through very carefully. I’ve been asked—we call it the four-year review. I’ve been asked whether that’s because it will last four years. The answer is no. It’s the four-year review because it happened—it was triggered at the four-year mark of the tariffs.

I want to convey to the audience, and to all who are interested in this, that the Biden administration takes the management of the US-China relationship extremely seriously. It is one of our most profound responsibilities in terms of managing not just our economy, but the world economy, in terms of how we are relating to each other as the two largest economies in the world. And so we are making sure to take our time, to be very deliberate, and to be extremely thoughtful about how we can rebalance the trading relationship between these two largest economies in the world to achieve more fairness and to achieve more effectiveness in defending our economic interests.

And I think at the core of this exercise is a recognition that the US and the Chinese economies, for their size and their weight and significance in the world economy, that we’re two economies that are very structurally different, that are based on very different philosophical underpinnings. And so the issue of how we can achieve a coexistence that can be productive and constructive for the world is not an easy question. And I don’t think the answers are easy either. But in terms of this particular tariff review, it is a part of the larger exercise that we are bringing to management of this relationship.

STEPHANIE FLANDERS: But, as you pointed out, you’ve been—you closed the comments period in January. So I guess that’s eight months. I mean, can we expect any action on this, you know, in the near-ish future? Or is this something that’s going to push a long way ahead?

KATHERINE TAI: Well, our goal is to wrap this up hopefully by the end of this year.

STEPHANIE FLANDERS: OK. And you talked about the broader relationship. We obviously also measure the relationship in part—maybe we shouldn’t—but by visits and shakings of hands and meetings. We’ve had—Secretary Raimondo and others from the administration have now been to China. Are you expecting to go to China in the near future? How do you see the relationship at that level, the sort of personal relationship?

KATHERINE TAI: So I’ll go back to the way you framed your question, because I think it was quite telling, whether or not we should be measuring the relationship in terms of the numbers of visits or who’s going where. I think that the—what we’re trying to get at and the most important element is whether or not we are communicating and, given the challenges between us, whether or not we are able to promote a better understanding of each other. So I think it’s less about the active visiting and more about the substance of the engagement. And on that, I have from the very beginning of my time indicated and stood by my openness to engage with my counterparts in Beijing. Since the last changeover in President Xi’s team last fall, I’ve not yet had a chance to meet the new vice premier, but we have indicated through all of our channels and openness and an eagerness to meet to continue the process of deepening the understanding between us, especially around the areas where our economies are encountering friction and incompatibility.

STEPHANIE FLANDERS: You probably need to seize your moment because the lineup might change any minute; it’s been changing every few months.

Closer to home, your team reminded me when we were discussing this session that you’re only a month away from the US and the EU potentially reimposing tariffs on each other, having not reached a deal on the clean steel talks. So could you just let us know briefly how those are going?

KATHERINE TAI: Certainly. Let me review the facts there a little bit, too, and a bit of the history. So when we came in in this administration at the beginning of 2021, the transatlantic relationship was under quite a bit of stress, and in response to the global steel and aluminum tariffs that had been applied in 2018, Europe applied on a large amount of US trade going to Europe retaliatory tariffs.

Now, what we did in October of 2021 was to call a truce with Europe. We converted the tariffs to what we call tariff-rate quotas. That allowed for us to resume duty-free trade in steel and aluminum from Europe with guardrails. If they hit certain limits that exceed historical quantities, tariffs outside of those volumes would kick back in. In the meantime, Europe suspended its retaliatory tariffs.

Now, we programmed those tariff factions on both sides to expire at the end of 2023 if we did not come up with a new arrangement between the US and the EU by the end of October. And that’s the deadline that we’re working towards, October 31, 2023. We gave ourselves two years to negotiate something where the US and the EU could put ourselves on footing where we could be linking arms to take on the overall challenge of overproduction, overcapacity in steel and aluminum in the global marketplace that is impacting our producers, our workers in similar ways because we both have what we consider to be market-based production, production that is exposed to market forces, that is responding to market forces like demand, and that this overproduction in the global marketplace is based on nonmarket forces. So we are nearing the deadline and we have been doing a lot of work in terms of aligning our systems.

The two challenges that we are trying to solve for together, on a US-EU basis, are, first, the global market distortions and the negative impacts to our producers that come from nonmarket excess production and capacity—so, unfair trade. The other challenge that we are linking arms to address is the need for a clean energy and industrial future, and so the other pieces of what we’ve been doing is trying to figure out how to align our markets to create incentives for cleaner production.

If you are producing as cleanly as we are based on our metrics and our data then the concept is that you will have easier access into our markets, just creating incentives for clean trade and clean production. The more fairly you are producing your steel and aluminum, again, the more we treat you the way that we will be treating each other and this is the basis for what we’ve been working towards, what we’ve been calling a global sustainable steel and aluminum arrangement.

So that our vision is that once the US and the EU can agree that we then bring in other like-minded parties and we try to create a paradigm—to your point about changing the paradigms of trade, we try to create a paradigm for trade that is going to raise standards over time, that is going to incentivize fair production and fair trade based on market principles, and also clean production and clean trade.

So this is one of the most consequential engagements and negotiations that we are engaged in, one of the most important between the US and the EU, and I remain very hopeful that we will have something to show the rest of the world in the next six-week period.

STEPHANIE FLANDERS: Are you sort of dead set on introducing a tariff even if it’s unilateral on what you might call dirty steel, a sort of US version of the carbon border adjustment mechanism because that—you’ve highlighted that that sort of mechanism would be part of the deal you’re looking for but it goes beyond Europe.

KATHERINE TAI: So just push back a little bit on the way you framed your question, am I dead set. I am very determined for the United States to be able to work with the EU as partners jointly to address the challenges that we face in the changing global economic situation and those have to do with fair trade, market-based production, and also carbon intensity.

So let me just bring it back down to the principles of what we’re trying to accomplish and, yes, we are very, very committed to being able to do this with Europe.

STEPHANIE FLANDERS: The way that you’ve wanted to do it and I think the issue has been for the EU, and I think Vice President Dombrovskis have made it clear, is that what you’re looking for seems to go against WTO rules because you will be discriminating against a certain number of countries, and you don’t have a similar mechanism that the EU has for—that applies to its own companies.

So I think this gets us to one of the discussions that we’ve had all through the day. There’s a sort of disquiet in Europe with a US policy which seems to undermine the concept of a global rule-based order and I just—there’s even a feeling that you can’t do all the things that you’re talking about within the WTO or even within the spirit of the WTO. Is that fair?

KATHERINE TAI: That’s absolutely not fair, and you know that I’m going to say that. So thank you for that setup.

STEPHANIE FLANDERS: Well, tell us why not.

KATHERINE TAI: I appreciate the opportunity to explain the US point of view because I know that Brussels has been very effective in transmitting its side of the story. And do keep in mind that we are still at the table negotiating constructively so that—and the public versions of what you’re hearing is for a public audience. But we have a very good partnership still in terms of the negotiations themselves.

What I want to really emphasize is I really bristle at this narrative that the United States would put forward a proposal that is WTO inconsistent because that calls into question our good faith in engagement and our good faith as a WTO member.

Let me put it to you this way because I think that we talk a lot about the WTO and many people talk about the WTO. Not a lot of people have been to the WTO, participated at the WTO, or represented their governments at the WTO.

The fact of the matter is that there is no WTO rabbi who sits and pronounces whether or not a measure that is being advanced by a WTO member is kosher or not. I think that when we put forward measures, we all try to ensure that we are working within the rules-based order.

In fact, I know that the Europeans are very, very proud of their carbon border adjustment mechanism. And that it is the culmination of a lot of European-based work, and compromise, and negotiations. But I also want to acknowledge and recognize that Europe’s confidence that the CBAM is WTO consistent is indicative of the work that Europe has put in to design this system. And Europe’s confidence in terms of how it will defend the CBAM if challenged at the WTO—and we all know that there are members of the WTO right now who are looking and preparing to challenge the CBM at the WTO. So whether or not you feel confident about the work you’ve done to design your system doesn’t mean that it’s not going to be challenged, or you wouldn’t have to defend it.

And so I give you that background because I want to emphasize and make clear that the proposals that we have put on the table and shared with Brussels are ones that we also feel we have designed to withstand WTO scrutiny, that we have our reasons for believing that we have abided by the WTO rules. At the end of the day, in our negotiations it became very clear that our levels of tolerance or our comfort level with different types of defenses are different on a Washington and Brussels basis. And that’s very natural. We have adapted in the negotiations, as you must in negotiations, to try to come towards Europe in terms of its WTO argumentation and defense comfort.

And I want to make sure to share that with all of you because that is something that we do not get credit for. That I want you to know that we don’t just sit at a negotiating table and pound the table and say you must do this, because we do know how to negotiate. We have successfully negotiated agreements with the EU. And we do intend to land this negotiation on a Washington-Brussels basis, and soon.

STEPHANIE FLANDERS: Well, you’ve made me wish even more than I was in the room in some of these negotiations, because it must be really good fun being in negotiation with you. I’m sure if there was—if there was actually—if there was actually a WTO rabbi, I’m fairly sure that the transatlantic council would have somehow got them on the stage here. But, unfortunately, there isn’t.

I can’t help asking, given what you’ve just said—changing the subject a little—what was your response when you heard, probably a fair bit ahead of the rest of us, that the EU was going to launch its probe into the subsidies of Chinese electrical vehicles, given how much high-blown rhetoric we have heard from the European Union on free trade and other things?

KATHERINE TAI: What was my response? I don’t know. I think—I don’t know that I heard it—

STEPHANIE FLANDERS: Well, what did you think about it?

KATHERINE TAI: I don’t know that I heard it much in advance of everyone else. I’m quite sympathetic to the announcement, really, because at the end of the day, as a policymaker—an economic policy maker in a democracy—your responsibility is to the livelihoods of your citizens and your workers, and your ability to grow your industries. This is true for us in the United States. It’s true for Europe. I know you’ve got a more complicated structure in terms of the member states and the Commission. But if you look at the facts, and you look at the data on the ground, and you look at the electric vehicle industry and the competition, and you look at how this industry has grown in China, it is—it is echoing all of the dynamics that we have seen from industry to industry, that—where we have been under incredible pressure to continue to compete from our standpoint of having market-based economies.

And it underpins the dynamics that we have with steel and aluminum that have led us to a point where we were launching tariffs against each other before we could try to figure out a place and an opportunity to—on how we work together on a challenge that is putting pressure on both of us. We have experienced it with solar panels, were twenty years ago we both—the US, the EU, also Canada—had burgeoning solar-production industries that we have mostly lost, by the way. And we see the same thing happening with electric vehicles.

So I think that what I see is, in so many ways—and this is one of the ways in which the EU is waking up to the fact that global trade today is not happening on a level playing field, and therefore there are things that we market-based democratic economies need to do in order to defend, to defend our interests and to defend the space to have fair and free trade.

And I think that that is one of the most important aspects of this coming to terms with today’s global realities is so many things happened in these past couple of years, whether it’s the supply-chain shocks that came from the pandemic and the discombobulation of the shipping and the logistics around supply chains too; Russia’s invasion of Ukraine.

I just want to recall that not even that many years ago the accepted wisdom was two countries that had McDonald’ses would never go to war with each other. But just a year and a half ago we saw that, despite the fact that there had been many McDonald’ses in Russia and in Ukraine, that that didn’t stop Vladimir Putin from making the decision to invade Ukraine.

And so for many, many reasons, it is incumbent on us, especially on a transatlantic basis, but across the world, to open our eyes and to look at how the world trading system is functioning. Compare the reality that we are experiencing today to the foundational goals that we set out for ourselves fifty, sixty, seventy, eighty years ago, and try to figure out how we can accomplish what I believe are still valid and legitimate goals from a long time ago, but to correct for the distortions and the losing our way that has happened over time.

And this also gives me an opportunity—Stephanie, I hope you’ll indulge me—to pitch my speech on WTO reform and my remarks with Director General Ngozi a little bit later today here in Washington.

STEPHANIE FLANDERS: OK. Heard it here first.

Just very briefly on that, just on the—because I’m trying to tease out where we’re going on this—if you have a finding from the EU against China and it ends up in quite a costly amount of retaliation, tariffs on Chinese electric vehicles, retaliation by China, which obviously many in Germany are fearful of, does that serve the kind of objectives that you’re seeking when you talk about trying to build a sort of fairer global trading system to have that kind of all-out trade dispute?

KATHERINE TAI: Well, let me unpack your question, because let’s be very clear. The countervailing-duty investigation, and potentially countervailing-duty actions, are allowed expressly under WTO rules. The WTO recognizes that not all trade is fair necessarily, and we are allowed trade-defense instruments that are, as you call them in the EU, and what we call trade remedies, all WTO members are allowed trade remedies to correct for unfair trade, whether it takes the form of dumping illegal subsidies or when they’re combined. They can be very harmful to your industrial and your worker and societal growth.

So from where I sit in terms of tracking announcements from the EU, the EU was well within its rights, as we all are, to launch a countervailing-duty investigation. I think I did hear a bit of Denis’ interventions earlier. They will have to allow those investigations to run. And then, based on the findings of those investigations, if they do apply countervailing duties, they will be calculated to address the unfairness and the gap in terms of the harm. And should there be retaliation, that retaliation should be based in WTO rules or that retaliation is illegal.

And I also heard Denis talk about economic coercion. So I think it’s not wrong to anticipate that there may be economic consequences that are inflicted. But just to reflect again, that that is not the way that the world trading rules are supposed to work. So appreciate your question, because I think that it really highlights some of the fundamental values that are baked into the World Trade Organization, and how far our reality has deviated from the way that we tried to design the system.

STEPHANIE FLANDERS: I want to tick off a couple more things, because you’ve said that the emphasis—you’ve often said in numerous speeches—the emphasis of your policy at the moment and what you consider to be your job is not ticking off trade agreements, reducing tariffs, but a much broader concept of resilience in our—in trade relations and broader relationships. The Indo-Pacific Economic Framework was one example of that. About a year ago started the—started the negotiations on that. Just can we expect to see something at the APEC meeting? Just wondering how that’s—how that’s going.

KATHERINE TAI: No, I think you absolutely should expect to see. We are looking forward to, again, unveiling and demonstrating the progress that we’ve accomplished in this fourteen-country group, about half the size of the EU. We’re not trying to accomplish the same things as the EU, but just to—just to demonstrate that it’s a multiparty cooperative effort that we have gotten underway. The entire framework effort was launched by our leaders in May of 2022. That’s just over a year ago.

We just hit, and just passed, our one-year anniversary of convening the first meeting of economic and trade ministers. We did that in September of 2022, at the beginning of September in Los Angeles. And in just the last twelve months, and by November will be fourteen months, I’m looking forward to sharing with everyone what we’ve accomplished, keeping in mind how challenging multiparty exercises are. And that in the world of trade negotiations in particular, twelve to fourteen months is a very short amount of time. I think I would very much look forward to demonstrating how much we have done in a very short period of time.

It is more than just showing off. In that we actually have—

STEPHANIE FLANDERS: And there’s a trade pillar?

KATHERINE TAI:—demonstrating how quickly we need to find ways to collaborate, to come together, to innovate together in a global economy where changes are not waiting for massive single undertakings and years-long trade negotiations. That what we are doing is finding ways to work together with likeminded partners to figure out how we can unlock and use the tools of trade and economic principles to promote, not just resilience—I know that there’s a huge focus on resilience—but also sustainability and, equally importantly, inclusivity in the outcomes of our economic cooperation. Because all of those are dynamics and challenges that we all face in the current global economic climate.

STEPHANIE FLANDERS: And there’s a trade pillar to that?

KATHERINE TAI: There are four pillars. There’s a trade pillar. There’s a supply chain pillar.

STEPHANIE FLANDERS: Yes. How is the trade pillar going?

KATHERINE TAI: It’s going well. We’re making a lot of progress.

STEPHANIE FLANDERS: OK. We got a couple of minutes for question. I know that there might well be a question in the audience. I don’t have the iPad side, so can’t get the questions from outside. But I didn’t get any this morning, so does anyone have a question for the ambassador? I will ask you—oh, yes. OK, well, just wait for the mic.

NOAH BARKIN: Hi. Noah Barkin from Rhodium Group and German Marshall Fund.

I’m just curious for your thoughts, Ms. Tai, on the TTC and the future of the TTC. How is it going? Do you see a bright future for it? Do changes need to be made? Thank you.

KATHERINE TAI: Thank you for that question. It’s wonderful. It would be—it would be wrong to wrap this up without talking about the TTC, so I’m very glad for that prompt.

We are looking to host TTC five sometime this fall. I’m also looking forward to that. I think, you know, trade negotiators and, you know, demanding bosses, we like to be critical about how we can do things better. But I think that the TTC has been incredibly successful and it’s incredibly valuable.

We set this up—President Biden and President von der Leyen announced the start of the TTC effort in June of 2021, and we hosted our first TTC in Pittsburgh almost exactly two years ago. When we set it up, it was really to create a forum for collaboration, cooperation, incubation, and innovation of new ideas to address how we can align better in responding to trade and technology challenges that we are facing.

It was—I think the value of the TTC was demonstrated very, very clearly when Russia invaded Ukraine and this structure of communication and relationships that we had built through the TTC—and I think at that point we’d only met once—immediately facilitated the ability for the US and the EU to coordinate response on the economic side to the Russian invasion of Ukraine. And ever since then, I think that the robust work that’s happening across ten working groups, could it be streamlined? Possibly. Can we improve it? I’m sure. But I’m really delighted and looking forward to hosting the next TTC because I think that it’s already demonstrated its value. And with all of the challenges that we continue to face, I expect it to continue to serve a great deal of our transatlantic interests.

STEPHANIE FLANDERS: And just a final question, Ambassador, before we let you go. I was very struck one of your predecessors, Michael Froman, said to me earlier this year in an interview that looking back on when China joined the WTO that we had this anticipation that China would become more like us, and instead we have become more like them—focus on subsidies, playing one country against another, state-directed investments in different sectors. Do you think that’s a fair observation?

KATHERINE TAI: Well, Mike Froman is a good friend of mine, and I think that one of the benefits of not being US trade representative anymore, and perhaps he was in his CFR identity when you had the chance to talk to him. I don’t think that’s fair—in particular the second part, that we are becoming more like China.

I think, again, you have to recognize that the global economy, the terms of competition have changed, and we need to adapt. We’re not trying to embrace the Chinese model; we’re trying to embrace a model that stays true to our market orientation, to our democratic principles, that is going to allow us to compete in a global economy that is very, very different, truly, than it was just twenty short years ago. And we are doing it on an EU and US basis.

The key is that we have to stay true to our principles because, at the end of the day, what we value most is our democratic freedoms and, frankly, our economic freedoms and our opportunities. And that is something that underlies everything that we are doing today, and that hasn’t changed.

STEPHANIE FLANDERS: Ambassador Katherine Tai, thank you very much.

Watch the event

The post US Trade Representative Katherine Tai: ‘Global trade today is not happening on a level playing field’ appeared first on Atlantic Council.

Public Event Fri, September 22, 2023 • 3:30 am ET

Transatlantic Forum on GeoEconomics

The goal of this year’s Transatlantic Forum is to outline a way forward on the use of tools of economic statecraft.

Economic Sanctions Economy & Business European Union Financial Regulation

Event transcript

Uncorrected transcript: Check against delivery

Speaker

Robert Habeck
Federal Minister for Economic Affairs and Climate Action, German Federal Government

Moderator

Julia Friedlander
CEO, Atlantik-Brücke

MINISTER ROBERT HABECK: But I’d like to start with a broad picture, how I see the global situation, the economic situation, and the state of globalization, and then move onto the German-American, European-American relationship and concrete actions that have been taken and other ones that are to be taken.

I think it’s not surprising to say and to start with that globalization, as we knew it in the past, let’s say three decades, is now at a tipping point. It’s under pressure, if we consider that the pressure comes from outside, but I think this is not the right phrase. I think it has come to an end, because we tend to believe that globalization, open markets, traveling around, the supply chains always reliable, business deals are being made without interest or power interest. That has been always—that has always been wrong. At least now we see that this is not the case anymore.

This is not the case in two directions, of course. Globalization has fulfilled its promises in many, many areas and reasons. The amount of people being hungry, having less than two dollars every day has dramatically decreased, so global worth has increased; that’s true. But on the other hand, we see that the losses that were a little bit in the shadow of the successes of globalization have now led to a global tendency of mainly right-wing populism—it’s an all-time high of right-wing populism since World War II—and a shrinking number of liberal democracies. And this has actually nothing to do with specific situations or governments in different countries.

You know, if you come from Germany there has been a lot of debate about the heating law—I call it the heating law. This might be the reason that the right-wing populism in Germany has risen in the past half year. There are other governments that haven’t cared about the heating system. They don’t have an Ampel government. They are Western European countries, Eastern European countries, Northern European countries, Southern European countries, federal democracies, presidency democracies. It’s a broad picture and they all have, from my point of view, the threat of right-wing populism. So I think, to be honest, we have to dig a little bit deeper and it must be a problem of the system itself and the system itself has led to a decrease of the value of labor, from my point of view, which is hard to discuss and leads a little bit away from the topic of these days’ discussions.

But I think if we want to fight right-wing populism, we have to understand the source of it, and the source is not one particular political problem but disappointment with the promise that if you try hard you can make it always on your own. This is not true, actually. We know it by our lives. And this is a promise that points back to—if you are not succeeding that the failure is always your problem, and then, of course, this problem becomes combined with disrespect. And anyway, the tendency to move away from society and then you—the right-wing populism is like a—like a Hoover, searching for points where it can show that this system, the liberal democracy and also open-market democracy and open-market economy, has problems not solved. And this not solving the problems is overblown, then, and say: You see, they are impossible to solve the problems. So, long story short, we have to solve our problems to fight back right-wing populism.

But the idea is that globalization, as known in the past, is changing and a new period—some call it geopolitics—is coming or we are in the midst of it. This shift in the global policy framework is a difficult situation for open-market economies like Germany’s and also America. We are—but on the other hand, we are part of the game.

I can’t go over the last year with stating that also the terrible aggression of Russia against Ukraine is maybe the most visible point of this global change, that we are now using instruments of the last century once again on European soil. But it’s only one example. Others can be taken.

I think all major economies are trying to build interest spheres around their economic model, and this is also true for the US. You know it—the Inflation Reduction Act, as one, I don’t know, phrase for it, an example for it. It goes ahead with local-content rules. It goes ahead with the idea of re- or friend- or nearshoring—meaning, of course, speaking from an economic perspective, that not the cheapest place is the best place for production but we consider other measures, that we need also production in our own country. And this is a tremendous threat and change.

Europe, and also [the] US, mainly have all brought their raw materials from external countries into the continent. We don’t have that much exploration of energy, at least fossil energy, in Europe anymore. We buy it from other countries and we ship it to Europe. We don’t have at least only few experience in exploiting raw materials and critical minerals. It’s all coming mainly from China because it is cheaper there—cheaper for a different reason, but it’s cheaper.

If we’re now saying we want to have it on our own soil, this is not an economic thought. It’s a different thought. It’s called economic security. And I think we have to behave—we have to act according to the idea of economic security. But this goes ahead with a change also in the safety belief, political prefixes, that we are always buying from the cheapest places, for example. So if this is not an economic idea in itself but a security idea in itself, it is more costly. Of course it is more costly.

So we have to—we have to ask: How do the budget rules fit to this idea of re- or friend- or nearshoring, to this idea of economic sovereignty? And I’m not talking about economic independence. This is a stupid idea. This is not possible. It can’t be and it’s not desirable at all. But sovereignty means that at least some competence, some resilience, some parts of productions are within our own hands. This is a lesson we have learned now on the raw-materials side, on the energy side, and also looking back to the post-COVID-19 period also in the COVID-19 period.

So I’m following this idea. And in the possibilities, or within the possibilities I have in my ministry, we tried to push the economy also in this direction, like investment screening. It’s now a lot of—in a lot of cases, we have stopped Chinese investment in Germany because they go into critical areas—satellites, semiconductors, you name it. But of course, this can be considered, from a German perspective, also a disadvantage.

I talked about the money problems, the budget problems that this idea of economic security creates. On the other hand, it is also a disadvantage compared to the other European partners. You remember the debate about the port of Hamburg where Cosco tried to invest into a terminal, one of the smaller ones, and they did after we lowered the investment rate they could get. But of course, they were right—or, I mean, the Hamburg government was also right pointing to Rotterdam or to Piraeus. So if it is in disadvantage, if you create a more—higher security network in your own country disadvantaged then you won’t do it anymore.

So I think the right consequence out of this very brief analysis is that we have to move forward on a European level, meaning that investment screening into critical infrastructure or business should be following the same routes in Europe, meaning that outbound investment is necessary, as the Biden administration has done it now, but not so much the European countries.

I’m advocating for this idea but it must be done on a European level, meaning that cooperation in the defense industry is more than necessary. I guess you have discussed it many times in this audience. Actually, we have twenty-seven natural defense industries and they work together, yes, more or less OK. But more or less OK is not OK enough anymore. So creating an own European defense industry cooperation at least in the sector is also one result of this brief analysis I just gave you.

So now this all leads to the question how’s the European—the German—Germany in Europe, European connection and in relation to the US. I have to say that the partnership, I would like to call it—the friendship actually to the different ministers—and I think we have Katherine Tai later on in the evening or the afternoon—is really wonderful.

We are friends, and if we have problems we call each other. So many times where I got text messages: Robert, there is a problem, can we talk? And then we try to solve the problems, and a lot of problems have been solved. I have now a written a speech here, if I can name it, TTC—US trade and technology country suspension—suspension on tariffs in the dispute area between Airbus and Boeing, agreement on principles for a minimum carbon tax rate, the work on global agreement on steel, the agreement on transatlantic data transference, so on and so on.

You know, a lot of progress has been made. But from a European perspective we can’t oversee that the biggest defining relationship for the US is not Europe but China, and I really can remember a telephone conference I had with Secretary Yellen in the beginning of the [IRA] where I pointed out that these local-content rules for cars is a problem for the European and German automotive industry and I will never forget the silence on the other side of the telephone. It was like, oh, shit, there’s a problem. And then she was very, very, very direct and said, well, I think we forgot you. They forgot you or this was not—it’s not directed against Germany or Europe. They just thought not about Europe. They just thought about China.

And this is telling a story. What is your European industry doing if the US-China conflict becomes more harsh, if they force us to make a decision selling cars or whatever we are selling in China or on the US market and what—on the other hand, and this is definitely not something I wish—what if not the Biden administration or a Democratic-led government is on the other side of the Atlantic but a Republican one and what if US and China become, in a way, authoritarian partners? What is Europe then doing?

So put it one way or another, I think the consequence is clear and we have to—we have to be honest. The old world is gone. A new world is rising. This is a new world where the economic question alone can’t be the political leading question.

We have to think about reliance. We have to think about security issues. We have to think about also reinventing the European idea of cooperation in many areas. Otherwise, we are—the European, the German partners—too weak and this is I think also in the interest—I hope at least—in the interest of a democratic US government that you don’t have a weak European partner but a strong European partner that is working with you together side and side, hand in hand, for a liberal democracy.

Thank you very much.

JULIA FRIEDLANDER: It’s working. Thank you so much, Mr. Minister.

You’ve touched on so many of the issues in just a few minutes that we’ve been discussing all morning. I’m an American and in Germany, so I’ve got a foot on one side on the foot on the other, and an alumna of the US government. And one of the main challenges that I have observed over the past years working on these issues is that we’re having a little trouble deciding what belongs to competitiveness and what we would call economic security, wirtschaft sicherheit, and what is national security.

So maybe you can help us understand within the German context, when you’re sitting around the table and you’re negotiating over what to what to do, how is the dialogue different when you’re saying we’re going to do this because we want to, you know, keep Russia from being able to prosecute this war versus we need to do this to make sure we have a security of supply? They are two sort of two different objectives, right, but they overlap in the means.

MINISTER ROBERT HABECK: Well, from a—it is complicated. The economic models in Europe are very, very different. Maybe I start with a look back on the energy question. We had—my French colleague, Bruno Le Maire, was just here the other week. And he, in a way—I would not say he complained, but he pointed out that France has lost its energy intensive industry in the past, I think he said, one and a half decades by half. So the industrial production, the energy-intensive industrial production in France was like it was—or is in Germany, 20 percent of the industrial production. And now it’s only 10 [percent]. We have still the same amount of industrial production like we have decades ago because we bought cheap energy. France did not. Not so much natural gas, at least.

Well, this is gone now and can’t come back so fast, not from Russia at least. And this is a problem now, an actual problem mainly for Germany, also Czech Republic, but not so much for Spain, for France, for Scandinavian countries. This is a German problem. So we have a very, very concrete German problem in the European family. And the same goes for the Chinese market. We are selling a lot of cars into China. It’s becoming a little bit difficult now because they are clever and know how to build electric vehicles, and the electric vehicle market in China is increasing very, very fast.

But German cars are sold well in China. France, for example, is not selling its cars, at least not so—not so many in China. Now, it was a friend of mine proposed that we should have a deep dive into the question if China is giving illegal or, you know, not WTO-according subsidies. The German economic system, the German automotive industry, is afraid—rightly so—that if this would be the case and tariffs would be invented on Chinese cars, or whatever, we have to fear counter action. For France it’s not a problem, because they’re not selling so many cars.

So you see, we are always coming from different angles. And it’s very, very hard to bring all these—all these different views together. So your question was, in reality, how is the discussion? And I can tell you, it’s very, very complicated. And to my—well, to my—I’m not satisfied. It takes so long and so long. To overcome this. I think we have to create a political idea of Europe. The economic zone of Europe, the idea of transatlantic partnership, where do we want to move to? And not only start from the—from the actual situation. This is a historical developed situation. We have to look into the future. But this is maybe—I still have this idealism that politics and politicians can solve big problems. And this is a big problem we have to solve.

JULIA FRIEDLANDER: Well, I tend to agree that Germany is not the sick man of Europe. So your response to the Economist article, I think, is—yeah?

MINISTER ROBERT HABECK: On the other hand, you have Germany—Europe can’t do without the German economy. We are the strongest economic power in Europe. If our economy would be harmed or has a problem, Europe has a problem. So we are we are all in this together. It’s interwoven. But when you’re sitting at the table and you are the French, the German, whatever, the Italian minister for economic affairs, of course you are arguing from the perspective of your own country.

JULIA FRIEDLANDER: Of course. And I think that we’re, certainly in the United States—and we were just discussing over dinner last night—there are two charts that are looked at—it’s the trajectory of growth in China and the trajectory of growth in Germany—as the arbiters of the global economy, right? So—and this is the focus of Washington. But when we—when we think about the pillars of that growth—and you referenced the IRA, and of course we could discuss it until we’re blue in the face—it really—it really makes me wonder about the balance between what you can expect the private sector to do, how much capital you expect them to invest, often without the promise of return or at least over the medium term, versus what is the role of the state. If you want to make the US a renewable powerhouse, maybe the—maybe the government has to go into the hole ahead of time and then initiate the private capital, right? So where is that balance? And where is that balance in Germany? Because there have been some major government investments in industry, chips for example.

MINISTER ROBERT HABECK: Well, for Europe the IRA is a problem. Not so much that we are in a competitive situation with the US or other markets; this is—I mean, we are proud to be in a market society, so competition is nothing we should be afraid of—but because of two reasons.

First, from a market perspective society, subsidies have only one good reason: to create a market that is not there. That’s a political decision. We want to have hydrogen, for example. Hydrogen is not available. We have to create the market for hydrogen. And this is the reason why we give subsidies to companies to do green steel or whatever. So this is the good reason for—in a market-driven economy.

The bad one is that we are in a subsidy race. The others are giving also subsidies, and this is now happening mainly because of the IRA. There is—a lot of companies want to invest into solar industry in Germany, and I want them to do the investment because of energy security or economic security. At least some parts of the panels we are building on our rooftops should be—should be built in Germany or in Europe. But they’re saying privately: Well, how much do you give me? And I say, oh, not so much, I don’t have any money more. And they say, OK, we get more in the US, then we go. So this is the—this is the first problem. It’s a subsidy race. It is also a problem for the US or could be a problem for the US, because if the world is doing this subsidy race you never know who will win.

And the second one is that this is leading to the question—the political route we have given ourselves the last decades are fitting to the new problems. The US has a—has a very simple system. The IRA—the advantage of the IRA is that it is a tax-credit system, and this is not in line with the way we are doing things in Europe and in Germany because we have very strict budget rules. We have to know in advance how much money we are giving for this or that program. So the companies have to go to us and we have to go to the European Commission, and then back and forth and back and forth, and it takes two-and-a-half years. This is actually too long, but this is the way.

But the thing is, we know exactly we have, I don’t know, ten billion euros for hydrogen industry or whatever. It’s not becoming fifteen or sixteen or twenty [billion euros]. We know there is a budget, and if it’s gone, it’s gone. The tax-credit system in the US is actually saying—it’s very fast. You were doing the investment, and later on you’re bringing your investment to the tax administration, and then you get the advantage back. But you don’t know how much it will cost. All the numbers are just estimations.

And this—I mean, the minister of finance would get crazy if I would do things like that. If we are saying: Well, we have a program. Let’s say will last five years. And if it’s doing well, it will blow away all the budget restrictions. But this is something we want to. And while the US has, if I’m following the news right, their own problems, they have to raise the budget. This is something we can’t do. They have to raise the budget, and as far as I can see they don’t have agreed on it once again, so it’s not easy for them as well.

But the—you asked about the IRA, and the two problems are subsidy raise and different systems in these competition. It’s like handball and football. And if one is saying gripping the ball with your hands is not allowed, and you’re saying why and why not, I’m playing handball, well, then you don’t play the same game.

JULIA FRIEDLANDER: Mmm hmm. And what do you think could envision—an incentive structure in Germany or in Europe could be to generate the kind of private investment that the IRA hopes for, right, if it’s through capital market or other means—or the European Investment Bank, right, of course, which is now about to choose a new leader? Are there new tools that you think could be—could be developed that would be—that would be helpful?

MINISTER ROBERT HABECK: Well, there are also huge advantages in Germany. Now we have a harsh discussion about the standard Germany. And of course let’s—if I can put it blunt, we—our economic model relied on cheap Russian gas and the Chinese market. Well, and then you see the problem; the one is gone and the other one is systematic rivalry now. So it’s problematic, in a way.

And by looking into these two broad areas—and I hope nobody gets me wrong; we all know how politicians are and how politics works—but in a way, the country or, well, the government, whatever, have been a little bit lazy in the past times. We haven’t done our homework. We are not—the digitalization is not at the forefront. Our permitting processes take too long, way too long. Our competition—digital competition rules are not—they are created from an inside view how Europe should be—should create a level playing field. Fine enough, but this is not the real competition situation.

Our competition in Europe is with US or China. So the rules are not fitting to the problems, in a way, bringing labor force to Germany, to Europe. I mean, it’s not astonishing that we are getting older. And it can’t be a surprise that there’s a lack in the workforce now. But the rules were not fitting to these problems. So this has to be done now.

But the advantages are we are a stable democracy. We have a very, very attractive social system. We have high competence in the industries. We have very good education for the—for the workers in the industries. We have the European single market. We are the strongest economy. We have a big financial power if we want to use it. So there are huge advantage also for the German standard, so we don’t have to be afraid that we have to lose these challenging situation.

But we have to create an attitude that we will win it, that we don’t sit there like the rabbit and stare into the problem. Then we are going to be eaten by the other day. You have—well, you know in Germany football is a big issue. We lost in Japan, one to four. Japan is an OK football country, but, well, it’s not the most—it’s not Brazil. Let’s say it. And we lost. And one week—one week later, we succeeded in France. France is playing football very well—soccer—very, very well. It’s the same team. It’s the same ball. It’s—the grass was not going down. So the conditions were the same.

Why is that so? It’s about the attitude. If you want to—if you go into the game and say, oh, OK, this is very difficult, and I haven’t slept so well, and we have so many problems in our past, and I read in the news we have a problem in the team, then you will lose it. And if you go to the place and say, OK, there might be problems, but today we won’t leave the place without scoring our goals, then at least you have the chance to score some goals.

JULIA FRIEDLANDER: In graduate school, I learned that was called animal spirits.

MINISTER ROBERT HABECK: That’s a very American way to talk about it.

JULIA FRIEDLANDER: I know. Sorry.

But I’d like to ask you a little bit—we talked—so the first panel this morning was stocked with practitioners of economic statecraft. So they were people who actually are—sit in—they sit in the dark room, as I did at one point, and put—and design sanctions and export controls. And we also discussed the—we discussed the sort of technicality side of it, but then also the broader perspective on building global coalitions.

And so I’d be interested in your perspective, seeing—looking at the Russia case, potentially seeing other challenges where we’re going to have to use so-called punitive measures of economic statecraft, how big do the coalitions have to be among nations—among size of GDP or capital market, or choose your metric—so that it doesn’t blow back on us, right, has adverse effects? So in the Russia context, right, I mean, at this point last year we thought we were going to be in an energy crisis. I remember in my office in Atlantik-Brücke we were saying, OK, well, we’re going to shut the lights off. We’re going to turn the heat off. We’re going to do all this. It didn’t happen, right, but it was—there was that as a visceral risk.

MINISTER ROBERT HABECK: Let me start with the remark that the search for the right or the biggest coalition is at least a change in the idealism of a globalized world, because there the idea was the coalition is multilateralism. We create structures—WTO, Paris Agreement, the UN, and so on—where the different countries big and small and east and east and whatever, find a way for cooperation. Coalition means that this is—we don’t trust this multilateralism anymore.

And of course, we—and this is also a day-to-day problem from my work—we have to find our way in these difficult decision. We, Germany, is an export nation. So, in a way, WTO, level playing field, fair rules are for our advantage. So we are working hard that these level playing field, the WTO rules, are still in place, or can be repaired, or at least gain some success. But on the other hand, I sometimes have the feeling that we are the last ones doing it. Nobody’s playing to the rules anymore. And we are the last romantics of WTO, in a way. But in—really, in my ministry, we have to think about every day if we are doing now things like the others are doing, could that lead to a counter action and will in the end harm the German economy, because it’s export driven? If everyone is creating local content rules, it’s not good for the exporting countries.

But the point is, building coalitions is moving away from the idea from a perfect never being in place, but the idea of multilateralism. And there we are, actually. So what is happening now is something I would like to call selective multilateralism. We still are working for the institutions. We have to work for the multilateral institutions. But we don’t have to be or can’t be naïve. So we need partners, of course. Then, once again, these partners are all on different areas in their coalitions, of course.

So let’s say—let’s talk about India, for example. Yeah, a very important coming economy—or, not coming, still it is there. But I think it has a lot of potential. The growth numbers—the predicted growth numbers are impressive. Very young population, very fond of digitalization. So it is very interesting country. But it’s part of the BRICS nations. It has a—it’s also talking with China—well, not talking just China, but with Russia. It has its own interest. And, well, the same goes for South Africa, or for Brazil, and so on. So there are potential partners for cooperation, but not in all areas. And, well, this—you can—you can go through the number of nations that are coming up strong economies. So big as possible, I would say. And, if possible, we could build a coalition that is working for the multilateral systems, that would be the best.

JULIA FRIEDLANDER: Yeah, I mean, I think some people are saying this is an end of multilateralism. To me, it sort of seems like this is actually the beginning of multilateralism, because the power—the powers are shifting, and many countries have leverage over each other. I told your team that I was going to ask you three questions, but I’m going to—bonus question, and then I will let you get back to your very busy schedule. What does outbound investment screening mean for Germany? What does outbound investment screening mean for Germany, because—

MINISTER ROBERT HABECK: Yes, well, we have—I mentioned it in my brief introduction or introductory thoughts. We have investment screening system. It’s established, and in this way, old system. But now we make use of it. I just gave you some ideas that in the past year we said stop too many investments, at least more than one. But we don’t scan our outbound investment. So if companies are building a factory in, whatever, let’s say, for example, China, we are not looking into this business case what they are doing. And if they are building, whatever they’re doing there, satellites, software systems, and the knowledge is critical and goes away, that is the same problem but outbound.

But now, as this is a—this is not an old, established system, but a new question. It’s not a new one, but it’s not been done before in Europe. We have to avoid the problems that re level playing field problems in the system. So my argumentation would be, yes, we should do it. We should—we can’t be naïve anymore. This is not the world we’re living in. But you should do it on the European level. So we are now doing—the sanction system for Russia is agreed on, on the European level. And this is—trade is on a European level. The free trade agreements we’re doing are on the European level. So this is not much—this is not so far away from policy areas we have given to Europe. And I think the discussion will lead to this.

JULIA FRIEDLANDER: Thank you. And thank you so much for taking your time. I know—I can only imagine what kind of a week it must be. Ladies and gentlemen, please let’s give a round of applause for the minister.

MINISTER ROBERT HABECK: Well, thank you very much.

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Public Event Fri, September 22, 2023 • 3:30 am ET

Transatlantic Forum on GeoEconomics

The goal of this year’s Transatlantic Forum is to outline a way forward on the use of tools of economic statecraft.

Economic Sanctions Economy & Business European Union Financial Regulation

Event transcript

Uncorrected transcript: Check against delivery

Speaker

Sigrid Kaag
First Deputy Prime Minister and Minister of Finance, Government of the Netherlands

Moderator

Frederick Kempe
President and CEO, Atlantic Council

SIGRID KAAG: “The war of ideas is a Greek invention,” Karl Popper wrote in Conjectures and Refutations, “and is one of the most important inventions, so to speak, ever made. Indeed, the possibility of fighting with words and ideas instead of fighting with swords is the very basis of our civilization.”

And I’m sure we all agree with Popper that anything is better than reaching for the sword and reverting to the barbarism of warfare. For this reason alone, it’s important, it’s good that alternatives, be the words or ideas as Popper argues or the tools of modern-day economics, are there. They are essential.

Geoeconomics—the use of economic means to achieve political ends—has gained traction in recent years, and figures show that international conflicts are increasingly being fought on the economic terrain. Or perhaps we were naïve not to acknowledge it, actually, much sooner; that could be a debate. Between 2014 and 2022, the amount of trade restrictions increased fivefold. Seen in this context, the war in Ukraine is as exceptional as it is horrific. And, lest we forget, there are also significant geoeconomic components to this hot conflict.

But above all, I’d like to underscore what the ambassador just said: the need to fight, to rise, to confirm and affirm liberal democracies in our united stance against the horrific atrocities that are conducted by the illegal Russian invasion of Ukraine. Russia cannot win.

But before sharing my views on how to face up to this development, allow me to briefly outline the causes. In the field of technology in particular, it’s increasingly difficult to see or to determine where economics ends and security starts. The interwoven nature is one thing, but we need to be sharp, we need to be more determined, and more precise—as the latest developments in artificial intelligence, for instance, are of significant importance, not only economically, not only beneficial with risks to society, but also militarily.

In addition, it’s essential to recognize that in relative terms the importance of the West is declining. In 2005, the GDP of the G7 alone was still six times that of the BRICS. Now it’s one-and-a-half times. So the shift has happened in eighteen years or less, and the pace is changing.

So the implications of this downward trend are still unclear, but are we moving towards a bipolar world, tripolar, or—as the ambassador has said—or should we be gearing up for a world order a la carte? But we need to be sure where we want to be and where our allies are and who they are.

Obviously, I’m at the Transatlantic Forum, so it’s pretty clear where they are for the Netherlands, also within the EU. But transatlanticism remains a pillar of our foreign policy, but also of our economic policy.

But we also have to reconsider our assumption that economic cooperation can always be relied upon to drive political cooperation. The EU is one such product, but the end of—the end of the end of history, as some people have put it, connectedness or interconnectedness also creates areas of dependence, mutual dependence that can all too easily be weaponized if there’s a change of regime, a change of political order, and a change of interest.

And for the EU in particular, this has proven to be a disruptive insight. After all, as I just mentioned, and you know that very well, the union is founded—has risen from the ashes of the Second World War. And it’s through that economic cooperation, economic collaboration, economic convergence also fosters political cooperation. So we’ve traditionally focused on being an open economy that relies and derives its strength from international rules, alignment and compliance with those rules, and mutually created dependencies. It remains an important principle. I do not want to renege that. Far from it. But it’s also good to acknowledge, be aware, and prepare for the fact it doesn’t always work in the way it was intended.

And, last but not least, we’re seeing a backlash against globalization in public debate. I do not follow the German press on a daily basis, but I can tell you for the Netherlands globalization in some quarters has become a dirty word, synonymous with allegations, with suggestions of undermining, as if it’s corrosive to society. It’s aligned with many other assumptions that are not always easy to tackle in the same way because not all is rational. But we also know that growing inequality, and the greater rightful coverage given to this, are a factor that needs to be debated and discussed. What have been the benefits of globalization? How should globalization be altered? And how can it truly reach the benefits that all people, all citizens around this world, need to be exposed to?

Globalization has not brought all benefits to all people in equal manner. That is something we need to acknowledge, we need to be mindful of, and we need to tackle. But globalization is also an easy target, as I just alluded, for populists who offer no real solutions to current problems. Far from it, I would add. And partly due to the structural causes, there seems to have been a negative spiral in recent years. Trade restrictions, protectionist policies, and assertive diplomacy appear to have generated a tit-for-tat dynamic between actors that has led to a hardening or a further erosion of the quality and interactions in our international relations.

