Bursting the Bubble

Balancing Europe’s Geo-economics and Geopolitics

29 June 2016 | by

Geo-economics may be defined in two different ways: as the relationship between economic policy, changes in national power and geopolitics (in other words, the geopolitical consequences of economic phenomena); or as the economic consequences of trends in geopolitics and national power. Both the notion that ‘trade follows the flag’ (that the projection of national power has economic consequences) and that ‘the flag follows trade’ (that there are geopolitical consequences of essentially economic phenomena) points to the subject matter of geo-economics.

The intellectual roots of geo-economics are embedded in seventeenth-century European, largely French mercantilism. The military pursuit of markets, resources and bullion intended to allow a country to export more and import less, to buy cheap and sell dear, preceded the advent of modern economics based on ideas of free trade as well as laissez-faire.

While the nineteenth century was dominated by these classical economic ideas, mercantilism was never definitively buried, and has repeatedly raised its head, in inter-war Europe, for example, and most recently in China.

In the 1980s, the rise of Japan elicited mercantilist responses from Europe and the United States based on fears that Japan itself was rising on the back of mercantilism. Today, economic crises in Europe and North America are once again reviving latent mercantilism, with many accusing Germany and the United States of pursuing a mercantilist agenda.

The dominant paradigm of the Cold War era, however, left politics in command, meaning that geopolitics was driven by ideological rather than purely economic factors.

In today’s world, all parts of the global system are ripe for disruption, be it economic, political, physical, or virtual. The wall between economics and politics has fallen, as political conflicts are often fought through the system that manages the global economy.

Where does this leave Europe?

The EU should fare better in a geo-economic world than a classic geopolitical one. Economically, the EU is a giant. It sits at the heart of a eurosphere of 80 countries that depends on it for trade and investment, and even align themselves with its currency. It is a regulatory superpower.

Because the EU has the world’s largest single market, most multinational companies depend on access to the region – which means complying with EU standards. The Union has used this power at various times over the years in the economic realm – blocking the merger of General Electric and Honeywell, forcing Microsoft to unbundle its Explorer browser, and challenging US agri-business in Africa as well as other global markets over the use of genetically modified organisms. This export of regulations has extended into the political sphere on issues such as climate change – and most dramatically through the EU’s accession process and neighbourhood policy.

These policies make access to EU markets and membership conditional upon other countries adopting EU legislation and EU standards. To join the Union, candidates need to integrate over 80,000 pages of law – governing everything from gay rights and the death penalty to lawnmower sound emissions and food safety – into domestic legislation. What is more, regulatory power is less costly, more durable, more deployable, and less easily undermined by competitors than more traditional foreign policy tools.

What’s more, some of its leading member states – such as Germany, the world’s foremost export nation – are particularly well-suited to wield power in a geo-economic world.

However, there are questions about how durable Europe’s geo-economic power is. As its share of the global economy shrinks, how long will its regulatory power last? And will the EU – which, unlike the other great powers, is not a state – be able to overcome its structural divisions and pool its ample resources behind common policies? Much of its foreign policy depends on unanimous support from all 28 member states – which have divergent views and different levels of vulnerability to blowback. For example, while Russia doesn’t even appear in the list of the most important trading partners of Portugal, over 17 percent of Estonia’s exports go towards the east.

But most importantly, Europe is hobbled by the fact that, more than any other power, its inhabitants live at the “end of history”, subscribing to the ideological orthodoxies of “win-win” globalisation. Many of its governments still think the economy should be protected from politics and geopolitics. Believing that inter-state conflict can be avoided through integration and interdependence, having faith in the ability of institutions to “socialise” the rising powers.

To counter these disadvantages, European states need to realise that – in the face of geo-economic challenges from other powers – state intervention can be the best way to promote an open global economy. For example, Western countries could learn from China’s infrastructure-first model, adapting it to their strengths. They should also develop ways of compensating member states that lose out from particular geo-economic policies, so that they can wield more effectively their collective power. They need – both at a national and an EU level – to set up a machinery for economic statecraft similar to that of other great powers.

The European Union should develop an economic statecraft taskforce and a sanctions bureau to co-ordinate this increasingly powerful tool.

Above all, Europeans should be at the forefront of the movement to develop the rules of engagement for economic warfare. When governments use the infrastructure of the global economy to pursue political goals, they challenge the universality of the system, making it more likely that other powers will hedge against this disruption. They can also provoke retaliation.

In the same way that states have developed a series of agreements and conventions that govern the conduct of conventional wars between countries, principles of conduct must be applied to the economic arena. Of course, this kind of coordination will prove difficult, given the wariness of all-out conventional war that makes economic disruption so attractive and widespread in the first place.

Geopolitics and geoeconomics after Brexit

Brexit could have serious implications for the rest of the EU. Everything depends on how the separation agreement pans out but financial and trade frictions are already underway. It must also be noted that political considerations might result in a more damaging outcome, not only for the UK.

A loss in hard and soft power is certain after Brexit. The UK has its diplomatic network and the largest army in the EU. The EU without the UK will be more impaired on a regional and geopolitical base, when compared to the current EU.  It is currently hit most strongly in geoeconomics terms, not in geopolitical. Within global diplomatic, strategic, security and military matters, the EU will punch far below its weight after Brexit.

We must then be aware that the step from soft power to no power base is a close one.

What do you think?