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April 23, 2025

Banque de France’s François Villeroy de Galhau on strengthening Europe

Banque de France Governor François Villeroy de Galhau discussed the challenges of safeguarding the euro amid global economic uncertainty with Charles Lichfield, deputy director of the Atlantic Council’s GeoEconomics Center.

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Transcript of remarks

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Thanks to all of you for welcoming me in the Atlantic Council. We sit just a few blocks from Franklin Park and Lafayette Square. And if necessary, Washington’s geography reminds us of the enduring bond between our two nations.

As the Marquis de Lafayette, probably as famous in the US as in France, hero of the two worlds, once wrote to George Washington, I quote him: “Humanity has won its battle. Liberty now has a country.” From the very start, the cause of liberty, of freedom, has been one we have carried together, across the Atlantic, and I strongly wish it is still today, despite very troubled waters we are sailing through.

Let me also remind you with gratitude that Dean Acheson, who played a key role in the creation of your Atlantic Council, was also instrumental in the early steps of European integration. This is perhaps less well known, but he urged the French government in 1949 and 1950 to take the bold step leading to the Schuman Declaration of 9th of May 1950, and hence of what would become the European Union.

For Dean Acheson, as for many Americans, the EU was not designed, and sorry for the quotation, was not designed to “screw the US,” on the contrary. And let me, by this opportunity, also pay tribute to his French counterpart, Robert Schuman, at that time French Foreign Affairs Minister. He came from the French-German border, Jenna, which you alluded to, and it’s a legacy I feel personally connected to, having grown up like him in that very region where our two nations meet.

Hence, I will highlight that the transatlantic partnership has been so far strong and balanced, as no other worldwide. Second, nevertheless, the US trade policy shift will harm the global economy, starting at home. Lastly, and more positively, I will trace out a path for this possible European moment you mentioned, if, I stress, if we seize the opportunity.

Let me try to state the obvious first, but telling the truth means sometimes reminding the obvious at present. The US and the EU are the world’s two largest economies, maintaining one of the largest bilateral economic relationships. Then there is this question of the trade surplus.

Let me give some figures. If I look at the surplus in goods, obviously, there is a European surplus of $234 billion. But there is a services deficit which has significantly widened in the last years and which is at the advantage of the US for $125 billion. If I add a third element, which is a net primary income flows in favor of US firms, this leads ultimately to a balanced current account.

Can I also add that the effective applied tariffs between the EU and the US were close before recent developments, 3.95 percent for the EU on US products, 3.5 percent for the US on European products. Let me remind also the obvious: Value-added tax, VAT, is not a customs duty. It is levied on the final value of imported and domestically produced goods equally like the sales tax in the US. And nobody would argue in Europe that the sales tax is a customs duty.

European majority-owned affiliates directly employed an estimated [5.3 million] US workers in 2023, and European-based investors represent close to 50 percent of all foreign holdings of US securities that same year.

Last figure, and I will stop there, but only to show how deep, old, and balanced our relationship is: Today, 120,000 European researchers are working in the US universities, labs, and firms.

I must unfortunately go to my second point about the US policy shift and its harmful consequences.

Let me be honest: I don’t mean that the latest globalization wave was a fairy tale. It had its problems. It had its imbalances, both social and financial. But the current lose-lose game will obviously increase these problems and in no way solve them. The new trade measures, tariffs announced, as well as the increasing unpredictability which affects confidence, constitute without any doubt a major negative shock, and self-indicted, to the global economy, but first and foremost, to the US economy. I say that with sadness.

According to all analyses by most US and international banks and yesterday by the IMF, the American economy could suffer this year from an average estimated loss of around 1 percentage point in annual growth less and a similar-sized, 1 point rise in underlying inflation. There could even be a US recession, which was unthinkable, unthinkable, three months ago. But bad news for the US is bad news for all, including for Europe.

According to our preliminary assessments, there could be a direct negative impact of 0.25 percent to euro area GDP growth this year. The impact on inflation remains more uncertain but could be as a whole on the downside. And this is a significant difference; our inflation would diminish while the US one would increase. That said, our baseline scenario for France and the euro area remains that of an exit from inflation without a recession.

Financial markets, as we all know, they reacted very negatively to these trade announcements with a very unusual combination—let me stress that—of a sharp drop in US equity indexes, a rise—very surprisingly—in US long term bond yields, and a broad-based decline in the US dollar. The economic uncertainty may possibly threaten financial stability. I say it with some gravity. And I add that such deeply disruptive effects would also result from attacks on the independence and credibility of central banks. Let me on this occasion express again my gratitude to Fed’s Chair Jay Powell, who admirably shows how a central banker must behave.

One word about monetary policy, if you allow me. Independent from political impatience, our monetary policies are also autonomous from one another across the Atlantic. This in no way precludes—and this is my commitment to you—this in no way precludes a continuous, trusted, and indispensable dialogue, which is more necessary than ever for global financial stability.

But this autonomy is precisely what allows each of us to fulfil our domestic price stability mandate. In Europe, this is made possible by one of the greatest institutional achievements of the [1990s]: the creation of the euro. I am old enough, I must confess, to have been personally in Maastricht thirty-three years ago, and much more recently, I was in Frankfurt last week, for our latest decision to cut interest rates.