We realize it in the US, economics is increasingly seen as a central battleground in geopolitical competition. We’re also seeing a similar shift in the EU. And the latest editions of Foreign Affairs even referred to the geoeconomic awakening of the EU. And I can see some of you nod, I think approvingly. But we can possibly debate that further. And that brings me to a matter how we should be dealing with his development, not only from a status quo perspective but rather from a moving forward perspective.

What’s the role of the Netherlands, the seventeenth economy in the world, the fifth in the European Union? We’re not big, but we’re forceful enough and we’re home to a number of the large, innovative companies. You will remember Philips, I wouldn’t say the olden days, but that’s a well-known one from my generation. But more pertinently, of course, a company such as ASML, a global leader in its field.

So what should be our role? How can we sustainably ensure our security, prosperity, environment, and way of life now and in the future in an increasingly complex international playing field where Western—and I align actually with the comments made by the ambassador, Western seems like an old term—liberal democracies’ influence and reach risks to be on the winning side? So we need to assert ourselves.

But before we get to these questions, we need to take a good look at ourselves. First of all, we need to improve and strengthen our own political-economic foundations as this determines our geoeconomic position to a large extent. Our homework needs to be done. We need to make our economies more competitive, innovative, and resilient to shocks. On top of that, we need effective solutions to our internal policy and political questions. And I, from an EU perspective, know that we need to find a quick solution to our economic governance review.

This may be a moment where some of you in the audience from the US might have a yawn moment, and think what is she talking about? It’s our fiscal rules. It’s how we pay our bills, how we invest, how we build our buffers, how we continue to be fit for purpose, particularly also within the euro area. But it means also we need to improve and strengthen, actually make progress towards, the Capital Markets Union. We should deepen that. EU capital markets are underdeveloped. They’re fragmented. They’re hampering early-stage investments and innovation for sustainable growth, a sharp contrast to the United States in this regard.

But back to the geoeconomic developments that we need to face. Let me state my position upfront: I see it as a mix of defensive and open policy instruments. They’re needed to meet these challenges. And it’s a little bit similar to the way my country has dealt with water over time.

You know we are below sea level. If climate change continues to happen the way it is, my country, too, will disappear. But we have some time. But the water is too powerful to be held back by only dikes, so we give space. We create space for the waters to flow. We tend to move with—as the water moves. We let it flow through the meadows and store it underground. And if the space is insufficient—we can no longer store the water in the floodplains—we have the levees, an ultimate remedy to stop the water as a last resort. So take this as a perspective on our defensive measures.

A starting point, of course, is one should never be naïve, and perhaps we have been too latent or somewhat naïve in the past. And it’s an accusation or rather a point made that could have been levied at the EU at the beginning of this century. When other actors already sought to use their economic resources for political purposes, they are successful in undermining not only our interests but, of course, also in undermining through the advancement of their interest. So we need to strengthen our level playing field within the EU as this, if we don’t act, can have major consequences for our prosperity and security.

So defensive measures remain important also for the EU, and these may take the form of instruments designed to counter economic coercion or to defend level playing field, the backbone of our internal market. And examples of how the EU has adapted to the changing world order includes the foreign direct investment screening instrument and the anti-coercion instrument. These are very practical measures taken to actually strengthen our position from a defensive perspective.

But defensive measures also have their drawbacks, not in the least negative economic consequences. And a study commissioned by the IMF has shown that far-reaching geoeconomic fragmentation could lead to a worldwide drop in prosperity of up to 7 percent of global GDP in the worst-case scenario, with, obviously, the less-developed countries and middle-income countries being particularly badly hit. And that’s the equivalent of Germany and Japan disappearing from the global economy. Decoupling is, therefore, not an option to the EU or the Netherlands, and we find it valuable that the concept of de-risking is getting more and more attention and traction, as the damage quickly goes beyond the economic arena.

A fragmented or fragmenting geoeconomic world order impedes our ability to address global issues such as climate change, but also poverty, or actually achieve the advancements of global public goods. Fragmentation tends to be less efficient than cooperation, so fragmentation often comes at the expense of issues such as poverty reduction, education, climate change, mitigation, but to me above all adaptation. And this takes place as a time when our troubles in this era of poli crisis have increased significantly. In other words, the adverse effects of defensive measures can be major and have perhaps been a little bit underexposed in recent times. We’ve spoken to their value, but we have insufficiently acknowledged the indirect consequences.

And as a result, mutually reinforced dependencies have also gained a bad reputation, and perhaps unfairly so, because where there are dependencies—if properly managed and mitigated, through trade for instance—the benefits of trade could also be measured and could be shared. But international relations have become grimmer and a defensive reflex is the logical response, and I understand that and I support that. But we need to be mindful of a self-reinforcing mechanism that results from the defensive reflex, a process in which we lose control or are faced with a lessening of influence.

It’s therefore vital that in addition to the necessary defensive measures we make a concerted effort to shift our focus towards strengthened/enhanced cooperation, and perhaps in varied ways with different types of partnerships dependent on the country or situation you’re dealing with. Obviously, I’m making a big carveout here for the current—for the current situation imposed on the world by Russia.

Let me be very clear on this. I’m speaking more in general. Our position on the Russian—illegal Russian invasion of Ukraine is very clear, and I think we are very aligned. And we see ourselves in Europe as a frontrunner and a helpful ally where we can on sanctions, on the humanitarian field, the military field, as well as the reconstruction of Ukraine. So let me be clear I’m making a carveout.

But more—in broader terms, when we want to speak cooperation in the Netherlands, we like to emphasize the concept of open strategic autonomy. I am aware that in France one speaks of strategic autonomy; the Netherlands and Spain have put forward a paper that speaks to open strategic autonomy. One could argue that the differences may be semantic, but open for us actually likes to reflect the importance we continue attach to being an open economy, to being an open society; that we see our security also strengthened through an investment in shared prosperity, in working collaborative partnerships with whom this is possible in order to prevent further fragmentation. And in an ideal world, extended cooperation of this kind is governed still by multilateral rules and it takes place in a spirit of cooperation. And the WTO still has a key role to fulfill in this regard, and reinstating the WTO’s dispute settlement mechanism to us remains crucial.

But multilateral cooperation—and I’m certainly not naïve here—is not always equally effective when the world is changing, countries are shifting [gears], and alliances are changing. So it’s no surprise that we see a trend towards plurilateral cooperation between different parts of the world and different, shifting alliances dependent on the interest at stake. This is, however, a second-best choice. And in times of geoeconomic fragmentation, it’s sometimes the only route left open to us. When multilateral cooperation is actually mired in difficulty, other forms of cooperation—one has to be pragmatic—remain vital, may be needed, and can be useful to advance a return towards the formal multilateral forum such as the WTO or others.

And the EU is making efforts and progress in this regard. The work taking place in the Technology and Trade Council and the 2019 trade and investment agreement with Japan are two very practical examples of this approach. Meanwhile, negotiations are also ongoing with other countries, including Chile and Australia. And EU expansion/enlargement is also an example of new engagements and a changing approach to partnerships.

And the benefits of these partnerships are multiple—diversification, allowing for external shocks to be absorbed. Diversification is also a way to actually reduce high-risk dependencies compared to industrial policies such as onshoring. And just look at the crucial role played by international actors—of course, the US—in supplying gas to the EU. There are different ways to tackle problems that we’ve encountered.

Now, the benefits of open geoeconomic measures and building broader cooperation are obvious, but talk is easy, as many of you know. And I’m looking particularly to the practitioner. The gap between our talk and reality can sometimes be quite, quite tough. And whilst we acknowledge the world has changed, we also need to affirm our role in it and the instruments we find optimal in advancing and strengthening the role of liberal societies, liberal democracies, and our place in the world.

So that means cooperation cannot only focus on the usual suspects, our closest allies. We also need to find ways in tackling and changing and building new partnerships or [relationships] with countries with whom we find it much harder and with whom we often do not have much in common, but still a shared agenda of peace, security, poverty reduction, sustainability. And I would like to urge all of us to look at different and different-shaded cooperative ventures in the public and private sectors with third countries that have an outward-looking stance and have a shared interest still in rule-based trading order, because countries that can offer mutual gains and prosperity—and for us as an EU—the Netherlands as an EU member can serve as a reliable partner.

And in saying this, we consider a new approach to the Global South essential. And I know the EU president, Ursula von der Leyen, has also spoken to this. This, too, is a part of an effective new geoeconomic policy, but one that is open as opposed to only defensive, and which offers more advantages than disadvantages. In this complex world, I think it’s upon us with the tools, the instruments, and the experience to not always change track, but certainly offer greater diversity in our solutions. That’s the only way we can [be] effective. We have the means, and we certainly still have the funding and the financing to be an effective counterpart in this multipolar world.

Thank you.

FREDERICK KEMPE: That was an important statement. Thank you so much.

So, Madam Deputy Prime Minister, Madam Minister, let me start. There’s so much richness in your speech on Russia cannot win, the importance of Western decline—relative decline that we’re talking about issues, the geoeconomic awakening of the EU. I want to come back to that. Geoeconomic fragmentation, really taking a look at a quite different world that we’re going into. We’ve got—we’ve got ten, fifteen minutes, I think, that the organizers have given us. So let me ask a couple of questions, and I hope we get to the audience.

Let me start with sanctions. And the first panel talked about this a lot too. Putin’s still there.

SIGRID KAAG: Yeah.

FREDERICK KEMPE: The Russian economy doesn’t seem to be doing all that badly. His engagement and the nature of his war hasn’t been influenced by sanctions. So there are dangers to sanctions, as you said, there’s upsides to sanctions. How is—what grade would you give these so far? How have they worked?

SIGRID KAAG: Hmm. Well, I think they have had a significant effect on the Russian economy. There is a decline—a sharp decline in consumer spending—despite of what the Russians tell us, of course but based on other sources—rising inflation and declining production in the arms industry. Sanctions are always a matter of—and I’m looking to the ambassador, the former coordinator—of having the long haul. If anybody believes that in imposing sanctions that a dictator or an aggressor will immediately say, oh, that’s right. I’ve seen it now. I’ve seen the light, I give in. No, that’s never happened. The history of sanctions is one of long term, sadly.

So I think sometimes we need to communicate effectively that we will not relent, we will always find new packages, more sharper and so-called smarter sanctions to target and effectively a halt as quickly as possible all instruments of warfare, money being an important factor. But had we expected an immediate overturn? No. And I think that’s upon us to explain that better. But we have evidence that the eleven sanctions packages that have been introduced so far have worked and are working.

The question is to maintain and sustain the pace and always look for the loopholes to avoid sanctions diversion. That requires particular work by the EU. And we’re working on that. And it means—it requires ministries of finance to be particularly accurate, to find which ways the Russian economy is still finding their financial avenues. Of course, we also need to look at other big players. I mean, the whole point of crypto and diversion is a big risk. How is the war effort still sustained? How do we deal with other international players that are directly or indirectly enabling the war effort? Those are the political questions to tackle alongside the maintenance and sustenance of sanctions.

FREDERICK KEMPE: So you would be in favor of, as one says, tightening the screws at this point even further? Would you do more sanctions? Would you do secondary sanctions? What do you think we should be looking to next?

SIGRID KAAG: Well, in terms of a principled stance, the Netherlands is always willing to explore additional sanctions. One needs to be mindful of the fact that we need to introduce measures that can either work, have a primary, or secondary effect. I’m not in the latest inner workings of the discussion of what we’re discussing in Brussels today. I can’t do that. We only pronounce them once they’re adopted. But we—our stance is that we should not leave any avenue unexplored. And that’s alongside the discussion if we can use the Russian frozen assets, under which conditions legally is viable to use the frozen assets, to assist in the reconstruction of Ukraine.

FREDERICK KEMPE: Most of which are held in Europe.

SIGRID KAAG: Most of which are held in Europe. Certainly the state-held –

FREDERICK KEMPE: I was just talking to the deputy prime minister of Canada, Chrystia Freeland. They hold about five billion [dollars], and they’re willing to do it. But of course, that’s not three hundred billion [dollars]. And that would make a big difference as we rebuild this.

On the positive measures—those are the coercive measures. On the positive measures, are we doing well enough on the coercive measures? To a certain extent you’re saying, yes, but we should do more. On the positive measures, let me link these together with your comments about the geoeconomic awakening of the EU, and plurilateralism, geoeconomic fragmentation, somehow that seems to all fit together.

And, you know, we have implemented our Inflation Reduction Act. That seems like a piece of fragmentation. You have to tell me if you agree it is. The EU has got an answer to that. I don’t know if it will work as quite as well, but it’s very interesting. So as you’re looking at the positive measures, particularly transatlantic positive measures, give us your situation report. How well are we doing or how poorly are we doing? And particularly in the context of trade, and the fragmentation you’re talking about, and the IRA and the European equivalent?

SIGRID KAAG: Yeah. Well, I think as a matter of principle, as strong allies from a transatlantic perspective, the EU, but of course also in NATO, we should always be mindful the fact that any measures we adopt, certainly from an EU perspective, doesn’t run counter the broader geopolitical interests we have, our shared values. I found that the EU was not the response to the IRA. I think a follow-up to the IRA I would call the EU actions taken. Should not be seen as a defensive posture to the US. The US has leapfrogged. I think it’s beneficial to tackle climate change. It aids the American economy. And actually, I’ve always looked at it as something where we shouldn’t say, oh, look at the Americas, they’re doing this. No. We should be getting our own act together. We should position ourselves in a way that we can be both complementary. And we’re using different instruments.

The difficulty if you compare the systems, separate from a few areas that may be sort of not totally in alignment with the WTO, I don’t think that’s the heart of the matter. The Americans—the US government has introduced a system that works via tax credits, which is easy, it’s accessible, that works quickly. And within Europe, we sometimes tend to be sort of slow. And certainly for businesses—despite the volume of financing available—they’re finding it very hard to basically have access to the funding. So we need to get our own house in order, that we’re more agile and more flexible.

That’s not an American problem. I think there’s an inter-European problem. So I don’t think that actually results in further fragmentation. It’s how we use it and how we sort of position ourselves. So I don’t think the battle is not EU-US. The issue is really are we fit for purpose to go and build this new economy, that is green, that is inclusive, and that creates jobs for the future, and that assists our companies to be competitive? We both have free market economies. And we should sustain that. And competition is healthy. One shouldn’t be daunted by it. And an overdue rate of state subsidies is not helping our economy.

FREDERICK KEMPE: So I’m going to ask one more question, then I’m going to look to the audience… But I want you to define and tell me what you’re thinking about when you talk about the EU’s geoeconomic awakening. That was a really interesting term for me, and a new term for me. So what is—what is the awakening about it, and how would you describe it?

SIGRID KAAG: Well, I think—in in political practitioners terms I would say it, because I’m not the political scientist here, I think it’s an awakening of the fact that we always thought we were—we work towards the internal market. Then we’ve been very preoccupied with accession and enlargement, but it’s always EU-centered. When I worked outside, I’ve worked a lot in the Middle East and so-called fragile states. I was—I always encountered an EU that was busy with the market and with trade, but didn’t spread its political wings. And many countries and players look towards the EU—and I don’t want to quote Henry Kissinger, but you know what I mean—to say, who do we deal with, when do we deal with them? And it’s not really happening.

And the latest phase, perhaps also further accelerated and triggered by a war on the continent, has shown that the EU needs to not only get his house in order, use the instruments it has, has but it needs to assert itself on the international stage. And you can use instruments in a way that advances that position, but in a collaborative way with its partners. And our strength is not the military, because that is derived from NATO, the alliance, and the Americans being the leader of NATO. We need to get our house in order when it comes to defense expenditure, but we also need to get our house in order when it comes to the political decision making. Abolishment, for instance, of the vetoes on EU foreign policy would be, like, the big first ticket item. But geoeconomics is a source of our strength. Trade agreements, offering support, offering access to our markets, building capacity. It’s soft –

FREDERICK KEMPE: And regulatory standards too, yeah.

SIGRID KAAG: And regulatory standards, yeah. You know, that’s where we come to little wood pellets, for instance, for the US. But regulatory standards. There are many ways. And I think the foreign direct investment screening, that’s new to us. I couldn’t have imagined that perhaps ten years ago. When it comes to outward bound screening, outward bound investment screening, that’s under discussion. The fact that we have the global gateway when it comes to building partnerships with countries with whom we do not have a trade agreement but we want to have some form of economic exchange or interest. And so you build elements of a potential partnership.

So all these areas, I think, are bolstering the presence of the European Union, even though we are twenty-seven member states, different backgrounds, different political systems. But bolstering the presence. And geoeconomics in a world where it’s more about those areas of influence and wealth that can be leveraged and/or peacefully weaponized, that’s an area, I think, that is new. But we need to build on that.

FREDERICK KEMPE: Yeah. No, I note, when I was—also, when I was running the Wall Street Journal in Europe, we introduced the term into the lexicon of the EU as a superpower regulator. But now it’s gone way beyond that, to using economic elsewhere.

So I’m looking for questions, please. Norbert, and then why don’t we pick up these two questions and then—and the microphone here in the front. And not everyone knows who everybody is, so please introduce yourself to the audience as well.

NORTBERT RÖTTGEN: No, it’s on. My name is Norbert Röttgen. I’m the vice chairman of Atlantik-Brucke and a member of the German parliament.

I have a question on Russian gas. As you know, so far no gas sanctions have been—no European sanctions on Russian gas have been imposed. Russian gas is not entering Europe via pipelines. The one has been destroyed, the other not completed. But Europe has become the relatively largest consumer of Russian gas, nevertheless, because it is shipped now as LNG to European ports, then regassified, and then transferred and sent across Europe. So we are filling with billions of dollars yearly—annually the war chest of Vladimir Putin. Is your view on that, that he should stop this as Europeans?

SIGRID KAAG: That’s a tough one. I was worried that you were going to ask me about North Stream, the pipeline. Well, to be honest, I’m not sure if we have—if we have adopted a position in the Dutch Cabinet. So I want to be mindful that I’m not sort of expressing myself in advance of a government position. I think it is the right question to ask, because we cannot be naïve or suggest that we stopped using gas.

The Netherlands was one of the first ones to be out of Russian gas, and we even had a debate with our municipalities that had contracts with Gazprom, and we tried to sanction them. Actually, it didn’t hold up in front of the courts. But the real question is, indeed, are we indirectly enabling diversion? It comes in through different ways, but it still ends up in the Russian coffers. I think that’s a debate to have in Brussels. So I’m taking your question forward. I also want to know from my colleague.

The other question, of course, is—and you come to the point of mutual dependencies—can we afford it? And I don’t mean financially. How significant is our dependency? You may know the—you may know the answer, but I take forward your question.

FREDERICK KEMPE: OK, please.

MARTIN MÜHLEISEN: My name is Martin Mühleisen, ex-IMF and now with the Atlantic Council [as a] senior fellow.

You mentioned the long-term impact of sanctions. And indeed, keeping the pressure up on Russia for hopefully not too many years, but many years, will be necessary to see this conflict come to a successful conclusion, from the European and US perspective. But there’s also significant pressures on the other side in keeping that coalition together. There’s the military expenditure, you mentioned climate costs, very tight fiscal positions everywhere, relatively high inflation, rising interest rates, that—plus, I think tremendous political difficulties coming over the coming years, too. There are important elections in the US. There are elections also in Europe with forces that are more Russia-friendly than many of us in this room would like to see possibly gaining votes. So how do you see the long-term capacity of Europe, of European countries, the EU, and also our transatlantic partners to maintain that position and to see this conflict through to a successful conclusion?

FREDERICK KEMPE: And I guess I’d add to that. With your own elections in November, will they—how do you see the impact of them on this as well?

SIGRID KAAG: Yeah.

FREDERICK KEMPE: Yeah.

SIGRID KAAG: Well, first of all, it depends, really, on our ability to continue to foster economic growth in the eurozone. That’s extremely important. Now, I know in Germany it hasn’t been so fantastic, let’s say, in recent periods. We still have very modest growth, but it’s nothing to write home about. So that is sort of the underpinning.

Secondly, a lot of countries, including my own country, we have spent significantly and generously last year to deal with historic inflation rates and provide for purchasing power packages for consumers, for our citizens. However, we’ve done it in such a large measure it’s not sustainable over time.

And that brings me to the need to have the proper fiscal reforms. You know, we need to start living—post-corona, post-2022—the economic hit—we need to start living within our own means again. And that’s where the crunch comes, that a lot of citizens have gotten used to generous compensation by the state. Now we’ve reached the time where we can no longer afford it, economic uncertainty has crept in. So we need to start taking tougher choices—either raise taxes, not always very popular, or cut costs; either one of the two. So this is, I think, a potential Achilles’ heel.

On top of that, in a number of European countries new governments have been elected with populist voices either supporting it or being within the government. And they often feed the idea—we hear it, too, in our Dutch parliament—as if there’s a false choice, false contradiction between support and the cost of financing the courageous war effort led by the Ukrainians against the Russian invasion militarily and at a humanitarian level and the need to keep up the financing of the state of Ukraine to assist in that way, and the cost of living, the debate we’re having domestically. It’s a false narrative. If we lose the war in Ukraine, we’re all lost. No peace and security on this continent. This is something we have to keep financing. And I think we need continued courageous political leadership from mainstream political parties, right or left on the spectrum, to keep bringing home this message. It’s not free of charge, so it requires also prudent fiscal choices domestically, which are not always very popular but necessary with a long-term view.

So how I see it? I’m not entirely optimistic, certainly if I look at elections in a number of countries. I was the former party leader of a progressive liberal party. We’re not doing fantastically in the polls, euphemistically put. But you shouldn’t be scared or polls or polling to be—to say the right thing and to stand for what is right, and I think that’s what matters right now.

FREDERICK KEMPE: That’s terrific.

Well, I fear we’ve run out of time, but what a rich conversation this has been. And you’ve put a lot of terms/thinking on the table that I think we’ll continue talking about as we go forward. And I hope we’ll pick up on this conversation on plurilateralism.

SIGRID KAAG: Yeah.

FREDERICK KEMPE: I wrote something last week saying the time of multi-alignment—the time of non-alignment is over; it’s now multi-alignment.

SIGRID KAAG: That’s correct.

FREDERICK KEMPE: And people don’t want to choose sides, China or the US, particularly in the Global South. And so I think this is going to be a confusing shakeout period. That seems to be what you were saying there. Is that right?

SIGRID KAAG: I think so, but also I think we have to be fairly pragmatic. When I was minister for trade in the previous Rutte government, I was actually—although being a staunch multilateralist, I believe that working in a plurilateral way towards, hopefully, multilateral-endorsed outcomes is a way moving forward and not giving up on the system, and not also becoming a passive bystander of an erosion of what are internationally agreed rules and values and standards. We have to sort of breathe new life and perspective into the system. You do not have to continuously reform the system; you have to make it work in a different way.

And I think there plurilateralism can be a way to continue to engage and to bring different players into the system, because there is no such thing as one bloc and one bloc. Not everybody from the Global South agrees on every topic with each other. There are also varied and different-shaded interests, same as we have them in the EU, let’s face it. But we’re still members of the EU.

FREDERICK KEMPE: Thank you.

SIGRID KAAG: And proudly so.

FREDERICK KEMPE: Thank you. Thank you for making the trip to Berlin this morning. And I’d ask the audience to join me in thanking the first deputy prime minister and minister of finance of the Netherlands.

SIGRID KAAG: Thank you.

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An earlier version of this paper was published in November 2022 by Aspen Romania in a collection of essays entitled A World in Flux: Towards a New European Architecture, ed. Alina Inayeh (Aspen Institute, 2023).

It is one of the most important development questions of all time: Do countries need freedom to achieve prosperity? Our paper explores this question by analyzing the evolution since the early 1990s of a select group of Eastern European countries. 

The countries we studied shared many similarities in the early 1990s. Politically, they had all been under Communist rule until the late 1980s, and some had never even been independent countries before the dissolution of the Soviet Union and Yugoslavia. Economically, they were at a comparable development level at the time of the democratic revolutions that swept Eastern Europe in the late ’80s and early ’90s. 

But by 2021 the group was no longer homogenous: they had different levels of freedom and some experienced robust prosperity while others stagnated. Using the scoring and ranking analysis of the Atlantic Council’s Freedom and Prosperity Indexes,¹ and other measurements, we show that the countries that experienced more political, economic, and legal freedoms enjoyed greater prosperity. Conversely, those that made less progress on the path of freedom are also less prosperous. 

The context 

The question of the correlation between freedom and prosperity is always worth studying. But the war in Ukraine gives the debate over development models new timeliness. 

Russia’s invasion of Crimea in 2014 was preceded by an internal crisis in Ukraine. When President Viktor Yanukovych rejected a deal for greater integration with the European Union (EU), Russia backed Yanukovych’s violent attempt to put down protests by Ukrainian citizens who disagreed with his decision. Russia did not want Ukraine to become prosperous and democratic. This would have contrasted with the economically moribund and politically oppressive authoritarian regimes in Russia and Belarus, and might have inspired the peoples in these countries to ask for change. The 2022 Russian invasion was an attempt to finish the job started in 2014. Putin is trying to keep Ukraine in the Russian sphere of influence, and have it resemble Russia, politically and economically. 

In its essence, the Ukraine war is about two visions for Eastern Europe: Will Russia succeed in using political subversion and military force to impose its authoritarian model? A model in which democratic opponents are imprisoned and killed, and economic activity is rife with corruption and arbitrary interventions by the dictatorial elite. Or will the peoples of Eastern Europe be able to choose their own political and economic system without interference and adopt the democratic and free market model represented by the EU? 

This is a pivotal moment of change for Eastern Europe, similar in significance to that of the collapse of the Soviet Union. Examining the progress made by several former Communist countries over the past thirty years can provide useful lessons for the countries of the region and elsewhere. 

The analysis 

We started by selecting, from among Europe’s formerly Communist countries, a group with a comparable level of economic development in 1996, the first year for which World Bank data are available for all post-Communist countries. We selected only countries that were categorized as lower-middle income, according to the World Bank’s classification for that year: Albania, Belarus, Bulgaria, Estonia, Latvia, Lithuania, Montenegro, North Macedonia, Romania, Russia, Serbia, and Ukraine. 

We excluded from our analysis higher-middle income formerly Communist countries: Poland, Croatia, Czech Republic, Hungary, Slovak Republic, and Slovenia. These countries were more developed at that time and were on a different trajectory than the selected countries. 

For best comparability, we also excluded low-income formerly Communist countries: Moldova, and Bosnia and Herzegovina. Because of the catch-up effect, low-income countries tend to grow faster, which would have distorted the results of our analysis. 

We then ranked the selected countries using their 2021 scores in the Atlantic Council’s Freedom Index. This Index assigns scores to 174 countries on their economic, political, and legal freedoms, the latter reflecting the strength of the rule of law in a country. Depending on their score, countries are then categorized as Free, Mostly Free, Mostly Unfree, and Unfree. 

We then created two groups of countries. Group 1 includes all countries in the selected group that are in the “Free” category of the Freedom Index. Group 2 includes all other countries in our selected group. 

Next, for countries in both groups, we compared their GDP per capita levels in 1996 and 2021, and calculated GDP growth multiples for each country and for both groups. 

We also checked which countries had escaped the “middle-income trap” by 2021. This term refers to the fact that, over the years, many developing countries succeeded in advancing from the World Bank’s low-income to the middle-income category but did not cross the threshold of the high-income category. 

The final element of our analysis was to look at 2021 measures of development, in addition to GDP per capita. We used the Atlantic Council’s Prosperity Index, which measures health, the environment, happiness, and government treatment of minorities in addition to GDP per capita (Table 1). 

The results 

• In 2021, the countries in Group 1 had a freedom score 40 percent higher than that of the countries in Group 2. The average freedom score for Group 1 was 82, which compares favorably with the average of OECD countries in this Index at 85. The freedom score average for Group 2 was only 57.
• By 2021, the countries in Group 1 were more prosperous than those in Group 2. Looking at GDP per capita, Group 1 countries grew 32 percent faster (GDP per capita increased threefold, on average) than those in Group 2 between 1996 and 2021 (Table 1 and Figure 1). In Group 2, only Albania and Montenegro reached growth levels similar to those of Group 1 countries. Although belonging to the lower-middle income group, their respective GDP levels were the lowest of the two groups in 1996. This confirms that, other things being equal, economic growth is faster when a country starts from a lower level.

• The gap between the two groups consistently increased over time (Figure 1). Freedom takes time to materialize, but the benefits compound.
• All countries in Group 1 escaped the middle-income trap. None of the countries of Group 2 did so.
• All countries in Group 1 also tend to rank better in the broader Prosperity Index than those in Group 2. Serbia is the only Group 2 country to achieve a prosperity score within three points of the Group 1 average. Although Serbia’s GDP growth multiple is consistent with those of the other countries in Group 2, it outperforms them on the environment and happiness indicators in the Prosperity Index, thus raising its total prosperity score.

Another way to explore the performance of the two groups of countries is to use the scores in the Freedom Index and the Prosperity Index for the past fifteen years (Figure 2). Over that period (2006–21), the Group 2 countries improved their average score in both the Freedom Index and the Prosperity Index by 2 percent. But the Group 1 countries improved their scores on each index by 5 percent and 11 percent, respectively. 

Higher and improving freedom scores are associated with countries that also achieved increased prosperity. Such situations create virtuous cycles of mutual reinforcement in which more freedoms build a prosperous middle-class citizenry that demands yet more freedoms that in turn perpetuate more human flourishing. 

Policy implications 

Our data suggest that countries that want to increase their prosperity should increase their economic, political, and legal freedoms, with legal freedom being defined as an impartial rule of law; transparent, corruption-free, and effective political institutions; and good governance. 

Our analysis also points to a positive role for the EU. All the countries in Group 1 are members of the EU, as is Bulgaria, the Group 2 country with the highest freedom score and second highest prosperity score in that group. All the other countries in Group 2 are candidates to EU membership, with two exceptions: Russia and Belarus. These two countries have the worst freedom scores and the second and third worst prosperity scores in our sample. 

The source of the appeal of EU membership is clear. In 2021, the average freedom score of EU member countries was 82, which compared with 62 for our group of EU candidate countries, or 32 percent higher. The respective prosperity scores were 75 and 55, or 37 percent higher. Using a narrower measure of prosperity, the respective 2021 GDP per capita numbers were $44,024 and $16,851, or 161 percent higher. 

Former Soviet Bloc countries that joined the EU left behind the Communist world of political repression, inefficient centrally planned economies, and corrupt judicial processes. Instead, they entered a world of political and economic freedom, respect for the rule of law, and prosperity. The EU offers these countries a free trade area for their companies pursuing business growth, and freedom of movement for their citizens seeking educational and work opportunities. 

During the long years of preparation for EU accession, candidate countries have had to implement many profound reforms and show perseverance in their progress away from their Communist past. Corruption, in particular, was a pervasive problem. The current EU membership candidates will need leaders with strong political will, who are prepared to push meaningful reforms—especially in their national judicial and law-enforcement systems. 

Some analysts and public commentators in Western democracies complain that the EU’s leadership is unelected and unaccountable to voters, that the EU is overly bureaucratic and growing more so, and that it is often insensitive to the cultural traditions of member countries. To a majority of the Brexit referendum voters in the UK, a developed country with a long democratic tradition, these and other perceived disadvantages of EU membership outweighed its benefits. 

But for Eastern Europe’s former Communist countries, the EU’s many rules and standards catalyzed a national consensus for the profound reforms needed in order to leave behind the malevolent and malfunctioning Communist political and economic system. Today, EU support and guidance for reform in candidate member states, towards their EU membership, contributes to more freedom and prosperity in these countries. 

Which leads us to Ukraine, whose strong desire to join the EU, and the free world in general, was one of the main reasons for the Russian aggression against it, both in 2014 and in 2022. The Ukrainian people have heroically proven their firm determination to be forever free from domination by the Russian state, which is still beset by many of the Soviet Union’s pathologies in its political and economic structure. 

In 2022, Ukraine asked for accelerated consideration of its EU membership, and the EU granted it candidate status. But Ukraine has a long way to go to meet EU standards. Its standing in the Atlantic Council’s Indexes makes this very clear: in 2021, before the full-scale Russian invasion, Ukraine had the third lowest freedom score among Group 2 countries and the lowest prosperity score. 

In time the war will end, and Ukraine will rebuild. Ukraine will need profound societal reforms as part of its rebuilding process, especially regarding corruption. Its people will have to show in this task the same courage and determination as they are showing in the war. But they are very clear about their choice. They believe that greater economic, political, and legal freedoms are the surest path toward prosperity. And that the EU has an important role to play in helping them along the way. 

Dan Negrea is the senior director of the Freedom and Prosperity Center at the Atlantic Council.  

Joseph Lemoine is the deputy director of the Freedom and Prosperity Center at the Atlantic Council.  

Yomna Gaafar was an assistant director of the Freedom and Prosperity Center at the Atlantic Council. 

The post Freedom and prosperity in Eastern Europe appeared first on Atlantic Council.

Context: Overlapping security, political, and economic challenges in Eastern Europe 

Since Russia invaded Ukraine on February 24, 2022, the transatlantic community refocused heavily on the security of the region. Beyond the military battlefront in Ukraine, malign political and economic influences from Russia and China have persisted across Eastern Europe for many years—both within the European Union (EU) and in the broader Black Sea region. 

The nature of the current challenges raises the need for a comprehensive course of action that deals not only with a sharper regional awareness of threats and vulnerabilities but also with their variety, in economic, social, and political dimensions. Eastern Europe has experienced a steady process of economic and political integration with the rest of Europe over the past three decades. Gradually, up to 2016, countries from East-Central Europe (ECE)¹ joined the EU; after that date, the Eastern Partnership (EaP)² countries signed Association Agreements with the EU, showing that a pathway to EU membership was possible. 

The domestic politics of ECE countries like Bulgaria and Hungary, and EaP countries like Georgia or Armenia have long been divided in terms of their alignment with the Western community. The apparent lack of commitment to democratic values on the part of some political leaders led to questions about electoral integrity in the EaP states of Ukraine, Moldova, and Georgia.³ In East-Central Europe, rule-of-law issues, and even rising authoritarianism in the case of Hungary, have not only affected the quality of democracy, but also the fairness of institutional checks and balances in the field of economic policies.⁴ In contrast, for the countries more politically aligned toward the United States, vulnerabilities took an economic form: large investment gaps in critical infrastructure—like energy, transport, or digital technologies—have left countries like Poland, Czechia, Romania, Slovakia, or Moldova vulnerable to the current disruptions in supply chains and rising energy prices. Europe faces overlapping economic and energy crises, and if each country faces these vulnerabilities alone, it could reinforce the political discord amongst Western allies. 

Therefore, as this chapter argues, the road toward freedom and prosperity in ECE and in the EaP countries requires a clear strategic engagement from Western allies in the EU and the transatlantic community, linking immediate responses to the war in Ukraine with clear longer-term prospects for development in the region as a whole. Essentially, stabilizing East-Central Europe will require a scaling-up of effort, from security to economic partnerships that deliver long-term prosperity to all partners. 

This chapter is built in a telescopic manner, as it reviews the quest for prosperity from the perspective of global trends, applies these trends to the current context of Eastern Europe, and focuses further on the case study of Romania to reflect specific mechanisms of development. The chapter also engages with three major growth trajectories: through economic integration, through the development of sustainable growth models at the national and local levels, and through local developmental alliances. In our opinion, these three trajectories of growth should be seen as overlapping layers of a comprehensive development model that is resilient to overlapping crises, anchored in freedom, and delivering long-term prosperity. 

Trajectory: Eastern Europe in the transatlantic community and the EU growth trajectories through European integration 

The Freedom and Prosperity Indexes of the Atlantic Council allow us to trace a clear connection between growth trajectories and economic, political, and legal freedoms.⁵EU integration consolidated the economic, political, and legal freedoms in many of the ECE countries, which in turn allowed them to develop more sophisticated economic models.⁶ While many countries in the region experienced economic growth, data in the Freedom and Prosperity Indexes raise the question of how sustainable their development trajectories have been: improvements in freedom are equally important, ensuring a greater and more durable prosperity.⁷

Unlike Western Europe, which went through a period of economic slowdown, for ECE countries the last decade saw a period of economic growth and prosperity. Overall convergence was clear in the region—to a greater extent for countries with larger development gaps to fill (e.g., Romania, Lithuania, Latvia) or a lesser extent for better-integrated economies in the regional supply chains (e.g., Hungary, Czechia, Slovenia). EU member states from this region are in fact net beneficiaries of European funding, receiving much more than they contribute to the EU budget, mainly in the form of cohesion funding. However, because much of the economic convergence has been based on foreign direct investment (FDI) and not domestic companies, the amount of profits that flow from Eastern to Western member states exceeds the EU funding into the ECE.⁸ Still, the EU funding has provided ECE member states with very strong leverage in attracting higher-value-added foreign investments—a game which some countries played virtuously (e.g., Hungary, Czechia, Poland), while others less so (e.g., Bulgaria). Essentially, EU funds were used in the ECE region to provide direct state aid to large foreign investors in key strategic sectors (e.g., automobile manufacturing, information and communication technology (ICT), energy), or to finance enabling infrastructure for foreign investments (e.g., road, rail, and even air transport facilities, digital infrastructure, or human resource formation in targeted specializations like science, technology, engineering, and mathematics). 

But large subnational disparities mean the beneficial effects of economic integration are not felt equally, and the relative economic deprivation in some parts of Central and Eastern Europe can be linked to growing anti-liberal political sentiment. For example, Czechia’s poorest regions, home to the declining coal industry, are strongholds for the ANO (Action of Dissatisfied Citizens) populist party, while poverty-stricken rural areas in Poland all voted for PiS (Law and Justice) in the last presidential election. European funding has contributed to local development, but it has also placed a heavy burden on administrations that often lack both technical capacity⁹ and capital to fulfill the co-financing requirements.¹⁰

Local resilience can be defined as “a community’s capacity to resist, adapt and recover its functions and structures after a crisis or a disruptive event.”¹¹ Based on a review of several existing resilience indicators, the authors of this chapter have developed a pilot index on local resilience in Romania and Moldova in 2022 (as an example, Figure 2 shows results for the socioeconomic pillar for Romania). Our Local Resilience Index (LOCRES) comprises three dimensions: economic, societal, and security. For economic local resilience, we used three pillars: socioeconomic policies (i.e., adaptive economic policies and targeted social policies responding to the specific context of the local community), access to basic services (i.e., basic level of quality of services, and intra- and inter-community connectedness), and local economic opportunities (i.e., employment perspectives, mobility or availability of financial resources, entrepreneurship, and private sector development). All three socioeconomic pillars have been measured through a mixed data set, comprising both statistical indicators and population survey data. We found that in the case of Romania, there is a balanced level of development in terms of policies’ capacity to cater to local needs and in terms of access to public services (see Figure 2). However, the large prosperity gaps are correlated with large discrepancies in economic opportunities between localities—with people in the capital region of Bucharest having nine times more economic opportunities than those in the county of Vaslui, near the eastern border (see Figure 2). 

Regions that lag behind on the LOCRES Index are extremely vulnerable to economic shocks, with low resilience, and lower capacity to recover, regardless of the dimension of local resilience—political, security, or economic. These regions usually share some common characteristics: a lack of critical infrastructure and medical supplies; poor access to basic education; a low level of digitalization; social divisions, and social polarization in general; a high level of corruption and clientelism at the local level; and a high level of non-conventional threats like fake news and disinformation. Low gross domestic product (GDP) per capita and limited labor market opportunities diminish further the local capacity. Moreover, there is a salient mistrust in public authorities in these regions, and the civic culture—expressed as personal involvement in civic actions at the local level—tends to be limited. 

Malign economic and political influences have swept through the region’s democracies for a long time and there is a sense of complacency in the way the transatlantic community has approached them. First, it took too long for us to connect the dots, and realize that political actors supported by the Kremlin had similar narratives and strategies across Central and Eastern Europe and beyond.¹² Second, the desirable plurality of elections and the quest for foreign direct investment meant that too often malign interventions were welcomed as endogenous elements of liberal economies. Third, there was a reluctance in the West to admit that some of the malign influences—Russia and China, for example—were targeting salient economic and political vulnerabilities: low political influence in international relations, and large investment gaps, including in key strategic sectors (e.g., energy, infrastructure, digital technologies).¹³ Our data show the importance of attending to the local level within Eastern European democracies, both to understand their vulnerabilities to malign political influences from Russia, and to address the persistent economic divides at subnational level. 

Growth trajectories in a new economic model 

While initially the economic convergence was built on the back of economic growth, the persistent inequality levels highlighted the need for a more comprehensive approach to European convergence. As such, aligned with international trends, evidence on human development levels enabled decision makers to craft targeted, informed policies that helped people take full advantage of the opportunities created by economic growth.¹⁴

Several layers of transformation occurred in the global economy over the past decade that are changing the growth model for Eastern Europe. These can all be linked to the way the traditional bottom lines of business strategies have changed. One dimension of transformation is linked to the way productivity is achieved, and the way competitiveness is defined more in relation to sustainability than to profit margins. To this end, increasing amounts of public capital are being used to de-risk private investments in new technological sectors that can support both sustainable and competitive objectives. Thirdly, enabling endowments such as infrastructure, skills, and governance are as important as profit margins. Finally, profit margins are increasingly becoming a secondary priority to geopolitical alignments. 

Across Europe and in the United States, there has been a concerted effort to reorient economic policy in a new direction informed by climate action. As the EU coins the term “competitive sustainability,” which can be defined as “the ability of an economy, companies and industrial ecosystems to excel relative to international competitors in their transition to a sustainable economy – with climate neutrality at its core – through investment in the necessary innovation.¹⁵ The European Commission thus links unequivocally the pursuit of economic growth and prosperity to a “fair, just, green, and digital transition.¹⁶ Similarly, the United States is engaged in a comprehensive effort to link economic transformations to climate action goals such as reducing carbon emissions (as seen, for instance, in the Inflation Reduction Act of 2022¹⁷). As the economic and energy crises are increasingly interconnected, the dual pursuit of prosperity and sustainability will likely pose a new economic challenge to Eastern Europe. 

The new ambitions of linking competitiveness to sustainability have required more and more blended financing. Public capital is increasingly used to leverage private resources—both financial and intellectual—to develop niche sectors in leading economies of the United States, EU, or China. This new form of industrial policy is not, however, led by the state, but rather a co-design process, which some authors characterize as the “Wall Street consensus,¹⁸ “state capitalism,¹⁹ or a “hidden investment state.”²⁰ Either way, the disadvantage of smaller economies with poorer national budgets is clear, and the need for concerted action amongst Western allied economies is very large. 

Within the EU, there is an East-West divide on measures of basic competitiveness indicators in the Eurostat Regional Competitiveness Index: quality of institutions, macroeconomic stability, infrastructure, health services, and basic education.²¹ Eastern Europe was also much less competitive than the West in technological innovation. The values of these metrics in ECE countries were, on average, two times smaller than the average of older member states (e.g., Denmark’s maximal value of 0.89 vs. Romania’s minimal value of −1.44 on the national averages of the Regional Competitiveness Index).²² While recent growth patterns in Eastern Europe have shown increases in labor productivity, the region had not gained ground in innovation or technology. 

Geopolitical realignments have become increasingly visible over the past decade, with the war in Ukraine drawing firm ties between allies. These realignments have been amplified by the dire realities of global value chain (GVC) vulnerabilities that surfaced during the COVID-19 pandemic. Eastern Europe is looking for economic support in this context from its security allies in the transatlantic space. The geopolitical positioning of countries like Romania and Poland comes with expectations for strengthening economic ties. This is not just a transactional logic in the diplomacy of nation states, but an important policy commitment for ensuring governments retain the support of their populations for the security pledges they make. Further shifting the sands of the regional economy, by the beginning of 2023 over 1,000 Western companies had curtailed operations in Russia, according to the Yale School of Management monitoring data.²³

For all of these reasons, Eastern European economies are prone to engaging in a redesign of their national economic models, moving away from the lure of cheap labor, and fighting hard for high-value-added (HVA) investments. Moving beyond the automotive and basic manufacturing sectors, countries in Eastern Europe are now focusing on attracting FDI in biotech, aviation, information and communications technologies (ICT), and cyber, defence, or energy. These can deliver more prosperity to the local economies, and would be supported by more complex pull factors. HVA investments can make use of a skilled labor force, can access EU funds for leveraging foreign investments, and can build on geopolitical alliances in near-shoring or allied-shoring processes. As opposed to Hungary, both Romania and Poland share a better territorial distribution of HVA investments (see Table 1). While Hungary has been more skilled in leveraging EU funds to attract and increase its HVA investments, its decreasing level of freedom (according to the Atlantic Council Freedom Index) leaves it unable today to mobilize the full spectrum of drivers of a new economic model that might otherwise be possible through allied-shoring and pooling public resources such as EU funds. 

Growth trajectories and freedom as an enabling condition for prosperity 

Societal actors (e.g., civil society, media, lawyers, or political parties) are key in ensuring a free and vibrant democracy, one in which economic opportunities prevail, and public sector development leads to shared prosperity. Not only are societal actors able to implement checks and balances that uphold the quality of our democracies, but they are increasingly more involved in co-designing solutions in times of crisis (e.g., COVID-19,²⁴ the war in Ukraine), and long-term growth trajectories for local communities. 

Of all the countries in Eastern Europe, Romania has by far the strongest civil society,²⁵ including the largest number of civil society organizations (CSOs). These CSOs have been part of large EU or international networks, or gained experience locally, in multimillion-euro projects and with large, diverse networks. Romanian CSOs have proven their resilience, and the sustainability of their business model, not only by working well internationally, but by partnering effectively with government when crisis situations required it.²⁶ Apart from Moldova, where the situation for nongovernmental organizations (NGOs) has seen improvements, the situation of NGOs in all other countries of the Black Sea region has either remained the same (e.g., Georgia) or became worse (e.g., Armenia). While some countries (e.g., Romania) have seen constant improvements in press freedom, others (e.g., Poland, or more noticeably, Hungary) have shifted more and more towards autocracy, with several independent media outlets in Hungary being closed by direct government intervention.²⁷ This has not led to immediate economic consequences for ordinary citizens, but we see signs that the economic situation in Hungary has deteriorated, with both its GDP and consumption decreasing in 2021, falling below most countries in the region.²⁸

A strong civil society is not only a prerequisite for prosperity, but an important facilitator for other factors associated with an open and free society, and a way to hold the government accountable for its decisions. Romania’s case is particularly interesting from this point of view. From the summer of 2017 onwards, movements against internet regulation and for a stronger voice for local communities cohered into increasingly strong activist networks (e.g., #rezist, #insist, #unitedwesave). These networks became vocal opponents of corruption, fueling new political parties, and thus increasing the quality of democracy.²⁹ 

Online groups and social media were at the heart of these burgeoning movements, but free access to information has been a double-edged sword. It has not only driven a stronger civil society, but, as an unwanted consequence, allowed Russian propaganda and its anti-democratic narratives to find a way into people’s minds—especially when events coincide with a crisis like the COVID-19 pandemic. The restrictions imposed by the governments during the pandemic had an impact on the overall feeling of freedom people were experiencing, and this created fertile ground for propaganda pushed by Russian actors. 

Despite this, Romanian civil society witnessed a surge in solidarity during the pandemic, and a broad community effort to support the vulnerable and those in need. Networks grew stronger, and new partnerships were fostered between the state and civil society, particularly in terms of social innovation. For example, Code for Romania (an association of volunteers from the IT industry) created a digital platform to support the COVID response. As a result of this growth, when Russia attacked Ukraine in February 2022, the response of Romanian society was swift and overwhelming: Tools built in COVID times were quickly repurposed in support of refugees.³⁰ Local networks of NGOs, which had supported older people during the pandemic (with medicines, etc.), became active collectors of goods and first aid materials to be sent to Ukraine. Over 300 Romanian NGOs have been involved in supporting the Ukrainian people since the beginning of the war. This strong, robust, and healthy civil society in Romania has proved to be a pillar of resilience when the country has been confronted with pro-Russian narratives related to the war: 65 percent of the population believe that there was no justification for the Russian invasion of Ukraine and 75 percent believe in NATO’s capacity to defend the country.³¹

In particular, the United We Save (#unitedwesave) movement was, in our opinion, the most important turning point in the Romanian civil society movement, from 2013 onwards.³² Its major success was that it proved united citizens could influence government politics—especially noteworthy given the common perception, that a government ostensibly of the people was led neither by the people (but by a few corrupt politicians) nor for the people (but rather for corporate interests). Following this import-ant milestone in the Romanian civil society movement, mass protests have managed to take down several governments for corruption-related issues,³³ when the state has not been perceived as functioning to the benefit of the citizens. These movements provided a strong indication that it was not only the government that needed reform, but the political class as well. 

Romanian civil society has strongly supported the country’s democratic institutions in their attempts to resist corrupt practices of politicians, or laws perceived as being made solely for corporate interests. Russian propaganda, trying to use the same channels as these movements, has had some minor success, especially in supporting the movement against COVID regulations, but as we have seen, in general the large mass of people has been well inoculated for defending liberal democratic values. In our view supporting a robust civil society that can withstand such challenges is the most important investment one can make, especially if we look toward the future reconstruction of Ukraine. The resources that will be spent in repairing bridges, buildings, roads, and other infrastructure have to be matched by continuous investments in the strengthening of civil society. Here, Romania has useful experience, which can be transferred and used to the benefit of the Ukrainian people. 

Mutual engagement between civil society and local administrations has been relatively poor in Hungary, Poland, and Romania.³⁴ However, the last decade has seen the creation of new formal and informal avenues of engagement between citizens and local governments. The key to collaborations that push back against the shrinking of civic space lies with civic actors’ ability to participate, and with local governments’ engagement in consultations, collaborations, and public deliberations. CSOs are essential actors in mediating the relationship between citizens and the state by building trust and social capital. They can play a role in advancing transparent and accountable governance by articulating and representing citizens’ concerns, thereby furthering participatory governance, and by increasing the legitimacy of public actors and the relevance of their projects. 

Conclusion: Ways forward for economic resilience in Eastern Europe 

Since the war in Ukraine began in 2022, it is clearer than ever that Eastern Europe is a key battlefront for democratic values. It is no longer the region’s inner transitional risks, but outward hybrid threats from Russia that pose the challenge to democratic alliances. Winning hearts and minds, however, is not only a battle of ideas—however important those might be—but also of ensuring that democracy and prosperity go hand in hand. Our central argument is that, considering the overlapping crises that are unfolding (e.g., energy security, inflation), economic resilience should be seen as a key element of the security strategy for Eastern Europe. 

The chapter tells the story of economic trajectories of growth for Eastern European countries. In a time when economic growth seems to be only a memory of the good times past, the region still relies heavily on a sustained dynamic of growth in order to maintain its stability. There are three core arguments that we present. First, European integration has been the lifeline of the economic growth trajectory of the region, with large influxes of FDI and EU funding for investments. However, this has not translated into the pace of economic convergence that would have stabilized the overall trajectory of the region within the EU single market, as large economic disparities between and within member states persist. Second, the path to prosperity for the region has to account for a transition to a new economic model—one that is more embedded in national endowments, but also better aligned with the overarching energy and technological transitions of its Western peers. This will mean doubling down on efforts to attract high-value-added investments that allow for its growth trajectory to be maintained. Finally, in order to achieve a sustainable and shared prosperity, Eastern Europe must capitalize on all societal actors. A free and empowered society allows for a consolidation of capabilities. It is only through mutual engagement, mobilizing both public and private sector investments, and aligning strategic priorities in a way that reflects both freedom and prosperity, that the countries of Eastern Europe will achieve lasting stability and societal resilience in the face of malign threats and ever-emerging risks.  

Clara Volintiru is a professor at the Bucharest University of Economic Studies and director of the Bucharest Office of the German Marshall Fund and of the Black Sea Trust.  

Camelia Crişan is assistant professor at the National School of Political Science and Public Administration in Romania and the managing director of Project Romania 2030.  

George Ștefan is an assistant professor at the Bucharest University of Economic Studies. 

The post Scaling up the transatlantic partnership from security to prosperity: Economic resilience in Eastern Europe appeared first on Atlantic Council.

Roaring tourism and demand for services, luxury goods, and other light manufactures are fueling the continent’s economic resilience. That means that countries that are more oriented towards these sectors, like France and Southern Europe’s major economies, have reaped the lion’s share of European economic growth. If we weight economic growth projections by each country’s share of European GDP, Spain, Italy, and France will likely be the largest contributors to the EU’s growth in 2023. This is despite the Italian economy’s surprise contraction in the last quarter, which partially reflects the one-off effects of curbing its ‘Superbonus’ tax exemption program. In its July World Economic Outlook update, the IMF upgraded Italy and Spain’s growth forecasts by 0.4 percentage points and 1 percentage points, respectively.

On the other hand, Europe’s traditional juggernaut has become its laggard. Germany’s economy, which is more dependent on heavy manufacturing exports than its peers, faces an uncertain global trade environment, worker shortages, and rising subsidies in the US and China. The IMF forecasts a 0.3% contraction this year.

Regional inversion

Ten years ago, the map would have nearly been reversed, with Germany leading European growth and Southern Europe in dire straits. The 2008 financial crisis hit Southern Europe hard; after the collapse of asset bubbles prompted governments to increase stimulus spending, the resulting debt loads triggered a balance-of-payments crisis. To resolve their debt crises, these countries took austerity measures like painful cutbacks on government spending, largely at the behest of their northern neighbors. 

Moreover, the region’s industry mix was unfavorable for years after the financial crisis. Resilient demand, especially from Asia, for essential industrial goods pulled Germany out of recession quickly, while tourism and other services sectors were slower to rebound as households pulled back on spending. While France’s economic experience was not as extreme, its recovery was also hampered by an economy dependent on services, tourism, and luxury goods.

Meanwhile in the South, poor consumer confidence and austerity contributed to a vicious cycle of contraction, amounting to a “lost decade” for growth. For instance, Italy’s GDP growth underperformed the EU average every year between 2008 and 2020.

Back to the future

How did Southern Europe bounce back? Some factors, like the strength of the services sector and a rebound in tourism, are more recent. Although Russia’s invasion of Ukraine drove up energy prices in all European countries, France, Spain, Italy were among the least affected countries. In 2021, Russian imports accounted for 6%, 9% and 23% of French, Spanish, and Italian fuel consumption, respectively, compared to 31% of German consumption. Southern European countries also received an outsized proportion (47%) of EU recovery funds from the pandemic. 

Structural factors have also helped, particularly in Southern Europe. Austerity programs have ended, and many of the region’s most indebted countries have improved public finances. Greek bonds, for example, are now one upgrade away from being ‘investment grade’–a far cry from the early 2010s, when Greece was placed in ‘selective default.’ 

These improvements offer optimism that Southern Europe may be turning a page on its “lost decade.” It may be hard to imagine now, but rapid regional economic growth was once the norm before economic crises (starting with Italy in the 1990s) set the region back. From 1971 to 1990, nominal economic growth averaged 3.3% per year in Spain and 3.1% in Italy, compared to 2.6% in Germany and Britain. That might not sound like much, but sustained growth meant that Southern Europe was quickly catching up to its northern peers. In 1980, GDP per capita in Italy and Spain were 72% and 53% of Europe’s three largest economies (an average of Germany, France, and the United Kingdom, weighted by population). By the end of the decade, those figures were 98% and 62% respectively. Indeed, Italians of a certain generation still remember ‘il sorpasso,’ the point in 1987 when Italy’s economy surpassed Britain’s in size (in spite of its smaller population).

It is too soon to say whether Southern Europe is back on this trajectory, but the economic winds may be shifting. Ten years ago, Northern Europe could dictate its solutions to the sovereign debt crisis because Southern Europe needed a bailout. Now, southern capitals may call for a more balanced debate on Europe’s economic future.

Sophia Busch is a Program Assistant for the Atlantic Council GeoEconomics Center.

Phillip Meng is a consultant for the Atlantic Council GeoEconomics Center.

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The post Southern Europe is the continent’s new economic growth engine appeared first on Atlantic Council.

But it’s not over. The second half of 2023 poses four major tests that will reveal the realities of the EU’s geopolitical aspirations. These tests underscore a sense of urgency. Russia’s continued brutality in Ukraine and the specter of Chinese assertiveness, combined with the fact that Europe will pick a new Parliament and Commission in 2024—with US presidential elections not far behind—add pressure to deliver.

Test 1: Negotiations on steel and aluminum tariffs test transatlantic unity

US and European officials insist transatlantic relations are at an all-time high, but tensions over steel and aluminum tariffs risk upending the bonhomie. An approaching October deadline to resolve the issue will test the realities of Europe’s trade strategy with its biggest partner. 

The steel and aluminum issue has been a concern for the entirety of the Biden and von der Leyen presidencies. The issue dates back to the Trump administration which, amid frustrations about excess steel and aluminum harming US producers, levied tariffs on European steel and aluminum imports, leading to an unceremonious transatlantic trade war. The Biden administration and EU pressed pause on the tariffs in October 2021, parking the dispute with negotiators to dream up a fix by this coming fall. Without a deal or some stopgap, however, tariffs will return. Negotiations are progressing slowly and will likely come down to the wire.

US and EU officials have every reason to find a compromise. The EU and United States rely on each other for trade, and Europe is undergoing a historic decoupling of its economies away from Russian energy and, simultaneously, attempting to “de-risk” from China. A sustainable relationship with partners such as the United States is essential in those efforts. Brussels can ill afford a trade war at the same time. 

The negotiations are also a test for the EU’s open strategic autonomy. As the difficult negotiations highlight, trade and industrial policies have been one of the most challenging aspects of the US-EU relationship. The Biden administration has made clear it will “unapologetically” advance US industry and the green transition as matters of national urgency even if that goes against the interests of friends. The Inflation Reduction Act signed into law almost exactly a year ago made this painfully clear to Brussels. This has led the EU, a historic bastion of free trade since its single market came into being, to adopt more dirigiste policies to build up Europe’s own industrial capacity. Avoiding a trade war with Europe’s largest trading partner and advancing its own economic interests in negotiations with Washington will be critical for Europe’s economic plans.

Test 2: The EU-Mercosur deal measures the reach or limits of the EU’s “de-risking” strategy

Shortly before the July 17-18 summit between the EU and the Community of Latin American and Caribbean States (CELAC), von der Leyen pledged to conclude the long-awaited free trade deal with Mercosur countries Argentina, Brazil, Paraguay, and Uruguay by the end of the year. A deal would be a major deliverable in rebuilding Europe’s relationship with South America and a much-needed opportunity for Europe to diversify its trade partnerships.

Like most free trade agreements, the (sometimes literally) meat of the deal comes down to market access and politics. Europeans are worried about the impact on domestic farmers of South American agriculture, including beef, pushing down prices in the European market. Europe has also placed added emphasis on sustainability and climate neutrality, earning the ire of South American capitals. Negotiations are slow but progressing. Meetings on the sidelines of the EU-CELAC Summit appear to have been productive. 

A deal before the end of the year would be an important signal that Europe can credibly engage with partners in the Global South and use those relationships to bolster Europe’s economic security. The EU is one of the Mercosur countries’ biggest trading and investment partners, but it has struggled to engage with the wider region and has been supplanted by China as South America’s chief partner apart from the United States. 

Europe is looking for partners to rebalance an overreliance on Russia and China, expressed in the Commission’s proposed economic security strategy. Especially as the security of supply of critical raw materials—many of which are found in South America—sharpens European thinking about its trade relations, a deal represents a step forward for Europe in proving its vision of a free trade world is fit for purpose. 

Test 3: Talks with Ukraine show if the EU is real about enlargement

Russia’s war in Ukraine breathed new life into the EU’s enlargement policy. In June 2022, Brussels decided to grant Ukraine “candidate status,” starting Kyiv on the road to membership. Formal negotiations could begin in December and would be an important signal of Europe’s commitment to Ukraine—and of Europe’s agency. 

The pace of Ukraine’s EU accession has been blinding. Behind this speed is a recognition that Europe cannot afford gray zones on its borders and the EU itself is capable of providing security to Europe. While EU membership won’t supply the same security guarantees for Ukraine as NATO membership, the start of negotiations would show how determined the EU is to anchor Ukraine in Europe. It would also be the logical conclusion to the EU’s pledge of support to Kyiv for “as long as it takes,” building on the billions of euros in assistance to Ukraine it has sent so far, including the taboo-breaking provision of EU-funded military aid. 

Ukraine’s entry into the EU will not be simple. Kyiv will need to align with the EU’s regulations on everything from agriculture to trade, budgets, transport, taxation, and more. Ukraine will also need to address the hard issues of tackling corruption and reforming its judicial system. Even in the face of Russia’s brutal invasion, Ukraine in the last year has still made progress on the conditions the Commission outlined, underscoring the seriousness of Ukraine’s EU aspirations. Ukraine will be responsible for keeping up its reforms, but starting negotiations this year is crucial to recognizing Ukraine’s progress and sustaining Ukraine’s EU aspirations as it encounters the daunting realities of entering the EU. 

There is also a broader political dimension to Ukraine’s EU story: Enlargement also necessitates EU reform. The EU, Europe-watchers warn, cannot admit Ukraine without first altering internal EU structures and processes. Chiefly, this would likely require replacing unanimity in foreign policy decisions with qualified majority voting, by which 55 percent of EU member states representing at least 65 percent of the EU population could approve a decision. Others fret that Ukraine’s agricultural sector could derail the EU’s system of farm subsidies and collapse prices once Ukraine joins the single market. 

It’s also not just about Ukraine. EU applicants in the Western Balkans have languished for years in Europe’s waiting room. Fast-tracking Ukraine at the cost of others risks further undermining the EU’s already-rocky credibility in that region. That said, delays, real or not, for Ukraine’s EU path would threaten momentum and be politically damaging to the legitimacy of the bloc.

Test 4: Negotiations on the AI Act will tell if the “Brussels effect” can meet the AI moment

The EU’s digital regulations are arguably the most impactful policies coming out of Brussels, and the AI Act will test the bloc’s staying power in tech regulation. The AI Act is the first of its kind to regulate the field of artificial intelligence (AI). It sets out Europe’s risk-based approach to the tech, adding oversight on high-risk AI and laying out which uses should be banned outright. The AI Act has been approved by both the European Parliament and Council of the European Union and heads into “trilogue” negotiations between the EU’s respective bodies to iron out the details of a combined version. Spain, the current holder of the EU Council presidency, has declared its ambition to finish negotiations during its tenure, which concludes at the end of the year. 

The AI craze has attracted the attention of tech enthusiasts, luddites, and everyone in between. For policymakers, it carries the geopolitical potential to reshape economies and societies. How and when AI is used—including for things like policing, generating mis- or disinformation, social scoring, and more—all point to the need for action, especially when others such as China are crafting their own plans to dominate the space.

Europe should not take its foot off the gas. The faster the AI Act moves through the EU legislative process, the faster it can be adopted, and will help determine if the EU will be successful at regulating the space. At the same time, regulation alone will not position the EU to win an AI innovation race in which it is already lagging behind. The EU has also advanced a vision of digital sovereignty—or, in some critics’ eyes, protectionism—which will carry implications for the United States and its many AI companies leading the AI race. The AI Act’s final text will be important to measure how the EU is balancing its vision for the EU’s dominant position in the digital regulatory space and prove the bloc continues to set the agenda for the regulation of world-bending tech while creating the space for EU-based innovation and competitiveness in the AI field. 

The last four years have not provided Brussels’ policymakers much rest. Constant crises have kept them on their toes and in their offices. Yet despite—or more likely because of—these crises, the EU has adopted a new geopolitical mindset and made moves to translate ambition into reality. How the EU meets the tests in the months ahead will be important to show that Europe can deliver.

Jörn Fleck is the senior director of the Atlantic Council’s Europe Center. 

James Batchik is an assistant director with the Atlantic Council’s Europe Center. 

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Then, she managed to pull off a coup of sorts. By suggesting that the EU “de-risk” its relationship with China she simultaneously appeared tough on Beijing in the context of Europe and nudged the US discourse away from more hawkish talk of “decoupling.”

However, next week’s speech will prove even trickier. (As there is much at stake, squabbles over what does and doesn’t go into the EU Economic Security Strategy speech have already reached the media.) The Commission, which will author the forthcoming EU Economic Security Strategy, must tread carefully so as not to alienate member states who care deeply about their economic relations with China. Yet, it must simultaneously move toward a clearer objective for the EU-China relationship and coax its members toward a more “realpolitik” view of the world. None of that will be easy.

Europe’s economic security

It is the first time the Commission will issue a document on economic security. Its prerogatives on trade and market regulation used to not be so directly affected by geopolitics. Now, the global struggle for access to and control over strategic economic resources is defining the world’s geopolitical fault lines. So, it is right for the EU Commission to try to approach economic security as comprehensively as possible, combining strategic vision and attention to technical detail. Such an integral approach should at least allow the EU to assess emerging risks and threats to the EU’s economic security in a more systematic way.

The harsh reality in EU policy making is that process often dominates content. This is both a blessing and a curse. Economic security is about securing access to and control over strategic economic resources. What is “strategic” is of key importance to the security of the EU and its member states. While talk about economic security nowadays often focuses on high tech, such as semiconductors, it also includes being able to feed the European population, having access to natural resources, and having an industrial base and a well-educated workforce. Furthermore, it requires secure infrastructure—ports, roads, waterways, railways, telecommunications—to get the resources to their destination in the EU.

Clearly, as economic security shapes geopolitical dynamics, the EU’s understanding of it should not be limited to a set of working-level policies. An adequate approach to economic security must link the more tangible, technical aspects with higher order, strategic and geopolitical issues, which are often more abstract. One’s understanding of how economic security relates to geopolitical dynamics at the strategic level should guide and inform the more technocratic issues like investment screening, export controls, financial-economic sanctions, anti-coercion, and their associated risk assessments.

Economic security is also closely related to other dimensions of policy making, including defense policy and international finance. The EU, or its member states, depend on military power for secure access to and control over strategic economic resources. That is why European discussions about the military aspects of strategic autonomy matter to economic security. And financial geopolitics play a major part in determining the EU’s economic security, as the “real economy” is highly dependent on global finance and capital flows. It demands a constant intellectual effort to appreciate how economic security interacts with these and other policy dimensions.

Lacking a more comprehensive view, European policy makers are at risk of reacting in a fragmentary and ad hoc manner to complex economic security challenges. Sound ideas and strong knowledge form the basis for good political discussions and effective decision making on economic security. The EU Economic Security Strategy therefore needs to define the development of European knowledge and ideas about economic security as a necessary element. Member states themselves should also deepen their knowledge about economic security to help shape the Commission’s understanding.

Three hurdles to clear

To arrive at a more comprehensive approach to economic security, the European Commission will have to address at least three hurdles.

First, it will have to foster consensus about how to approach economic security among the different Directorate Generals (DGs) involved. These DGs tend to have different perspectives on the economy, some being more interventionist-minded, others being more free-market minded. Also, the Commission and the Council, constituted of the EU member states, will have to reconcile their views. Whereas the Commission tends to have the lead on economic issues, the Council’s member states have the lead on foreign and security policy. Moving ahead on economic security, at the intersection of both fields, may demand significant intra-EU diplomacy. The EU Economic Security Strategy should lead to the establishment of a European forum where the nexus of economics and security can be discussed on an ongoing basis between all relevant stakeholders.

Second, the strength of any strategy tends to depend on its clarity, or the definition of objectives and means. The Commission will thus have to combine strategic clarity with diplomatic consensus, which is a balancing act. Moreover, the Commission wants to publish the strategy document quickly, while strategic clarity tends to emerge only after time. The risk is that clarity is achieved on rather small and pre-existing technocratic issues, while the higher, more strategic issues are left ill-defined. The EU Economic Security Strategic should therefore call for long-term strategic clarity on economic security, as a compromise between diplomatic consensus in the short run and strategic clarity in the longer run.

Third, and perhaps most importantly, a comprehensive European approach to economic security requires a stronger European geopolitical or “realpolitik” reflex. The importance of economic security has been long underestimated and misunderstood in Europe as the EU policy makers did not tend to view the world in terms of power politics and national security dilemmas. An effective EU approach to economic security requires a context or culture of more strategic and geopolitical reasoning. The EU will be less at risk of an inadequate, fragmented approach if it has more access to outside, independent, and informal views, and knowledge about economic security to inform its decision making. The Commission should therefore use its Economic Security Strategy to stimulate a more thorough academic and intellectual debate about the intersection of economics, security, and geopolitics.

Good policies are based on sound ideas and strong knowledge. The EU’s Economic Security Strategy will be most relevant if it stimulates intellectual debate and strategic clarity. The Commission may operate pragmatically in the short run by seeking consensus on the more technocratic issues, while at the same time laying the groundwork for the next phase. The greatest challenge is to attune the EU’s traditional technocratic reflexes with the strategic exigencies of a geopolitical context dominated by great power competition.

Dr. Elmar Hellendoorn is a nonresident senior fellow with the GeoEconomics Center and the Europe Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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At 40 percent of the vote (and a whopping 20 percentage points above second-place Syriza, the leftist party of former Prime Minister Alexis Tsipras) the New Democracy Party’s showing was higher than when Mitsotakis was first elected to power in 2019. In fact, it is the best of any incumbent Greek government in half a century. The impressive win is widely considered a vote of confidence in the Greek prime minister, who went to the polls asking for a second term to complete his pro-business agenda. 

But as much as it says about how Greek voters evaluate his first term, the result also speaks volumes about the state of the opposition, especially Syriza, which failed to persuade voters that it had a compelling governing proposition and refused to shed its populist rhetoric.

Given a new voting law of proportional representation, New Democracy was still a few seats shy of forming a majority government. Thus, Mitsotakis has called for a runoff election as soon as June 25, which will be held under a different voting law that may well propel New Democracy to a majority, given the bonus of as many as fifty seats that it grants to the first-place party. As for the prospect of Mitsotakis forming a coalition government, a lack of appetite or scope for such cooperation all but rules it out.

Contrary to the years of the financial crisis, these elections in Greece did not attract wide international attention. The fact that no government was formed did not rattle the markets, nor did it create cause for geopolitical concern. On the contrary, the Greek stock market rallied on the news on Monday.

This is partly because the strategic direction of Greece is not in question in these elections, as all the mainstream parties support Greece’s defense cooperation with the United States and are committed to the eurozone. This is also true on foreign policy, where they agree on the strategic priorities of a country that is moored to the West and playing a stabilizing role in the wider region. As US State Department Spokesperson Matthew Miller congratulated the people of Greece on the elections in anticipation of the runoff, he noted that “the US-Greece bilateral relationship has strong support across political parties in both the United States and Greece. It has been strengthened over years of cooperation between multiple administrations and governments in both countries.”

That said, New Democracy is focused on further deepening the US-Greece strategic partnership, including on defense, and continuing to support Ukraine by providing it with military aid and implementing sanctions against Russia. Greece under the leadership of Mitsotakis has also gained influence within the European Union (EU) on issues such as the energy transition and energy security, which could continue as Greece has a goal of tripling its regasification capacity (converting liquefied natural gas back to gas) this year. Greece is also expected to continue to exert tight control over its borders. And despite a rocky relationship with Turkish President Recep Tayyip Erdoğan (who also seems poised for reelection on May 28) Mitsotakis is open to a rapprochement, if anything to avoid a replay of recent tensions.

Yet the biggest focus of a second New Democracy term would be on the economy. The May 21 election was the first in Greece after the end of the post-bailout monitoring. Under Mitsotakis’s reign, Greece registered one of the fastest economic growth rates in the eurozone in 2022, at 5.9 percent, and he promises to push with the reforms that will further increase foreign direct investment and improve Greek competitiveness, while also making good use of the 30.5 billion euros that Greece is due to receive from the EU’s Recovery and Resilience Facility.

But as the Financial Times notes, “Greece’s economic revival is still a work in progress.” Despite significant improvement, the legacies of the debt crisis are still evident in its gross domestic product (GDP) and unemployment numbers, with New Democracy promising to continue increasing salaries and pensions to deal with a cost-of-living crisis. And Greece has committed to primary surpluses of 2 percent of GDP per year, which may prove difficult to achieve if public expenditures exceed the government’s projections amid higher inflation.

Indeed, the Greek prime minister offered an economic reason for calling the elections a couple of months early: to regain the investment-grade credit rating that the country lost during its debt crisis, considered a prerequisite to sustainably increase growth and manage its debt. As S&P Global Ratings changed its outlook for Greece from neutral to positive last month, it signaled that an upgrade to investment grade may be a matter of months away. But the credit rating agency also noted that this is subject to preserving political stability. And as the governor of the Bank of Greece warned, there is no fiscal room in Greece for all of the political parties’ electoral promises.  

But even as the prospect of another debt crisis does not seem near, the New Democracy government withstood more immediate challenges on the road to its electoral triumph. These include the 2020 Evros border crisis—in which thousands of migrants and asylum seekers tried to breach the Greece-Turkey border with the encouragement of the Turkish government—as well as the devastating effects of the pandemic, heightened tensions with Turkey, and the cost of the energy crisis for Greek households and the economy.

So, despite the tragic loss of life in a train accident in March that exposed the inefficiencies that are still plaguing Greece’s public sector, or a wire-tapping scandal that embroiled the prime minister’s office last year, it was the quest for stability and the promise of a more efficient and bolder government that gave New Democracy its impressive lead. Now, Mitsotakis is betting this will be confirmed in the runoff.

Katerina Sokou is a nonresident senior fellow with the Atlantic Council’s Europe Center, Theodore Couloumbis research fellow on Greek-American relations at the Hellenic Foundation for European and Foreign Policy, and the Washington DC correspondent for Greek daily newspaper Kathimerini, where she is also a columnist.

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After the sale of Credit Suisse, the most poignant example of investor concerns is the market pressure on Deutsche Bank (DB).  DB shares have lost more than a fifth of their value this month—despite improving its financial performance in recent years. Following significant restructuring efforts since 2019, DB has posted ten consecutive quarters of profit, including a net income of €5 billion ($5.4 billion) in 2022, a 159 percent increase from 2021. At the end of 2022, its Core Equity Tier 1 capital ratio was at 13.4 percent, Liquidity Coverage Ratio at 142 percent and Net Stable Funding Ratio at 119 percent—all meeting Basel III regulatory requirements. 

The satisfactory regulatory ratios for most banks in the US and Europe have enabled financial authorities to insist that their banking system is basically safe and sound. Investors, however, have taken a different view. Since the 2008 global financial crisis, the ratio of market share price to net book value (assets minus liabilities) of European and US banks have traded at half of their pre-2008 averages. Specifically, European banks have traded at around a P/B ratio of 0.6–meaning investors value banks’ net assets at much less than what their financial statements show, reflecting lack of confidence in the profitability of those banks. By comparison, the P/B ratio of US banks has been around 1.4.

In short, the turmoil in the banking sector of global equity markets reflects the lack of confidence that banks can cope with the current and expected difficult business environment. Most worrisome is a likely recession that would cause losses in banks’ loan and credit portfolios. 

Besides interest rate risks, which have materialized due to quickly rising interest rates, credit risk is the second shoe to drop. Some economists have looked for this event to assess the severity of what increasingly appears to be a systemic financial crisis. Financial regulators have identified several areas of vulnerability that can crystallize into losses: commercial real estate, construction loans, and leveraged loans packaged into Collateral Loan Obligations. Those financial products have been distributed widely beyond the banking sector— to pension funds, insurance companies, and investment funds.  Some investment funds are vulnerable to redemption runs by their investors, thus bearing similar risks as SVB and Signature Bank of asset losses combined with unstable funding.

Unfortunately, under current unsettled financial conditions, monetary policy and financial stability policy as articulated by authorities have failed to reassure market participants. At times, they even seem to have the opposite effect.

Major central banks, most notably the Federal Reserve System and the European Central Bank, have continued to tighten.  However, the Fed has done so by less than it planned to, and the tightening has been accompanied by changes in rhetoric. The words “ongoing increase” became “some additional firming” in the recent Federal Open Market Committee statement. The banks have also indicated that they are prepared to raise rates further if inflation remains stubbornly high. The message sent to financial markets implies that, as a last resort, central banks are prepared to accept a recession to bring inflation under control. Consequently, market participants must price this possible outcome, focusing on the weak link—being banks and, eventually, other non-banking financial institutions.

Central banks have also emphasized that they will closely monitor financial market instability and stand ready to supply liquidity as needed. However, in the case of the United States, tension is revealed in the changes in Treasury Secretary Janet Yellen’s recent remarks. On March 22, 2023, she said she had not considered blanket insurance to all deposits (as requested by a group of mid-sized banks) without congressional approval. The following day, Yellen said she was prepared to stabilize banks and ensure the safety of their deposits. Amid growing political opposition to what is perceived to be bailouts of large depositors of the two failed banks, there is uncertainty about whether and to what extent the US Department of the Treasury and regulators can protect all bank deposits without congressional approval. This is especially difficult to predict given political divisiveness in the United States.

More importantly, supplying liquidity, while useful, may not be sufficient to quell the current market turmoil. This is despite the simplistic belief that authorities have a set of policy tools to deal with financial crises, separate from interest rate policy. Specifically, the problems facing banks are not necessarily liquidity or solvency weaknesses, but due to investor loss of confidence. Many banks—like DB—have maintained adequate capital and liquidity positions, but still came under market pressure when their investors lost confidence in their ability to navigate the difficult period ahead. Unfortunately, the authorities have amplified this fear by raising the risk of a recession and its attendant credit losses.

At this juncture, it is important for central banks to recognize that combating inflation is important in the medium term, while averting a full-blown global financial crisis is an acute problem which should be prioritized now. Central banks should do everything they can, including becoming more flexible in their interest rate decisions to calm down equity markets, especially for banks. At the same time, they should communicate their commitment to bring inflation under control over time.

This is a tall order for central banks and authorities to rise to in today’s politically polarized circumstances. But the stakes are much higher for everyone. There is a greater risk of losses of output, employment, and wealth in a recession accompanied by a banking crisis.

Hung Tran is a nonresident senior fellow at the Atlantic Council; a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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But if you look past the surface, it’s clear that 2023 bears little similarity to 2008. The international financial system is much stronger today thanks to the lessons learned over the past decade—and that’s why this time policymakers stand a much better chance of containing the fallout.

Here are two key differences between now and then:

1. Moving fast, moving forcefully

In the period between Bear Stearns collapsing in March 2008 and Lehman Brothers going under that September, there was continuous handwringing in Washington and around the world about what to do. Debates on moral hazard, contagion, and how to use taxpayer money to save the financial sector consumed that entire summer. Many wanted to believe that Bear Stearns’s problems were the result of bad management and a failure to hedge against risk. At the time some analysts said the fallout would be limited. Sound familiar? By the time the Federal Reserve (Fed) and Treasury convinced Congress that the problem was systemic, it was almost too late.

This time around, policymakers took action quickly. Last Sunday the Fed, Treasury, and the Federal Deposit Insurance Corporation moved swiftly in response to Silicon Valley Bank’s failure. They surprised many with a complete protection for all of the bank’s depositors and a guarantee of one year of loans to other financial institutions.  While some have understandably criticized the move (including US senators who grilled Treasury Secretary Janet Yellen on Thursday), it’s clear that the decision calmed markets and stabilized the situation for other banks.

Switzerland was paying attention. On Wednesday, as shares of banking giant Credit Suisse traded at record lows, the Swiss National Bank pledged a fifty-four-billion-dollar financial lifeline. To put that in perspective, the entire gross domestic product (GDP) of Switzerland is around eight hundred billion dollars. So the commitment of its central bank amounts to nearly 7 percent of the country’s GDP. The entire amount accessed under the Troubled Asset Relief Program in the United States—the largest financial rescue plan ever authorized—amounted to slightly more than 3 percent of US GDP.

Now comes the European Central Bank (ECB). Its president, Christine Lagarde, was a key player in 2008, serving as French finance minister and coordinating on a plan of action with then US Treasury Secretary Hank Paulson. So it should be no surprise that Lagarde and the ECB didn’t blink in today’s meeting. The governing council raised interest rates by half a percent, as expected, and sent a signal to markets that the ECB was fully prepared to step in and support the euro area banking system if needed. But she reminded reporters, “I was around in 2008, so I have clear recollection of what happened and what we had to do, we did reform the framework… And I think that the banking sector is currently in a much, much stronger position than where it was back in 2008.”

The bottom line is that instead of waiting to see what unfolds, central banks are being decisive.

2. More money, fewer problems

One of the challenges of 2008 was understanding the size of the problem. In the chaos of Lehman’s collapse, banks and regulators were scrambling to figure out just how many ‘toxic’ assets other banks held on their balance sheets. This time a similar effort is under way, but the problem is far less complex. These institutions are not dealing with mortgage-backed securities but instead US Treasuries—arguably the safest investment on the planet—and therefore it is much easier to find someone willing to step in and buy them up. That simply wasn’t the case last time around.

Meanwhile, thanks in part to the Dodd-Frank legislation that raised capital requirements for banks, the largest financial institutions have more money on hand to deal with potential problems. The charts below help show the difference from 2008:

The total deposit amount and the loan/deposit ratio in the overall US banking industry is extremely healthy. As we have seen, however, that doesn’t mean regional banks are going to emerge unscathed. It’s already clear that depositors want to move their money from smaller banks to bigger banks, and we can expect that trend to continue in the months ahead. In 2018, changes to Dodd-Frank exempted many regional banks from the kind of oversight that may have mitigated the current problems. Now, as regulators step up their oversight of mid-sized banks, the short-term result could be more regional banks having to shutter their doors. This will create domestic economic headwinds and presents its own problems of too much concentration of capital in the largest banks—but it is not a threat to global financial stability.

The data show that there is much more money in the system right now than there was in 2008, and there’s a huge market available for banks that are trying to resolve problematic parts of their balance sheets. It’s night and day from the abyss that confronted bankers and regulators in the fall of 2008.

At the end of the day, banking is about confidence. Customers need to have faith that their money is safe. Citizens need to be assured that their governments have a plan. It would be a mistake to hesitate, thereby sowing doubt in the markets and creating a problem worse than the one that actually exists.

Josh Lipsky is the senior director of the Atlantic Council’s GeoEconomics Center and a former adviser at the International Monetary Fund.

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1. National security must include national cohesion

Following Russia’s full-scale invasion of Ukraine last year, Estonia became a major donor to the war effort while also facing the highest inflation rate of all European Union (EU) countries at 25 percent, with very limited government support for Estonian households and companies. Then Kallas’ first coalition collapsed in June 2022.

The government’s 2023 budget represented a pivot and a recognition that national security is also about national cohesion: Along with increased defense spending came new support to the Estonian population and companies to deal with high energy prices, plus increased pensions and family allowances. Estonia also more deeply integrated its ethnic Russian community (which is between 25 percent and 30 percent of the population) by beginning the transition to having schools teach only in the Estonian language, removing Soviet-era war monuments from public places, offering Estonians alternative Russian-language information sources to those based in Russia, and investing to develop the Narva region close to the Russian border.

2. Foreign policy competency mattered more than the economy

The far-right EKRE called for prudence regarding Russia, denouncing the economic consequences for Estonia of the country’s massive aid to Ukraine while rejecting the welcoming of Ukrainian refugees (Estonia has taken in the second-most Ukrainian refugees per capita of any country). But this strategy did not resonate with voters, not even ethnic Russian voters, who usually vote for the Center Party (which was expected to lose votes) but were wooed by the EKRE. Kallas, on the contrary, demonstrated her leadership in foreign policy to reassure voters. To some extent, the vote breakdown suggests that Estonian voters see economic struggle as the accepted price to pay in the name of preserving shared values and national security.

3. For struggling fringe parties, the future may depend on where they sit

The Center Party (EKE) performed quite poorly, because of the radical changes following the Russian invasion and past corruption scandals. The relative decline of the conservative Isamaa (Fatherland) party is probably more a result of internal difficulties (some key party officials having left to create another more liberal party), while the Social Democratic Party had a limited ability to attract new voters. That is not the case for Eesti 200, which will enter Parliament for the first time, having run on a socially liberal platform pushing for more state intervention in the economy. These groups now must adapt for survival: They might opt to be in the opposition or to join Kallas’s coalition.

4. E-voting is the wave of the future

A stunning 51 percent of the votes in this year’s election were cast online—making Estonia the first country in the world where electronic votes outscore the traditional ballot box. The e-vote was favored by Reform Party supporters, while the EKRE performed better with in-person balloting. The high turnout of 63.7 percent (including Estonians living abroad, who usually are less likely to vote) should be noted especially by other European countries where more voters might participate if they could vote electronically. E-voting requires ample resources committed to securing the vote, verifying identification, and more, but Estonia is proving that this method is now favored by most of its population—a trend that must be taken into account when talking about the future of democracies.

5. Expect continuity in foreign affairs

Forming the coalition may take time, and Kallas, with thirty-seven seats, needs to partner with other parties to reach the required fifty-one. She could turn to the newcomer Eesti 200 (fourteen seats) and the Social Democrats (nine sets). An alternative could be to reconstruct the current coalition with the Social Democrats and Isamaa, but that is less likely. Nevertheless, don’t expect major changes for Estonian foreign policy—which is built on strong support to Ukraine, the EU, and NATO—and budgetary orthodoxy. If anything, the prime minister’s international stance is here to stay.

Marie Jourdain is a visiting fellow at the Atlantic Council’s Europe Center and a former staffer for the French Ministry of Defense’s Directorate General for International Relations and Strategy.

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Online Event Wed, February 22, 2023 • 9:15 am ET

A conversation with Prime Minister of Croatia Andrej Plenković

AN #ACFRONTPAGE EVENT—Plenković joined the Atlantic Council to share his perspective on the implications of Russia’s war in Ukraine for Europe and the Western Balkans, Croatia’s foreign-policy objectives, its entry into the eurozone and the Schengen area, and how his country’s Euro-Atlantic journey can serve as a source of inspiration for the Western Balkan countries and Ukraine.

Europe & Eurasia Eurozone Politics & Diplomacy Southern & Southeastern Europe

As Ukraine fights to maintain its national autonomy while pushing for European integration, it has found an ally in Croatia, which has faced similar challenges since achieving independence just three decades ago.

“There are many parallels from Croatia to Ukraine today, from Vukovar to Mariupol for instance,” said Croatian Prime Minister Andrej Plenković at an Atlantic Council Front Page event on February 22, naming two cities that were the target of significant siege and urban warfare.

Despite intense periods of conflict that devastated its economy and its citizens, Croatia has proven itself a success story—and can now serve as a beacon for other nations that, like Ukraine, will continue to navigate the tricky process of European integration and nation building.

Plenković noted how on January 1, Croatia became the first country to simultaneously join the eurozone currency union and visa-free Schengen area, and it’s now one of only fifteen members of those two groupings plus NATO. “In the span of three decades, from a country which was not even recognized, we managed to enter this core group,” he said. 

Plenković is the longest-serving prime minister in Croatia’s history, with more than six years in office, a time that has seen the ongoing migrant crisis, stalled European Union (EU) enlargement, and now the invasion of Ukraine. The latter, he said, should serve as a “lesson” for Western leaders “about recognizing the threats as they are for international law, for international security, for the global system of governance. And also to completely abandon the politics of naïveté.”

Read on for more highlights from his remarks and conversation with Paula J. Dobriansky, vice chair of the Scowcroft Center for Strategy and Security at the Atlantic Council.

The newest member of the club

• Plenković acknowledged his country’s relatively fortunate position within the EU right now. It is, alongside Slovenia, the only former Yugoslavian country to be accepted into the EU and has joined the eurozone and Schengen area faster than Bulgaria and Romania—even though they joined the EU before Croatia did.

• Plenković noted that Croatia is “a net beneficiary country” that brings in more EU funds than it contributes. It “enables the government to invest in areas that need to catch up,” he said, such as infrastructure, environmental protections, and “elevating the living standards of our people.”

• But Plenković acknowledged that European integration has been a difficult thing for some Croatians to grapple with. “People who are living in Croatia today knew how it was not to have our state,” he said. “Some of them are wary of the impact of other actors into what we decide what to do. My point was that by joining NATO and the EU, we have only become stronger. Some people appreciate [it], others less.”

A model for the rest

• Plenković envisioned Croatia’s speedy integration as a model for other countries that want to join the club. “No one has more knowledge of the most recent accession process than we do.”

• Plenković confirmed that Croatia is supportive of Ukraine’s efforts to join the EU going forward: “There is strong political pressure coming, especially from Poland and Baltic countries, to move forward with Ukraine.”

• As for Serbia’s EU candidacy, Plenković was a little more careful with his words. “When it comes to Serbia, our relationship has been burdened by the events of thirty years ago,” he said. “After our session now, I will even go and visit an area near Vukovar where we are still looking for the remnants of missing persons who died thirty years ago, so there are many sensitivities. But we are determined to normalize our relations.” Plenković has continued to meet with Serbian President Aleksandar Vučić, including at Davos, and the nation’s foreign ministers have met on multiple occasions as well. 

• Plenković was steadfast in his belief that current candidate countries will benefit from EU membership. “EU membership is the only attraction, the only real source of transformative power and the political will to change in many of the polities which are not yet in the EU.” 

A shared history of conflict

• Plenković is a firm supporter of ongoing efforts to bolster Ukraine’s defenses and economy. “My government was swift and articulate in condemning Russian aggression and in extending solidarity to Ukraine in all potential ways,” he said. Plenković summed up his vision of aiding Ukraine with one word: sustainability. “Sustainability of Ukrainians to resist, sustainability of Western assistance of Ukraine, and sustainability of the Western governments to live up to the challenges that we are faced with, which are prices of energy, inflation, food, and keeping the social cohesion in our countries.”

• Plenković also noted Croatia’s role in housing Ukrainian refugees. “We are hosting around twenty-two thousand refugees from Ukraine, and they are well integrated. Children are going to our schools. Due to the proximity of Slavic languages, it is even easier in a Slavic country than somewhere else.”

• Plenković saw some glimmers of hope in the situation, too, particularly in the way that Russian aggression has spurred increased European unity. “The unity of the EU is really unprecedented. This unity is unique in international affairs for the last three decades. I can’t recall of any remotely similar scenario where international support was so strong.”

Nick Fouriezos is a writer with more than a decade of journalism experience around the globe.

Watch the full event

The post Croatia’s prime minister: There should be fewer roadblocks for EU enlargement to the Balkans—and Ukraine appeared first on Atlantic Council.

Frances Burwell: Sunak proves the UK and EU can work together—at his own political peril

Livia Godaert: What this deal says about the union, the monarchy, and the PM’s soft power

Jörn Fleck: The UK and EU can finally move forward on trade, defense, and more 

Sunak proves the UK and EU can work together—at his own political peril

The agreement Monday between the United Kingdom and the European Commission on Northern Ireland represents a remarkable reconciliation between the EU and the UK government. As prime ministers, Boris Johnson and Liz Truss had completely lost the confidence of the European Commission and of the EU member state governments. Since moving into Number 10, Sunak—a Brexit supporter from the beginning—has proven that the United Kingdom and EU can address their differences constructively. Analysts have long seen a path forward in these negotiations to a settlement very similar to the one announced today, so the details are not surprising. But until Sunak became prime minister and established a more pragmatic approach, there was little chance that even this obvious solution could be agreed upon.  

This more constructive climate is vital not only for achieving the Windsor Framework, but also because there will inevitably be hiccups in its implementation. Both parties, and the Northern Ireland government in Stormont, must be prepared for continuing negotiations over technical details. For those who want to play politics and exacerbate differences, there will be plenty of ammunition. But we can hope that calmer personalities will prevail and push forward to make this new arrangement work. If it does work, Northern Ireland stands to benefit tremendously. Not only will there be renewed political stability, but foreign direct investment, especially in the manufacturing sector, will be strong, given that the province will be a doorway to both the EU and UK markets. 

However, the agreement has some tall hurdles to overcome before it becomes reality. Sunak has pledged to let Parliament vote on the accord, and a wing of his own party, the Conservatives, seems oddly opposed to anything that will finalize Brexit. Perhaps these MPs see themselves coming back to power if divisions over Brexit persist, and thus a settlement is contrary to their ambitions. Similarly, the Democratic Unionist Party (DUP) has found political support in opposing the previous arrangement—the Northern Ireland Protocol—and it is not clear that the DUP will now go along with this new formulation (party leaders say they will take a few days to review and decide). 

A failure by the United Kingdom to formally adopt the Windsor Framework will trigger two crises: a political crisis within the United Kingdom and a rupture in UK-EU relations. Sunak cannot survive as prime minister if defeated on such a major issue. Moreover, if he wins the parliamentary vote because of the support of the Labour party (which has already indicated that it favors the agreement) rather than his own, he will be significantly wounded. Britain will likely return to the state of continuous political chaos that it suffered from 2016 until Sunak’s arrival, with consequences for both domestic governance and its international presence. Failure to move forward with this agreement will also cause an enormous rupture with the EU, exactly when the United Kingdom and EU need to be working together on a range of issues, from climate change to Ukraine. Already in Brussels, there is a feeling that the United Kingdom has essentially disappeared, rather than building a new relationship. The fate of the Windsor Framework will determine the future of that cross-Channel partnership—or even if there will be one.

—Frances Burwell is a distinguished fellow at the Atlantic Council and a senior director at McLarty Associates.

What this deal says about the union, the monarchy, and the PM’s soft power

It’s not déjà vu or a time loop—there has been an agreement reached between the United Kingdom and the EU on Northern Ireland. Again. As we parse through the nitty-gritty details of yet another “agreement in principle” between the United Kingdom and the EU, there are three interesting takeaways for the state of the United Kingdom and its role in the world, seven years on from the initial Brexit vote.

Let’s first talk about devolution and what this agreement tells us about the state of the union. This framework—which renames and replaces the beleaguered Northern Ireland Protocol—gives an important power to Stormont. This agreement establishes the “Stormont Brake,” which would allow Northern Ireland to call for the UK government to veto any new or amended EU rules that would have a “significant impact on the day-to-day lives of businesses and citizens.” Within the context of a long-running dispute with the Democratic Unionist Party, which refuses to participate in Northern Ireland’s power-sharing arrangement because of the Northern Ireland Protocol, and broader debates about the Union writ large, this is a significant outreach. 

The rhetoric of addressing a democratic deficit, of upholding constitutional duties to the Good Friday (Belfast) Agreement, and of “safeguarding” Northern Ireland’s place in the union reflect a deeper anxiety. This agreement follows a strong showing by Sinn Fein in last year’s Northern Ireland assembly elections, as well as a fight of a different nature with Scotland over a gender self-identification bill that brought Number 10 and Holyrood to the brink of a constitutional standoff. The unity of the kingdom has felt precarious since the Brexit vote, but there is a new urgency. The cost-of-living crisis has thrown into sharp relief the fact that that the petty interparty squabbles of the last several years have real consequences outside Westminster, and that some parts of the union may have had enough. Number 10 may be hedging its bets here, building up goodwill and incentivizing partnership with the devolved government in Northern Ireland to stave off further intra-UK fights. 

Second, the role of the monarchy in this agreement cannot be ignored. The United Kingdom no longer has a sovereign removed from politics—unlike Queen Elizabeth II, King Charles III engaged with a variety of political issues before ascending to the throne. We see the next stage of this in how intertwined the monarchy is with the optics of this agreement: from its name—the Windsor Framework—to the meeting between the king and von der Leyen at Windsor Castle on the official itinerary. Whether this is a net benefit or negative remains to be seen, as some Parliament backbenchers have expressed anger at the king for this intervention, but it marks a new era in the relationship between the government and the monarchy. 

A third takeaway is that this is a soft-power victory for Sunak. There are still fights to be had with Parliament and the DUP, and Northern Ireland will probably always be a point of re-negotiation and tension in the UK-EU relationship, but managing to untangle the mess that his predecessors made of Northern Ireland in their various negotiations is quite an achievement. When Sunak was first appointed as prime minister, I made the point that one of his key priorities should be repairing Britain’s reputation on the international stage, particularly with the EU and the United States. The Northern Ireland Protocol—and the subsequent bill attempting to take it all back—was a sticking point in both of these key relationships, and Sunak has shown that he is capable of taking that huge step forward. 

This will open doors for the United Kingdom to pursue its broader international strategy. For example, von der Leyen has already discussed allowing the United Kingdom to participate in the Horizon research scheme, which will be key to the success of Sunak’s technology-focused government reshuffle. The Windsor Framework shows that Sunak is capable of moving beyond Brexit to be a partner to friends and allies. He also can break through a stalemate, a skill that will be an asset for the entire transatlantic community if he can continue to wield it. 

—Livia Godaert is a nonresident fellow at the Atlantic Council’s Europe Center.

The UK and EU can finally move forward on trade, defense, and more 

The new Northern Ireland Protocol deal is a pragmatic compromise and a welcome sign for EU-UK relations. But the announcement of the so-called Windsor Framework is just the first step. The agreement itself will need to be approved by both the European Union’s members and, more crucially, the UK House of Commons—whose earlier rejections of the “Irish backstop” to deal with the border issue ended Theresa May’s premiership. 

More broadly, the compromise could be a stepping stone toward a more constructive EU-UK relationship. That von der Leyen traveled to London to iron out the details personally and announce the agreement shows the concerted effort and goodwill in Brussels and London to move past the worst parts of the Brexit acrimony. For years the relationship between London and Brussels was toxic, and even a short train ride by the Commission president to London would have been unthinkable. But geography, economic realities, and the need for European and transatlantic unity in the face of Russia’s aggression in Ukraine all make a lasting estrangement between the United Kingdom and the EU unsustainable. The Northern Ireland Protocol remained the foundational roadblock to setting the UK-EU relationship on a better footing. With the matter on the path to be settled, Brussels and Britain can finally begin to build out a successful and productive relationship on issues of trade, defense cooperation, and even digital policy—especially when unity is needed now more than ever.

—Jörn Fleck is the senior director of the Atlantic Council’s Europe Center.

The post Experts react: Will a new deal on Northern Ireland repair UK-EU relations? appeared first on Atlantic Council.

How grave is Britain’s stagnation?

As Britain faces a historical rupture from its historical trend with flatlining productivity growth, Ben Judah spoke with Professor Adam Tooze, Director of the European Institute and Kathryn and Shelby Cullom Davis Professor of History at Columbia University on how this crisis looks from a historical perspective.

Why does the economic data suggest this is more serious than previous moments of feared decline? How does this stagnation compare to previous instances in the 1930s and 1970s? What impact has Brexit had on this trend? Would a Labour government under Keir Starmer be able to turn this around?

You can watch #BritainDebrief on YouTube and as a podcast on Apple Podcasts and Spotify.

Former staff

Ben Judah

Former Director

Europe Center Transform Europe Initiative

Economy & Business European Union

The Europe Center promotes leadership, strategies, and analysis to ensure a strong, ambitious, and forward-looking transatlantic relationship.

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The post #BritainDebrief – How grave is Britain’s stagnation? | A debrief from Dr. Adam Tooze appeared first on Atlantic Council.

What is the future of Ukraine’s relationship with the European Union? How much integration between the EU and Ukraine can we expect in the coming months to years? Is membership in the EU in the near, medium, or even long-term future for Ukraine, and what will have to happen in order to achieve that?

Ahead of the EU-Ukraine summit following Russia’s invasion of Ukraine, Ben Judah speaks with Europe Center Distinguished Fellow Gérard Araud on the relationship between the EU and Ukraine for a special Atlantic Debrief.

You can watch #AtlanticDebrief on YouTube and as a podcast.

Former staff

Ben Judah

Former Director

Europe Center Transform Europe Initiative

Economy & Business European Union

The Europe Center promotes leadership, strategies, and analysis to ensure a strong, ambitious, and forward-looking transatlantic relationship.

Learn more

The post #AtlanticDebrief – What’s Ukraine’s future with the EU? | A Debrief with Gérard Araud appeared first on Atlantic Council.

As headline inflation shows signs of moderating, this piece puts the three central banks’ final monetary policy decisions of 2022 into context. It then focuses on the impact and outlook of central banks’ balance sheet tightening, the other mechanism in banks’ toolkit to fight inflation. 

Lower inflation readings in November allowed the Fed, ECB, and BoE to step down from their most recent 75 to a 50 basis points (bps) hike in December.

The Fed now has two consumer price index data points for October and November that indicate US headline inflation might have passed its peak. While a recession in 2023 remains likely, this data suggests that there is still a window for the US economy to stick a soft landing. Chair Powell’s remarks indicate, however, that the Fed is concerned about price pressures broadening across the economy and becoming entrenched. With price increases for services now outpacing goods inflation and a still-resilient US labor market, the Fed’s December dot plot projects rates will remain at around 5 percent throughout 2023 to combat stickier core inflation. Maintaining higher rates for longer opens the door for the Fed’s balance sheet tightening to have a larger impact on its policy stance.

In contrast to the US economy, the BoE estimates that the UK economy has already entered a protracted recession, which is expected to continue until the end of 2023. The BoE’s monetary policy committee seems divided about how to follow-up this week’s 50 bps hike that increased the policy rate to 3.5 percent. Market estimates for the UK terminal rate in 2023 range from 3.75 to 4.75 percent.  The continued energy price shock, tight labor market, and the looming threat of stagflation make additional rate increases likely, but a severe recession might force the BoE’s hand to ease conditions earlier than expected. This uncertainty also clouds the future path of the BoE’s quantitative tightening.

Like the UK economy, the eurozone has already entered recession territory in Q4. Germany reporting a downside surprise in headline inflation is welcome news, but projections of at least a technical recession, the ongoing energy crisis, and persistent fragmentation risks in the euro area complicate the ECB’s choices in 2023. ECB President Lagarde is expected to oversee additional, albeit smaller, rate hikes to increase the deposit rate to near 3 percent. In addition, the ECB will also begin to reduce the size of its balance sheet in 2023.

The balance sheet tightening, or quantitative tightening (QT), by the Fed, BoE, and ECB comes in response to the significant increase in the size of their cumulative balance sheet as result of quantitative easing (QE) to stimulate economic activity during the pandemic. When a central bank conducts QT, it drains liquidity from the economy by reducing the supply of securities such as US treasury bonds. A lower supply increases the yields of these securities and tightens financial conditions. Please read my previous article on this topic for a more in-depth explanation of how QT works and what might be some of the associated risks.

There are several important reasons why central banks reduce the size of their balance sheets. First, QT can amplify the restrictive monetary stance achieved by higher interest rates. In a best-case scenario, this could allow central banks to forego a rate hike or begin lowering rates earlier. Second, by raising policy rates to rein in inflation, central banks, including the Fed, might incur losses because the interest payments on their liabilities increase while earned interest on their previous asset purchases remains the same. In the case of the Fed, BoE, and ECB, such losses are unlikely to create financial stability concerns, but could result in political complications. Third, there is a finite number of securities a central bank can purchase. For QE to remain an effective tool during a future crisis, it is important to ensure an ample pool of securities.

Between these three central banks, only the BoE and the Fed are already undertaking QT. They are on track to reduce their balance sheets by roughly 45 billion pounds and $500 billion in 2022 respectively. If both banks’ QT programs remain on schedule through 2023, the Fed would unwind approximately 35 percent ($1.6 trillion) of the assets purchased since the beginning of the pandemic, whereas the BoE would only shrink its pandemic related portfolio by around 15 percent (120 billion pounds). The ECB announced at its December meeting that it would begin in March to slowly roll-off securities in its Asset Purchase Program at a 15 billion euros per month pace. This will likely result in a balance sheet reduction of 150 to 200 billion euros or roughly 4 percent of the ECB’s pandemic related asset purchases by the end of 2023. When measured against the pandemic related balance sheet increases of these three central banks, the Fed is currently pursuing the most significant QT program.

The question remains, however, about what the impact of QT might be when expressed in basis points of additional tightening of financial conditions. When the Fed first commenced its post-pandemic QT in June 2023, Fed Chair Powell cautioned: “I would just stress how uncertain the effect is of shrinking the balance sheet.” In a recent analysis, a researcher from the Federal Reserve Bank of Atlanta estimated that a $2.2 trillion balance sheet reduction could be equivalent to an increase in the Fed’s policy rate of between 29 and 74 basis points. The wide gulf between the two numbers is based on the financial conditions in which QT is implemented. When financial conditions become strained, for instance during a recession, QT has a larger tightening impact. This insight suggests that the Fed’s target of $1.6 trillion in QT until the end of 2023 could equal at least a small interest hike (25 bps) in tightening. Similarly, the smaller scale of the BoE’s QT program could still have a fairly significant impact in a stagflationary environment. Of course, this also points to the risk of QT causing a financial accident by constricting liquidity too much. Other reasons why a central bank might pause QT could include a severe recession or the goal to significantly ease financial conditions.

The decisions and statements this week from the Fed, ECB, and BoE show that 2023 will be a year full of new monetary policy challenges. Central banks have tools at their disposal, but they will have to be deployed in different ways across these economies in the months ahead.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post A different monetary policy path in 2023 appeared first on Atlantic Council.

As this year began, many experts predicted inflation would be transitory, Europe’s recovery would be stronger than the United States’, and China would return to strong growth. Then inflation soared and Russian President Vladimir Putin invaded Ukraine—fueling an energy crisis in Europe and food price shocks around the world. Meanwhile, China’s zero-COVID policy chained its economy. To make sense of a shocking year for the global economy, our GeoEconomics Center experts take you inside the numbers that mattered—including many you may have missed—in 2022.

Over the past year, the market value of cryptocurrency assets has collapsed from $3 trillion to about $850 billion as Bitcoin—the original and best-known cryptocurrency—plunged from $68,000 to $17,700, stablecoins such as TerraUSD broke the advertised one-to-one peg to the US dollar, and the crypto-exchange FTX sank from a $32 billion valuation to bankruptcy within a week. Those losses and market turmoil have laid bare the volatility of crypto-assets and the pressing need for consumer protections. 

Going forward, crypto-assets may not recover their full value, and it’s clear that regulation needs to be tightened to deal with the financial instability and lack of consumer protections exhibited by this year’s market upheaval. In our latest tracker, the GeoEconomics Center explored regulatory developments in twenty-five jurisdictions, which include Group of Twenty (G20) member countries and six countries with the highest crypto adoption rates. Among the countries we studied, cryptocurrency is legal in thirteen, partially banned in nine, and generally banned in three. We found that in 88 percent of the countries we studied, crypto regulations were under consideration, and the next frontier of regulatory developments will be on stablecoins. The United States has a number of legislative proposals under consideration currently, with a larger debate on which regulatory authority must have jurisdiction over crypto-assets. Watch for 2023 to be a marquee year on crypto regulation, especially as Europe and the United Kingdom clarify their regulatory structures.

—Ananya Kumar is the associate director for digital currency at the GeoEconomics Center. 

A striking ten of the G20 countries (including Russia of course) do not participate at all in the financial sanctions triggered by the invasion of Ukraine.

Admittedly this division did not prevent the issuance of a G20 Bali Leaders’ Declaration on November 16 stating: “Most members strongly condemned the war in Ukraine and stressed it is causing immense human suffering and exacerbating existing fragilities in the global economy—constraining growth, increasing inflation, disrupting supply chains, heightening energy and food insecurity, and elevating financial stability risks.”

Yet only advanced economies have joined the sanctioning process, even if to a varying extent, whereas emerging economies (except for South Korea) are not involved. This illustrates how fragmented the world has become and contrasts with the G20 momentum created by the global financial crisis—during which the entire group was largely on the same page in crafting a robust response.

—Marc-Olivier Strauss-Kahn is a nonresident senior fellow at the GeoEconomics Center and a former director general and chief economist for the Banque de France.

In October, a US government report found that the Russian military lost six thousand pieces of equipment since invading Ukraine in February. The imposition of Western sanctions has made it difficult for Russia to acquire the supplies and foreign parts it needs to repair or maintain this lost equipment, which includes items such as tanks, armored personnel carriers, and infantry fighting vehicles. This six thousand figure is important because it offers a tangible example of how sanctions can undermine a country’s war machine and make it difficult to pursue its aggression. Now, because of sanctions, the Russian regime must find other costly and more complicated means of acquiring hard-to-find parts, which was a deliberate goal of the sanctions, as reported by the New York Times. Often, when analysts, the press, or even governments discuss the impact of Russia sanctions, they first look at the state of the Russian economy or currency. But those figures are not entirely affected by sanctions and can change for numerous reasons; whereas, this six thousand figure is proof that sanctions are working to achieve their stated goal—to undermine Russia’s aggression against Ukraine.

—Hagar Chemali is a nonresident senior fellow at the GeoEconomics Center and a former spokesperson for terrorism and financial intelligence at the US Treasury Department.

This is the amount of Central Bank of Russia (CBR) reserves that Group of Seven (G7) nations and the European Union (EU) have immobilized since Russia’s invasion of Ukraine. In response, CBR Governor Elvira Nabiullina pledged to file legal claims in order to recover the reserves, but she has yet to set a timeframe to do so. Meanwhile, experts and policymakers on both sides of the Atlantic have discussed seizing frozen Russian reserves and using them for Ukraine’s reconstruction. However, this effort is hindered by laws in the EU and other sanctions-wielding countries. Confiscating frozen assets is allowed only in case of criminal conviction, and even then, getting each case through the court could take years.

But even before it could seize the frozen assets, the West still has to identify where the blocked assets are. Sanctioning jurisdictions are publishing reports at their own pace on how much Russian reserves they have immobilized, but a multilateral effort is essential to identify the rest. We are hearing that the US government is certain about the location of only a third of the three hundred billion dollars, and it is working to find the rest.

Sanctioning the CBR and blocking its assets held in Western central banks took Moscow by surprise. However, the policy hasn’t delivered the punch to the gut that it might have. At least not yet. The West has options now to make it truly hurt.

—Maia Nikoladze is a program assistant at the Economic Statecraft Initiative within the GeoEconomics Center.

On December 5, the G7-led price cap on Russian oil exports came into force. The decision to place the initial cap at sixty US dollars per barrel was reached only a few short days beforehand. EU member states that had pushed for a much lower cap managed to secure a last-minute drop from sixty-five.

Wary of adding more complexity to an already tense market, the policy’s original backers in the US Treasury are reasonably happy with a cap that is close to the average price Russia has been selling at over the past six months. In their view, this locks in a discounted price, which has already cost Moscow billions in lost revenue and which new buyers of Russian oil such as India will unashamedly use as they negotiate contracts.

Implementation relies on Western providers of insurance and shipping services, which must ask buyers of Russian oil for attestations that they have paid at or below the cap. So far, energy markets seem to understand the guidance that has been issued and we haven’t seen any major price swings. This doesn’t rule out snags that could fuel fears over supply, such as the recent situation where Turkish authorities started demanding proof of insurance from all tankers flowing through the Bosphorus.

—Charles Lichfield is the deputy director of the GeoEconomics Center.

This year produced one of the most significant sanctions programs ever devised, both in terms of the scale of the economy where sanctions were imposed, as well as the speed and comprehensiveness of the tactics used. Despite the fact that Western sanctions programs expanded by 42 percent in 2022, there are still substantial sectors where Russia trade continues and has grown in some instances. The one absent element of an effective sanctions program has been enforcement—which has been severely lacking in the United States, United Kingdom, and EU against violators of the Russia sanctions. There has yet to ever be an EU sanctions enforcement action, and some nations don’t even have the legal authority to levy sanctions. Enforcement in the United States, which historically has led the world in monetary fines, has dropped substantially in each of the past three years. While cases typically take time to build, early moves to highlight and penalize sanctions violators could serve the objective of continuing to put on notice those that would try to still carry out certain business with Russia.

—Daniel Tannebaum is a nonresident senior fellow in the GeoEconomic Center’s Economic Statecraft Initiative and a partner in Oliver Wyman’s Risk and Public Policy Practice, where he leads the firm’s Global Anti-Financial Crime Practice.

Sixty countries globally have reached an advanced stage of central bank digital currency (CBDC) development. As of November, the United States is one of them. 

Eighteen of the G20 countries have CBDCs under development, piloted, or fully launched, as reported in our Central Bank Digital Currency tracker. Motivations differ globally for CBDC exploration, from concerns about international standards setting to efforts at improving financial inclusion. The logistical difficulties of sending physical COVID-19 stimulus checks called attention to inefficiencies in US payment systems. By harnessing technology, including the blockchain, central banks may be able to develop payment systems that are quicker, cheaper, and safer. In November, the New York Federal Reserve released a white paper explaining that it was starting to test a wholesale (bank-to-bank) CBDC in cooperation with the Monetary Authority of Singapore. In doing so, it joined the European Central Bank, which is already in the development stages for a retail digital euro. A pilot program for China’s digital currency, the e-CNY, began in 2020 and has now expanded to over two hundred million users.

With the risks of cryptocurrencies and stablecoins front and center in the news, attention may turn more and more to central banks. CBDC development, and what the United States does next, will play a major role in the future of payments in 2023.

—Sophia Busch is a program assistant at the GeoEconomics Center.

The Biden administration has declared US dependence on advanced semiconductors produced in Taiwan as “untenable and unsafe” (in the words of Commerce Secretary Gina Raimondo) because of the threat to the country from neighboring China. As a result, the administration in 2022 prioritized the passage of the CHIPS and Science Act, which was signed into law in August. The law provides fifty-two billion dollars of subsidies and tax incentives to promote the development of cutting-edge semiconductor factories on US soil. One of the projects taking advantage of that funding is being undertaken by Taiwan Semiconductor Manufacturing Corporation (TSMC), which currently produces over 90 percent of the most sophisticated chips in the world in Taiwan. When TSMC’s Phoenix plant reaches full capacity in the next two years, it will produce about twenty thousand wafers of semiconductors each month. That will only represent less than 1.6 percent of the company’s current monthly output of 1.3 million wafers. Reducing dependence on Taiwan will remain a long way off.

—Jeremy Mark is a nonresident senior fellow at the GeoEconomics Center and former official at the International Monetary Fund (IMF) and reporter for the Wall Street Journal.

Investment screening regulations continued to proliferate, strengthen, and expand in 2022. Seven EU member states drafted, introduced, or started consultation processes for new investment screening authorities this year (Belgium, Croatia, Estonia, Greece, Ireland, Luxembourg, and Sweden). In the United States, the Biden administration issued the first executive order designed to provide clarity over the process by which the Committee on Foreign Investment in the United States (CFIUS) evaluates the national-security implications of foreign acquisitions of US businesses. And this fall saw two congressional hearings on the prospects of creating a CFIUS-like process for outbound investment. Look out for increased regulation over both inbound and outbound investment among major economies in 2023.

—Sarah Bauerle-Danzman is a nonresident senior fellow with the GeoEconomic Center’s Economic Statecraft Initiative and associate professor of international studies at Indiana University.

North America is still the commercial dynamo for the United States, with over three million dollars per minute in goods traded between the United States and its two neighbors through September of this year.

Canada and Mexico are the top two US trade partners, together accounting for more than twice what the United States trades with China. North American trade is growing at double digits within the framework of the US-Mexico-Canada agreement (USMCA), which came into effect in 2020.

In the most recent study available, North American trade was estimated to support more than twelve million US jobs in 2019 and millions more in Mexico and Canada.

North America is demonstrating the clear potential to emerge more competitive globally vis-a-vis China and other commercial powerhouses, as the world transforms following the pandemic, the war in Ukraine, and other disruptions. The question will be how well the United States, Canada, and Mexico can work through differences and seize the opportunities to maintain the impressive commercial growth that can boost the continent’s prosperity and well-being.

—Earl Anthony Wayne is a nonresident senior fellow at the GeoEconomics Center and a former US ambassador to Mexico.

A staggering and concerning 60 percent of low-income countries are currently at risk of debt distress or debt default, according to the IMF. If a series of low-income countries were set to default, it is possible the IMF would not have enough resources to to disburse the loans these countries would need to keep afloat. The G20 had a plan to deal with the problem called “the common framework.” It was supposed to be a way to help countries restructure their debt and involve the world’s largest bilateral creditor, China. But only a handful of countries have used the system—largely because it’s slow and private creditors haven’t fully signed on. This number is a flashing red light for the global economy headed into 2023. 

—Josh Lipsky is the senior director of the GeoEconomics Center.

Forty-five million people are expected to face starvation by the end of 2022. A series of economic shocks sent global food prices to an all-time high in 2022 and curbed households’ ability to pay for sustenance. Extreme global uncertainty and the prospect of sudden unemployment resulted in food hoarding in 2020 during the pandemic. The supply-chain constraints of 2021 then dramatically increased transport costs for those items. And Russia’s invasion of Ukraine at the beginning of 2022 unexpectedly eliminated large volumes of food items from the global market overnight. In the past year, food insecurity was exacerbated by export bans by other major grain producers, weakening currencies, and accelerating inflation around the world. The threat of a global recession next year now looms large over hundreds of millions of people who are struggling to fulfill basic human needs.

—Mrugank Bhusari is a program assistant at the GeoEconomics Center.

In November, the world’s population surpassed eight billion and is expected to continue to rise as life expectancy increases around the world and fertility rates remain high in several regions, primarily sub-Saharan Africa and South Asia. The geoeconomic and development implications are stark and are compounded by the lingering effects of COVID-19 as well as climate change and conflict. The world’s people and resources are not distributed equally, and inequality within and among countries is rising. Ever-expanding cities seek to capitalize on the benefits of agglomeration while managing the resulting stress on infrastructure and services. At the same time, in lower- and middle-income countries—which tend to be the most populous—food, health, and education systems struggle to meet expanding and evolving needs. 

Younger and older people tend to bear the brunt of the challenges associated with population growth, especially in terms of economic opportunity as job creation fails to keep pace with the number of labor market entrants, and digitization, automation, and the changing nature of work put worker longevity and job security at risk. However, history and emerging evidence show that strategic economic and environmental policies combined with investments in human capital, lifelong learning and wellbeing, and technologies that increase innovation and productivity are what enable the accumulation of earnings and intergenerational wealth. That catalyzes consumption and can harness larger populations toward demographic dividends and sustainable, inclusive growth.

—Nicole Goldin is a nonresident senior fellow at the GeoEconomics Center and global head of inclusive economic growth at Abt Associates.

To combat inflation, central banks representing nearly three-quarters of the global economy, measured by gross domestic product (GDP) weight, increased their benchmark interest rates in 2022. Most noticeably, this was done by the US Federal Reserve (the Fed), European Central Bank (ECB), and Bank of England, together accounting for 42 percent of global GDP. The Bank of Japan, People’s Bank of China, and Central Bank of the Republic of Turkey were among the few central banks cutting their benchmark interest rates in 2022. When it comes to central bank rate hikes, it is important to note that forty-one countries have their currencies pegged to the US dollar and/or euro. To protect the peg while also allowing for the free flow of capital, these economies have no choice but to increase their domestic interest rates on par with the Fed and ECB—even if domestic inflation is not a concern for their economies—therefore reducing their growth potentials. Oil and gas exporting countries of the Persian Gulf are among these economies.

—Amin Mohseni-Cheraghlou is the macroeconomist at the GeoEconomics Center and an economics professor at American University.

On September 28, 2022, the US dollar, euro, and British pound were closer to a triple parity than ever before. The dollar had appreciated against most currencies throughout the year, reflecting the relative strength of the US economy, the Federal Reserve’s determination to bring inflation down by sharply raising overnight interest rates, and a flight to safety after the start of the Ukraine war. European inflation has been more strongly tied to energy, and the ECB was therefore slower to embark on a tightening cycle, helping the dollar breach parity to the euro in August for the first time in twenty years. And in late September, the pound fell to the lowest ever value against the dollar after the short-lived government of Prime Minister Liz Truss presented its inflationary tax-cut proposals and the Bank of England had to prevent a collapse in the UK government bond market. Both the euro and pound have rebounded since, but for a short moment the three currencies were only a few basis points away from being valued equally.

—Martin Mühleisen is a nonresident senior fellow and former chief of staff and strategy director of the IMF.

The share of global environmental, social, and governance (ESG) investments as a proportion of total assets under management is projected to increase from 14.4 percent in 2021 to 21.5 percent in 2026.

ESG funds, which evaluate how well companies are managing risks and opportunities related to environmental, social, and governance issues, are growing rapidly to become the new default choice for investors. As investors refocus their long-term investment strategies, the demand for ESG funds is out-stripping the existing supply. Asset managers looking to deliver investor success and survive turbulent investment markets are embracing ESG funds as the best way to differentiate their products in the future. These emerging global trends in the asset and wealth management industry—led by the United States—provide a critical reality check on swiftly evolving investor priorities and an important counterweight to concerns that recent anti-ESG rhetoric and legislation were taking some of the steam out of enthusiasm for impact investing. ESG funds are the next big thing.

—John Forrer is a contributor to the GeoEconomics Center and director of the Institute of Corporate Responsibility at George Washington University

For most of the world, 2022 was the year the pandemic became endemic. While COVID-19 case numbers continue to soar, with year-over-year cases increasing by nearly 75 percent in 2022, deaths have sharply declined by some 67 percent when compared to 2021. At the same time, the pandemic remains one of the foundational trends shaping the global policy landscape—complicating a range of issues from Russia’s invasion of Ukraine to a potential global recession. In the United States, COVID continues to moderate economic productivity with a recent National Burea of Economic Research working paper estimating that people’s unwillingness to be in close proximity with others reduced labor force participation by 2.5 percent in the first half of 2022. This translates to roughly a $250 billion drop in potential output—or around 1 percent of GDP. COVID’s sweeping impact is most prominently playing out in China, which in recent weeks has been rocked by the most widespread protests in decades following nearly three years of periodic lockdowns and dampening economic prospects. 

—Niels Graham is an assistant director at the GeoEconomics Center.

The US Federal Reserve has reduced the size of its balance sheet in 2022 by $381 billion, draining liquidity from the financial system. This quantitative tightening (QT) policy aims to support the contractionary impact of the Fed’s interest-rate hikes to rein in inflation. At the current pace, the Fed will shed $1.6 trillion in assets by the end of 2023, reducing its overall balance sheet by roughly 18 percent. While it remains difficult to measure QT’s impact, a reduction of that size could tighten financial conditions significantly. This matters because it might allow the Fed to forego a rate hike in 2023 and/or start decreasing interest rates earlier. QT targets long-dated assets that have an outsized influence on equity and bond markets. A severe recession or the Fed’s desire to ease financial conditions could all spell an early end to QT. This is a space to watch in 2023.

—Ole Moehr is a senior fellow and consultant with the GeoEconomics Center.

That’s how many manufacturing jobs have been created in the United States since April 2020 (when manufacturing employment was at a record low) to reach a total of 12.9 million manufacturing jobs as of November 2022. US manufacturing employment started out at nine million in 1940 and rose steadily to a peak of 19.5 million in July 1979. The US then lost 8.1 million manufacturing jobs in the following four decades, a result of the hollowing out of the US manufacturing base due to the offshoring of manufacturing to other countries, in particular China. Since early 2020, pro-manufacturing policies in the US seem to have reversed the declining trend. It remains to be seen if this nascent recovery will be strengthened in the future as a result of efforts to attract high-tech manufacturing activity back to the United States with incentives provided to companies in the US CHIPS and Science Act and the Inflation Reduction Act.

—Hung Tran is a nonresident senior fellow at the GeoEconomics Center and a former IMF official.

Year to date, the US Commerce Department has designated 390 parties to the Entity List, a 260 percent increase over the designations made in 2021. Along with various other export-control mechanisms, Entity List designations are increasingly used to promote US national security and foreign-policy interests by restricting the target parties from receiving certain, or in some cases all, items subject to US regulation. Because US export controls are primarily property-based, these restrictions can be effective in covering gaps left by trade and economic sanctions, which may not apply to certain foreign parties whose dealings in US-regulated products, technologies, or software could benefit US adversaries. 

Unsurprisingly, the vast majority of Commerce’s Entity List designations in 2022 involved parties in Russia. Notably, parties elsewhere, including in certain US ally countries such as the United Kingdom and Spain, were listed for having acquired or attempted to acquire US-regulated products in support of Russia’s military, defense industrial base, or strategic ambitions. China was also heavily targeted by designations that took aim at parties involved in certain semiconductor manufacturing activities. Whether the swell in designations continues over time remains to be seen, but it seems likely that Commerce will continue to use the Entity List in furtherance of efforts to limit Russia’s and China’s military and advanced manufacturing capabilities. In addition, Commerce has the authority to designate parties whose host governments fail to facilitate US security-driven end-use verifications, as well as those involved in human rights, cybersecurity, and spyware-related threats. Regardless of the final numbers, the Entity List is a score worth tracking in 2023.

—Annie Froehlich is a nonresident senior fellow at the GeoEconomics Center’s Economic Statecraft Initiative and special counsel at Cooley LLP.

The post By the numbers: The global economy in 2022 appeared first on Atlantic Council.

For those who thought the United States was behind in the digital-currency “space race,” the news was welcome. In a subsequent white paper on the project—named Project Cedar—the New York Fed explained that it has already completed stage one of testing and proved that international currency transactions could be done both quickly and safely through the blockchain. But buried in the technical details was a revealing line on the ambitions of the project: The goal of the new network is “to reduce settlement risk in cross-border, cross-currency transactions.” The message? We see what the world is doing on CBDCs, and the United States is not going to be left behind.

According to new Atlantic Council research, the United States, thanks to Project Cedar, has moved into development of a central bank digital currency and joined its colleagues at the European Central Bank, the Bank of Japan, and the Bank of England in making the leap forward. All of these jurisdictions have different projects (some, such as the United States, are focused on wholesale, while others, such as the eurozone, are hard at work on a “retail” digital currency that could be used to buy an espresso). Many of these central banks, including the Fed, have not actually decided to issue a CBDC—for that, most of the central banks will need legislative approval. And there are major privacy and cybersecurity challenges to address before most Americans open up their phones and use the digital dollar. 

Check out the CBDC Tracker

Central Bank Digital Currency Tracker

Our flagship Central Bank Digital Currency (CBDC) Tracker takes you inside the rapid evolution of money all over the world. The interactive database now tracks over 130 countries— triple the number of countries we first identified as being active in CBDC development in 2020.

But over a span of two years, the world’s leading central banks have gone from skeptical to serious about a government form of digital currency. When the Atlantic Council’s GeoEconomics Center began this project in 2020, thirty-five central banks were exploring a CBDC; as of today, that number is 114. The motivations vary in each economy, but there are some common themes. The first is the pandemic, or more specifically, the lessons learned from it. At the height of COVID-19, many countries—including the United States—discovered how antiquated their financial plumbing was. The distribution of stimulus checks that could have taken hours sometimes took weeks. As the global economy likely heads into a recession in 2023, the need to improve delivery of money to citizens is paramount for policymakers. 

The second is crypto. The FTX debacle is just the latest and largest in a string of prominent crypto failures. Finance ministries and legislatures around the world are trying to figure out rules that can help rein in the worst actors in the field. But while the regulators get to work, central bankers don’t want to sit on the sidelines. Cryptocurrencies and stablecoins are being used all over the world. In India, for example, nearly 10 percent of the population now owns or is planning to invest in cryptocurrency. In the United States, it’s closer to 13 percent. Central bankers are concerned about losing monetary sovereignty and becoming blind to what is happening inside their own economies. They see a central bank digital currency as a way to evolve and compete in this changing landscape.

The final motivation is geopolitical: Russia’s invasion of Ukraine. In the ten months since Russia’s invasion, the GeoEconomics Center’s research has shown that interest in wholesale central bank digital currency has nearly doubled. A range of countries including China, India, Indonesia, South Korea, and Brazil are pursuing this new technology. So what does a land war in Europe have to do with the future of finance?

When the United States and Group of Seven (G7) responded to Russian President Vladimir Putin’s invasion, they did so not with direct military engagement but with the most sweeping set of financial sanctions ever levied against a major economy. The West froze Russian reserves, cut Russian banks off the SWIFT payment messaging system, and slapped over 6,500 individuals with sanctions—and the rest of the world took notice. In conversations we have had with central bankers, it was clear that financial sanctions made several countries think differently about the dollar. Suddenly, the possibility that any country on the G7’s bad side could be cut off from the ability to transfer funds between banks became very real. The logical move, for many countries, was to develop a back-up plan. That’s where central bank digital currencies come in. 

The dollar is involved in approximately 88 percent of all foreign exchange transactions. That dominance comes in part from the fact that the dollar is a stable liquid asset in demand by nearly every central bank and financial institution. But only 60 percent of official cross-border contracts are actually denominated in dollars. That’s because even when countries aren’t settling in dollars, they still use it as a trusted intermediary between other currencies. Sometimes international transactions can take days to finalize, so having the dollar as the agreed-upon conversion helps both parties manage risks and reduce costs. Technologies such as CBDCs that allow countries and their commercial banks to settle currency across borders almost instantly are changing the nature of cross-border flows of money. Last month, Hong Kong, China, Thailand, and the United Arab Emirates showed what settlements may look like in the future when they completed twenty-two million dollars in cross-border transactions on the blockchain in the first successful test of its kind.

Suddenly the United States could see the future arriving faster than it previously anticipated. If countries could settle currencies between themselves without touching the dollar, they could significantly soften the bite of sanctions. While debates about crypto legislation and central bank digital currencies have been playing out on Capitol Hill for years, up until now little concrete action has been taken. The speed of finance is faster than the legislative imagination of Congress. With Project Cedar, the New York Fed is showing what is possible when the world’s largest financial market uses state-of-the-art technology to try to improve financial flows across the world.

The announcement, of course, was just the first step. More testing will be done over the next six months, and it will likely be a year before any real money is settled on a US central bank digital currency network. But the signal from the New York Fed was clear: If you are a country considering developing a CBDC, you have a new model to pay attention to. The United States has entered the chat. 

Josh Lipsky is the senior director of the Atlantic Council GeoEconomics Center.

Ananya Kumar is the associate director for digital currency at the Atlantic Council GeoEconomics Center.

The post It’s official: The United States is developing a bank-to-bank digital currency appeared first on Atlantic Council.

Online Event Tue, December 13, 2022 • 8:00 am ET

Next steps for the TTC: A conversation with Under Secretary of State Jose W. Fernandez

Fireside chat on the US-EU Trade and Technology Council’s progress throughout 2022 and the priorities of the US-EU economic relationship in 2023 with Jose W. Fernandez.

China Digital Policy Economic Sanctions Economy & Business

Good morning and thank you for inviting me here today to discuss what I think is one of the most important ways the US and Europe connect: the US-EU Trade and Technology Council, or TTC. 

As you know, we recently hosted the third TTC ministerial meeting, where the co-chairs met to discuss progress and advance concrete actions on transatlantic cooperation. I think it really showed the effectiveness of our approach to trade, technology, and innovation. 

Right now, the TTC has ten working groups that tackle myriad issues from sustainable, inclusive economic growth to promoting a rules-based economic system. The joint statement we released shows the breadth of our focus and commitment. 

Through this forum, we have a ready-made venue to iron out any bumps that occur in our relationship: the US-EU task force on the Inflation Reduction Act, for example, is an effective forum through which we as allies can hash out mutually beneficial results when our approaches don’t meet eye to eye. 

We look forward to meeting again in 2023. In the meantime, we’ll keep working toward advancing our ongoing projects and creating new ones. Why? Because transatlantic unity is essential not only for the United States and the EU, but for the world as well. Through the TTC, the US. and the EU are tackling issues critical for global economic prosperity and our shared security. 

A lot of folks have questioned what the TTC has accomplished, suggesting this is all whitewashing and doesn’t get to the core of our shared interests. However, that is simply not true. Here I would like to highlight two specific examples in third countries that the TTC is moving forward in this group. They show that we are already making progress beyond issues that the US and EU are targeting. Without the progress we’ve already made, they wouldn’t be possible:

For example, together, we launched new cooperation on inclusive information and communication technology and services (ICTS) projects in Jamaica and Kenya and in cooperation with their respective governments. 

In Jamaica, we will connect over one thousand public schools and children’s homes to secure internet services, strengthen digital competencies of teachers, support the use of digital technologies by all types of enterprises, and expand wi-fi infrastructure. We also intend to support secure and resilient rural broadband connectivity provided by trusted vendors in the country.

In Kenya, we will expand school connectivity and provide technical assistance to help Kenya update its Information and Communications Act and 5G strategy in line with the principles set for high-quality global infrastructure projects.

Those are just two concrete examples. Overall, there are five main areas where I think we really showed TTC is the best forum for moving forward our close cooperation:

First, we’re cooperating on new and emerging technologies. We issued both a joint artificial intelligence roadmap that will inform our approaches to risk management and a joint study on the impact of AI on the workforce. We began breaking down barriers to research collaboration needed to expand our understanding and exploitation of quantum information science and technology. As for standards, our working groups hashed out better cooperation on sharing information on international standardization activities and responding to common strategic issues. As for climate change, our two sides developed joint recommendations for government-funded implementation of electric vehicle charging infrastructure, as well as recommendations for future public demonstrations of vehicle-to-grid integration pilots. I think you can agree that this is a lot. 

Second, we all know semiconductors are increasingly one of the most important components to modern manufacturing. We’ve now institutionalized the semiconductor supply chain early warning system to mitigate disruptions to the supply chain. TTC also acts as a better forum for exchanging information and developing a common understanding of market dynamics on our respective government support programs for semiconductors.

Third, this isn’t all just trade outputs. We’re advancing the principles of the declaration for the future of the internet—protection of universal human rights and fundamental freedoms, a global internet, and inclusive and affordable access to the internet—which are global in scope. That includes deepening the cooperation between US- and EU-funded emergency plans in support of human-rights defenders worldwide. 

Those sound like lofty goals, but they are crucial right now, which leads me to the fourth point: Together we’re assessing with civil society and online platform operators how Russian information manipulation and interference in third-country jurisdictions is affecting the population as a whole. Our values are under attack as we speak, and cooperation is the only way we can combat Russian mis- and disinformation.

Scores of other items are still in the works. The cost of doing business is always an impediment to efficiency and economic growth. We’re sharing best practices to simplify or reduce that cost. Ease of doing business means more mutual recognition agreements and continuing to work on identifying other potential sectors in which strengthened cooperation and conformity could enhance transatlantic trade. Our pooled information on US and EU medical device companies in China will help us better understand and address the impact of China’s non-market policies and impacts on US and EU companies. And we’re also identifying and addressing economic coercion and exploring potential joint efforts, bilaterally and with other like-minded partners.

Fifth and finally, I want to touch on labor and health. We’re launching a new transatlantic initiative on sustainable trade to identify actions in key areas of trade and environmental sustainability that support our shared goals of a green and sustainable future, and to increase transatlantic trade and investment. Beyond that, we’re working together intensively to facilitate the exchange of health information to support research, innovation, and advancements in public health with applicable legal requirements governing the protection of data. By establishing a new “talent for growth” task force that will bring together government and private-sector leaders from business, labor, and organizations, we’ll help provide training with the goal of catalyzing innovative skills policies.

To me, the TTC demonstrates to the world how democratic and market-oriented approaches to trade, technology, and innovation can be a force for greater global prosperity. It prioritizes US and EU joint engagement with industry, labor, and non-governmental stakeholders to foster an inclusive, information-sharing environment that shapes our work to deliver results for workers, businesses, and consumers.

The transatlantic relationship is stronger than ever, as shown by the unprecedented level of cooperation to support Ukraine and hold Putin to account for his brutal war of choice. Remember those two projects in Jamaica and Kenya? They happen because we are working together in this forum to move forward. Transatlantic unity matters not only in the United States and the EU, but also around the world; the United States and EU are working together to address issues that impact the global economy and our shared security interests. 

Thank you, and I look forward to a stimulating discussion. 

Watch the full event

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As the digital landscape grows, the European Union (EU) is advancing its efforts to expand its indigenous technological capacities and establish global governance norms. This effort has significant implications for the economic and political underpinnings of the US-EU relationship.

Under the leadership of European Commission President Ursula von der Leyen, the idea of “digital sovereignty” has become a central—albeit nebulous and controversial—guiding principle for Europe’s engagement on digital and tech affairs.

Three years after von der Leyen first spoke of digital sovereignty, this Europe Center report explores what the concept has meant in practice, building on its 2020 report “The European Union and the search for digital sovereignty: Building “Fortress Europe” or preparing for a new world?”. The report identifies three common elements to digital sovereignty:

• a greater commitment to supporting technology development within the EU;
• an effort to elaborate global norms to govern data and the digital environment; and
• greater restrictions on non-EU actors in the EU market.

This direction has outsized implications for the transatlantic relationship. By concentrating on digitizing the European economy and investing in technology capabilities, the EU hopes to make up for current shortfalls and to compete more robustly with digital powerhouses based in the United States and China. In areas such as artificial intelligence—where global norms and standards have yet to emerge—the EU sees its own regulatory efforts as a potential international “gold standard”, like the role that the General Data Protection Regulation has played across the globe.

These measures are not without controversy. For example, the Digital Markets Act, which imposes restrictions on the largest platform companies operating in Europe, is anticipated to affect US firms predominantly, and current proposals for a cybersecurity certification of cloud service providers would limit ownership by non-EU companies. These moves have led to tensions in the US-EU economic relationship—at a time where transatlantic unity is critical in an increasingly geopolitical world.  

What is the future of EU digital sovereignty? The European Union will continue to insist that European technology and innovation respect its own concepts of fundamental rights. The report also sees opportunities for democracies to build coalitions to fight growing authoritarian challenges to the liberal order. The global digital realm remains unwieldy and difficult to govern. Yet through creative and determined collaboration in the US-EU Trade and Technology Council, among other fora, policymakers on both sides of the Atlantic can begin to craft a common democratic approach to digital governance, benefiting an open global economy.

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Flagship Event Wed, September 28, 2022 • 2:00 am ET

Highlights from the 2022 Frankfurt Forum on US-European GeoEconomics

Explore key moments from the inaugural forum, presented in partnership with Atlantik-Brücke, including keynote remarks from European Central Bank President Christine Lagarde.

Event transcript

Uncorrected transcript: Check against delivery

PAOLO GENTILONI: Thank you very much. Thank you all. A pleasure to join you, and unfortunately only virtually. This is Wednesday, day of college here in Brussels.

Of course, we all know that the EU and US relations are deep, with strong ties. And after the Second World War, we always, in difficult times, we were able to stand side by side. So again, since February, we have come together to impose unprecedented sanctions against Russia, to provide crucial military and financial assistance to Ukraine, and to weaken Russia’s grip on our energy markets.

Is our common response working? In my view, definitely yes. The sanctions are eating away at Russia’s economy, which is set to shrink markedly both this year and next year. Russia’s own Federal Labor Service has stated that three thousand brands have put business on hold since the invasion, with five hundred foreign companies having been liquidated by the end of July—five hundred. Russia’s imports from the EU fell by around 50 percent in the period March-June. Russia’s imports of IT equipment have tumbled, despite its legalization of parallel imports. Blocked access to updates of Western software, absence of spare parts and semiconductors are having a grinding effect on the industry.

Many of the few cars produced in Russia—data over the summer indicated that sales were down by more than 70 percent compared to the previous year. Most of these few cars are without airbags and catalytic converters.

Russia’s share on EU gas imports has fallen by two-thirds, from 45 percent before the war to 14 percent now. And its share of our pipeline gas imports has fallen by three quarters, from 40 percent to 9 percent. The deals that we have struck with the US and other partners to boost energy imports have made up for the cuts in Russian fossil fuels.

I am mentioning these figures because I think we need always to repeat how successful was our common effort to respond to the Russian invasion with economic sanctions. And now the cap on the price of Russian oil exports that was agreed in principle at G7 level and was mentioned in the previous panel will put downward pressure on global energy prices and reduce the Kremlin’s ability to fund the war. And today we are setting out the legal basis to implement these key measures in the EU.

So overall our common response is working. And I have to say that Russia’s recent moves, from halting gas deliveries to the mobilization of their reservists and sham referendum, are clear signs of weakness and growing desperation. Of course, they are also sign of escalation, which we are responding with other packages, the eighth sanction package that was just announced by President von der Leyen here in Brussels.

On the economy, it’s clear that the consequences of the war are weighing on economic prospects on both sides of the Atlantic. A combination of high energy price, high inflation, monetary tightening, and uncertainty are putting a damper on growth. Both EU and US will see positive growth for the year 2022 as a whole, but all the signs are there of a slowdown. And a recession can no longer be ruled out. We are entering the phases of stagnation and possible recession.

So, to ensure—to navigate in these troubled waters, we need to maintain our responsible fiscal policies and at the same time our efforts of investments. For Europe, the NextGenerationEU remains the strongest common tool at disposal, and this is why I have made clear that while we are open to discussing limited and specific points, there should be no wholesale re-opening of plans of recovery or postponing of key commitments.

In this context, let me conclude these remarks with three lessons or priorities for the future of our transatlantic relations. First, of course, our strength lies in our unity. Within the EU—and you know how challenging it is to keep our unity with our likeminded partners across the Atlantic and beyond. In the months ahead, this unity will be tested again and again, and we must stay the course.

Second, in an increasingly multipolar world, the EU and US must continue to work together every day—and not just in times of crisis—to show that liberal democracies can deliver sustainable and inclusive growth, and this is happening. I think that the arrival of the Biden administration marked a qualitative improvement in these multilateral relations.

Our agendas are very much aligned. In Europe, we are pursuing an ambitious part of investments and reform to deliver on the triple transition—the green, the digital, and the social. I think that the Inflation Reduction Act in the US goes in a similar direction. As you know, we are also looking more broadly on how our fiscal roles can better support investments in crucial areas while making sure that level remains sustainable, and we will present our proposal in this next month.

Going forward, there is also hope to strengthen our trade cooperation knowing that the disruption to global supply chain must galvanize us to build safer, more resilient supply chains—especially in strategic sectors—but this doesn’t mean in any sense going to protections.

Third and last lesson, transatlantic cooperation is necessarily but not sufficient condition to tackle the challenges ahead of us. For that, we need to master much wider coalitions.

Russia has openly challenged the rule-based international order. This is not a Western order. It’s an order that is in everyone’s interest to uphold. Yet, thirty-five countries, as you know, including three members of the G20, decided to abstain in the U.N. resolution condemning Russia’s invasion of Ukraine.

So, we have to increase our reach out and influence in other parts of the world. This is the key objective for the EU of the Global Gateway Strategy to mobilize… investments across the world, in line with the G7 Partnership for Global Infrastructure.

We also need to work for a more effective multilateralism. There’s a great example that we have now to implement. It is last year’s global agreement to reform our global corporate taxation—an agreement that was made possible because everyone worked in a spirit of compromise to find a common solution. And I’m confident that this spirit will lead it too, and this spirit is alive and can guide us in meeting the common challenges we face.

So, thank you very much for this opportunity, and I’m happy to answer your questions.

ANNETTE WEISBACH: Commissioner Gentiloni, thank you very much for your deliberations. Let me, first of all, ask you about what happened today in Brussels because clearly President von der Leyen has presented a new round of sanctions, a package, and also news on potential oil price caps. Perhaps you can give us the latest what’s discussed in Brussels.

PAOLO GENTILONI: Yes. Indeed, we are working on the eighth package of sanctions. The main aspects of this package of sanctions are probably three. The first, we increase our listing of Russian persons or entities. They are now up to 1,025 persons, and seventy Russian entities. And this is the first part. The second part will be increasing of trade limits towards Russia. And the third, that I heard mentioned in the previous panel, is the agreement of G7 level on the price cap of oil.

Of course, this means that we will work especially on the sector of the shipment insurance to make sure that there is an agreement to avoid contracts, if oil is transported at the higher price in relation to the cap that we will establish at G7 level. As always, the decision making in the European Union is a process. We don’t have executive orders. But I am quite confident that, again, this new package of sanctions will be supported by member states and will enter into force.

ANNETTE WEISBACH: What do you think—when will those price caps, also for the energy of electricity and gas market, will get implemented and so consumer will finally benefit from it? Because we’re heading into the winter period.

PAOLO GENTILONI: Well, of course, we worked a lot in the previous months. And indeed, there were metrics and figures in my remarks, also to remind myself and everyone of how much we were able to achieve in these few months. If you look at the fact that we go from 40 to 9 percent, and maybe we are now even less than 9 percent, about gas coming from Russia. This is quite substantial. You know that we have very high level of storage.

We are working on mandatory savings among member states, of course, with different ways of reaching these mandatory targets. And next Friday, the Council of Ministers of Energy will address the—also not only these issues, the issue of solidarity contributions, the so-called price limits… but also the issue of a price cap on gas. I’m sure that this discussion will be, as always, with different opinions. And I am confident that Friday will put the basis for a final agreement in October in the European Council to introduce a limitation of price for gas.

My final remark is, we should, I think, avoid raising expectation of the fact that these price limits will automatically bring energy prices to a pre-war situation. It will be a gradual process, but it’s very important to start this process of limiting these prices.

ANNETTE WEISBACH: Let me also ask you about the cooperation between Europe and the EU and the United States, because clearly we are here at the Atlantic Council. So how is cooperation going, and how confident are you that perhaps there might be more LNG deliveries from the US into Europe?

PAOLO GENTILONI: One, we had a very important agreement—President Biden and President von der Leyen a few months ago agreed on supply of LNG. Of course, when we refer to capping prices of gas, we are referring mainly to gas reaching the Union—the European Union through pipelines. And of course we are not putting at the same level Russia and Norway, or Algeria, or Azerbaijan because, of course, with Russia we have a double intention to keep the prices—to limit the prices but also to undermine the war machine of Russia.

Different is the situation for LNG, where we will cooperate with our partners and with the US both on supply and possibly on making differences of prices for European and Asian markets less dangerous than the one that we are seeing now. By the way, this difference between the Asian and the European market on LNG is changing months per months, so I think we have to address this issue with our partners. This is a different story from the capping of gas and from the pipelines.

ANNETTE WEISBACH: Aside from that energy crisis we are currently facing, there has been also political developments in the EU, which at least is interesting, also for an international audience. The election outcome in Italy—I know you are also from Italy, so it might be a bit tricky for you to answer that question, but I’ll at least try and ask it.

So what do you think will be the ramifications from the outcome of the elections in Italy?

PAOLO GENTILONI: Well, the—of course I have a conflict of interest, so I have to—once we are questioned as European Commissioner—

ANNETTE WEISBACH: Yes.

PAOLO GENTILONI:—not as a former Italian politician.

As European Commissioner, I would simply say that we are of course ready to cooperate with the old governments, including the coming Italian government. Now, of course, I could add that, as the Latin motto goes, “pacta sunt servanda.” So we have a very important cooperation on the recovery, and we have our common rules. You know that these common rules, by the way, are under review and discussion, and what we ask of all European member states is give their contribution, to have their view, but to stay to the facts that are ruling our union. I am confident that this will be the case also for Italy, and we are ready to cooperate…

Watch the full event

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Flagship Event Wed, September 28, 2022 • 2:00 am ET

Highlights from the 2022 Frankfurt Forum on US-European GeoEconomics

Explore key moments from the inaugural forum, presented in partnership with Atlantik-Brücke, including keynote remarks from European Central Bank President Christine Lagarde.

Event transcript

Uncorrected transcript: Check against delivery

MARIA DEMERTZIS: Good morning, ladies and gentlemen. Welcome. Also, a very warm welcome from my side.

My name is Maria Demertzis. I am the deputy director of Bruegel, which is a think tank—an economic think tank based in Brussels, and I’m delighted to be here. Thank you to the organizers for including me in the program. And of course, I am delighted to host President Lagarde, who needs no introduction.

President Lagarde, there’s a lot to talk about. If I may start with just the title, as you see, the Frankfurt Forum is a forum that is a conference that concentrates on the US-European economic and geoeconomics relations. We’re here to talk, I’m sure, about inflation. Inflation is a problem. And I wanted to quote Chair Powell, who said that inflation is a global phenomenon even though the sources and the way that it’s felt in different parts of the world are actually quite different. Do you share his view in this respect?

CHRISTINE LAGARDE: Well, first of all, good morning. Good morning to all of you in the audience. And my great thanks to you, Fred, for a flattering introduction, but for standing as a leader in the European-Atlantic relationship, which matters so much. And I’d like to extend a special thank you to Josh and Julia. They’re in the back of the room and they have been instrumental in getting us all together.

So back to Jay’s—to Chairman Powell’s—view. It is a fact that we have inflation pretty much across the world—including in Japan, where it was so low for so long. Even there, we are seeing it. But we’re seeing inflation in different shape, form, and levels, and I think it has a lot to do with the roots of that inflation.

So if I—if I concentrate only on Europe—and I will say “Europe,” but it’s obviously the euro area, where we are welcoming our twentieth member on the first of January because Croatia will be joining the euro area and will become a full-time member of the European Central Bank—if I compare Europe with the United States, the roots of inflation are different. And I think it matters to understand where it is coming from so that we can adjust the monetary policy response accordingly.

So the two key differences that I would—I would see is—have to do with energy and labor.

If you look at energy, it is the key driver and has been the key driver of inflation in Europe. Rough speaking, if you take the direct impact of energy—and by energy I mean, you know, electricity, gas, all petrol-related products—if I look at that plus the indirect impact of energy costs, you’re talking about roughly 60 percent. So 60 percent of the drivers behind inflation here are related to energy. If you look at the United States, it’s about half of it. If you put food on the top, we are more impacted as well by food because of the way we are organized. The US is less impacted. So the drivers are predominantly energy-related in Europe and not as much in the United States.

The second factor which also has an impact is that when you look at wage progression, you see that wages in the United States progress anywhere between 5 and 7 percent at the moment. When we look at wages negotiated in the last few months, we are between 2.5 and 3 percent. So that’s also a major difference in terms of second-round effect that we have to be very attentive to.

Those are the two key differences. And if you add to that the economic analysis of is it supply-driven/is it demand-driven, clearly our inflation is strongly supply-driven. So we have shortage of supply for various reasons—you know, the supply-chain bottlenecks that have affected us critically at a time when the recovery was, you know, taking its full flight and at a much faster pace than expected. When you look at the United States, because of the wage point that I was making it is much more so demand-driven.

And that has—that has consequences to how we deal with it. And in a way, when you have predominantly or purely demand-driven inflation, I wouldn’t say that it’s fairly simple but you have to hammer demand, reduce it, so that it realigns with supply. When you are predominantly supply-driven, it’s far more complicated because monetary policy cannot in and of itself reduce the price of gas, cannot stop the war as much as I would love for us to be able to do that. So we need to be attentive to—

MARIA DEMERTZIS: If I may—I mean, I suppose my question is, it took a little while before action came in this respect, right? I mean, at Bruegel, we started monitoring the fiscal health that people were—that countries were giving to, both to companies, as well as to households, back in September of last year.

CHRISTINE LAGARDE: Mmm hmm.

MARIA DEMERTZIS: And so, we knew that the inflation was going to be a problem. Yet it took a long time to get there. Why did it take so long to come here?

CHRISTINE LAGARDE: Well, first of all, we started that journey of normalizing monetary policy in December. So, yes, it could have been September, but we started the journey in December. In December, we decided that we were going to reduce net asset purchases, stop net asset purchases, whether it was under the normal asset purchase program, or under the pandemic emergency program that we put in place—rightly so, in my view—in order to deal with the phenomenal crisis that we faced. But we decided to stop net asset purchases, and as soon as net asset purchases had stopped, then we decided to move out of negative interest rates—in which we had been since 2014—and then to hike again.

So, we decided in a matter of two monetary policy meetings, six weeks apart, 125 basis point increases. So, you know, I’m not—I’m not challenging that we made some projection errors—like everybody else who was doing projections, maybe because many of us are using the same models. But no one understood—I’ll take you back a little bit further. You mentioned September of that year. I’ll take you to December. So, eighteen months ago, roughly, eighteen months ago, I’m sure that very few in this room remember where inflation was. It was in negative territory, December 2020, minus three [percent]. Now, we are at plus 9.1 [percent], the last reading of October. Minus-0.3 [percent], sorry.

MARIA DEMERTZIS: Minus-0.3 [percent].

CHRISTINE LAGARDE: Minus-0.3 [percent]. But negative. We are now—last reading, at 9.1 [percent]. And our forecast for this year is a little north of 8 [percent], for the whole year, and moving towards 5.5 [percent] next year.

So, yes, I think there was a general sense for a period of time that this inflation, that was generated by the rotation of demand that we observed right after the recovery, from, you know, massive purchases of goods, to pent-up demand in services, in particular, we—many of us, I would say, pretty much all projectionists assumed that it was going to be transitory, because in the textbook, supply bottlenecks eventually fade out. Energy prices eventually return. Well, this didn’t happen. And what we are seeing and have been seeing for the last few months, and accelerated by the war in Ukraine, has been more persistent and of a magnitude that nobody had expected. But we started that journey in December.

MARIA DEMERTZIS: With the normalization, yeah.

Well, we are here now.

CHRISTINE LAGARDE: Yup.

MARIA DEMERTZIS: And the inflation is a projected 5.5 [percent], as you said, next year. I’m not going to comment on the forecast. I think that—I mean, there are—there are so many things we can say about forecasting, but in any case we have to deal with the tools that we have.

CHRISTINE LAGARDE: Yeah.

MARIA DEMERTZIS: But one thing we do know is that whatever we do now is not going to come into effect for another year and a half.

CHRISTINE LAGARDE: Yeah.

MARIA DEMERTZIS: It’s going to take a long time to get—to see the effects of the decisions that we take now. That’s why it was important to ask the question where we lay in starting, you see.

CHRISTINE LAGARDE: Yeah.

MARIA DEMERTZIS: But so my question to you now is—and given that now we have to wait for another eighteen months to see the effects—and now you are, actually—I think you are decisively increasing interest rates –

CHRISTINE LAGARDE: Mmm hmm.

MARIA DEMERTZIS:—are you afraid that maybe there will be stifled growth? Because you know, in a year and a half from now, maybe this war is over—I hope this war is over. Maybe the energy issue has normalized. Is it correct to now increase rates at quite the speed that we think is—increases are going to happen?

CHRISTINE LAGARDE: Returning stability of prices is the mission of the ECB. This is our primary objective, stated in the treaties as I have just said, and this is what we have to do, returning inflation to 2 percent in the medium term.

And we will do what we have to do, which is to continue hiking interest rates in the next several meetings, as I have said at our last monetary policy meeting. We have to deliver on that.

So, our primary goal is not to, you know, to reduce growth. Our primary goal is not to put people on the dole. Our primary goal is not to create a recession. Our primary objective is price stability, and we have to deliver on that. If we were not delivering, it would hurt the economy far more than if we do deliver on that point.

MARIA DEMERTZIS: So, if I may, you are trying to, so, ensure that the inflation that we see is not entrenched.

CHRISTINE LAGARDE: Yeah.

MARIA DEMERTZIS: You say 60 percent is supply-driven; the rest is, if I may call, demand or other things that are happening.

CHRISTINE LAGARDE: Yeah.

MARIA DEMERTZIS: So your hikes are there to prevent inflation from being entrenched, I think.

CHRISTINE LAGARDE: Yeah. Yeah, because what is—we are all seeing it. And thank you again, President, for hosting us at the chamber. It’s wonderful to be here in proximity of those who are in the trade, in the business, industrialists. In the business, there are wage negotiations taking place. There is anxiety on the part of those who see the bill at the end of the month, and with the electricity and the gas prices increasing. So, those who sit at the negotiation tables need to appreciate that in the medium term, inflation will be returned to 2 percent.

And that’s what I mean by working on the inflation expectations, because we are very attentive to that. We not only look at what the models tell us; we look at what our scenarios tell us. We do sensitivity analysis. We look at surveys. We try to understand exactly what is in investors’ minds, in consumers’ minds, to see where it’s heading. And we need to make sure that those inflation expectations stay anchored at 2 percent. But that’s really an important part of the job that we have to do at the moment, because we can impact second-round effects, more difficult to impact the first-round effects when they are, you know, predominantly energy-driven.

MARIA DEMERTZIS: President Lagarde, I want to ask you a question on communication. I know you care deeply about communication, and about direct and clear communication.

CHRISTINE LAGARDE: I try. No, absolutely.

MARIA DEMERTZIS: The issue of forward guidance, the issue of telling us what you’re going to do in the future—you also just told us right now—I was personally surprised to see that you had told us that you’re not going to tell us what you’re going to do, and then you told us, we will tell you what we are going to do.

At the same time, you put a lot of emphasis on the issue of uncertainty. We don’t know what’s going to happen; we don’t know where we’re going. And my question to you is, I mean, how should communication be adjusted? That quite well the degrees of uncertainty that we have out there are so, so big, when we don’t know where we’re going, can we not go there slower? Or should we go faster? And how should you adjust your communication, when actually the future is quite so uncertain?

CHRISTINE LAGARDE: You’re totally right that the future is extremely uncertain, and that’s the reason why we decided that we would decide, meeting by meeting, on the basis of the data that we receive. And I think that in such uncertain times, to rely exceedingly on forward guidance would be a constraint and would not be good communication, because if you communicate in terms of forward guidance that you are going to do this or that at such time, it will be state-dependent, it will—and uncertainty results in completely—in a completely different situation from what you had anticipated in your models, in your scenario analysis, in your sensitivities analysis.

Then, your forward guidance was wrong; you misguided those who carefully listened to you. So, we think that in those uncertain times, and as we are no longer at the effective lower bounds—so very, very low or close to that effective lower bound as we were—it’s probably much safer and much more accountable to our mission to be data-dependent, and to decide meeting by meeting.

Now, I gave a little bit of forward guidance by saying that—and I think it’s based on sufficient analysis and facts—when I said that after the 125-basis-point hikes of interest rates, that there will be more interest rate hikes in the next several meetings because we are—we are not at the neutral rate yet. We are—this is our first destination on the journey, but we are not there. And we have to move there first and then see what rate will deliver us the 2 percent inflation objective that we have for the medium term.

So there is a little bit of forward guidance. It doesn’t say by how much. It doesn’t say the number of meetings. But it’s a clear indication that we are on a—on a path the pace of which, the volume of which will be determined on the basis of data and meeting by meeting.

MARIA DEMERTZIS: If I may, I would like to move on to another topic, subject of conversation that has actually kept us busy for some time, and that is the new and different anti-fragmentation tool.

CHRISTINE LAGARDE: Uh-huh.

MARIA DEMERTZIS: I think that’s actually something that has created a lot of fans and a lot of those who are very critical about it. But I want to start by asking you: Why is there a need for a new tool? Don’t we have enough tools?… There are different ways of dealing with the fragmentation risk. Why is there a need for a new tool?

CHRISTINE LAGARDE: We believe that not only should we deliver on monetary policy, but we must ensure that monetary policy is delivered across all member states. So if there is—if our—if the reaction function applies predominantly in, I don’t know, you know, ten out of nineteen countries or twelve out of nineteen countries, we haven’t done our job. It has to apply throughout the entire euro area.

So I think the Transmission Protection Instrument is precisely aimed at that. If we see—if we assess that because of market dynamics that are unwarranted our monetary policy is not transmitted throughout the euro area; and if the four criterias that we have put in place, which predominantly you can summarize as a well-behaved country by the rules of Europe; and if it is a proportionate instrument to use, in other words it will serve the purpose that we have of transmitting monetary policy; then the Governing Council, in its collective wisdom and of course borrowing the analysis of other institutes of quality and good standing, will trigger the Transmission Protection Instrument and will do so. It’s one more instrument that we have in the toolbox. And it’s intended for that specific purpose, unwarranted market dynamics.

We do have other tools. And you know, if the TPI has been used for the results for whatever cause that is, then there will be other tools that we can use. And they are completely alive and available as well, and we will use all instruments of monetary policy in the toolbox in order to deliver on the primary objective and make sure that it is transmitted across the euro area.

And it’s not intended for one country or the other. You know, the world turns and we have to be attentive to all nineteen member states.

MARIA DEMERTZIS: But if I may, the unwarranted part is, of course—how are you going to apply this? What is unwarranted? And how do you go about identifying what is unwarranted? I mean, this is—I mean, the tools that we have in our—in our hands, do you think they will give you the confidence to say something is warranted by fundamentals and something is not warranted? And with that—if you could comment on that, that would be interesting. But also, with that, a very important—one of the four criteria that you have there is that there is—the debt behind the countries is sustainable.

CHRISTINE LAGARDE: Mmm hmm.

MARIA DEMERTZIS: And you say that you are going to do your own analysis, but also do the analysis—look at the analysis of other institutions and come to a conclusion. If I may ask a little provocative question, but the debt sustainability of a country is as much economics as it is politics. And don’t you think it would be better, certainly for the reputation of the central bank, to let other institutions decide what is sustainable and what is not sustainable? Why did you have a need to decide on yourself to do that?

CHRISTINE LAGARDE: First of all, because a central bank in current times is an independent institution, and I have to respect the collective wisdom of twenty governors and the Executive Board members around the table whose job it is to deliver on the mission. So it is the independence of the central bank to use the appropriate tool on the basis of a process that we have identified in relation to TPI, the three-step assessment process and the four criterias, one of which is fiscal sustainability.

And that is intended not, you know, for us to suddenly become the ultimate judge of sustainability. Because we will, obviously, use the analysis produced by institutions like the IMF, like the ESM, like the Commission, to name a few because they do produce excellent analyses—not always on the same page, you’re right, and there is a political dimension to it, absolutely, but you can try to eliminate as much as possible the political biases when you use several institutions.

You know, I was—as an anecdote—and I have some former IMF colleagues in the room. They will remember those days when the Commission was publishing a debt-sustainability analysis, when the IMF was publishing an IMF debt-sustainability analysis for a country. And then we would go and visit the country, and that country would say, oh, I have a completely different analysis from yours and this is, you know, smoke and mirrors. Well, in all fairness to those who are technical experts, they can really reduce the uncertainty to a minimal portion. And the fact that we are cross-checking and cross-referencing our own understanding—because we do have quite a few good analysts ourselves—and those produced by other reputable institutions, I think, is the best guarantee we have of producing something that is independent because that’s clearly a necessity.

MARIA DEMERTZIS: Thank you very much, President Lagarde.

Given the time, if you’ll allow me I want to move into two more things, simply because they will be discussed very much today later in different sessions. One is the international role of the euro, exchange rates and how much you can see the euro becoming more of an international currency. And the other one is the digital euro. So let me take them one by one.

CHRISTINE LAGARDE: Mmm hmm.

MARIA DEMERTZIS: There is actually going to be a session later with—Martin here has—will present a very interesting paper on the international role of the euro. If you look at the international reserves, the euro reserves internationally have been about 20 percent for the longest time. So 60 percent the dollar, 20 percent the euro. Do you think that there is a scope for the euro to take a bigger role? And, in fact, should it?

CHRISTINE LAGARDE: You know, I can’t help saying that the euro is the second international currency of reference. So 60 percent for the dollar, 20 percent for the euro, and the rest—the other 20 percent are allocated differently. You know, you’ve got sterling, Swiss francs, renminbi of course, yen. So to remain the second is something that we should acknowledge.

Can we do better? I’m sure we can. But in my humble view and with tribute to Martin Mühleisen’s paper, which is really interesting and I would concur with him on many points, there are three key attributes for a currency to become THE international currency, if you will, or one of the main—that is, more than 20 percent.

First of all, you need a large, sizeable economy. That’s what I would call the weight. It has to be solid and large. I think, you know, Europe satisfies that criteria.

The second one is the stability of all its institutions, of its economic framework, which gives predictability to those who trade and invest. You could dispute that in a few corners, but I think in the main Europe also has to offer that stability.

The third one—on which, in my view, we are short—is the depth of its financial—of its capital market. And you know, many European leaders advocated—I don’t see many European countries actually moving forward with the project of really delivering on a European capital market that would be a union capital market. So we have good markets. Let’s get it right. There’s a good capital market in Germany. There’s a good capital market in France. There’s a good capital market in all those countries. But there is no Union capital market where you can, you know, move smoothly from one to the other. And I really hope that we can achieve that.

Now, of course, what do we deal with? The rivalries between places. We deal with the rivalry between authorities that supervise those markets. We deal with political sovereignty that is often associated with a member and not with the union. But we are not helping our cause of being stronger and more powerful as a currency if we keep on dealing with a fragmented market as we do. If you talk to investors, they say that very clearly. That, in and of itself, would not be enough to make us totally efficient, and the union would have to be deeper in other respects. But the capital markets union is really an element that is missing in the three pillars that I associate with a very strong international currency. The United States has all three, no question about it.

One more point about this. There is research now that really points in the—in the direction of the relationship between trade and reserves. In other words, the more you trade in dollars, the more dollar reserves you want to have. The more you trade in euros, the more euros you generally have in your reserves. So there is a linkage between trade and reserves.

By the way, we in the euro area, we benefit from the union in that respect because about 60 [percent]—and I stand to be corrected, President, because I’m sure you have the trade numbers better than I do. I used to have them well. But about 60 percent of the trade that we conduct is actually within and between members of the euro area, and we trade in euros. We don’t trade in alternative currencies at home within the euro area. So there is a portion of our trade that is exposed to FOREX risk, but 60 percent of it is within the euro area.

MARIA DEMERTZIS: So just to be clear, then, the reason why we might want for the euro area—for the euro to become a stronger and more popular currency is because it’s going to generate more trade and therefore more wealth.

CHRISTINE LAGARDE: I don’t want to jump to conclusion. I think the observation is that the more trade you have, the more reserve you have. But it’s obvious that the stronger the currency, the easier it is. You know, when you go and visit Vietnam or when you go and try to invest in, you know, whichever country, typically the relationship ends up with how much and then in what currency and who takes the exchange risk. Well, if we have a strong currency, we can negotiate in euro rather than have to go through either the local currency of the country in which you invest or with which you trade or the dollar, which is often referred to as the currency of reference because of its role as an international currency.

MARIA DEMERTZIS: If I may pick on one of the things you said on the—on the depth of the capital markets, I think, as one missing –

CHRISTINE LAGARDE: Yeah.

MARIA DEMERTZIS:—a slight diverging a little bit of the—of the role of the currency, but the creation of the depth of markets in the euro area is something that we have been at it for some time. We have been ten years—

CHRISTINE LAGARDE: Yeah. More than ten years, yeah.

MARIA DEMERTZIS: More than ten years. What, in your view, is the one thing that we need to do next in order to really create the conditions for capital markets to develop and thrive in Europe?

CHRISTINE LAGARDE: Well, what makes the strength of the—of the US capital market is, you know, Treasury bills, Treasury bonds. This is something that we have on a scattered—in a scattered way, not in a unified way. And you know, the only instrument that I can think of which is vaguely similar to that would be the European instrument that are issued by the Commission to finance NextGenerationEU. That is—but that has been defined and agreed as an ad-hoc instrument to deal with the pandemic.

Will we go further than that? It’s not for the central bank to decide. Would it help setting up a strong capital market with depth? Of course it would.

MARIA DEMERTZIS: Thank you for that.

I’m looking at the time. I really want to talk also about one more last thing, the digital euro, this—and the—

CHRISTINE LAGARDE: Oh, we’re here for the rest of the day now.

MARIA DEMERTZIS: Exactly. I mean, first of all, I would like to commend the Atlantic Council because they have produced a wonderful database on where countries and central banks are with regards to digital currencies.

But again, talking about the euro area, I am—especially for the benefit of our audience, I am a bit puzzled why—don’t we already have a digital euro? I only pay—I never pay with cash. I only pay with digital money. What is a central bank digital currency?

CHRISTINE LAGARDE: All right. To keep it super simple, I would say that it’s a digital banknote with a little less anonymity than the paper banknote, OK, because it is issued/guaranteed by the central bank.

Am I saying that banknotes will disappear? Uh-uh. No. And, you know, that’s the beauty of Europe. You are fine paying with your plastic cards, or with your phone, or using whatever token you use. But in other countries, people are still very happy to hold bank notes in their pocket and to pay quite significant purchases with cash.

I happen to be one of those. I like—I like bank notes, I’m sorry. I use plastic cards, and my phone eventually, but yeah, there is an attachment to cash that exists in many countries. If you look from—at the moment, I think there is a referendum in Austria to argue with public opinion support against a directive by the commission to actually require that any payment north of ten thousand euros be made not in cash. Well, the Austrians are not happy with that, as I understand, because they want to be able to use cash. Now, there are multiple reasons why it is legitimate to not have those huge payments in cash, because you want traceability, you want to fight money laundering, you want to fight tax evasion, da, da, da, da, da, da.

But do you know what is the first thing that we found out when we did the first survey and sort of client testing? We found that all those who are interested in a digital euro that would be a central bank-guaranteed payment system, peer-to-peer and otherwise, they say that the one thing that we really care about is privacy.

And privacy, I think, has been—I mean there are countries in Europe which have suffered from lack of privacy, and these countries are particularly attached to their privacy. But second, I think there have been enough scandals in the last few years of companies that have collected data through payments, notably and otherwise, and that have monetized those data by selling databases, by producing artificial intelligence-produced in-depth analysis of you, me, and others. And they don’t want that.

So, you know, I think it’s—in addition to being the sort of central bank-guaranteed digital banknote, it’s also a digital payment that should be available, if people want it. You know, if Europeans don’t want it, then we shouldn’t go there. But we should be ready if they want it, because we provide the guarantee that those data will never be exploited for commercial purposes.

Whether people pay to buy their bread, or they pay to buy their cars, or what kind of medicine they purchase, what kind of frequency they go to a hospital, is none of our business as central banks. It can be the business of private sector data collectors, who happen to find out lots of interesting things about us. This is not the business of a central bank, and it should never be.

MARIA DEMERTZIS: Do you think—and also linking it to the previous question—maybe a digital euro will actually make it more popular outside the EU waters?

CHRISTINE LAGARDE: Could well be, could well be, but for that, and maybe we circle back to the Atlantic Council purpose and the trans-Atlantic relationship, and what the council has always aimed at and for. This has to be coordinated with others. We cannot—you know, a digital currency is borderless. It shouldn’t be borderline, and it should certainly cross the lines, which is why I think it should be regulated and properly supervised.

But it can facilitate cross-border payments, big way, which is why between the United States authorities, the European authorities, and others beyond that, we need to compare notes. We need to check what the imperatives are. We need to understand what is the ideal supervision and regulatory mechanism so that we have something that—you know, systems and currencies in digital form that can talk to each other, even at retail level and certainly more so at wholesale level.

So, I’m so pleased that the Atlantic Council is doing this CBDC tracker and is facilitating a dialogue between the authorities. I think it’s great. We need it.

MARIA DEMERTZIS: Absolutely.

President Lagarde, thank you very much. That’s all we have time for today. Thank you for your very frank and very clear answers, so thank you for taking the time to join us this morning.

Watch the full event

The post Full transcript: Christine Lagarde on fighting inflation, coordinating monetary policy, and creating a digital euro appeared first on Atlantic Council.

“We will do what we have to do, which is to continue hiking interest rates in the next several meetings,” she told moderator Maria Demertzis, deputy director of Belgian think tank Bruegel.

While acknowledging such moves could slow economic growth, Lagarde said failing to act would “hurt the economy far more.” 

Here are the key takeaways from the Frankfurt Forum’s fireside chat with Europe’s top banker, which kicked off the day-long event:

Two faces of inflation

• Lagarde said the persistent price hikes have taken many economic officials by surprise, as they assumed the inflation during the post-pandemic economic recovery was only “transitory.” She added: “In the textbook, supply bottlenecks eventually fade out; energy prices eventually return. Well, this didn’t happen.”
• Accelerated by Russia’s invasion of Ukraine, today’s crisis, Lagarde said, has been “more persistent and of a magnitude that nobody had expected.”
• She also distinguished between the causes of inflation in the United States, where it is demand-driven, and in Europe, where it is supply-driven (and caused more by energy). The latter, Lagarde added, is “far more complicated because monetary policy cannot, in and of itself, reduce the price of gas [and] cannot stop the war.”

Meeting the moment

• By steadily hiking interest rates over the course of regular meetings, Lagarde said the goal would be to return inflation, which hit a record 9.1 percent in August, to 2 percent in the medium term.
• But she added that overreliance on such targets during these uncertain times “would be a constraint and would not be good communication.” Therefore, Lagarde said, any decisions will ultimately be made based on what’s known at the moment. “It’s probably much safer, and much more accountable to our mission, to be data-dependent and to decide meeting by meeting.”
• The ECB chief also touted the new transmission protection instrument (TPI), unveiled this summer, as a tool with which to streamline bank policy across the eurozone to prevent financial fragmentation. “We believe that not only should we deliver on monetary policy, but we must ensure monetary policy is delivered across all member states.”

Can the euro become king?

• Asked whether the euro can play a larger global role as a reserve currency, Lagarde said that while the size of the eurozone economy and the stability of its institutions are major advantages, it still falls short when it comes to “depth of its capital market.” 
• Continental leaders have advocated for the idea, she said, but few are “actually moving forward with the project of really delivering on a European capital market that would be a union capital market.” 
• So far, Lagarde said, rivalries between authorities that supervise those markets are getting in the way of achieving that goal. “We are not helping our cause of being stronger and more powerful as a currency if we keep on dealing with a fragmented market.”

The future is digital

• As the ECB continues its move toward a digital euro—you can follow its development along with all central bank digital currencies (CBDC) around the world with the Council’s CBDC tracker—Lagarde (who praised the Council’s tracker) said privacy remains a top concern. Consumers are worried about scandals involving companies that collected payments data and then ”monetized those data by selling databases.”
• Lagarde said this kind of data “is none of our business as central banks” and maintained that the ECB will not get ahead of public desire for a CBDC. “If Europeans don’t want it, then we shouldn’t go there,” she said. “But we should be ready if they want it, because we provide the guarantee that those data will never be exploited for commercial purposes.” 
• Any progress toward a digital euro, Lagarde added, will need to come in close coordination with the US Federal Reserve and others. “We need to compare notes,” she said. “We need to check what the imperatives are. We need to understand what is the ideal supervision and regulatory mechanisms so that we have… systems and currencies in digital form that can talk to each other.”

Dan Peleschuk is the New Atlanticist editor at the Atlantic Council.

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Introducing our annotators for this edition of Markup

• Olga Khakova: Deputy director for European energy security at the Global Energy Center
• Jörn Fleck: Acting director of the Europe Center
• Tyson Barker: Nonresident senior fellow at the Europe Center
• James Batchik: Assistant director at the Europe Center
• Joseph Webster: Senior fellow at the Global Energy Center

Their key takeaways from the speech:

1. Energy security took top billing. Von der Leyen made news with an announcement on price caps and new rules on the electricity market. The European Green Deal, the search for reliable energy partners, and the climate transition were major focuses in the speech. 
2. EU sanctions aren’t going anywhere. Von der Leyen made clear that sanctions against Russia are here to stay, a message to European member states and the rest of the world as much as to Vladimir Putin.
3. Europe’s strategic decoupling is accelerating. The days of an assertive EU markets-first, free-trade approach are coming to an end. Von der Leyen doubled down on reducing Europe’s strategic economic dependencies on both Russia and China. Her announcement of the European Critical Raw Materials Act builds on previous efforts to become more self-reliant in microchips and batteries.  
4. Will the EU grow? Von der Leyen endorsed the European Political Community, a nascent if vague proposal from French President Emmanuel Macron to rewrite Europe’s engagement with its neighbors. Ukraine will get access to the internal market, von der Leyen said, but she only mentioned in passing EU enlargement for the Balkans, Moldova, and Georgia.
5. What was missing: a discussion of defense. With a recognition that war has again come to Europe, von der Leyen spent very little time on the future of Europe’s security and defense. Neither the EU’s Strategic Compass nor common security and defense policies made the cut for this year’s State of the European Union. 

Here is the speech, displayed with annotations from our experts.

The post What’s next for European energy security? Our experts decipher the State of the European Union Address. appeared first on Atlantic Council.

The US dollar has soared against the world’s major currencies this year by 13.5 percent. It reached parity with the euro in July for the first time in twenty years. It has touched 144 yen and 0.86 pounds per dollar, levels unseen since the turn of the century. Such dollar strength can pose problems for the rest of the global economy, and history shows why. 

The United States has been here before. In the early 1980s, the dollar surged by more than 50 percent against other major currencies with no signs of respite. The economic backdrop was comparable to today’s—inflation was high, and some central banks remained reluctant to hike rates while others dared to do so. In response, global economic heavyweights struck an unprecedented deal. The 1985 Plaza Accord stipulated an agreement between the United States, the United Kingdom, Germany, France, and Japan to jointly intervene in the foreign exchange markets by selling dollars to weaken the greenback. However, similar coordination is unlikely to happen again. Neither China, nor the original participants of the Plaza Accord, are willing to engage in such an agreement today. 

The time-traveling dollar: From the 1980s to the 2020s

Over the past few months, the dollar has reached a relative strength only seen once since 1985. In both the early 1980s and early 2020s, major fiscal spending and rapidly tightening monetary policy generated conditions that facilitated a surge in the dollar’s value. 

In the early 1980s, President Ronald Reagan implemented tax cuts to stimulate the economy. Simultaneously, the Federal Reserve System (Fed) hiked rates to tame runaway inflation, hitting a high of 19 percent in 1981 before returning to double digits in 1984 after a brief fall in between. But while the Fed was hiking rates, other major central banks darted in the opposite direction. The Bank of Japan slashed its policy rates from 9 percent to 5 percent and the Deutsche Bundesbank from 9.5 percent to 5.5 percent between 1980 and 1984.

In response to the pandemic, President Joe Biden has similarly undertaken expansionary fiscal policy through the American Rescue Plan. As inflation accelerated, the Fed responded by raising interest rates and deploying quantitative tightening. But other central banks have lagged behind the pace and extent of Fed action. The Fed has already hiked rates twice by seventy-five basis points each, while the European Central Bank has only hiked rates by fifty points, and the Bank of Japan has shied away from changing them at all.

The greenback is thus in high demand, and it is hardly a surprise that we have seen a sharp appreciation in the value of the dollar, similar to its surge in the 1980s. Higher returns as a result of higher comparative interest rates, as well as the dollar’s safe haven status during fears of a global recession, have incentivized capital inflow and strengthened the dollar exchange rate.

Don’t expect a Plaza Accord 2.0 just yet

In 1985, the dollar’s strength was hurting American exporters, especially in the auto sector. The US Treasury Secretary at the time, Jim Baker, was open to negotiations that could result in an erosion of the dollar’s strength. The end result was the Plaza Accord. The coordination between the Group of Five economies was highly successful—by the end of 1987, the dollar had more than halved its value against the yen and the deutschmark.

However, you shouldn’t expect a second iteration of the Plaza Accord—at least not yet. 

For starters, the global economy today would be unrecognizable to an observer in 1985. China has emerged as one of the largest trading partners for the United States, the European Union, Japan, and the United Kingdom. While in 1985 it was easier to effectively manage exchange rates with European powers and Japan, an agreement now without Chinese participation would be ineffective as a result of its engagement in a large share of trade with those countries. China has little motivation to cooperate; right now, the yuan is not trading at levels that would force the Chinese to the negotiating table. Though that could change as the yuan falls under increasing pressure as the hawkish Fed puts US monetary policy at odds with that of China, it is unlikely to anytime soon. 

More importantly, there is no political will for such an agreement among the original Plaza Accord participants. Unlike in 2013, when lawmakers pushed for a currency oversight bill, or in 2019, when President Trump demanded the Fed help weaken the exchange rate, US Treasury Secretary Janet Yellen has made clear that she wants “market exchange rates” to determine the value of the dollar. It helps her case that a strong dollar eats away at inflation, which still sits considerably higher than the Fed’s long-running target of 2 percent. Since 2013, the Group of Seven has also committed to non-intervention in currency markets, with a renewed commitment as recently as May 2022. 

Things may look different if the United States enters a recession. It’s possible that inflation ebbs but dollar strength remains, hurting exporters. Indeed, that’s precisely what happened in 1985. In spite of two continuous quarters of negative GDP growth, however, the US labor market remains remarkably strong, suggesting the United States may not be in a recession yet.

A strong dollar is here to stay. So what next?

The upward momentum of the dollar value may fade, but the dollar value will likely settle at a level higher than that at the end of 2021. As in 1985, a stronger dollar will produce winners and losers.

For the United States, the stronger greenback could mildly ease inflationary pressure in the short-term by making imports cheaper. But just like 1985, it will hurt export growth as the US could become a relatively more expensive country to produce in. Dollar strength could also hamper profits of US companies abroad by deflating revenue generated overseas. Corporate growth of large firms could trim down as a result, as Microsoft, Netflix, and IBM have painfully learned. 

As well, the possibilities of imported inflation will make countries other than the United States anxious, even if a persistently strong dollar promotes export growth. Nearly half of international trade is conducted in dollars, even in exchanges not involving the United States. This means most businesses worldwide trade goods across international borders in exchange for dollars, which they must then exchange for their local currency to avail their earnings. As the dollar gained strength in the last few months, traders began to pay more local currency to acquire the same amount of imports as before, thus adding to inflationary pressures on non-US economies. This will especially concern countries that rely on imports for their agricultural needs—such as Egypt and Afghanistan—and for energy needs—such as Europe and Japan. 

The Plaza Accord was an unmatched agreement of economic cooperation that devalued the dollar. It shall remain so as long as China does not participate and inflation concerns persist in the United States. A new reality for the global economy of a strong dollar is on the horizon, and the global economy must prepare for its repercussions. 

Mrugank Bhusari is a Program Assistant with the Atlantic Council’s GeoEconomics Center. Follow him on Twitter @BhusariMrugank

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The Euro at parity with the USD: Implications for the global economy

By Hung Tran

The difficult challenges facing the Euro Area and actions taken to calm inflation in the US make it difficult for the EA and other countries to undertake their own policy measures to counter the looming stagflation and recession threats.

Economy & Business Europe & Eurasia

EconoGraphics Dec 1, 2020

Global QE Tracker

By GeoEconomics Center

This Global QE Tracker allows users to compare the major central banks’ different quantitative easing policies, offers in-depth breakdowns of each institution’s specific QE measures, and explains in clear terms how QE and interest rates work together to produce successful monetary policy.

Economy & Business European Union

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Russia and China: Partners in Dedollarization

By Mrugank Bhusari, Maia Nikoladze

Russia has virtually stopped receiving Dollars for its exports to China. Does the US have reason to be concerned?

China Economic Sanctions

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Don’t expect a Plaza Accord 2.0 to reverse the dollar’s surge appeared first on Atlantic Council.

The EA—and Europe in general—have been hard hit by Russia’s invasion of Ukraine and the subsequent Western sanctions against Russian entities that European countries rely on for resources. In particular, the EU ban on oil shipments from Russia and the shutdown of the Nord Stream gas pipeline to Western Europe, probably to extend beyond the scheduled 10-day maintenance period, have visibly caused stagflation. EA growth estimates have been cut to 2.5% this year and 1.9% in 2023.

By contrast, EA inflation accelerated to a decades-high of 8.6% in June. The weakening Euro has complicated the inflationary outlook, making the tasks of the European Central Bank (ECB) more difficult. With its first policy rate hike—likely of 25 basis points—scheduled for the July 20-21 Board meeting, the ECB has been perceived as lagging behind other major central banks. The Fed has already tightened by 75 basis points. Consequently, the ECB may have to take stronger actions to regain credibility.

Combined with the withdrawal of monetary stimulus, the ECB’s actions have led to widening spreads of government bond yields of peripheral members, such as Italy and Greece, against core members such as Germany. For example, the Italy-Germany bond spread has widened to 215 basis points at present, after staying below 120 basis points for most of 2021. As a result, at its July Board meeting, the ECB will consider a staff report on a Transmission Protection Mechanisms (TPM) aiming to stabilize peripheral-core bond spreads. However, it is not clear how purchasing peripheral government bonds to stabilize peripheral-core spreads can interfere with the ECB efforts to tighten monetary policy to bring high inflation under control. Today’s circumstances are completely different from the 2010-2011 period when low inflation allowed then-ECB President Mario Draghi to promise “to do whatever it takes” to stabilize inter-EA spreads and the Euro. Fighting inflation and stabilizing peripheral-core spreads may become incompatible goals for the ECB at present.

It is also unknown if any conditionality will be attached to the use of such a mechanism to support a member under stress, or if the TPM will be used automatically whenever peripheral-core spreads reach a certain magnitude. In the latter case, the ECB will have transformed itself from a central bank dedicated to keeping inflation low and stable to one aiming to keep bond yields of the most heavily indebted member government close to those of the most credit-worthy members with the lowest debt/GDP ratio. This is something hardly recognizable in the Maastricht Treaty which provides the mandate for the ECB!

Another problem confronting the EA is the economic slowdown in China due to a series of lockdowns in response to surges in infection of the Covid-19 Omicron variants. China’s growth estimate for 2022 has been cut to 4.3% from the official target of about 5.5%. The slowdown of the EA major export market together with rising energy prices have led to a sharp turnaround in the EA goods and services trade balance. It has decreased from a surplus of €71.7 billion in the first four months of 2021 to a deficit €85 billion in the comparable period this year.

Alongside the weakening US economy, whose growth estimate for 2022 has been cut to 2.3% by the IMF, the slowdown of Europe (with the EU accounting for 14% of world trade) and China (15% of world trade) have negatively impacted the export demand for other countries. Emerging market and developing countries (EMDCs) are especially hard-hit. At the same time, rising US interest rates and a strengthening USD have led to a net outflow of almost $40 billion of international portfolio capital from emerging market countries in the past four months, according to the International Institute of Finance. The net capital outflow has tightened financial conditions in those countries already experiencing significantly slower growth. EMDCs are likely to suffer cumulative output losses (relative to pre-Covid trends) of 33 percentage points in 2020-2024, compared to losses of 22 percentage points for the world as a whole.

Of special concern is the fact that many EMDCs are on the verge of a “historic cascade of defaults” with a quarter-trillion of USD of sovereign debt already in distress. In addition to countries going through debt restructuring negotiations like Zambia, Chad, and Ethiopia; and those in defaults such as Venezuela, Lebanon, and Sri Lanka; market attention has focused on El Salvador, Ghana, Egypt, Tunisia, and Pakistan. This wave of sovereign debt defaults will have negative spillover effects on EMDCs, adding to their already formidable difficulties.

In short, the Euro at parity with the USD reflects not only the unique set of difficult challenges facing the EA, but also the fall-out from rising US interest rates and actions taken to strengthen the USD and calm inflation in the US. This combination makes it difficult for the EA and other countries, especially emerging market and developing countries, to undertake their own policy measures to counter the looming stagflation and recession threats.

Hung Tran is a nonresident senior fellow at the Atlantic Council, former executive managing director at the International Institute of Finance and former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post The Euro at parity with the USD: Implications for the global economy appeared first on Atlantic Council.

And Kosovo deserves its place in that conversation, says Prime Minister Albin Kurti, whose country is seeking swift membership in both NATO and the EU. “Kosovo is the democratic success story of the region,” Kurti said Wednesday in Washington at an Atlantic Council Front Page event. “Make no mistake: Undoing our progress in Kosovo would be the single greatest victory despotic President [Vladimir] Putin could wish for.”

In a conversation with Damir Marusic, a senior fellow at the Atlantic Council’s Europe Center, Kurti made the case for the power of the EU, debunked Putin’s use of NATO’s 1999 intervention in Kosovo as justification for the Ukraine invasion, and addressed his country’s path forward with Serbia. Find more highlights from the discussion below.

Watch the full event

Eye on Moscow

• Kosovo is key to the Russian messaging battle around Ukraine. Kurti said Putin’s “irrational fixation” on Kosovo was a result of his desire to discredit Western intervention. “Kosovo is the only country which is left as a success story,” Kurti said, after US and NATO failures in Iraq and Afghanistan. “We must not allow Putin to frame this debate as to whether or not it is acceptable to him to have NATO members on the border of Russia or her proxies but, rather, whether we can tolerate autocracy on the borders of peaceful democratic nations.”

• Kurti is pushing for Kosovo to join the Council of Europe at its meetings this week. Like most of Kosovo’s efforts to join international bodies, this move is opposed by Serbia, which—along with about half of the world’s governments—still does not recognize Kosovo as a sovereign state. But the timing is right, Kurti said, given that the Council of Europe recently booted Russia: “If you really are on the side of peace and democracy, this is the right thing to do: Kick out the Russian Federation, bring in the Republic of Kosovo.”
  
• As for the EU, Kurti noted that admitting the six Western Balkan nations would ease trade and logistics by reducing the bloc’s borders by some 2,000 miles while making sure “our families get united” because so many Balkan citizens live in Western Europe. A stalled EU expansion, he said, would be “an invitation for foreign malign actors that threaten the security of Europe.” 

• Kurti had harsh criticism for Serbia, but said it was still Kosovo’s goal to normalize relations, adding that US President Joe Biden is pushing for “a legally binding agreement centered on mutual recognition.” Kurti also said he hopes Biden and the EU will condemn Serbia’s decision to not join Western sanctions: “You cannot be neutral between [a] firefighter and fire.”

Juicing the economy

• As Kosovo applies for EU membership alongside other Balkan and Eastern European nations, Kurti said the EU should relaunch the “Berlin Process 2.0” policy: “No EU funds without EU values,” he said, highlighting democratization, rule of law, freedom of the press, and human rights. He pointed to the inclusion of Norway, Iceland, Switzerland, and Liechtenstein in the European Free Trade Association before some of them joined the EU as a possible pathway for Balkan nations. 

• Short of a full recognition deal with Serbia, Kurti pointed out that non-recognizer countries such as Greece, Slovakia, and Romania accept Kosovo’s documents even without recognizing its independence—a half-measure that could pave the way for stronger economic ties. “There is a space in which the President of Serbia can walk, but he refuses to do so.” 

• Kurti is wrapping up a US trip that has taken him from San Francisco, Dallas, and Chicago to Iowa, Michigan, and Washington—with New York and Boston up next. Aside from the typical diplomatic stops, many of his meetings have been to promote investment from business leaders within the Kosovo diaspora. “This time I’m not calling them to sacrifice,” Kurti said, “but to come and profit and join us in the unprecedented development we’ve been having since the end of the war.” 

• Amid concerns about the Balkan region’s reliance on electricity and other resources from Russia, Kurti signed an agreement with the US Millennium Challenge Corporation that gives Kosovo $234 million for battery storage and energy workforce training, particularly women, with an eye toward self-sufficiency. “A harsh winter is ahead of us, and we must make sure that we cover the peak with our generation,” he said. 

Nick Fouriezos is an Atlanta-based writer with bylines from every US state and six continents. Follow him on Twitter @nick4iezos.

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At last week’s Fed meeting, the first 50-basis points rate hike in 22 years showed that the Fed means business in its fight against inflation. However, the Fed also decided to reactivate its balance sheet-based tool. Starting on June 1, the Fed will begin to reduce the size of its balance sheet, i.e., conduct quantitative tightening (QT), to amplify the contractionary impact of higher interest rates. This piece explains how QT works, discusses its goals, and outlines potential risks of the policy.

The Atlantic Council’s Global QE Tracker shows that the Fed more than doubled the size of its balance sheet through asset purchases in response to the economic recession caused by COVID-19. Now the Fed is switching roles from a buyer to a seller of treasury bonds and mortgage-backed-securities (MBS). If QE is supposed to “lower borrowing costs, boost spending, support economic growth, and ultimately increase inflation,” QT aims to achieve the opposite. By shrinking its balance sheet, the Fed drains liquidity from the financial system and increases borrowing rates for long-dated assets to weaken inflation. Rather than  selling assets outright, the Fed will initially conduct passive sales by not replacing maturing securities. Beginning on June 1, the Fed will let a maximum of $47.5 billion treasury bonds and MBS mature per month. By September, this cap will rise to $95 billion per month. At this rate, the Fed could reduce its balance sheet by roughly $1 trillion—or 11%—over the course of a year. This would be a significantly quicker pace than the Fed’s first attempt at QT between 2017 and 2019, when it shrunk its balance sheet by a maximum of $50 billion per month.

The Fed’s faster QT schedule this time around is a function of its much bigger balance sheet ($9trn vs $4.5 trn)[1]  and considerably higher inflation (8.5% vs. 2.75% total CPI) in 2022 compared to 2017. While the Fed was the first central bank to ever introduce QT in 2017, it is now following the lead of the Bank of England (BoE) and Bank of Canada. Both put in place QT programs earlier this spring. Together, major central banks might withdraw up to $2 trillion in liquidity from the global economy over the next year. This would amount to roughly 20% of the combined asset purchases the world’s four largest central banks (Fed, European Central Bank, Bank of Japan, and BoE) have undertaken since the beginning of 2020. If the Fed keeps up the current QT pace until end of 2024, as some market participants expect, it will reduce its balance sheet from currently 37% of GDP to approximately 20%.

QE is supposed to provide additional support to the economy once interest rates reach zero. In contrast, the Fed and other central banks are implementing QT alongside interest rate hikes to achieve further monetary tightening than would be possible by only increasing rates. It remains unclear by how much QT might amplify the impact of rate hikes to contribute to tighter financial conditions. Market analysts estimate the impact could range from 25 to 125 basis points (1.25%). Should the Fed’s QT significantly increase yields of longer-term securities, interest rates might have to rise less than forecasted in the graph above. This would establish QT as an effective complement to raising interest rates as part of central banks’ toolkit to fight inflation.

QT does, however, create potential risks for financial stability both domestically and internationally. The Fed had to end its first QT program in September 2019 after the declining size of its balance sheet contributed to a crisis in overnight lending markets. To avoid a similar outcome, the Fed has put in place an overnight-lending facility to ensure banks have sufficient access to cash.

The uncertain impact of QT also poses a risk for central banks that oversee less stable financial systems. While the Fed and BoE are starting their QT programs, the European Central Bank (ECB) is continuing its asset purchases. Concerns about economically weaker euro area countries, such as Italy and Greece, being vulnerable to increasing sovereign bond yields, are part of the reason why the ECB still conducts QE rather than QT. At the same time, rising interest rates combined with the unprecedented size of QT in advanced economies is likely to pull capital out of emerging markets and increase the risks of sovereign defaults and financial crisis contagion.

The Federal Open Market Committee’s (FOMC) incorrect assessment that inflation would be transitory forced the Fed to make an abrupt course correction at its March meeting. Fed Chair Jay Powell now has the exceedingly difficult task of taming inflation without driving the US economy into a recession. If QT is effective in amplifying the contractionary impact of interest rate increases, it might prove to be a helpful tool to engineer a softer landing for the US economy.

Ole Moehr is a contributor and consultant with the Atlantic Council’s GeoEconomics Center.

The post Deploying QT – The Fed readies its new tool to fight inflation appeared first on Atlantic Council.

What’s at stake in France’s Presidential Election?

As French President Emmanuel Macron maintains a lead ahead of his far-right challenger Marine Le Pen, Senior Fellow Ben Judah interviews Ambassador Gérard Araud, former French Ambassador to the US and Senior Fellow, for #BritainDebrief to discuss how this election will impact France. What is France’s role in NATO? What will happen to the European Union and France-Russia relations if Le Pen wins the election?

You can watch #BritainDebrief on YouTube and as a podcast on Apple Podcasts and Spotify.

Former staff

Ben Judah

Former Director

Europe Center Transform Europe Initiative

Economy & Business European Union

Fellow

Gérard Araud

Distinguished Fellow

Europe Center

English Europe & Eurasia

The Europe Center promotes leadership, strategies, and analysis to ensure a strong, ambitious, and forward-looking transatlantic relationship.

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The post #BritainDebrief – What’s at stake in France’s Presidential Election? | A Debrief from Ambassador Gérard Araud appeared first on Atlantic Council.

At the time of the first COVID-19 lockdowns there was fear in many economies of another Great Depression. However, for large parts of the world, the economic recovery has been stronger and faster than anticipated despite challenges from high inflation and, more recently, Russia’s invasion of Ukraine and its economic fallout. For example, at the start of 2022 the EA and US GDP trajectories were already approaching pre-pandemic trend levels. The recovery has been better than past ones in part due to enormous fiscal spending. Compared to the Great Recession, both the EA and US used fiscal stimulus to a much larger degree.

While both the EA and US spent more this time around, how they went about fiscal stimulus was notably different. In the EA, much of the income support for workers was funneled through their employers. Most EA countries paid employers to keep furloughed workers on their payroll while not working, and paid them a high but less than equal percentage of their working wages (on average ~75 percent). In the US, UI was expanded to include more types of workers than previously accepted, the length of time workers could be on UI was extended, and the amount of income support provided was greatly elevated. In some cases, US workers were receiving more than 100 percent of their working income. In addition, multiple rounds of stimulus checks were sent to US households.

Structural differences in EA and US labor markets, differences in spending magnitude, and differences in public health management make policy impact comparisons inexact. However, it is clear both policy regimes were effective and present tradeoffs.

As a result of EA furlough programs, employment levels were affected very little, and much less than in the US. Employment is also back to pre-pandemic levels, unlike in the US. Relatedly, these policies were very successful at keeping workers in the labor force. In many EA countries the labor force participation rate has been higher for most of the pandemic recovery than the US’. Labor market stability is one reason inflation in the EA has been lower than in the US.

On the flip side, real wages for US workers grew faster for much of the recovery because they have been less attached to pre-pandemic employers (though recently both have been struggling with surging inflation). Job switching and competition for labor are driving forces behind rising wages as employers try to attract employees. In addition, self-employed workers likely fared better in the US from direct income support. Lastly, unlike the EA there has been a burst of new business formation in the US, which could have long-run impacts as economies evolve after the pandemic.

From a public finance perspective, it appears the EA was more efficient than the US as the EA has had higher GDP growth per unit of public debt issued. This reflects political choices in terms of how much to spend, policy effectiveness, and differences in administrative capabilities. For example, the US struggled to effectively implement enhanced UI. As a result, a crude measure emerged where one dollar amount was instituted instead of a given percentage level of lost wage income. This led to a larger percentage of Americans receiving more money from UI than they did while working than policymakers necessarily intended. Other areas of inefficiency in the US fiscal response include employee-retention tax credit processing and the primary attempt at a large-scale furlough style policy, the Paycheck Protection Program (PPP). PPP had positive impacts but also helped lots of employers that likely did not need assistance.

The EA and US fiscal policy responses to the COVID-19 pandemic have led to stronger economic recoveries than many imagined. However, there is always room for improvement and lessons to be learned. Moving forward EA and US policymakers should assess the strengths and weaknesses of both approaches while improving components of their respective fiscal policy apparatuses as needed. Both furloughed job and income support methods may be needed when responding to future crises. Policymakers should have a complete toolkit available to respond in the most effective and efficient manner.

Jeff Goldstein is a contributor to the Atlantic Council’s GeoEconomics Center. During the Obama administration he served as the Deputy Chief of Staff and Special Assistant to the Chairman of the White House Council of Economic Advisers. He also worked at the Peterson Institute for International Economics. Views and opinions expressed are strictly his own.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Two years in: Assessing US and Euro area’s pandemic fiscal responses appeared first on Atlantic Council.

Climate change hazards, from rising sea levels to forest fires, are set to asymmetrically impact the Mediterranean’s coastal ecosystems. In addition to increased natural disasters, climate change also will exacerbate the region’s economic vulnerabilities stemming from resource scarcity, heat stress, and impacts on tourism. With increased stress on populations in the region, climate pressures have the potential to indirectly exacerbate violent conflict.

The potential for future threats from climate change necessitates that nations consider not only national climate plans, but strategies to mitigate global pressures on supply chains, food systems, and economic interdependencies to manage cross-border risks. The United Nations Environment Programme’s Mediterranean Action Plan serves as a starting point by assessing these risks. Building on it, the European Union can direct development assistance towards strengthening countries’ abilities to adapt, further strengthened by transatlantic cooperation. In anticipation of the security ramifications of climate change, NATO should set climate adaptation as a priority.

The transition to renewable energy will result in both economic and geopolitical benefits through the creation of jobs and development of advanced technologies. Tourism, which makes up a fifth of Greece’s GDP, is likely to be adversely impacted by higher temperatures and natural disasters. This could generate additional risk for Greece’s financial credibility. The EU should consider this as a threat to the institution as a whole, with Greece and Cyprus the member states most vulnerable to climate change. Fortunately, Greece has a solid foundation from which to build up its climate resiliency, as strategies to this end are part of the Greece 2.0 plan and the country is already one of the top producers of wind and solar energy globally. 

The Mediterranean should not be making these efforts alone as economic and geopolitical stressors cause cross-border instability, a strong motivator for the region and partners to deliberately address climate adaptation in tandem.

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The post The rising national security threats from climate change in the Mediterranean region appeared first on Atlantic Council.

Europe and the West must answer with firmness and take bold steps to include Ukraine in structures of solidarity of those countries where law, and not brute force, rules.

In these dramatic circumstances, the time has come to offer Ukraine an EU membership perspective.

With NATO membership not currently a realistic prospect, the Western word must also identify alternatives to provide Ukraine with security guarantees.

More robust support with materials for Ukrainians to defend themselves is also needed.

A recent survey commissioned by the Yalta European Strategy and conducted mid-February 2022 shows: Ukrainians want to join the EU (75%) and NATO (64%). At the same time Ukrainians understand that this may happen not now but “at some point in time.”

The poll found that Ukrainians’ wish for NATO membership has been motivated first and foremost to achieve security to prevent Russian efforts to end the existence of a free Ukraine. When asked to state the reasons for backing NATO membership, the top three responses were “it would make Ukraine more secure,” “it would protect Ukraine from Russia,” and “it would allow peace instead of war.” 

As the world watches the Russian invasion of Ukraine unfold, UkraineAlert delivers the best Atlantic Council expert insight and analysis on Ukraine twice a week directly to your inbox.

Ukrainians said in the survey that the most important factor of deterrence is to “strengthen the Ukrainian military to fight for our own territory” (82%).

In this context, it is very important to note respondents‘ readiness to become involved in the defense of their country and put themselves at risk if needed. The result shows impressively that Ukrainians want to live free and will defend themselves. 49% of all adult Ukrainians, every second adult Ukrainian, say they will volunteer to fight or serve in Ukraine’s armed forces if a new Russian offensive happens. 10% are undecided, only 35% said they would not themselves volunteer.

While support for joining NATO has surged in recent years, Ukrainians are ready to consider options if now NATO membership is not on the table. Overall, 84% of respondents expressed an interest in other security formats in absence of a clear way to NATO membership in the nearest future. Almost half (48%) said security guarantees from the US would make Ukraine safer, while the figure for a joint security guarantee from the US and the EU or individual European countries rose to 60%.

The EU should now offer Ukraine a membership perspective. This step cannot be portrayed as an escalation. But it would be a bold, courageous, and meaningful political statement. 

This would not be easy; it would demand exceptional leadership from the politicians of EU member states to explain to their domestic audiences why offering an EU membership perspective to Ukraine now is the right decision.

Eurasia Center events

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Ukraine’s advance in Kursk: What’s next and implications

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Nor would the accession process be rapid. Existing conditionality and the principles of media freedom, personal freedom, rule of law and the fight against corruption must be upheld. 

But today, opening an EU membership perspective for Ukraine can be a game changer. As a sign to Ukraine as well as to the Kremlin.

A discussion of security guarantees for Ukraine is also urgently required. While NATO membership is Ukrainians’ long-term goal, right now Ukrainians need practical proposals that have the potential to deter Russian aggression.

This must be combined with more robust supplies of arms to help Ukrainians prepare to defend themselves. 

The terrible war in Europe that started now could claim hundreds of thousands of lives. 

The cost and difficulties of the steps we suggest are infinitely lower than the cost of not giving Ukrainians the strongest possible support in this critical moment.

Since its inception in 2004, the Yalta European Strategy has worked to help secure Ukraine’s European future. Russia has started a war against this future. The response should be an EU membership perspective, commitment to tangible security guarantees for Ukraine, and robust support to help Ukrainians defend themselves.

Aleksander Kwaśniewski is Head of the Board of Yalta European Strategy and former President of Poland. Kersti Kaljulaid is a Member of the Board of Yalta European Strategy and former President of Estonia. Carl Bildt is a Member of the Board of Yalta European Strategy and former Prime Minister of Sweden. Stéphane Fouks is a Member of the Board of Yalta European Strategy, Vice President of Havas Group, and Executive Co-Chairman of Havas Worldwide. Wolfgang Ischinger is a Member of the Board of Yalta European Strategy and President of the Munich Security Conference Foundation Council. Anders Fogh Rasmussen is a Member of the Board of Yalta European Strategy and former Secretary General of NATO. Businessman and philanthropist Victor Pinchuk is the Founder and a Member of the Board of Yalta European Strategy.

Further reading

UkraineAlert Feb 24, 2022

Ukraine desperately needs help

By Andrey Stavnitser

As Russia declares war, Ukraine calls on the global community not to sit on the sidelines and to urgently stand with Ukrainians.

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Going after the Kremlin’s oligarchs who stash their illicit wealth in the West is an essential move that should happen now before Putin goes further in his campaign to end Ukrainian independence and revise Europe as we know it today.

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By Atlantic Council experts

As the crisis in Eastern Europe continues to unfold, we tapped our expert network to answer the burning questions about the implications for Russia, Ukraine, and the wider world.

Conflict Crisis Management

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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UkraineAlert is a comprehensive online publication that provides regular news and analysis on developments in Ukraine’s politics, economy, civil society, and culture.

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The post What Ukraine needs now appeared first on Atlantic Council.

On December 14th, the EU Commission’s Representation in Sweden and the Atlantic Council’s Northern Europe Office held the event “Developing the EU’s industrial strategic capacity under growing geopolitical tensions.” 

Speakers included: 

• Björn Fägersten, Swedish Institute of International Afairs (UI)
• Charlotte Andersdotter, Confederation of Swedish Enterprise
• Ulf Pehrsson, Ericsson
• Per Altenberg, Swedish National Board of Trade 
• Christian Danielsson, Head of the EU Commission’s Representation in Sweden

The event was moderated by Anna Wieslander, Director for the Atlantic Council’s Northern Europe Office. 

Panelists discussed how “strategic autonomy” applied to Europe’s economic, industrial, and technological sectors. Strengthening the EU’s capabilities in these sectors was considered crucial to successfully addressing major societal challenges and remaining a relevant international actor in the emerging geo-economic age.

Supply chains and data streams were the new geopolitical battlefields where China was challenging the US for supremacy. Free trade and globalization were no longer risk-free; the EU needed to adapt to this confrontational environment.

Beginning its digital and green transformation relatively early, the EU was in a good position to compete globally in these growing markets, but protective instruments were needed to push back against Russian and Chinese pressure. 

Nonetheless, maintaining open and competitive markets was important in creating European economic strength. Europe needed to ensure resilience and maintain technological leadership on an even-playing field within an integrated global market. Protecting and investing too heavily in “national champions” risked backfiring. Establishing global standards and regulations was one area where the EU was defined as a global superpower and key in maintaining a technological advantage.

Balancing defensive economic measures and open markets was thus the central conflict between national security and industry. Particularly with China and the US securitizing their economies, the EU would have to adapt its stance in this direction as well. 

Importantly, the choice between national security and open markets was not mutually exclusive. The EU could improve its strategic position through further economic integration with like-minded democracies like the US, Australia, New Zealand, and India.

The post Developing the EU’s industrial strategic capacity under rising geopolitical tensions appeared first on Atlantic Council.

The Europe Center hosts the 2021 Central Europe Week—a week of virtual programming highlighting how the United States and Central Europe can together lead in shaping transatlantic responses to global challenges.

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Online Event Mon, November 15, 2021 • 10:30 am ET

2021 Central Europe Week

A week of virtual programming highlighting how the United States and Central Europe can together lead in shaping transatlantic responses to global challenges, while also underscoring our unique cultural connections. The 2021 Central Europe Week will occur from November 15th through 19th.

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The post AC Selects: Highlights from 2021 Central Europe Week appeared first on Atlantic Council.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post AC GeoEcon Explores the Sanctions Response to the Belarus-Poland Border Face-Off appeared first on Atlantic Council.

What does the Northern Ireland Protocol and the threat of the UK triggering Article 16 mean for Northern Ireland?

The United Kingdom is threatening to use Article 16 of the Northern Ireland protocol of the Brexit withdrawal agreement, which suspends the agreement either in part or as a whole, amid tough talks with Brussels. To find out what this means for the different communities affected by the Northern Ireland protocol, Europe Center senior fellow Ben Judah interviewed Matthew O’Toole, Member of the Northern Irish Assembly for South Belfast, who is the Social Democratic and Labour Party’s Spokesperson on the Economy and Brexit for #BritainDebrief.

What does the protocol mean to the communities in Northern Ireland? How is the UK government impacting the region? What can be done to help moderate unionists support the continuation of the protocol?”

You can watch #BritainDebrief on YouTube and as a podcast on Apple Podcasts and Spotify.

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The post #BritainDebrief – What happens to Northern Ireland with Article 16? A debrief from Matthew O’Toole MLA appeared first on Atlantic Council.

What was the purpose of the 232 in the first place?

The idea was to help the US producers. We specifically wanted to support capacity utilization in US steel plants. Our goal was to get utilization to more than 80% which would help ensure the industry was healthy and maintained a sustainable production level. China, which had four times the steel production capacity, was the primary culprit. President Trump, however, was still focused on a global response instead of singling out China. The 232 was justified on the basis that some of these steel products are essential to US national security, but the true motivation behind the tariffs was improving capacity utilization in the industry. 

Do you think that it was the successful choice?

Overall, we saw mixed results. The positives include: increasing capacity utilization from the low 70s to more than 80% today, higher steel prices in the US–which helps industry, and excess capacity issues receiving more attention from the public and policymakers than before. The negatives include: harming the US-EU trading relationship, making our allies feel that they were being treated as a national security threat when the problem was and is China, and higher steel prices contributing to inflation and slowing the economic recovery. On top of all that, we still have not solved the problem of excess capacity. Overall the industry is in a much better place than when we implemented these tariffs which is why it’s time to look at modifying these measures. 

What do you think of the deal? What does it look like to you?

The deal is very positive on the whole, especially after trying to convince Trump to not to use the 232 tariffs. After that did not work, we attempted to exempt America’s allies. Once that was rejected, our third attempt was to do a tariff-rate quota (TRQ) which lets the EU import most of the steel duty free and only after that import quota was filled would tariffs apply. This would have been less disruptive to trade than a pure tariff measure. Trump didn’t go for it but Biden did. By doing so Biden liberalizes a significant amount of trade as long as the 232 framework remains in place.

Other elements of the deal look at broader issues. In addition to the TRQ, you also have the elimination of retaliatory measures and the end of related WTO disputes. The US and the EU will also set up a work program to deal with the issue of excess capacity as well as the carbon intensive nature of steel and aluminum production. The deal marries some of our goals on excess capacity and climate with carbon border adjustments, and it’s good that the US and EU are getting ahead of it. 

What next steps do you think the US should take and how can we bring in other countries?

It is great that the administration is opening the door for that. In addition to the EU deal, the administration announced they were in consultation with the UK and Japan on similar arrangements. Just like the EU, these are two other entities which have been hurt by Chinese excess capacity. We also need to work on the climate issue with them, especially since they may have less energy-intensive ways of handling steel and aluminum production, such as Norway. It would be great to expand this deal further by also engaging with Brazil and South Korea. Those are pure quota models, and it would be nice to see those converted to TRQs as well.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Goodbye for now, 232: Breaking down the G20 US-EU agreement on steel and aluminum appeared first on Atlantic Council.

In this week’s episode, hear from Chilean President Sebastián Piñera, Irish Minister Simon Coveney, and the European Commission’s Frans Timmermans on international climate goals and cooperation with the European Union.

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Virtual fireside chat with Frans Timmermans: The European Union’s new path forward on climate

The Global Energy Center hosts Frans Timmermans, European Commission Executive Vice-President for the European Green Deal, to discuss the European Union’s proposals on climate, energy, transport, and taxation policies and global climate ambition ahead of COP26.

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Minister Simon Coveney joins the Europe Center for a discussion on Ireland’s foreign policy priorities.

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The post AC Selects: UNGA 76, climate ambitions, and EU cooperation appeared first on Atlantic Council.

The only safe prediction is this: For the first time since the 1950s, the German government will likely require a three-way coalition. That could send Europe’s largest economy into messy, months-long coalition negotiations that could last into early 2022. The result could be a Germany led by a caretaker government under perennial Chancellor Angela Merkel for several months more—and lacking political clout at a time when major initiatives at the EU level come to a head and the transatlantic partnership stumbles from one crisis to the next.

On the eve of this major vote, we’re offering an authoritative guide to the players and parties involved—as well as gaming out the various scenarios facing Germany’s coalition-builders.

Click on the links below to jump to a section:

The key players

Color-coding coalitions

What to watch on election night…

…and in the days and weeks to follow

The key players

A drawn-out CDU leadership contest eventually won by Armin Laschet, the premier of Germany’s most populous state, North Rhine-Westphalia, and the open fight with its Bavarian sister party, the Christian Social Union (CSU), over the nomination for their joint chancellor candidate has seen the CDU-CSU alliance drop 10-15 percent in the polls since early 2021. With an uncharismatic Laschet at the helm—and following his missteps after flash floods in his state this summer, lackluster campaigning, and the lack of a clear platform—the CDU has lingered around 20 percent. Amid a more concerted campaign effort and more appearances from Merkel, who until the last few weeks had refrained from campaigning, the CDU has shown signs of a small surge only in recent days up to 23 percent.    

The Green Party, a product of the 1970s environmental and peace movements that has since gained extensive, state-level government experience and nationally as part of a 1998-2005 SPD-led coalition, peaked at around 28 percent last spring, having carefully expanded its platform to more centrist voters. However, following intense—and, some would argue, overblown—media scrutiny of Annalena Baerbock, the Greens’ first ever-chancellor candidate, for allegations of plagiarism, delayed bonus disclosures, and botched campaign appearances, the party has dropped to around 16-18 percent. The Greens seem to have been unable to capitalize on the government’s failures during the Afghanistan withdrawal or dire news on the climate, the party’s core issue. Nor have Baerbock and her party been able to inspire new momentum among Germany’s aging and famously status-quo electorate with a message of change.

Perhaps the most stunning reversal has seen the Social Democrats rise to the lead of the pack during the last eight weeks of campaigning. Years of infighting among centrists and progressives over the party’s strategic direction and its junior role in three grand coalitions with the CDU threatened to plunge this grand old dame of German party politics into insignificance. With the party hovering around 15-17 percent as late as July, Spitzenkandidat Olaf Scholz has since taken the SPD to around 25 percent and the lead in the polls. Many credit the weak competition in Laschet and Baerbock for the surprising success of the uncharismatic former mayor of Hamburg and current finance minister. Others argue it’s all about his strategy to present himself as the candidate of Merkellian continuity and status-quo politics in style and substance. 

The free-market, libertarian Free Democrats (FDP) have settled in at around 11 percent. If the party maintains that result, it could become somewhat of a kingmaker in subsequent coalition talks. FDP leader Christian Lindner unilaterally withdrew from talks with the CDU and Greens in 2017, and has since tried to spin that decision as proof that his party will be ready to do so again. But the 2017 FDP-provoked collapse of “Jamaica” coalition talks has left a mark on him and his party. Potential partners might conclude that the legacy of that decision now works to his detriment—forcing Linder to make concessions, knowing he cannot walk away again and take the blame for yet another collapse of talks (especially if these have dragged on for months).

The two fringe parties on the right and left have not played any significant role compared to previous federal elections. The right-wing populist Alternative for Germany (AfD) has remained steady at around 11 percent and has struggled during the pandemic to energize its base and attract new voters with its focus on migration and law and order. Meanwhile, the socialist Left Party is polling just above the 5-percent threshold for proportional seats in the Bundestag—having featured as a prop for the SPD and Greens, which can dangle before the CDU and FDP the remote possibility of creating a coalition with The Left.

While Germans don’t vote for chancellor directly, pollsters have long asked who they’d prefer at the helm of the next government if they could vote for a candidate. On the eve of the election, there seems to be limited excitement about any of the three Spitzenkandidaten. Scholz leads with 40 percent over Laschet’s 19 percent, with the Greens’ Annalena Baerbock at 13 percent, and 28 percent of respondents saying they don’t know or prefer none of the above. When asked about the next coalition government, 34 percent prefer an SPD-led government over 29 percent who support the CDU in the driver’s seat. Only 12 percent want a Green-led coalition.

Color-coding coalitions

Germany’s complex election system may also impact the distribution of seats in the next Bundestag and could be of major importance in a particularly tight race. The basic size of 598 seats in the Bundestag—half chosen by direct candidates in 299 constituencies, and the other half based on the proportional votes won by party lists—is adjusted by so-called overhang and balancing mandates (or seats). These can increase the final size of the Bundestag by dozens of seats.  

There is little historic precedent for building a three-way coalition, and if current polls hold, both the SPD and the CDU could separately invite other parties to pre-negotiations in the weeks immediately following the elections, making for five to six coalition scenarios. 

Most of these three-way combinations break down into two camps along economic- and social-policy lines, one with a center-right orientation of CDU and FDP, the other with a center-left majority of SPD and Greens. None are tested at the federal level, though several have survived in various German states. Even when one trio wraps up negotiations, the outcome will likely have to be put to a vote by one or more party bases. The process could be long and painful.   

In Germany’s multi-party system, political chromatics go far beyond the United States’ red and blue. Coalition constellations are usually designated by nicknames, abbreviations, or national flags corresponding to the colors assigned to German parties.

Here’s a breakdown of the various scenarios and their possible implications, starting with the two most likely outcomes. (Note: All projections assume 598 seats and no overhang or balancing mandates, based on this data.)

The ‘traffic light’ coalition: Stop on…yellow? 

Coalition partners: SPD (red), FDP (yellow), Greens (green)

Center of gravity: Left of center, given two progressive parties in the SPD and the Greens

Dynamics: The SPD and Greens have made clear in recent weeks that governing with one another would be their preferred choice. The FDP has been openly skeptical toward this coalition option, but its leadership has not ruled out the possibility completely. It might not have many other good options to govern (depending on the CDU’s performance), even if the “traffic light” is highly unpopular among its base. The Greens may need to make the most concessions to keep on board the FDP as the political odd man out, although the fallout from the FDP’s 2017 decision to walk away from coalition talks at the last minute may change that dynamic.

Majority: The coalition would have a healthy majority of around 40 seats.

Stumbling blocks: The FDP and Greens are likely to clash on tax reform, a range of climate-related issues—from energy and CO2 price mechanisms to technology-versus-regulatory approaches—and fiscal policies, such as the debt break and the eurozone. Even if they find compromise in negotiations, both might be locked into a continuous fight in government.        

The view from Brussels and Washington: The SPD and Greens will likely push for laxer debt rules and both support turning the NextGenerationEU fund into a more permanent mechanism. On EU trade policy, German leadership will subside under SPD-Green influence, and the FDP is unlikely to pick this as its battle. All three will remain broadly supportive of strong transatlantic partnership in rhetoric. On substance, the SPD’s soft stance and the pro-business FDP’s occasional wavering on Russia—as well as SPD and Green questions over nuclear-sharing within NATO—may raise concerns in Washington. That said, all three parties’ platforms suggest more hawkish stances on China.

The ‘Jamaica’ coalition: Second time’s a charm?

Coalition partners: CDU (black), Greens (green), FDP (yellow)

Center of gravity: Right of center, given a CDU-FDP majority 

Dynamics: With a strong showing—and as the odd man out that needs to be kept on board—the Greens could be able to extract even more concessions from their potential partners than in a “traffic light” coalition. As any self-respecting conservative party in Europe, the CDU’s will to continue governing may override its many differences with the Greens. But a weakened CDU leader may also come under pressure from his own conservative wing after a poor election result to avoid making too many concessions to the Greens. Statedly its preferred choice, the FDP will have much overlap with the CDU and will face considerable political pressure not to walk away from the same scenario as in 2017, especially in the later stages of coalition talks. In recent days, toth the FDP and CDU have started wooing the Greens.   

Majority: The coalition would have a slimmer majority of around 20-25 seats. 

Stumbling blocks: The Greens will clash with both the CDU and FDP over economic, climate, fiscal, and social policies.       

The view from Brussels and Washington: Brussels will likely see more of the same as in the Merkel years. Except on climate policies, the Greens are unlikely to push through major EU-level initiatives or reforms against the weight of two status-quo partners. For Washington, a “Jamaica” coalition could be the best of both worlds—with the Greens bringing a welcome hawkish stance on Russia and China, while their critical stances on defense spending will likely be overridden by the CDU and FDP.      

The following are possible, but less likely, options:

R2G: A socialist utopia? 

Coalition partners: SPD (red), Greens (green), The Left (dark red), or red-red-green.

Center of gravity: Significantly left of center, given three progressive parties 

Dynamics and likelihood: The mainstream democratic parties have a non-cooperation policy toward The Left at the federal level (similar to the exclusion policy against the AfD on the right). But so far, the SPD and the Greens have refused to explicitly rule out the R2G option this time around, likely as a means to keep the pressure on both the conservatives and the FDP. The latter have noticed and are trying to mobilize centrist voters and their own bases with the specter of government participation by the far left. But what might work for all four, based on different campaign purposes, seems a highly unlikely option for governing. The Left’s categorical opposition to NATO and fundamental critique of the EU in its current form create fundamental differences with the SPD and Greens, and would call into question Germany’s Western integration. And even on economic policy, The Left hardly speaks the same language as the other two.  

The ‘Kenya’ coalition: A supersized grand coalition  

Coalition partners: SPD (red), CDU (black), Greens (green)

Center of gravity: Left-leaning, given two progressive parties

Dynamics and likelihood: The Kenya option would require the CDU to accept a junior role under the Social Democrats and a minority role among a progressive majority, which might prove difficult after a major election defeat. The CDU would most likely prefer to rejuvenate itself in opposition. Programmatically, the alliance could work among the three partners, but would mean more status-quo politics on major policy areas.     

The ‘Germany’ coalition: The SPD’s worst nightmare? 

Coalition partners: CDU (black), SPD (red), and the FDP (yellow)

Center of gravity: Center-right-leaning

Dynamics and likelihood: A “Germany” coalition might work on paper and would have the second largest majority projected. But having been dragged into the current coalition with the CDU kicking and screaming after all other coalition talks failed, progressives in the SPD are highly unlikely to acquiesce to what would amount to Kenya-in-reverse. For the Social Democrats, such a coalition would mean an expanded grand coalition with a hefty center-right majority and two difficult partners instead of only one.     

What to watch on election night…

When the first reliable projections come in Sunday night, all eyes will be on the differential between the SPD and the CDU. That difference has tightened in the latest pre-election polls. Anything that brings Laschet and his CDU within 1-2 percent of Scholz’s SDP will allow the former to lay claim to leading a government and create more coalition contingencies. If the SPD retains a 4-plus percent lead over the CDU, there seems to be a more limited mandate for the CDU to make such claims confidently.   

The CDU’s result will likely not only determine Laschet’s political future in national politics, but also decide whether any center-right coalition options are strong options. A weak showing at around 20 percent will make a “Jamaica” coalition with the Greens and Liberals a less reliable option and could slightly change the overall dynamics of coalition scenarios and talks. 

Anyone hoping for changes in Germany’s posture on its foreign, climate, or eurozone policies will be closely watching the Greens, whose final results traditionally tend to underperform their pre-election poll numbers. Baerbock’s party has been most critical of the grand coalition’s stances on Russia and the Nord Stream 2 natural gas pipeline, as well as on China and its human rights record, and has called for looser fiscal rules in the eurozone and greater German leadership in the European Union. With Germany a major player in EU economic and fiscal policy, Green positions on linking trade deals more closely to social and environmental standards may also impact the European trade policy agenda. If the Greens end up closer to 20 percent, rather than 15, they will have a stronger voice in any coalition scenario.

…and in the days and weeks to follow

Both the SPD and the Greens may have their biggest challenges yet to come in coalition talks.

Remarkably, given the Green Party’s history of intense internal debate (and even strife), Baerbock and her co-leader Robert Habeck have maintained the truce they’d carefully constructed among the left-wing and more centrist wings of the party in recent years. In the past, that clash, and the demands of the left, often threatened to undercut the Greens’ viability as a governing party, especially in the eyes of more mainstream voters. The unity and discipline among adherents of both camps during the campaign is unusual. A weaker-than-expected result may embolden both to return to more open sparring, while a strong showing will empower the co-leaders and their ability to navigate conflicting internal demands.       

The SPD seems in a similar, if perhaps more challenging, situation. Scholz’s success in leading the SPD to 25 percent in polls has forced even the most outspoken leftist party voices into line—or in some cases, into hiding. Scholz’s centrist course in the campaign has yet to create any backlash from a traditionally cantankerous party and the progressive wing that seemed to have won the decade-long internal war in the SPD following their victory in the 2019 leadership contest. But whether that discipline will hold in intense coalition talks, especially with the pro-business FDP, remains to be seen. If Scholz can point to three centrist SPD successes on Sunday—his own, plus that of two centrist candidates in the concurrent state elections in Berlin and Mecklenburg-Western Pomerania, which both look likely—that will strengthen his hand vis-à-vis internal challenges and rebellions.

Jörn Fleck is deputy director of the Atlantic Council’s Europe Center.

Further reading

Transcript May 6, 2021

Annalena Baerbock on a ‘transatlantic green deal’ and German strategies in facing Russia and China

By Atlantic Council

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The post Coalition crazy: Here’s how Germany’s new government could shake out appeared first on Atlantic Council.

Online Event Tue, September 21, 2021 • 11:15 am ET

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AN #ACFRONTPAGE EVENT – European Commissioner for the Internal Market Thierry Breton discussed COVID-19 and the EU’s digital and industrial policy agendas.

Digital Policy Economy & Business European Union Politics & Diplomacy

On Tuesday, European Commissioner for the Internal Market Thierry Breton joined the Atlantic Council to outline developments in the European Union’s vaccination efforts, digital policy agenda, and cooperation with the United States. Below, edited for length and clarity, is his conversation with Ben Haddad, the director of the Europe Center, and others at the Atlantic Council.

FREDERICK KEMPE, president and chief executive officer of the Atlantic Council: Today, you’re in the United States for discussions with the White House on launching the US-EU COVID-19 Taskforce. Your visit comes alongside notable developments within the European Union (EU), including the European Chips Act that EU President Ursula von der Leyen announced at her state of the union, the launch of the Health Emergency Preparedness and Response Authority, and of course the EU’s continued work on new rules for the digital space.

THIERRY BRETON: This visit is pretty timely. I did not anticipate this, but it’s after the withdrawal of the US troops from Afghanistan and the AUKUS deal between the United States, Australia, and the United Kingdom—which, by the way, happened on the very same day that Europe announced its own Indo-Pacific strategy. I think nothing happens by [accident] in our world. It is true that some see this in Europe as a wake-up call.

To tell you the truth, I planned this visit many weeks ago, with of course a very positive agenda: to deepen EU-US cooperation, which is something that I believe I do pretty well, and I like to do it because I know the benefit of this partnership; to strengthen our supply chain; to fight together against a global pandemic; to invest the right way in our technological landscape; and to regulate, in an appropriate way, our digital space. And while all of this is still very much on the menu, and I have had very constructive meetings here these days, something else changed.

There is, indeed, a growing feeling in Europe—and I say this with regret—that something is broken in our transatlantic relations. A partnership works when both parties are honest and truthful with each other, when both parties treat each other with respect, and when both partners are strong—and, of course, when there is trust. But, of course, we are not naïve. Trust is not a given. And after the latest events, there is, I should say, a strong perception that trust between the EU and United States has been eroded. So it is probably time to pause and reset our EU-US relationship. But let’s review it case by case, and I will start, if you allow me, with the fight against the global pandemic.

Since the beginning of the COVID-19 situation, we have learned the hard way that no single country—in fact, no single continent—can fight a global pandemic alone. Today the EU and United States account for more than half of all the vaccines produced and delivered around the world. And almost all mRNA vaccines are done by us. If global manufacturing capacity skyrocketed, it is of course thanks to us.

Yesterday’s decision to lift the US travel ban on fully vaccinated Europeans is welcome. But let’s be honest—we should have done this before because at the end of the day, Europe is the first continent in terms of people being vaccinated, so it’s true that we did not understand very well why we were in the same list as Iran, Brazil, China, and so on. But it is a good thing that it’s done now. I’m extremely happy for all these families who will be able to be together again.

I should say that in fighting the pandemic, Europe has lived up to its responsibilities. Large amounts of vaccine precursor material have been shipped from the EU to the United States, allowing the United States to boost its vaccine production. And more importantly, the EU has exported half of its own production to support and vaccinate more than one hundred countries. We have been the only one to do this.

Now, if I may be frank, when the US government deployed the Defense Production Act earlier this year, it created concrete tensions among the EU-based vaccine producers regarding the availability and the access to key materials, and it is only when the EU put forward our export authorization scheme that we were able to engage back with our US friends in a frank and operational dialogue to unblock supply chains, ingredient by ingredient, product by product, producer by producer; and I did it with my team. By the way, thanks also to the cooperation of people that we had on the other side like [Counselor to the US President] Jeff Zients.

We’ll, of course, continue working with the United States on securing vaccine production, like when yesterday, we marked the first official meeting of the joint task force on COVID-19 manufacturing supply chains, together with my counterpart, Jeff Zients.

Let’s not forget that the EU and United States, of course, only represent 10 percent of the population of our planet, and to eradicate the virus and its variants, we need to sustain these efforts, not only for ourselves but now for the rest of the world. And that means continuing to export and helping other continents develop their own production facilities so that we accelerate the pace of global vaccination.

Let’s move now to technology and investing in technological leadership. Revisiting our supply chains, avoiding vulnerabilities, and making the right investment to our citizens—this must also be done in new technologies in which the EU and the United States share common dependencies on other countries.

Take semiconductors, for example, where technology and geopolitics are increasingly hard to separate. The global shortage is affecting many industrial sectors across the globe and, therefore, the daily life of our citizens. Today, for example, 80 percent of global semiconductors production is located in Asia—and we know, of course, the role of Taiwan—while Europe and the United States hold 10 percent each from each side of the Atlantic.

We, therefore, need to retake control and rebalance the global supply chains of semiconductors. Last week, President von der Leyen announced the launch of the European Chips Act, which aims to turn our scientific and research excellence and untapped capacity into industrial leadership.

Those who think it’s just about regarding the United States are wrong. It is about technological sovereignty, about having enough autonomy to make the right choices for Europe. To do this, we must strengthen our industrial capacity in Europe. It is not a question of wanting to produce everything we need in Europe. We need to diversify our supply chains in order to decrease overall dependencies on a single country or region.

And while the EU aims to remain the top global destination for foreign investment, we also need to make our local productions more resilient and preserve, of course, Europe’s security of supply.

I spoke earlier about how our successful partnership requires both parties to be strong. Well, let me be clear on this. In a world of growing uncertainties, it’s in America’s best interest to have a strong and sovereign Europe as partner. This is what I said to US Senator Mark Warner (D-VA) yesterday and what I will convey today to US Secretary of Commerce Gina Raimondo.

It is also in this spirit that I am approaching the discussion in the EU-US Trade and Technology Council. Certainly, Europe and the United States have a lot to cooperate on in tech, and as a tech commissioner, I very much value partnerships, of course, and I know that in technologies, this is paramount.

Partnerships are built by combining respective strengths on several tech issues, including semiconductors. I see pretty well where Europe’s strengths lie, including, of course, our added value. I have yet to understand what the United States will bring to the table.

Despite what some may think or wish, this discussion is not about classical trade negotiation with gives and takes; it is about our future industrial position. Europe has to and will carefully assess its interests also in the light of the new geopolitical realities.

[We have] a common challenge in regulating the digital space.

You all know that on both sides on the Atlantic, we have been exposed to the war of the [social media] platforms and the consequences, like fragility, in our democracies and also to the threat that underregulated tech companies can pose to the survival of these threats through the spread of disinformation or hate speech. And I think we are at a moment now where the United States and the EU have an opportunity to reestablish global standards for balanced digital regulation that counters illiberal practices.

Europe is doing its fair share. We are moving fast and first with the Digital Market Act and the Digital Services Act. We wanted to ensure a safe, fair, competitive, and innovative digital economy. And these objectives stemmed from the same principle and values that the US cherishes: free speech, consumer protection, safety of minors, open markets, and rule of law.

Obviously, upholding these common values in the digital space also means stepping up our game on cybersecurity. And here, again, not one of us can do it alone. The EU and the United States face the same cybersecurity threat, and we must therefore unite our efforts to combat ransomware, impose cybersecurity, protect information sharing, and establish supply-chain security including 5G, critical information-and-communications-technology supply chains such as the cloud. And these technologies will be, of course, absolutely essential for our safety prospects and resiliency to come.

And I just want to conclude now to tell you that with the pandemic, the technological race, and ongoing conflicts, yes, we can say that times are volatile. And no one is at the center of the planet. So cooperation is absolutely key. In the EU, we remain open but on terms and conditions we set ourselves for protecting Europe’s strategic interest such as our security of supply, and this is also true in the field of security and defense.

I firmly believe that a common defense for Europe is the way forward. It is not about rejecting our historical alliances. On the contrary, it is about being able to act on our own when needed when these alliances are not ready or able to do so. Be it on industrial production, technology, or different strategic autonomies about ensuring Europe’s freedom and capacity to act, it can only strengthen our ties and our common endeavor to create a better world together.

BENJAMIN HADDAD: You just briefly mentioned it: We’re here in difficult times in the transatlantic relationship. You said something is broken. You talked about a pause and reset and a wake-up call. What’s next? Where do we go from there in the relationship between the EU and the United States?

THIERRY BRETON: Well, there is a growing feeling in Europe that something is wrong. It’s a feeling. It’s a feeling within our citizens. It’s a feeling within some member states. And the strength of our partnership is extremely important and paramount.

Take, again, the vaccines. We are not yet done, but if we are where we are today with almost 70 percent of the adult population vaccinated from both sides of the Atlantic—although we know that we still have to move ahead—it is because of the cooperation between Europe and the United States. And when I say cooperation, on the six vaccines working today, five have been developed in Europe by scientific researchers funded by European money. We put this together. It’s really, I should say, in terms of science and technology and industrial capacity, it’s a European-US partnership success.

We need to continue this because we know that if (hopefully) at the end of the year everybody is fully vaccinated on both sides of the Atlantic, it will represent 10 percent of the population. And we need already to take care of the rest of the world and discharge our responsibilities. This is why it was very important yesterday, together with Jeff Zients, to continue the work that we have done. We worked extremely well together with our joint team, where it had been decided last June between US President Joe Biden and President von der Leyen to create, together, a joint task force. We have been working together already for the past year or so. We know how to do this very well, but it’s important to continue to enhance it for us, and for the rest of the world.

Same thing, for example, for the fight against climate change. That’s extremely important. We know that our partnership will lead (hopefully) a successful effort, and there’s a lot of challenges if Europe and the United States cooperate. And for the rest, we have also all sorts of challenges. I hear that some of our member states in Europe say that maybe we need to pause after Afghanistan, after the ban that nobody understood, after what happened last week, or this new AUKUS. I mean, there are these voices, and that’s a political reality. Of course, personally, I regret it. I hope that we’ll be able to work again in good spirit and in trust. Because at the end of the day, we are allies. We have been allies for decades. We will be allies for decades. But we want everybody to be reminded of this on both sides of the Atlantic. And by the way, regarding China, we know that China is our systemic rival.

BENJAMIN HADDAD: I want to continue on the concept of strategic autonomy. You made an impassioned plea for it, and you’ve been vocal with some of your EU colleagues on this concept. We heard you also after the lack of consultation after the Afghanistan withdrawal. This is a concept that’s often misunderstood both in the United States but also in some parts of Europe where it’s seen as breaking away from the alliance, independence, or equidistance between the United States and China, for example. What do you say to those voices that are afraid of Europe’s path to strategic autonomy?

THIERRY BRETON: Well, you know, we are politicians. And in politics, words are important. And it’s true that the European Union is made up of twenty-seven countries. We align our global interests more and more, which is good, but we have our own futures, our own histories. This is what makes Europe. And this is also maybe why we are one of, if not the, most advanced democracies on the planet. And it’s difficult. And it requires a lot of capacity to listen to everyone. And when you speak of sovereignty or strategic autonomy, this resonates differently in different parts of Europe. That’s true.

So this is why, instead of using words, I prefer to use a full sentence. Saying, for example, that what we believe and what we learn every other day, including with what happened in our relations over the past few weeks and months, is that in some areas, we need to be able to make our decisions and to monitor our destiny ourselves. Look at the vaccine. Believe me, I have been in charge, and what I realized is that suddenly, the supply chains were blocked between the EU and United States. Never in my life did I think I would have to cope with this situation.

It has been painful. What did we learn? Continue to cooperate and also to increase our ability to secure our own supply. It’s the same thing in some areas in defense and the same thing in some areas like in semiconductors, in technology. It doesn’t mean that we want to do everything on our own. It just means that we need to take the decisions together. When we believe it is crucial for Europe and our fellow citizens, we need to secure some areas where it’s critical because sometimes even our strongest ally will not be able or not willing to do what is needed for us.

BENJAMIN HADDAD: And as you said earlier, a strong and sovereign Europe would be also in the interest, of course, of the alliance.

THIERRY BRETON: Like always in partnership, you need to have a strong partner. We will be partners for decades, but I think it in this complex world, it is definitely in the interest of our US friend to have a strong ally in Europe.

BENJAMIN HADDAD: I want to turn a little bit, talk about technology and digital issues. There have been some rumors about whether the EU-US Trade and Technology Council, which the first edition was supposed to be hosted in Pittsburgh I think later this month, could be paused. Do you have any comment on that?

THIERRY BRETON: No, I don’t have any comment and I don’t have any information on that. But you know, as the co-chair of the meeting mentioned, she said nothing breathtaking from this meeting is what she expected, but we’ll see. I don’t have any information.

BENJAMIN HADDAD: I’m going to turn to Fran Burwell.

FRANCES BURWELL, distinguished fellow at the Atlantic Council’s Europe Center: You are often regarded in the media as the champion of digital sovereignty in the European institutions. On this side of the Atlantic, I think that we’re still not always sure exactly what digital sovereignty means and what it requires in a policy approach. What does it mean to you? How do you define it? And what does it bring as far as the risk of protectionism? Will it require excluding others to build European capabilities? And here I would point to the Digital Markets Act, which you mentioned, and the widespread assumption right now that the gatekeepers and the way they’re defined would apply primarily, if not only, to US companies. Are US companies in a special category compared to other non-EU companies when you think about digital sovereignty? Could you help us understand this concept?

THIERRY BRETON: We must refer to the author of the term. I’m not the author of “digital sovereignty.” It is German Chancellor Angela Merkel who is the author of “digital sovereignty.” And by the way, when Chancellor Merkel was leading Europe six months ago, she put digital sovereignty, and she explained what she means by digital sovereignty, on the top of the list of our agenda. So I just propose that you see what she means by that, and as I’m in charge of digital in the Commission, I refer to her statement. But you will understand while reading what she means in that in some areas we need to keep our capacity to act on our own.

Let me give you an example. I have been also minister of finance, but I have also led some big tech companies, including in telecom. And I should tell you that it is a huge concern in Europe, especially for companies, to understand what will happen with their own data. We all understand the USA PATRIOT Act. We all understand the US CLOUD Act. For example, digital sovereignty means, of course, to be able to tell exactly to our companies what happens to what is most important to them: their data. But of course, it doesn’t mean that no one could come. We welcome everybody.

And you know, all my life, I did that. We have rules. We have to be clear in our rules. Everybody will have to understand our rules. My mission is to make sure that they are simple, they are readable, visible, and last for long. So that’s basically what we mean by this.

Now, regarding the Digital Markets Act, I could reassure you, this targets no one. This is really something not against but for Europeans. It is my job. My job is to make sure that I’m working for European growth, European competitiveness, European companies. That’s my job. And of course, in this, we welcome everyone. But it’s true that we decided that—and, by the way, this is the exact same situation in the United States—but some companies are so big now that they maybe sometimes act as gatekeepers. And you mentioned some US companies. We don’t have only US companies in the world. We have also other companies, big companies in Europe, big companies in Asia, big companies in China. And it is exactly these companies that are being taken into consideration in the DMA. But I assure you, there’s nothing against any one person, and especially not in the United States.

BENJAMIN HADDAD: I want to continue on this question of digital sovereignty and the DMA and DSA. The EU has really risen as a global standard- and norms-setter on the international stage on digital issues. And there are plans on artificial intelligence, for example. But it hasn’t been the innovative superpower that others, like especially in the United States, are. Could there be a form of tension between the two? Can we regulate without innovating? And in a way, who really shapes the norm? Is it the innovator and the creator, Silicon Valley, for example? Or is it the regulator who’s reacting to the technology?

THIERRY BRETON: Let’s be honest: It’s a discussion about how to behave in the digital space. It’s not a European discussion. It is a discussion extremely vibrant here in the United States—with, by the way, more radical proposals that are here, including in the US Senate. That’s what we need. This is just a normal discussion that we need to have as policymakers because guess what? Our children spend as much time in the digital space as in the physical space. And we see that there is no regulation here to protect our children, to protect our democracy—and I want to come back on January 6—to protect what we cherish.

So what we said is something extremely simple, that everything that is authorized in the physical world should be authorized in the digital world. But everything that is forbidden in the physical world has to be forbidden also in the digital world. This is exactly what is the DSA about—nothing more, nothing less. And I strongly believe that it’s not about regulating for the sake of regulating. I have been a chief executive officer all of my life. I have been a professor at Harvard teaching in the Harvard Business School, even. But I know also that it is our job to propose this.

And by the way, before preparing this, we are the only continent to have asked (for almost one year) to the planet: What do you believe? We had three-thousand contributions—a lot coming from United States, from governments, from countries, from nongovernmental organizations, from everyone. And we took time and we worked. And we believe that what we propose is pretty balanced. And, by the way, maybe it will give some ideas to our US friends.

BENJAMIN HADDAD: Here’s an important question from Lara Jakes, who’s a New York Times correspondent: Why is the EU opposing the waiver on intellectual property rights on vaccines?

THIERRY BRETON: No, I think it’s a misunderstanding. First, I should say that we have more or less six vaccines, maybe seven vaccines, which are really working. We have mentioned four of them have been developed with patents in Europe, two in the United States. So it’s not a question about patents. I should tell you that being in charge for our continent of the ramping up of the industrial capacity, it is definitely a problem of industrial capacity and infrastructure.

We initiated with Team Europe the first manufacturing fabrication plant for a vaccine in Senegal. I mean, it’s a very complex process. It takes time, but we need to do this. Before giving the patent freely, we need to organize ourselves. Where do we believe it’s appropriate to have these facilities? You need, of course, infrastructure there already.

Why Senegal? Because for eight years, Institut Pasteur was already in Senegal, and that Senegal is making the yellow fever vaccines for the planet. So they have skills. They have supply chains. They have networks. They have an ecosystem. But it’s very difficult and it takes eighteen months to do this.

And then, of course, will come the time to determine whether the lab will come or the company, and under which conditions? But we cannot wait. If you say I give you the patents and you do not wait… it’s reminding me of the Russian Sputnik vaccine, so-called Sputnik V. Russians were saying it’s great, it’s a great vaccine, and so on, and you could get it, you can get it. And at the end of the day, we realized that it was extremely difficult for them to manufacture this vaccine—just to make it, you know, manufacturing in a plant—because it’s extremely complex.

So that’s why doing step by step in terms of vaccines and in terms of the capacity to do what we have to do [is important]. First, we open our border for, let’s say, a year. We have been the only one to be able to vaccine the rest of all our allies, all the NATO allies, and the United States was closed. And it has been painful and difficult, but we did it. And we did it with half of our production. And it was difficult for our population to explain that it was our mission to do this, not to close our borders.

Second thing, to get ready to share vaccines, since this is the most important thing. Because now we need to be able to vaccinate our population, and we cannot wait two years. And at the same time, [we need to] start to identify how to help these countries in Africa, in South America, and elsewhere to start to build their own capacity. And then will come this question at the end of the day, but it will be important.

But do it step by step. Open your border. Give the vaccines. Try to identify where to build these factories.

EU did export more than half of its vaccine production, more than half, to more than one hundred countries: Canada, Mexico, all our NATO allies, everybody—Japan, Israel.

BENJAMIN HADDAD: Let me turn to my colleague Julia Friedlander, who is the Boyden Gray senior fellow and the deputy director of our GeoEconomics Center here at the Atlantic Council.

JULIA FRIEDLANDER: Regarding the EU Chips Act that President von der Leyen has announced and you yourself outlined for us on LinkedIn, and how will funds be appropriated among member states given the heterogeneity of national economies to promote technological development in this area? I mean, we’re having enough trouble with that, thinking about how we’re going to roll it out in the United States on a state level.

And maybe a little bit more broadly and philosophically, how do you view economic competitiveness, either driven by markets or by the state, as an element of national security policy? And I think that drawing that line, is crucial for working with the United States because those are the terms that the Biden administration is using.

THIERRY BRETON: To the first question, you’re absolutely right. By the way, I was yesterday meeting with Senator Warner. He is, as you know, chairing the Intelligence Committee in the Senate, but he’s also the sponsor of the US CHIPS for America Act. And we were discussing this—exactly this question together.

First, President von der Leyen announced this EU Chip Act. It is—the allocation is almost the same as that in the United States. Fifty-two billion dollars for the United States. It’s, roughly, the same figures for the EU together with our member states. So we are discussing a comparable amount of money, which is important, of course.

The second thing, of course, is that we have to be careful here because we will use public money, of course, and it means that we have to be extremely cautious, and especially for us in Europe, in order to make sure that we want to align everybody.

So we have created a semiconductor alliance. In other words, we put together everyone as a participant of the semiconductor ecosystem. When I say everyone, we invited, of course, all European companies. We invited the research and development centers. We invited everybody. It could be member states, who we believe have something to say here, and to be part of it.

And then, of course, we are deciding now on our strategy, and the strategy should be simple to explain. For us, it is, first, to increase the capacity of production to leverage, let’s say, in the next ten years. The US strategy is to triple it. Together, the United States and the EU should be able to have together the capacity to produce 50 percent of what the world needs in semiconductors by the end of this decade, 30 percent by the United States and 20 percent for us.

The second thing is, of course, to know how we will be able to support this investment, which is needed, and for us, of course, it means that we are welcoming foreign investment. We are welcoming any kinds of companies. To tell you the truth, I’m in discussions with a lot of US companies. We are discussing also with Asian companies. And at the end of the day, it’s important to discuss what to do with it and what kind of technology we want to use.

So we have now a particular agenda or roadmap. And that’s something that we can offer, of course, to non-EU partners to make sure that they will contribute with our own conditions in terms of security of supply in mind, which is, as you could imagine, extremely important.

Then we have to avoid the kind of race for subsidies between one country or the others, and that’s something that was a concern with a discussion I had yesterday. Maybe I will have this discussion again this afternoon with Secretary Raimondo. So we need also to see how we can organize this.

So last point for us is to be able to coordinate even better our research and development. We have extremely strong research and development centers in Europe and, of course, we want to be able to align all our strengths here.

So that’s a lot of work. But it’s interesting also to exchange here our views with our US partners.

The second question about national security policies, that’s a very important question. When I joined as the commissioner in charge of digital, I had to cope with the 5G story and question, and you remember it was high on the agenda of the previous administration, the Donald Trump administration. And then from the US part, it has been: This company is forbidden, period. I will not give you the name, but you will recognize it probably.

For us, we took a totally different approach. We met, and I did it with my team, all member states. We decided to define the criteria, which were extremely important, to protect our national interest in 5G deployment, and we know that we have a lot of risk here. We put this in a 5G toolbox that everyone agreed and supported. And, of course, we said then, which is true, everybody is welcome, of course, to come to invest in Europe—as long as you fulfill with these requirements.

In other words, we say: If you fulfill, you are not a high-risk supplier. If you don’t fulfill, you are considered as high-risk suppliers. And we have been able to find our ways. So that’s the European way.

Watch the full event

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Prabhat Agarwal, head of the Commission’s Digital Services and Platforms unit, and Gerard de Graaf, director for the digital transformation in the Commission’s Communications Networks, Content and Technology directorate-general, were the leading drafters of the Digital Services Act (DSA). The bill is a first-of-its-kind, comprehensive regulatory framework for governing digital services proposed by the European Commission to EU lawmakers in December. Aimed at making the internet safer while protecting fundamental human rights and freedoms, the DSA takes on modern digital challenges from content moderation to transparent data reporting and oversight. 

The DSA is currently being considered by the European Parliament and European Council for revision, with the goal of passing it in early 2022. And its wide-ranging scope makes it “more than just an EU regulation; it’s a potential model and the only fulsome democratic standard with which to engage at the moment,” said moderator Rose Jackson, director of the Democracy & Tech Policy Initiative at the Digital Forensic Research Lab. 

Below are some of the highlights from their discussion.

What does the DSA do?

• The DSA aims to protest users’ rights to freedom of expression while also empowering them to report illegal content, protecting their privacy, and allowing them to see why certain online ads or content are shown to them, its framers said. Authorities will receive unprecedented amounts of data for better public supervision. And platforms will receive clearer instruction on liability while facing just one point of contact for regulatory oversight: the EU, as opposed to each of its twenty-seven member states. 

• The proposed legislation builds on the EU’s existing e-Commerce Directive, bolstering liability protection for intermediary services like hosting sites and caching services, and it expands to new areas, with a common framework for enforcement and additional due diligence obligations that can include environmental and human-rights checks. That includes a “Good Samaritan” clause, which shields platforms from liability as long as they engage in good-faith efforts to remove illegal content expeditiously.
  
• The e-Commerce Directive mostly focused on cloud infrastructure and web-hosting services. DSA adds new categories for online platforms that cover marketplaces (such as app stores or sharing/gig economy platforms) and also large-scale social-media sites. Infrastructure intermediaries, such as domain registries or wifi hotspots, have the smallest regulatory responsibilities, while online platforms face increased scrutiny based on the sizes of their audiences. “We are, of course, dealing with some very powerful platforms that are, in some cases, so powerful that they can set the rules of the game,” de Graaf said. “Since so many companies and users depend on these platforms, it is in [their] interest that competition works.” 

Shaping the ‘fire exits’ of the digital world

• By clarifying expectations as well as liability issues related to their content, platforms could benefit from the DSA, its drafters said. “It is difficult to scale in Europe, because Europe is fragmented,” de Graaf pointed out. “The rules are not the same. We have twenty-seven member states.” Even small platforms that find success in one state may struggle to adjust to the individual rules of another: “You need to adjust your business model. You need to check out what are the rules that apply to [you], and that slows you down. And the internet is all about scale and speed.”

• Some human-rights experts are concerned that further regulation could limit free speech. “This is not an instrument for authoritarian regimes to dictate how people can express themselves online,” Agarwal said. “An analogy I often use is that this is regulating the fire exits, the alarm buttons, the safety features that we would expect if you go to a shopping mall or a concert hall.” Other pieces of European law define what types of speech are legal and not, and bad actors will abuse regulations regardless of safeguards written into the law, Agarwal said: “A feature of authoritarian regimes is that they are not rights-respecting in the first place.”
   
• The introduction of required, robust data-reporting is critical. “This kind of data is going to be generated, so if it is abused by some authority, it will leave an unmistakable trace,” Agarwal said. The transparency provisions could also greatly increase knowledge of user behavior on those platforms, allowing independent researchers—typically housed in academic institutions—to create novel studies and shape future governance based on data-driven evidence.  

A necessary conversation

• The e-Commerce Directive was enacted in June of 2000. As de Graaf noted, online life has shifted considerably since. In 2002, 9 percent of Europeans shopped online; now 70 percent do—and 40 percent of businesses sell through online platforms. “Platforms have become much more important to our lives in terms of social media, in terms of marketplaces. They are also very important vehicles for small and medium-sized businesses in Europe to reach their customers, so it is timely now to look at that framework,” de Graaf said.
  
• As of 2018, there were nearly 10,000 high-growth social and hosting-service platforms in Europe. “Most of them are small,” de Graaf said. He noted that the current EU structure makes it difficult for them to grow, citing Spotify as an example. “How did it grow? It started in Europe, then it went to the US. It got scaled in the US, and then it came back to Europe.”
  
• But the sheer size of platforms like Facebook—which counts 423 million monthly users in Europe, out of a population of about 750 million—illustrates the need to create a framework that is versatile enough to regulate both large- and small-scale platforms effectively. “Very large” online platforms, defined as reaching 45 million users (or 10 percent of the EU population), face more obligations under the proposed DSA. They are required to have compliance officers, independent audits, increased data access, and enhanced transparency reporting, among other responsibilities. “It’s an asymmetric obligation,” de Graaf said. “If you are in a user-, consumer-facing position, like a social-media company, you have greater responsibilities. These due-diligence obligations are the hard core of the Digital Services Act.”

Nick Fouriezos is an Atlanta-based writer with bylines from every US state and six continents. Follow him on Twitter @nick4iezos.

Watch the full event

Further reading

Transcript Jun 25, 2021

Maria Ressa, Nanjala Nyabola, and Katherine Maher on why social media is—and is not—a global public square

By Atlantic Council

Is social media a global digital public square? The DFRLab’s 360/Open Summit gathered Maria Ressa, Nanjala Nyabola, and Katherine Maher to discuss platforms’ role in the online world.

Africa Civil Society

New Atlanticist Jun 25, 2021

How to spot the latest trends in digital disinformation

By Nick Fouriezos

Top tech journalists joined the 360/Open Summit, hosted by the Atlantic Council’s Digital Forensic Research Lab, to discuss how tech platforms can enhance accountability and transparency

Disinformation India

New Atlanticist Jun 24, 2021

Fighting online extremism in ‘the Klan den of the twenty-first century’

By Nick Fouriezos

How can civil society groups, law enforcement, and policymakers assess and combat the threat of online extremism? Experts at the Digital Forensic Research Lab’s 360/Open Summit dive in.

Disinformation Extremism

The post Behind the European Union’s plan to rewrite the rules of online life appeared first on Atlantic Council.

Trade. Ireland’s leaders are quick to emphasize how the EU single market transformed the country into a modern economy, and EU membership enjoys some of the strongest popular support in the bloc. Post-Brexit, Irish trade will remain tied to the UK, but commentaries may paint a more dire picture than is perhaps warranted. At the end of last year, the UK accounted for 40 percent of Ireland’s turnover with the EU, but Ireland’s rapid expansion of total trade is increasingly due to its ties to the Continent (see above), a figure bound to see increases when post-split data becomes available. Anecdotally, freight shipping flows between Ireland and France have skyrocketed to avoid backup at the UK landbridge and customs delays. Goods moving between Ireland and EU-26 via the English Channel would now count as UK re-exports. Looking at the above chart, the year 2015 might raise eyebrows. The dramatic dip and recovery reflect a sharp drop in global oil prices and the introduction of sanctions on Russia, followed by a large-scale domestic corporate accounting adjustment, as the revenue from firms domiciled in Ireland for tax purposes were assumed into Irish figures– illustrating both volatility and strength for the “Celtic Tiger.”

In Brussels, accounting can mean everything. Ireland’s low corporate tax rates have incentivized over a thousand multinationals to base their European operations in Dublin. The European Commission has sought legal recourse against the Irish loophole, rejected so far by EU courts. EU-wide amendments to tax regimes require unanimity, shielding other member states from forcing changes through qualified majority voting procedures. This is an uneasy ceasefire with the digital taxation debate at a steady boil. Any solution that allocates tech revenue to market jurisdictions (for Ireland that means the rest of the EU) will divert revenue from Ireland’s rebound.

Banking Sector. Dublin’s approach toward financial regulation has made a clear shift since its financial crisis. The IMF, European Commission, and European Central Bank (infamously known as the “Troika”) imposed tough austerity measures to accompany its fiscal aid, ending an era of risky international lending (beginning with adoption of the euro in 2002) and rampant speculation in the constructing and housing sectors. The ominous collapse of beleaguered Anglo-Irish Bank in 2008 foresaw several years of nail-biting economic toil. ECB regulations now govern Ireland’s systemic financial institutions. Meeting Troika demands, bank assets were sold until they balanced deposits and two nationalized banks were wound down and liquidated. The Irish banking system, once internationalized and dependent upon wholesale funding and riskier overseas clients, is decidedly reserved and domestically oriented. Irish banks, as the above graphic shows, are much smaller. The successful implementation of IMF-led budget cutting has now earned Ireland the moniker “Celtic Phoenix,” (vice “Tiger”) but the Republic’s faith in banks to buoy the economy has been replaced by welcoming digital giants, a sector that will see significant regulation in the coming years.

COVID Recovery. After years of suspense over the “Irish backstop” and customs declarations in the North Sea, arrangements still under daily challenge, COVID vaccine rollout presents a new stark reality along Ireland’s internal line. Nearly three times as many residents of Northern Ireland are currently vaccinated, out of a population of less than two million. And while EU countries have closed and reopened Schengen borders throughout the pandemic, the free movement of people (many are dual citizens) within the UK-Irish travel area remains enshrined in the Good Friday Agreement. COVID has shown that Ireland remains caught between two worlds, but its leadership and industry remain clever in how they leverage this unique position, in boom or bust.

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The post Happy St Pats to Ireland: Boom, bust, and recovery for Europe’s most resilient appeared first on Atlantic Council.

A more positive relationship between the European Union and Turkey is a decade-long project of advocates from all over Europe and across the Atlantic. Drawing on history, witnesses see how this relationship can be an excellent win-win algorithm, as much as it can rapidly turn out to be a lose-lose situation or even a triple win-or-lose equation—with political, economic, and social resonance reaching far beyond the Continent.

The challenge is to upload this historically well-tested algorithm into the twenty-first century: rebooting a version 5.0 of Turkey’s European integration with updates on democratic conditionality, foreign policy cooperation, and an economic framework, as well as on the digital, green, and social dimensions.

The Turkey debate’s focal point is “Europe’s geostrategic sovereignty.” Turkey should evolve to be a net contributor to Europe’s security and global competitiveness. No matter how significant today’s drawbacks, such as freedom of expression and tensions like the life-consuming Cyprus imbroglio, the guiding question for the EU ought to be: “how can Turkey, in the near future, become a country that is progressively in convergence with the values and interests of European citizens?” This includes citizens of the Turkey as well.

EU capitals, including Athens and Nicosia, can either be idealistic or realistic. However, both ways of thinking point toward more benefits from reengaging Turkey in the integration process, including conditionalities on concluding, not initiating, different phases such as a modernized customs union. Maybe there also is a third way: short-sighted populism. There is enough historical evidence to argue that the more Turkey is excluded from the EU’s sphere of influence, the more it becomes part of the problems which in turn nourish populistic demagogy and threats to Western democracy. In the end, the main purpose of all these recommendations is the search for a better twenty-first century democracy.

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The Atlantic Council in Turkey, which is in charge of the Turkey program, aims to promote and strengthen transatlantic engagement with the region by providing a high-level forum and pursuing programming to address the most important issues on energy, economics, security, and defense.

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The post Europe’s geostrategic sovereignty and Turkey appeared first on Atlantic Council.

The crossing points along Ukraine’s western border with EU member states Poland, Slovakia, Hungary, and Romania have all witnessed increasing traffic during recent years as Ukraine has embraced historic changes and adopted a Euro-Atlantic national trajectory. In 2019, the last year before COVID considerations turned international travel upside down, more than 32 million people crossed at these border points. Growing volumes of border traffic have often led to congestion and long queues, especially for those seeking to cross in cars or other vehicles.

Ever since Ukraine signed an Association Agreement with the EU in summer 2014, efforts to improve the Ukraine-EU border have been on the agenda in Brussels and Kyiv. Attention has increased since 2017, when Ukrainian citizens gained the right to visa-free travel within the EU’s Schengen Zone. Traditionally, the priorities in Brussels have included the need to counter smuggling and prevent human trafficking. Meanwhile, Ukraine has typically been more concerned with the day-to-day challenges that individual Ukrainian travelers and Ukrainian businesses face while trying to cross into the EU.

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Despite increased attention, numerous problems remain unresolved and progress has proved painfully slow. One of the main challenges is Ukraine’s inability to develop clear-cut and consistent regulatory responses to border-related issues. For example, various Ukrainian governmental bodies often employ a variety of different terms relating to border infrastructure, impeding communication among stakeholders. This absence of a common language is symptomatic of a disjointed approach that is leading to delays in construction and modernization work. Numerous projects, including those financed by international partners, remain incompete or have yet to begin.

The EU’s fortress-like border policy also plays a significant role in complicating upgrade efforts. The introduction of joint control at the Ukrainian border with Hungary and Slovakia, along with the renewal of an existing agreement with Poland, would be a much cheaper and faster alternative to building new checkpoints. This approach could also significantly reduce queues. However, Kyiv and Brussels cannot find a compromise on the issue of legislative compatibility. Ukraine refuses to adhere to some aspects of the Schengen Borders Code, which would mean handing over Ukrainian citizens suspected of breaching the law in the joint control area.

Both Brussels and Kyiv also show little enthusiasm for discussions on the future of Ukrainian nationals with dual citizenship. This is especially important for the many residents of Ukraine’s Zakarpattia region who hold Hungarian citizenship in breach of Ukrainian law. What would happen to these dual citizens if they showed both passports at joint crossings manned by EU and Ukrainian border guards?

The current congestion and infrastructural chaos at the Ukraine-EU border is expensive. It hinders deeper bilateral cooperation and negatively affects a wide range of businesses involved in cross-border trade. To cite just one among thousands of examples, Ukrainian export company Modern-Expo reports annual losses of USD 50 million due to border delays.

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In order to improve the situation on the EU-Ukraine border, Kyiv must deliver on its promises and complete the renovation and construction of checkpoints funded by both the EU and Poland. The Ukrainian authorities also need to learn to prioritize border upgrade initiatives, enhance inter-agency communication, and review existing legislation. Kyiv must take further steps to promote alternative options for crossing the border, such as expanded railway services.

Greater flexibility on the part of the EU could also serve to improve the situation. For example, the European Commission currently insists that Ukraine adhere strictly to Schengen border rules. While this stance is entirely understandable, Brussels must keep in mind that it is effectively asking Kyiv to disregard the Ukrainian Constitution.

With the European Commission recently initiating a public consultation on the issue of amending the Schengen Borders Code, now is a good time for the EU and Ukraine to restart negotiations on how to upgrade border facilities. The outcome of any fresh talks could have huge implications for millions of people, especially the large numbers of Ukrainian economic migrants who suffer the most from the current chaos and inefficiency at the EU border.

While there is an obvious and persuasive humanitarian aspect to this question, it is also vital to recognize the major economic role played by Ukrainian economic migrants. In recent years, they have consistently sent back in excess of USD 10 billion annually in remittances, making them Ukraine’s largest single source of foreign currency revenues. At the same time, they perform a vital function for economies across the European Union. Ukrainian employees serve as the labor backbone for entire industries in Poland and some other Central European countries. They are also making increasingly significant contributions in northern and western Europe. These are convincing arguments for an infrastructure upgrade at the EU-Ukraine border.

Ukraine’s border with the European Union was once widely seen as the eastern boundary of the European project. However, the events of the past seven years have radically changed this picture. Since 2014, the EU-Ukraine border has taken on a new geopolitical and economic significance that has yet to be reflected in the quality of the border crossings themselves. As Russia’s war against Ukraine enters its eighth year with no sign of peace on the horizon, every effort must be made to upgrade the physical links connecting Ukraine to the rest of Europe.

Lesia Dubenko and Pavlo Kravchuk are analysts at Kyiv-based think tank Europe Without Barriers (EWB). They are co-authors of the report “Ukrainian Labour Migration to the EU: State of Play, Challenges and Solutions.”

Further reading

UkraineAlert Jan 5, 2021

All roads lead to Ukraine in Putin’s global hybrid war

By Peter Dickinson

For the past seven years, Russia has been waging a campaign of hybrid hostilities against the West. This confrontation began in Ukraine, and events in Ukraine remain central to what has become a new Cold War.

Conflict Democratic Transitions

UkraineAlert Nov 22, 2020

How Ukraine’s Orange Revolution shaped twenty-first century geopolitics

By Peter Dickinson

Ukraine’s 2004 Orange Revolution is often overlooked but it is worthy of more attention as one of the great geopolitical turning points of the early twenty-first century that set the stage for today’s Cold War climate.

Conflict Democratic Transitions

UkraineAlert Mar 3, 2020

Germany and Poland compete for Ukrainian migrant workers

By Alexander Khrebet

New German labor laws introduced in March 2020 make it easier for Ukrainians to be employed in the country. This is sparking fears in Ukraine—and Poland—that we may soon see a new wave of Ukrainian economic migration.

Germany Migration

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The post Ukraine-EU border crossings in urgent need of upgrade appeared first on Atlantic Council.

The EU-China investment agreement was thus neither a strategic embrace of Beijing, nor a European rejection of Washington. Europe’s signing of the CAI should be understood as what it is: the outcome of internal European dynamics and tactical bargaining, largely independent from geopolitical reasoning. The signing of the EU-China CAI only increases the relevance of a high-level transatlantic dialogue about the future world order and the Euro-Atlantic relationship. Meanwhile, the EU should consider how to bring its internal dynamics in line with geopolitical reality.

Political thinking

The EU’s approach to great powers like China is shaped by the way European policy makers see world politics. Even though EU Commission President Ursula von der Leyen called for a “geopolitical commission,” the ‘liberal institutionalist’ perspective, which contends that managed economic interdependence brings political stability, remains deeply rooted in European policy circles. The insistence on an investment deal with ‘systemic rival’ China seems in line with Europe’s traditionally ‘liberal’ approach to foreign policy.

Furthermore, in European capitals there is a widespread belief in the EU’s ‘normative power.’ Many EU policy makers think that leveraging access to Europe’s internal market can get other countries to adopt European norms on products and production standards. But to what extent they think that the EU’s ‘normative power’ can lead China to adopt European norms, is unclear.

This emphasis on normative power and the belief that economic interdependence has politically stabilizing effects is traditionally combined in the EU with a legalistic approach to international affairs. The prominence of a legalistic approach explains, in part, why the EU lends much credence to the conclusion of treaties and agreements, even–if not especially–with a “systemic rival” like China.

The EU’s approach could make sense in a context or ‘system’ of shared norms and enforceable legal commitments. However, the Chinese Communist leadership explicitly seeks to overturn the Western system of liberal democratic norms. This is reflected by the EU’s designation of China as a “systemic rival”, which implies a Euro-Chinese conflict or rivalry of norms.  In this context of inherent political conflict, it is open to debate to what extent the EU can actually enforce the legal framework of an investment treaty with China. Ultimately, lacking military power, the European Union can only leverage its market access to enforce the treaty with China. Considering the interests of EU businesses in China, it remains to be seen whether European or Chinese norms will prevail in this context of systemic rivalry.

Institutional dynamics

While ‘liberal’ views shape EU institutional thinking, EU institutional dynamics also shape the European Union’s dealing with the rest of world, including China. The EU Treaties and the European Court of Justice rulings determine which ‘competences’ – or powers – the EU Commission, the EU Council of the EU member states, and the EU Parliament have in making external policies. These EU institutions often seek to fully use and prove their respective competences, especially when those competences are newly acquired.

The Commission had internal institutional interests in negotiating the investment deal with China. The EU Commission wants to steer the EU’s overall external relations, and the EU-China investment treaty was an opportunity for the Commission to do so. Having only received the competence to negotiate and conclude investment agreements for the EU in 2009 with the Lisbon Treaty, the Commission, and especially its Directorate General for Trade, had an institutional interest in proving that it was both relevant and effective.

Timing in many ways likely also shaped the conditions of the CAI agreement. The EU Council needs to consent to the Commission’s proposals with a qualified majority, so the Commission needs the right circumstances in order for its proposals to succeed. Acting according to the right circumstances is often more a question of tactics than strategy. The German leadership also sought to secure a deal with China, and the six-month German EU Presidency in 2020 provided the Commission with an opportunity to get its investment deal with China through the EU Council. With Germany’s tenure in the EU presidency ending on December 31, there was pressure to act quickly.

Tactical moves over strategic focus

Notwithstanding institutional beliefs and dynamics, it seems hard to square the EU’s signing of the investment treaty with China with Europe’s broader strategic concerns. The EU’s designation of China as a ‘systemic rival’ is echoed in many European capitals, and the European popular sentiment has become very critical about China’s leadership. The EU has also become increasingly interested in establishing ‘strategic autonomy’ and limiting Europe’s dependence on China’s economy. However, tactical issues appear to have superseded such strategic concerns.

Ironically, American trade diplomacy and political dynamics appear to be an impetus for the EU to quickly conclude the CAI with China. The January 2020 US-China Phase One trade deal further opened certain Chinese sectors, including several financial services, to American businesses. In the face of US competition, European business wanted a similar deal with China. In fact, for nearly a decade, European businesses in China lobbied the EU to sign an agreement with China, hoping that an investment agreement would generate greater investor protection as well as more market access in China.

Furthermore, European consent to the proposed investment agreement evolved in the context of the ongoing transatlantic trade conflict. As some EU capitals were still weighing whether or not to agree to the investment treaty with China, the United States announced new tariffs on EU goods. In fact, signing the deal before the US presidential inauguration gave the EU an opportunity to send a signal across the Atlantic that Europe would “not wait for the United States to get its act together.”

Lastly, the joint German-Commission diplomatic surprise offensive over Christmas was a decisive tactical move. Throughout Europe, policy makers were off for holidays when the news of the agreement and the deadline came in. It allowed little time for diplomatic coordination, let alone study of the document. If more time had been allowed, countries like the Netherlands, Poland, Sweden, and Italy might have prevented a qualified majority for the signature.

The CAI episode reveals the extent to which the EU’s external policies are shaped by the EU’s liberal and normative thinking, institutional dynamics, and tactical bargaining, rather than strictly by geopolitical motives. If the EU’s aspires to be more ‘geopolitical,’ it will need to internalize much more historical and strategic geopolitical thinking, to better coordinate national security concerns with economic issues, and to ensure that tactical bargaining is in line with ulterior policy objectives. Acting geopolitically requires more than big words, but an understanding and transformation of the ways in which traditional political beliefs, dynamics, and tactical pressures impact the European Union’s approach to foreign policy.

Related reading

New Atlanticist

Dec 22, 2020

An EU-China investment deal is near—but is it ‘worth having?’

By Hung Tran

If signed, the CAI represents another major achievement for China in carving out an economic space for itself in the face of acrimonious contention with the United States, following last month’s signing of the Regional Comprehensive Economic Partnership with other Asian nations.

China Economy & Business

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The post Why tactical bargaining won the EU-China Investment Deal appeared first on Atlantic Council.

The post Friedlander spoke with Handelsblatt on Germany’s potential options to postpone the operation of Nord Stream 2 appeared first on Atlantic Council.

With $1 trillion in two-way trade in goods and services annually, the EU-US relationship remains key for the prosperity of both sides of the Atlantic. The European Union (EU) has always considered the United States a privileged partner with shared values; however, Europeans have suffered from the Donald Trump administration’s unpredictability and transactional approach.

The election of Joe Biden offers a window of opportunity to restart the discussion. European institutions have already extended a hand, notably by publishing in December 2020 an ambitious proposal for a new EU-US partnership. Europeans are ready to build a positive trade agenda—but on a balanced basis.

However, the clocks will not wind back to 2016. The global balance has changed, and a new partnership is needed. Trade policy is not just about trade agreements and tariffs, but also reflects technological, security, and geopolitical challenges. Beyond a trade agreement, this paper underlines that a true geopolitical and economic partnership is necessary to address systemic issues.

By analyzing the lessons learned from the failure of the Transatlantic Trade and Investment Partnership (TTIP) negotiations and drawing on interviews with European officials, this paper recommends adopting a step-by-step approach that pays greater attention from the start to the concerns of public opinion—notably, on climate change—the diversity of European sensitivities, and the need to rebuild trust progressively.

Relaunching the transatlantic trade agenda can follow three routes, which are not mutually exclusive, including

1. lifting Trump’s tariffs and starting by re-engaging on conformity
   assessment negotiations;
2. building a partnership on issues of shared geopolitical ambitions, notably China’s disruption of trade rules, foreign investment screening and export control, digital trade and technologies, climate change, and supply chain security; and
3. reforming together the World Trade Organization (WTO) by updating the rule book to better reflect current global economic challenges, resolving the WTO dispute-settlement system standoff, and reinforcing the WTO’s monitoring role.

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The post Relaunching the transatlantic trade agenda: A European perspective appeared first on Atlantic Council.

Check out the interactive map and accompanying charts below to learn more about how each country is spending.

Note: All these graphs are interactive. Hovering over the graphs reveals details. By clicking on the variables in the legend, they can be removed or added to your liking.

Most advanced economies experienced a remarkable economic rebound in Q3. But with the return of restrictions and lockdowns, can this rebound be sustained through 2021?

Global debt continues to rise to alarming levels and will be the theme of the conversation in 2021. The map below illustrates current levels of debt as a portion of GDP and the change from 2009.

Unemployment trends have varied at different stages of this crisis. This tells us about both, labor markets and the effectiveness of the government’s response. Youth unemployment is especially harder to compare, as NEET (Not in Education, Employment, or Training) means different things in different countries. For example, Japanese teenagers are less likely to pursue employment opportunities than their American counterparts, which is then reflected in the data. The jobs recovery is leaving behind the world’s youth. Our analysis shows youth unemployment remains particularly high in the US.

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The post Tracking the COVID-19 economy appeared first on Atlantic Council.

The post Tran quoted by the SCMP on EU-China investment deal appeared first on Atlantic Council.

The deals struck in the final hours were over fish—specifically deciding how many of them EU fishing boats can catch in UK waters—and over maintaining a “level playing field” with regards to state aid and environmental and labor standards. With those and other questions settled, the deal is set to be applied provisionally starting January 1, pending legislative ratification by both sides. Goods trade between the United Kingdom and EU will remain free of tariffs and quotas but will be subject to custom and regulatory border checks—for both country-of-origin verification and regulatory compliance. This will make UK-EU trade more time-consuming and costly, and thus less efficient, than was formerly the case within the EU’s single market. And the negative impact will be felt more acutely in the United Kingdom, which relies on the EU for about half of its exports and imports while in turn accounting for just around 5 percent of the EU’s overall exports and imports.

The agreement leaves many details open for future disputes. In particular, the deal’s commitment to a “level playing field” means the British government must not provide state aid to UK companies or relax environmental and labor standards so that UK companies can enjoy unfair advantages over their EU rivals. Depending on interpretation, this could constrain Britain’s ability to fully exercise its sovereignty—a key stated goal of Brexit in the first place. Moreover, the “level playing field” agreement comes with new procedures through which either side can raise grievances and start proceedings for retaliatory actions, such as levying countervailing duties. This is likely to be a very contentious process.

For financial services, a key UK export to the EU, a clear regulatory framework that allows free exchanges of financial transactions is paramount. According to the deal, such a framework will be based on the mutual recognition of regulatory equivalence between the United Kingdom and EU. That means that each side will recognize the other’s regulations as equivalent to its own, and that financial institutions will therefore have to comply only with their home regulations to be able to do business in the other jurisdiction. However, since either side will be free to decide whether equivalence exists in a specific case, this will make the legal and regulatory framework for cross-Channel financial activities less stable and predictable, imposing costs on financial intermediation to the detriment of both savers and users of capital on both sides. UK providers of other kinds of services will incur additional costs in selling on the continent since they still have to comply with EU regulations.

As contained in the deal, the legal framework for the enforcement of the new trade agreement and the settlement of any disputes could also be problematic, since the United Kingdom no longer recognizes the jurisdiction of the European Court of Justice. Disputes will essentially be subject to political negotiations, which is inefficient and unpredictable in resolving specific cases.

In any event, even with the new trade deal, the United Kingdom is expected to lose about 4 percentage points of its gross domestic product (GDP) over the next fifteen years thanks to Brexit, while experiencing rising unemployment, inflation, and public borrowing, according to the UK Office for Budget Responsibility. (Brexit without a trade deal would have cut UK GDP by 6 percentage points.) Already in 2020, the combination of the COVID-19 pandemic and Brexit have reduced business investment in the United Kingdom by 30 percent relative to its long-term trend, hurting not only current but future growth in the country.

Overall, and despite the economic costs, the Christmas Eve trade deal allows Brexit to proceed in the least disruptive way possible while preserving amicable relationships between the United Kingdom and EU. Both sides have stated their wishes and intentions to cooperate in other spheres such as security and crime-fighting. This is very important for the well-being of citizens of the United Kingdom and EU living in a very troubled world.

Hung Tran is a nonresident senior fellow at the Atlantic Council, a former executive managing director at the Institute of International Finance, and a former deputy director at the International Monetary Fund.

Further reading

Fast Thinking Dec 23, 2020

FAST THINKING: Will a Brexit deal be home for Christmas?

By Atlantic Council

The European Union’s chief Brexit negotiator said yesterday that a trade deal could come before Christmas. That would be quite the gift for British Prime Minister Boris Johnson, who faces the prospect of his country “crashing out” of its old trading arrangements with the EU.

Economy & Business European Union

UkraineAlert Oct 12, 2020

UK and Ukraine sign historic post-Brexit free trade deal

By Vasyl Myroshnychenko

The jury is still out on the economic impact of Brexit, but Ukraine emerged in early October as an unlikely early beneficiary of Britain’s EU exit by signing a landmark partnership agreement including free trade.

Economy & Business Trade

New Atlanticist Oct 15, 2020

COVID-19 and British unity

By John M. Roberts

The coronavirus crisis is straining British unity as officials in the North of England, Scotland, Wales, and Northern Ireland clash with Boris Johnson’s government over lockdowns and economic support measures.

Coronavirus Politics & Diplomacy

The post What the Brexit deal solves—and what it doesn’t appeared first on Atlantic Council.

Chinese negotiators surprised their European Union counterparts this week with key market-access concessions—following long months of intransigence—that could allow the two parties to reach an agreement on a historic investment deal by year’s end.

Though EU officials haven’t yet revealed the details, one senior EU diplomat said the agreement goes beyond anything Beijing has offered any foreign partner previously, both in the level of market access and legal and other guarantees.

EU officials aren’t naïve about the deal’s historic timing or political significance. It would come shortly after Americans elected Joe Biden in early November, following a campaign during which he pledged to rally allies in Europe and Asia to work in common cause to counteract the unfair practices of China’s authoritarian capitalist system.

In Brussels, Beijing’s rush to close the investment agreement follows the European Commission’s proposal on December 2 to President-elect Biden for “a new transatlantic agenda for global change” that has at its heart nothing less than the ambition of bringing together Europe and the United States as a global alliance based on shared values and history.

EU officials I reached on Friday said they were torn between the opportunity to close one of the best investment agreements ever offered by China and the desire to seize the early days of the Biden administration to dramatically improve transatlantic relations. Should the EU close the deal with China, they are likely to argue to the Biden team that the concessions they gained from Beijing can also be applied to any future US agreements with China.
 
That said, President Xi’s underlying message to President-elect Biden, paraphrasing the Rolling Stones’ hit 1974 single, is that “Time Waits for No One.”

Xi isn’t willing to hit the pause button to provide President-elect Biden time and space to assemble his China team, reach out to allies, and frame his strategy. He won’t do so on trade and investment, nor will he do so in his efforts to crack down on political dissent at home. He is moving rapidly to gain greater self-sufficiency in developing key technologies, particularly semiconductors. And he will head off any efforts that would impede his ambition to unify Taiwan with the mainland during his leadership.
 
It’s clear that President Xi regards 2021, the centenary of the Chinese Communist Party, as perhaps the most important year since he came to power in 2013. He regards the decade ahead as decisive.    
 
Nothing could have made President Xi’s personal ambitions clearer than the Fifth Plenum of the Central Chinese Committee, which concluded on October 29, just five days ahead of the US election.
 
“Judging by the Plenum’s outcome, Xi’s political ambition to remain in power for the next 15 years looks increasingly secure,” said Kevin Rudd, the former Australian prime minister, in a must-read speech as president of the Asia Society Policy Institute. Rudd sees the 2020s as the “make-or-break decade for the future of Chinese and American power.”   
 
President Xi’s rush to close the EU investment deal is just one among many elements of his evolving, pre-emptive approach toward the United States in general and President-elect Biden more specifically, with elements that range from trade initiatives around the world to escalating actions against pro-democracy activists in Hong Kong and real or perceived dissidents at home.
 
Seen most charitably, President Xi is hoping to incentivize the Biden administration to more cooperatively negotiate similar agreements with Beijing. It had been a long-desired Chinese goal, before the decline of relations during the Trump administration, to achieve a so-called BIT—or Bilateral Investment Treaty—with the United States akin to what is being negotiated with the EU.
 
Seen less generously, Xi is boxing in the Biden administration long before the January 20 inauguration by locking its closest democratic allies into investment and trade agreements to which Washington isn’t party. Regarding human-rights issues—including this week’s arrest of a Bloomberg journalist and the jailing of newspaper founder Jimmy Lai and other Hong Kong democracy activists—he’s signaling that today’s China will resist President-elect Biden’s expected efforts to highlight human-rights issues.  
 
President Xi is not only leveraging the long-standing commercial attractions of his country’s nearly 1.4 billion consumers. He’s also profiting from China’s significant success at getting COVID-19 under control. That, in turn, will allow China to be the world’s only major economy to post growth this year, at some 1.5 to 2 percent, with a shot at double-digit growth next year.  
 
The news from Brussels follows last month’s announcement that 15 member countries of the Association of Southeast Asian Nations and regional partners—including China, but not the United States—had signed the Regional Comprehensive Economic Partnership, or RCEP, one of the largest free-trade agreements in history. It is the first time China has come together with US allies South Korea and Japan in such an agreement.
 
Beyond that, President Xi has expressed interest in joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. The agreement was negotiated with the United States during the Obama administration, but President Trump pulled out of the talks, long before their 2018 successful conclusion, as one of his first acts in office.

For all his determination to reinvigorate relations with allies, President-elect Biden has said trade agreements won’t be a priority. There remains an insufficient constituency for them among Republican or Democratic lawmakers.
 
As always, it would be mistaken to underestimate China’s challenges, and they are many.
 
Among them are doubts about the Chinese economic model, particularly as President Xi tightens his controls over the private sector, including the recent blocking of the ANT initial public offering. China’s return to growth this year has been driven mostly by the state.
 
There are increasing signs that President Xi’s most ambitious international effort, the Belt and Road Initiative, is in trouble. Chinese officials are quietly reigning in its ambitions—and they face pressure to reschedule or forgive debts owed by poorer country partners.
 
It’s also not clear whether national self-sufficiency efforts will close remaining technology gaps, particularly when it comes to semiconductors. The Trump administration heightened tensions this week, putting China’s biggest chip maker and drone maker on an export blacklist, requiring US companies to get licenses to sell to them.
 
Whatever problems President Xi may have, he emerges from 2020 stronger than anyone anticipated when the coronavirus broke out in Wuhan late last year. In President-elect Biden’s inaugural year, it may be President Xi’s actions that are most worth watching. 

This article originally appeared on CNBC.com

Frederick Kempe is president and chief executive officer of the Atlantic Council. You can follow him on Twitter @FredKempe.

THE WEEK’S TOP READS

The selection includes a major Atlantic Council paper by Mathew Kroenig and Jeffrey Cimmino providing a logical, workable strategy for the US and its allies to manage China’s rise; the best piece I’ve read yet, by James Crabtree in Noema magazine, on Xi’s controversial “dual-circulation” economic policies that rethink globalization; and Dan Yergin’s rich look at history to understand the most dangerous waterway on earth, the South China Sea.
 
The Atlantic Council’s Matthew J. Burrows and Robert A. Manning provide their annual review of the ten greatest risks for the year ahead—but, mercifully, this year they have also added the ten top opportunities.
 
Rounding out this week’s choices, the Washington Post’s David Ignatius, a master novelist himself, provides a rich reflection on the life and writing of John Le Carré, who passed away last Sunday. Le Carré is also Inflection Points’ Person of the Week. 

#1. THIS CHINA STRATEGY COULD WORK

Global strategy 2021: An allied strategy for China
Matthew Kroenig and Jeffrey Cimmino / ATLANTIC COUNCIL

The Atlantic Council’s Matthew Kroenig and Jeffrey Cimmino, working alongside expert collaborators from ten of the world’s leading democracies, produced this week’s “must-read.” Their Global strategy 2021: An allied strategy for China, proposes what strategist and author Joe Nye called “a logical and actionable strategy for addressing the China challenge.”
 
As Nye outlines in his compelling foreword, the authors “argue that the desired endpoint of the strategy is not everlasting competition or the overthrow of the Chinese Communist Party, but rather to convince Chinese leaders that their interests are better served by cooperating within, rather than challenging, a rules-based international system.”
 
Best of all, the points in their paper are actionable. It calls for strengthening like-minded allies and partners and their rules-based global system; it outlines how to use that strengthened base to defend against malign Chinese behavior; and it looks at often-underestimated opportunities to engage China from a position of strength on matters such as climate, the global economy, public health and nonproliferation.
 
Pass this one to any policymaker you know! Read More →

#2. PRESIDENT XI’S ‘DUAL CIRCULATION’ STRATEGY

China’s Radical New Vision of Globalization
James Crabtree / NOEMA MAGAZINE

China watchers this year have been studying a new term, “dual circulation,” that describes President Xi Jinping’s radical new approach to globalization, based on the assumption that the US and its allies will try to deny China the technology it needs to build “a modern socialist country.”

This week’s potential investment agreement with the EU notwithstanding,  James Crabtree in Noema magazine writes on President Xi’s shift in thinking from globalization as a given to a likely new struggle with the US and the West that could “accelerate China’s decoupling from the West while also increasing the importance of trading links forged with other parts of the world.”

“Put more bluntly,” he writes, “while the world was distracted by the drama of the US presidential election, Xi quietly unveiled an economic strategy fit for a new Cold War. Both for China and for globalization itself, the results are likely to be profound.” Read More →

#3. THE WORLD’S MOST DANGEROUS WATERWAY

The World’s Most Important Body of Water
Daniel Yergin / THE ATLANTIC

Pulitzer Prize winner Dan Yergin delves into history as a guide to understanding today’s dangerous tensions between the United States and China in the South China Sea.

He calls it “the most important body of water for the world economy— through it passes at least one-third of global trade. It is also the most dangerous body of water in the world, the place where the militaries of the United States and China could most easily collide.”

Yergin tells his story through “four ghosts, long-departed men from centuries past…” 

They include China’s greatest seafarer; the Dutch lawyer who penned the legal brief against Chinese claims; the American admiral whose philosophies offered a foundation for both US Navy and Chinese maritime expansionism; and the British writer who argued the costs of conflict were too high, even for the potential victor. 

This is rich reading. Read More →

#4. WHAT TO WORRY ABOUT (AND HOPE FOR) IN 2021

The top ten risks and opportunities for 2021
Matthew J. Burrows and Robert A. Manning/ ATLANTIC COUNCIL

Drawing on their many years of combined experience at the US National Intelligence Council, the authors took their annual stab on behalf of the Atlantic Council at the top risks for the year ahead.  
 
They’ve added a twist this time, attaching probability to each scenario. You can look at their assessment of the chances of a stifled Biden presidency, a deepening COVID-19 crisis, a new global financial crisis, intensified Iran-US confrontation, or a US-China clash over Taiwan.
 
Mercifully, they’ve added a top ten look at opportunities this year. Here you’ll be able to gauge the chance for a WTO rebirth, new momentum for multilateralism, improvements in US-Russian relations, a Manhattan Project for battery storage, and an expanded and deepened Sunni Arab-Israel alliance. Read More →

#5. LE CARRÉ’S LEGACY

John le Carré didn’t just invent the characters in the foreground of the spy world. He designed the entire set. 
David Ignatius / WASHINGTON POST

These weekly picks have overfilled their quota of David Ignatius’ columns for this year.

But how could I not include Ignatius’ reflection on the great spy novelist John Le Carré, who passed away last Sunday? After all, Ignatius himself is a master storyteller with eleven novels under his belt, including Body of Lies, which director Ridley Scott adapted into a film.

“To say that le Carré invented the modern spy novel doesn’t do justice to his achievement,” writes Ignatius. “His fiction was so powerful that in the ‘secret world,’ as he always liked to call it, his imaginary names began to take over for real ones.”

Ignatius closes his rich piece with a conclusion one can only wish Le Carré could have read before he passed. He writes that the author’s “genius was that his reimaginings of people and events have proved more memorable than the real things. A handful of authors have similarly defined the periods in which they lived—Dickens, Tolstoy, Balzac, Flaubert—creators of unforgettable characters and the very air they seem to breathe.”

Some will question Ignatius’ decision to put Le Carré in that league, “but I suspect that a hundred years from now, readers will make that judgment,” concludes Ignatius. Read More →

QUOTE OF THE WEEK

Atlantic Council top reads

New Atlanticist Dec 17, 2020

Sanctions against Turkey over Russian arms: Has the United States found a sweet spot?

By Daniel Fried

With its sanctions against Turkey’s main defense-procurement entity, the United States may have found a sweet spot: sanctions strong enough to capture Turkish attention but not so sweeping as to shut down bilateral security and arms relations with a NATO ally.

Defense Industry Defense Technologies

New Atlanticist Dec 17, 2020

How the US and Europe should rethink their economic relationship in the Biden years

By Elmar Hellendoorn

If the Biden administration chooses a conventional approach to trade policy, it will not only deprive itself of a powerful instrument to shape international relations but also put US interests and the Western liberal order at a disadvantage.

Economy & Business Europe & Eurasia

New Atlanticist Dec 15, 2020

Which hacker group is most like your astrological sign?

By Safa Shahwan Edwards and June Lee

Which cyber Advanced Persistent Threat (APT) is most like your astrological sign? After all, behind every cyber operation is a human, led by his or her values and decisions, which can be shaped by one’s astrological sign. These APT-sign pairings provide a guide to some of the most dangerous cyber threat actors and perhaps even a forecast of their prospects for success.

Cybersecurity Internet

The post China’s Xi rushes to close EU investment deal ahead of Biden inauguration appeared first on Atlantic Council.

Transatlantic trade policy stands at a crossroads as 2020 draws to a close. Challenged by populists across the political spectrum, disrupted by COVID-19, and potentially rendered irrelevant by the distributed digital economy, it is fair to question whether the multilateral trading framework crafted at the tail end of World War II is fit for the twenty-first century.

At seventy-five years, the system was showing its age before the pandemic hit. The transatlantic community should seize the opportunity to make key changes and encourage the evolution of the multilateral trading system in four ways: accelerate supply-chain digitization, diversify supply-chains, increase standards interoperability, and engage constructively with China.

Transatlantic policymakers have a real opportunity to rebuild and push forward a new trade policy agenda that can deliver economic growth in response to the pandemic. Choosing achievable goals can lay the foundation for a multilateral trading system that is fit to serve the needs of the twenty-first-century digital economy, and provide the foundation for a generation of cooperation that promotes real and responsible economic growth.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

Learn more

The post Trade policy priorities for a COVID-19 era and beyond appeared first on Atlantic Council.

“Clearly all the [Purchasing Managers’ Index] PMI numbers and the latest developments that we are seeing are showing that the economy is still suffering,” Lagarde explained. While positive news about vaccine development means “we are seeing the other side of the crisis,” she argued, “we have not crossed that crisis yet. We are still in the midst of it.”

Since businesses were forced to temporarily close and travel was halted to control the increase in infections of the last two months, policymakers need to ensure that “fiscal policy is going to be more potent and has to continue to be deployed in order to stimulate demand,” Lagarde said. The ECB is prepared to take needed action as well, she added. “We demonstrated that we were there to support the economy during the first wave of coronavirus. We will be there for the second wave which is underway.”

The ECB president spoke with Atlantic Council President and CEO Frederick Kempe to mark the launch of the Atlantic Council’s new GeoEconomics Center. Here’s a brief look at what she had to say on coronavirus stimulus, digital currency, and more:

Riding out the second wave

• Light at the end of the tunnel, but we’re still in the tunnel: Lagarde celebrated the recent news from vaccine developers suggesting that vaccination could be widespread at some point in 2021. But policymakers still have work to do to make sure their economies and societies can ride out the rest of the pandemic storm. “Fiscal authorities have to continue to deploy fiscal tools…because we want to carry [them] to the other side” to ensure that a recovery is possible once vaccines are distributed, she said.

• Focus on fiscal stimulus: With economic data already showing the pain inflicted from the second round of shutdowns across Europe, Lagarde argued that governments must continue to pump fiscal stimulus into the economy. She suggested, however, that policymakers take care to target these measures “because not all sectors are at risk at the moment,” as the manufacturing sector may not need the same rescue package as the beleaguered tourism industry.

• ECB stands ready: While not providing specifics of how the European Central Bank will respond ahead of an important December 10 rate meeting, Lagarde said that the ECB “will recalibrate some of the instruments that we have used in order to make sure that they continue to sustain the economic recovery [and that] they continue to support very attractive financing conditions going forward.”

Watch the full event:

Lessons from crises present and past

• Move quickly: Lagarde explained that policymakers learned from the European sovereign debt crisis of the last decade to respond quickly to shocks as a “crisis is not going to wait for you to make up your mind.” Many in Europe believe, she added, that “if we had moved a little bit faster than we did, it would not have been as costly as it was and it would not have left as many scars as it did.” When the coronavirus crisis hit, this meant that European leaders “understood that we had to act swiftly and together.” This cooperation “leveraged our respective positions and amplified the impact that we had in trying to really put a floor under the economy,” she explained.

• Monetary and fiscal policy “hand in hand”: There was not only cooperation between countries during the pandemic, but coordination between the two main levers of economic power: fiscal policy and monetary policy. “In many countries, monetary policy and fiscal policy went hand in hand,” she explained, as emergency funding to banks by the central bank was effectively paired with government guarantees to allow banks to make riskier loans. “The combination of these two…was a successful instrument,” she explained. Government stimulus efforts were also crucial to helping societies weather the storm in ways the ECB could not achieve. “To make sure that companies were continuing to operate and had access to credit was one thing,” she said, “but having at the same time the fiscal authorities…put in place furlough schemes, unemployment schemes, that will actually support income” was especially important.

• Two key ECB tools: The two cornerstones of the ECB response to the pandemic, Lagarde explained, were an asset-purchasing program and attractive financing terms for banks. The asset-purchase program has grown to $1.3 trillion Euros, she said, which allowed the ECB to “stabilize financial markets” while also preventing a dangerous increase in inflation. The financing terms helped prevent “a seizure of the economy” as banks were able to keep money moving. Lagarde stressed that these terms were “not a gift,” but came with strict conditions that banks actually use the money to extend loans to other businesses or risk losing the special rates.

• A permanent Eurobond?: A key element of the European Union’s rescue plan was the issuance of a joint bond between the twenty-seven EU member states for 750 billion Euros. The “Eurobond” sparked predictions that European authorities would look to create permanent “safe asset” bonds in the style of US treasuries. But Lagarde cautioned that while the Eurobond was “an example of solidarity amongst members of the European Union” in the crisis, she did not think that “the founding mothers and fathers of this new instrument intended for it to stay forever.” The new bond does, however, provide “good standards for whatever further work may be done around similar types of instruments for similar circumstances going forward,” she added.

Access the GeoEconomics Center’s QE tracker:

Global QE Tracker

The Global QE Tracker allows users to compare the major central banks’ different QE policies, offers in-depth breakdowns of each institution’s specific QE measures, and explains in clear terms how QE and interest rates work together to produce successful monetary policy.

A digital Euro?

• Demand rising for a new Euro: The pandemic may also trigger another new development for the European Central Bank: the prospect of a digital Euro. The coronavirus has triggered an increased demand for “instant payment, contactless payment, and significant use of digital payment of all sorts,” Lagarde said, which has spurred more interest in a digital bank note issued from the ECB. Lagarde admitted that such a digital Euro “can be faster, cheaper, and more secure than other means of payment,” while also providing “good control of monetary policy.”

• Not so fast though: But despite the likely benefits, it will be some time before a digital Euro is available, Lagarde cautioned. Policymakers must explore potential risks with the digital payment, she said, including the crowding out of banks and private-sector payments, privacy concerns, and risks of money laundering and terrorism financing. “The job has begun, it is clearly in demand, but equally I don’t think that we should move too fast for the sake of being first out of the gate,” she said. It will likely “take a few years before we are safe with it and we can launch,” she predicted.

• China ahead of the game: While Europe is still exploring the idea, China has raced ahead with its plans for a digital currency, as Beijing has already launched large-scale trial runs of their Digital Currency/Electronic Payment (DCEP). While Lagarde acknowledged that China is “ahead of the game,” the country’s digital currency is “still in an experimental stage,” she added that it would be wrong to say that the Chinese have already won the race.

Putting the “Geo” in “Geoeconomics”

• Bringing the world together: Lagarde congratulated the Atlantic Council on the launch of its GeoEconomics Center, which she argued is well-timed for the current coronavirus crisis. “If we are learning anything from the kind of crisis we are going through at the moment, it is that things are handled and have to be addressed on a ‘geo’ basis, meaning the entire globe is concerned.” Atlantic Council Chairman John F.W. Rogers explained that one of the primary focuses of the new Center will be on “ensuring that America works with its time-honored friends and allies to strengthen the global economy, applying a constructive, multi-dimensional approach to the obstacles we collectively face.”

David A. Wemer is associate director, editorial at the Atlantic Council. Follow him on Twitter @DavidAWemer.

Further reading:

EconoGraphics Dec 1, 2020

Global QE Tracker

By GeoEconomics Center

This Global QE Tracker allows users to compare the major central banks’ different quantitative easing policies, offers in-depth breakdowns of each institution’s specific QE measures, and explains in clear terms how QE and interest rates work together to produce successful monetary policy.

Economy & Business European Union

New Atlanticist Nov 30, 2020

Can China’s digital yuan really challenge the dollar?

By Hung Tran

The DCEP will certainly bolster the Renminbi’s international position, but the weaknesses in China’s financial markets will prevent the Chinese currency from dethroning the US dollar anytime soon.

China Digital Currencies

Central Bank Digital Currencies Apr 20, 2021

The Rise of Central Bank Digital Currencies

By GeoEconomics Center

What exactly is a Central Bank Digital Currency (CBDC) and how does the research compare globally?

Digital Currencies Digital Policy

The post ECB President outlines her plans for overcoming the second wave of economic damage from COVID appeared first on Atlantic Council.

This Global QE Tracker allows users to compare the major central banks’ different QE policies, offers in-depth breakdowns of each institution’s specific QE measures, and explains in clear terms how QE and interest rates work together to produce successful monetary policy.

There are 3 sections to explore: Major central banks’ QE and interest rates compared, our interactive Global QE Tracker, and an explainer on how QE works.

Central banks’ QE and interest rates compared

Explainer: How QE works

“The problem with QE is that it works in practice, but it doesn’t work in theory.”
– former Federal Reserve Chair Ben Bernanke, 2014

Source: European Central Bank

We would like to thank Will Bonney, Ekta Deshmukh, Amanda Dickerson, Amy Jeon, and Stefan de Villiers for their contributions to this tracker.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

Learn more

The post Global QE Tracker appeared first on Atlantic Council.

Read more here.

The post Kasperek speaks at EconPol Europe Annual Conference 2020 appeared first on Atlantic Council.

As part of the Atlantic Council’s Elections 2020 programming, the New Atlanticist will feature a series of pieces looking at the major questions facing the United States around the world as Americans head to the polls.

For the past seven decades, Europe has been the United States’ political, economic, and security partner of first resort. Now, as the transatlantic relationship is challenged by internal and external forces—the COVID-19 pandemic, economic downturns, climate change, external pressures from Russia and China, and cracks in the foundational liberal international order that underpins the transatlantic community—the EU and the United States find themselves at a crossroads in the relationship. There are new opportunities for constructive partnership in responding to external threats and promoting further Euro-Atlantic integration in Europe’s neighborhood, but there are also chasms growing around issues of trade and regulation, digital policy, and diverging priorities in defense and investment. These challenges and opportunities have been building for a decade, but the two potential administrations have articulated different approaches to the US-EU relationship even as it remains one of the most consequential partners on the world stage.

Below are the five major questions facing the United States on Europe as the US elections approach, answered by top experts:

How can the United States and the EU start a new administration, either under Biden or Trump, on the right foot? What could be one big win that would build positive momentum in the US-EU relationship?

“US and European leaders need to halt the destructive, mainly Trump-instigated, cycle of self-indulgent posturing driving apart the world’s greatest democratic centers and start working on common global challenges and problems from authoritarian Russia and China.

“A Biden presidency will find it easy to stop treating Europe as a punching bag, a move Europe will gladly reciprocate. A Trump administration could as well, if it so chose (I’m skeptical.)

“Substance will need to follow tone, and swiftly. It may be a tactical mistake to bet all on one big win early. Instead, US and EU/European leaders should recommit to join forces on a set of challenges: the coronavirus, economic stresses, climate change, [Russian President Vladimir] Putin’s rejectionist aggression, China’s revisionist ambition, Iran, and more. It’s not hard to imagine an early US-EU summit producing agreement along these lines. 

“They should aim even higher: in addition, the United States and EU, joined by other key democracies, could issue a Charter of Principles, a sort of 21^st century version of the Atlantic Charter of 1941 that outlined the principles with which Roosevelt and Churchill sought to fight the Second World War. The challenges today are greater, and the principles must be broader and not issued by only two countries. But after years of democratic decline, authoritarian resurgence, and mounting economic and global problems, the democracies have the responsibility to stand up and declare their fundamentals and intentions.”

Daniel Fried, Weiser Family distinguished fellow at the Atlantic Council and former US ambassador to Poland.

How should the United States and EU work together to counter China?

“The lack of transatlantic coordination on China is one of the greatest missed opportunities of the last years. It is particularly striking as, on many areas, Washington and Europeans share similar concerns regarding China’s behavior. Having the largest integrated single market and a global norms setter, the EU, and its Member States, on its side would be the United States’ key asset in the strategic competition that will dominate the next decades.

“European public opinions have increasingly awakened to the challenge represented by China’s assertiveness, especially in the wake of the COVID-19 pandemic. China’s attempt at “mask diplomacy” has proven ineffective while Europeans have suffered from the regime’s cover-up of the pandemic.

An October Pew poll shows unprecedented unfavorable views of China in many European countries: 70 percent in France, 85 percent in Sweden, 74 percent in the UK, 71 percent in Germany hold negative opinions. The crisis has underscored the dependency of critical assets (such as masks or medicine) on Chinese supply chains and opened a debate on bringing back key industries.

“This change was already reflected in an official 2019 strategy document, where the European Commission pointed to China as a “systemic rival promoting alternative forms of governance.” While the paper also points to areas of potential cooperation and partnership, the phrase stuck and signaled a change in tone in European capitals. On issues such as trade manipulation, human rights, privacy and data collection, this year European Commission Executive Vice President Margrethe Vestager announced an initiative to “level the playing field” and control foreign investments receiving state subsidies. Meanwhile, Member States have also started raising concerns over investments, while France and the United Kingdom are conducting freedom of navigation operations in the South China Sea.

“The United States and European countries could work together to build a common front with Asian partners to address trade violations at a multilateral level (which would entail reinvesting the World Trade Organization) and build a common approach to screening foreign investments. Such approach would entail building convergence on issues such as digital regulation and trade. Our differences pale in comparison to the systemic challenge represented by China. Americans will have to accept that a stronger EU defending its own sovereignty is in its advantage, while also not amplifying potential differences in tones and approaches. Europeans will probably not follow a rhetoric of confrontation, that doesn’t mean there isn’t much space for a common agenda. A recurrent EU-US strategic dialogue would help shape that agenda.

“Finally, this strategy will work if it isn’t inward looking. As our economies struggle with the consequences of COVID-19, we must not forget the countries suffering from much higher debt-financing costs, from Africa to the Western Balkans or Central Asia. The United States and Europe should not let Beijing pursue its Belt and Road without offering robust alternatives.”

Benjamin Haddad, director of the Atlantic Council’s Future Europe Initiative

In which areas should the United States and Germany work to reconcile their differences to address global challenges and where should they “agree to disagree”?

“In the field of security and defense, Germany and the United States have an interest in reconciling their differences over a number of issues. On one side stand Germany’s attachment to Nord Stream II and Berlin’s tendency to look at the challenge of China’s rise through an economic lens rather than taking seriously its security implications. On the other side stand the US role in destabilizing the architecture of arms control through withdrawing from the Iran deal and not renewing the New START agreement and its neglect of climate change as a global security challenge.

“In order to be able to negotiate over these issues constructively, however, both sides will first have to address the issue of burden sharing. Here they might have to “agree to disagree” but should try hard to move on to a more constructive discussion. If President Trump wins another term, Berlin cannot afford to keep up the increasingly defiant stance it has adopted in response to his 2 percent bullying; nor can it afford to fall back asleep at the wheel out of relief over a Biden presidency. Since it is not at all clear that political circumstances in Germany will allow defense spending to increase to 2 percent of gross domestic product over the next few years, Berlin should instead lobby for a broader transatlantic understanding of what it means to take responsibility for security and defense. For example, it could offer to step up infrastructure contributions to increase military mobility for NATO troops in Europe, make investments in emerging defense technologies to help narrow the transatlantic interoperability gap, and boost support for EU and NATO efforts to turn European countries into more capable defense actors through e.g. joint training and capability cooperation. The arrival of new leaders on both sides of the Atlantic could offer a window of opportunity for such a reframing. This would make it easier to get out of the destructive spiral the US-Germany relationship is in today.”

Sophia Besch, nonresident senior fellow in the Future Europe Initiative

Where will the EU’s push for digital sovereignty take the US-EU relationship in 2020 and beyond?

“In the next year, the transatlantic gulf over digital regulation will widen dramatically, as the European Commission begins to deliver on its promise of digital ‘sovereignty.’ The Commission will introduce legislative proposals to reform the rules governing internet ‘gatekeepers’—large, and almost exclusively American, digital companies that operate platforms such as social networks or app stores.

“According to press reports, current voluntary commitments on content moderation would become mandatory. New responsibilities for content and safety could narrow the immunity from legal liability that platforms enjoy as information intermediaries. A blacklist of forbidden practices in the realms of e-commerce, advertising, marketing of apps, and access to data would be created, along with a greylist of practices requiring regulatory investigation. Also to be proposed is a new competition tool that would enable the Commission’s regulators to intervene in instances of market failure even where consumer harm is not clear-cut.

“Some of these ideas also are being discussed in the US Congress, but US legislators remain fundamentally divided over whether to pursue top-down regulation, in the EU fashion, or to let dynamic market innovation proceed. The US Department of Justice recently filed suit against Google, and a case against Facebook is being readied as well, but these litigation battles could last many years. 

“The EU legislative process, by contrast, advances deliberately but inexorably. 2021 will be remembered as the year that the US government, and US technology companies, began to face up to the challenge of the EU’s new thinking on digital markets.”

Kenneth Propp, nonresident senior fellow in the Future Europe Initiative

How can Europe and the United States build a sustainable transatlantic agenda across the flashpoints on Europe’s borders, such as the Eastern Med and Western Balkans?

“The Eastern Mediterranean is seeing heightened tensions over maritime claims and regional conflicts that threaten NATO’s cohesion and the security of the wider region. Stabilization is key to preserving American interests in an era of great power competition, vital for Europe’s Mediterranean countries, and critical to the security of the European Union in view of continued migration pressures. A common understanding of the Eastern Mediterranean’s geopolitical importance is the first step to addressing these challenges, which require increased security and diplomatic alert during these unstable times.

“A forward-looking transatlantic agenda for the region could take inspiration from the better-defined framework for cooperation in the Western Balkans. Rather than integration in the Euro-Atlantic institutions, the main vehicle for filling the power vacuum in the Eastern Mediterranean is regional cooperation. The US National Security Strategy focuses on strengthening its allies in the region by supporting energy and security partnerships among them to promote peace and prosperity. It has already contributed to building economic efficiencies and side-stepping some old enmities. The EU has similar tools in its Neighborhood Policy, as one of its priorities is also centered on connectivity, energy cooperation, and the environment. Another is strengthening institutions and good governance. Yet given the high stakes for the West, the single uncompromising value that the United States and Europe should insist upon is respect for international law: Even as they reward good neighborly relations, they should also target unilateral actions that infringe upon the sovereign rights of others—including through economic sanctions.”

Katerina Sokou, nonresident senior fellow in the Future Europe Initiative

“Europe and the United States need to engage with all allies and partners on the frontier of Europe to establish a more cooperative, productive, and sustainable transatlantic agenda in the context of an increasingly uncertain global geopolitical environment. Turkey, a NATO ally and EU accession country has had a fraught relationship with Europe and the United States in recent years which has harmed transatlantic cohesion. At the same time, Turkey’s importance to European security and stability, at NATO’s southeastern flank, has become all the more apparent since the beginning of the war in Syria and ensuing refugee crisis, and it shares many of the same concerns as its NATO allies in the face of an increasingly aggressive Russia. One emerging area of discord is the Eastern Mediterranean, where Turkey has felt ignored and sidelined. Europe and the United States need to advocate for all parties, including Turkey, to cooperate, find solutions, and in doing so, strengthen transatlantic solidarity.”

Defne Arslan is the Istanbul-based Director of Atlantic Council IN TURKEY.

“It’s a common refrain among Balkans experts that nothing gets done in the region unless the United States and its European partners are on the same page. The root cause of that is that leaders of these small countries are quite adept at balancing between sides when there is visible daylight between them. 

“It’s also a commonplace that without US leadership, the Western Balkans tend to stagnate, despite the best intentions of Europeans tasked with working on the region.

“The Trump administration showed that energetic US engagement can yield tangible results on the ground. It also learned that without its allies on board, these results prove to be fleeting and much smaller in scope than they otherwise would be. 

“Whoever wins in November needs to internalize both of these realities: America needs to lead on the Western Balkans, and it needs to bring its European allies along. It’s no small task to achieve both of these things at once. But it must be tried.”

Damir Marusic, nonresident senior fellow in the Future Europe Initiative

The post Five big questions as America votes: Europe appeared first on Atlantic Council.

Muzinich opened by comparing the recession responses in the US and EU. Acknowledging that there is still “much work to do” to support the economic recovery, he contrasted a US focus on stimulus checks and job retention programs with short term work programs common in the EU. Coupled with record low interest rates and increased asset purchase programs, both responses have been effective.

Muzinich went on to discuss transatlantic cooperation, highlighting four areas vital to that goal. Investment security is crucial, he noted, and “the pandemic has only increased the sense of urgency” to maintain it. Cryptocurrency integration into the public sphere is also important, ensuring that national security and financial stability is not threatened by decisions made in the private sector. The US and European powers must work together to hold bad actors accountable, said Muzinich, using the Syrian and Belarusian regimes as examples. Finally, growth is key to a good partnership, and a “strong economy is a testament to our liberal democratic system.”

Muzinich closed with a message of unity and hope for the future of the transatlantic relationship between the US and its European allies. “We must focus on our shared values as we look to create a prosperous, free, and secure world,” he said. “Our differences are small compared to the values we share.”

While answering questions, Muzinich readdressed the issue of digital currencies. No decisions regarding incorporation of the tool into public policy have been made, he explained, but extensive research is being done at both the Federal Reserve and the Treasury. He also answered questions regarding sanctions processes, taxes on digital companies, and growing income inequality as a result of COVID-19.

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The post Event recap: A conversation with Deputy Secretary of the Treasury, Justin Muzinich appeared first on Atlantic Council.

The European Central Bank and the US Federal Reserve responded to the economic effects of the COVID-19 pandemic with a similar prescription to the one they used during the Global Financial Crisis (GFC), but this time they multiplied the dose. In a few months, they have increased their balance sheets by as much as they did in several years following the GFC, with the main central bank interest rate remaining negative in Europe and returning to almost zero in America.

Once again, panic in the financial markets was halted, but as all cures, unconventional monetary policy (UMP) measures will have their side effects. These effects will often be much less spectacular and spread over time than the initial panics, undeservingly attracting less attention in the public debate. One of the most important of these is the zombification of non-viable firms in the economy.

The zombification occurs when creditors (or investors) are willing to provide virtually limitless low-cost funding to businesses regardless of their viability. UMP triggers zombification in three main ways:

1. With interest rates close to zero, almost every debtor is able to repay at least the interest on their debt. Even if the debt is gigantic, the interest payments are low and manageable.
2. When nearly all debtors can service their debt, it is hard to assess which one is viable and which is not. Obtaining such information becomes expensive and the information itself is uncertain anyway. With a large number of zombie firms in the economy, the long-term prospects of a company depend not only on whether it is viable itself, but also on the extent to which it or its contractors (and their contractors etc.) do business with zombie firms.
3. As long as UMP continues there is no need to struggle to attain this information.

In Europe, where banks play a larger role, banks are incentivized to remain ignorant. Many have been weakened by the GFC and UMP measures deployed to fight the crisis have deprived them of their usual income sources. Under normal circumstances, banks earn profits on interest rate margin, which depends on level of interest rates and the steepness of the yield curve (i.e. difference between interest rates of different maturity). Interest rates close to zero have largely taken away the former source of margin, while large scale asset purchases have impacted the latter. Additionally, financial supervision authorities, afraid of a GFC-like banking crisis, have obsessively forced banks to maintain high capital ratios. With zombie firms unidentified and alive, banks are not required to write off their loans and thus appear stronger than they actually are.

Our research shows that, of all market participants in Europe, banks’ attitude has changed the most in the aftermath of the GFC. Before the crisis, they were the most demanding market participants, meticulously eliminating the weakest companies to protect their profitability. They were more reluctant than equity investors to provide funding to non-viable companies, but after the crisis, their behavior has completely changed (see chart one).

Chart 1. Distribution of debt and equity financing between healthy and zombie companies in years 2002-2016 in Germany, France, Great Britain, and Italy.

One can suspect that in the United States, where the financial system is market based, struggling for accurate information about viability does not make much sense either. Asset prices are distorted by the Federal Reserve and profits come from anticipating its moves, not from thorough credit scoring of debtors, shifting the focal point of investors.

Our research shows that literally all European Union countries struggle with zombie firms. For example, in the north, the problem in Finland is almost as severe as in the south in Spain (see chart two).

Chart 2. Part of total assets locked in zombie companies in Spain and Finland in years 2002-2016.

Zombification has negatively affected all constituents of productivity (whose improvement is the only potentially inexhaustible source of long-term economic growth). Almost no companies exit the market because they can exist in a zombie state. Since these firms draw scarce resources, the number of new firms also falls (see chart three). Fewer exits and entries into the marketplace increase the importance of innovation and reallocation among incumbents but the intensity of those falls as well. Innovations are usually introduced either by new companies or because of their competitive pressure. In turn, restructuring is not needed by incumbents to survive. It creates an unnecessary risk instead.

Chart 3. Part of total assets belonging to new, incumbent and exiting companies in years 2000-2018 in Germany, France, Great Britain, and Italy.

Here our research brings yet another warning (although we focused the research on European data, the warning may apply to the United States as well). Central bankers use lower interest rates to encourage companies to carry out projects that they would not have normally undertaken at a higher cost of funding. Unfortunately, lowering interest rates may simultaneously have adverse effects on riskier and, as a result more profitable, projects . The reaction of companies will depend on the motivation of managers. If they intend to avoid bankruptcy or losses, or maintain profits or markups, they will respond to the lower cost of funding by choosing projects that are less risky, and thus less profitable. Some of the projects will become excessively risky for them and consequently will not be implemented at all. This will shift the economy towards lower profitability and, as a result, efficiency (see chart four). Only managers whose sole target is to maximize profits will respond to lower rates by taking on more risky projects. But profit maximization is not the main driving force behind managers decisions.

Chart 4. Actual to potential output in years 2008-2018 in Germany, France, and Italy.

UMP is not a free lunch. It emerged to avoid a collapse of the financial system. Initially successful in reducing uncertainty, UMP has also created barriers to long-term economic growth. It has continued like a drug addiction. Companies have developed dependency, the economy needs cheap money to function in its current state, and any reduction in dosage will cause withdrawal symptoms in the form of mass bankruptcies of companies unfit to function in a normal environment. Because pulling the plug has such dire consequences, no central banker will choose to do that. But as with all addictions, the longer we wait, the more difficult the detox will be.

Professor Andrzej Rzońca is a former member of the Monetary Policy Council in Poland and former chief economic advisor to the Civic Platform, currently the main opposition party in Poland.

Grzegorz Parosa is head of Equities at AXA’s investment arm in Poland and a student at Stanford University finishing his PhD under Rzońca’s supervision.

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The post Unconventional monetary policy is not a free lunch in Europe or the United States appeared first on Atlantic Council.

Two years ago, President Trump welcomed European Commission President Jean-Claude Juncker to the White House to face off escalating trade tensions. Instead of sparring, as many had predicted, they greenlighted a blueprint for fresh negotiations. But where are we two years on? Data, tax, and WTO disputes have taken center stage, while many of the traditional standoffs remain untouched. Four experts discuss what has and hasn’t changed, and how to keep momentum behind this fundamental, yet troubled project. Read the other pieces from Bart Oosterveld, Julia Friedlander, and Marc L. Busch.