There is currently, as I said, no inflationary risk in Europe. And we can almost say “mission accomplished” when it comes to bringing inflation back to our 2 percent target. The significant deceleration of wages is another proof thereof. It is therefore both fair and appropriate that, compared to the US Fed or the Bank of England, the ECB has started cutting rates earlier—last June—faster, and likely further this year.

While this supports activity in the short term, the key to strengthening European growth remains structural through a broader mobilization of our internal resources.

And this brings me to my last and more positive considerations about Europe. Can I first say hope that we use the ninety-day pause to seriously talk across the Atlantic.

The least economically harmful option would be indeed to negotiate and then deescalate the situation rather than setting off a transatlantic spiral of tariff hikes. So far, Europeans, and you could witness it, Europeans have reacted in a remarkably united and calm manner.

Furthermore, I strongly wish Europe and the US can still commit together to what I call a pragmatic multilateralism. I mean a pragmatic multilateralism that is focused on some practical themes of common interest.

Let me name just a few: financial stability, cross-border payments and crypto-assets, cybersecurity, or the fight against financial crime and the prevention of extreme climate events. I insist: Let us resolutely preserve and support the multilateral institutions such as the IMF and World Bank, born and hosted in this great country—and this great city of Washington.

Let me express one final hope. If this difficult current situation has a silver lining, it is to possibly usher the European moment: Europe, despite its limitations—and we are aware of these limitations—as a safe haven of economic predictability and confidence, of rule of law, of social cohesion. But this will not happen without bold moves.

We can already see the impressive shift of the next German government. And these moves are obvious on defense, but let me focus today on economy, as the other pillar of this European moment. We need what I would call a “general mobilization” focusing on three imperatives, three “I”s, taking the best of the impressive economic success of America—or if you prefer, rather than three “I”s, size multiplied by muscle multiplied by speed. What do I mean? And I will be very short, but this is a sum up of the Draghi report, so to say—four hundred pages.

First, we need to integrate, the first “I”, the single market more. This means making the most of its size—as large in GDP terms as the US—by removing internal barriers in several areas such as services and energy. We also need, second “I”, to invest better, giving priority to the most promising breakthrough innovations, particularly those related to AI. And to succeed there, we need to build financial muscle through a genuine Savings and Investments Union, fostering more our abundant private savings—we don’t lack private savings, no the contrary—but we must force them towards equity and venture capital, again, US type. And third “I”: We need to innovate faster. Europe needs simplification, obviously. Less bureaucracy, fewer procedures, and shorter deadlines, while stressing—and this is one of our messages—that simplification is not deregulation, and we will come back to that.

Can I add a general consideration on this European agenda and this European moment: To successfully implement these three “I”s, these three imperatives, we urgently need a binding, visible, and not too distant calendar: Such a calendar will mobilize all our political and economic forces, as did in the past the 1st of January 1993 for the single market, also 1st of January 1999 for the single currency.

Let me conclude, in quoting the great French writer Victor Hugo. He wrote, almost two centuries ago, “A day will come when there will be no other battlefields but markets opening to trade and minds. . .  A day will come when these two great groups, the United States of America and the United States of Europe, will stand face to face, reaching out across the seas, exchanging their products, their commerce, their industries, their arts, and their genius.”

That day, alas, has grown more distant in recent times, but we need such nice utopias. The transatlantic sky has darkened considerably. But even in the storm, we must not lose sight of our long-term course. You, the American people, will decide what must be said and what must be fought for on your side of the Atlantic, as loud and clear as necessary. As Europeans, our task is clear: to strengthen our own side of the ocean. Let us, in the very name of the Atlantic spirit this Council embodies, let us seize the European moment.

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The post France’s François Villeroy de Galhau on a US recession: ‘Bad news for the US is bad news for all, including for Europe’ appeared first on Atlantic Council.

Meloni’s Washington visit is the first for a European leader since President Donald Trump’s “Liberation Day” tariffs, and it represents a litmus test for the future of US-European Union (EU) relations in an evolving global landscape.

Headwinds for trade ties

With two-way trade in goods and services with the United States exceeding $126 billion, Italy’s economy is among the most vulnerable in Europe to US trade retrenchment. The United States is now Italy’s top non-EU export market, valued at $76 billion in 2024 and representing 10 percent of the country’s total exports. Italy is also the third-largest EU exporter to the United States after Germany and France. But that interdependence between “unshakable allies” is a double-edged sword.

Much of the recent growth in Italy’s trade surplus with the United States—marked at $43.75 billion, the third-highest among EU member states—stems from sectors now in Washington’s crosshairs: industrial machinery, pharmaceuticals, chemicals, textiles, and food exports such as cheese, pasta, and wine. For instance, industrial exports alone accounted for roughly $27 billion, and Italy sends a quarter of its wine exports to the United States—about $2.16 billion annually. Similarly, a quarter of Italy’s pharmaceutical exports, valued at $14.6 billion, cross the Atlantic.

Confronted with three tariff regimes—25 percent on automobiles, 20 percent on steel and aluminum, and all-encompassing “reciprocal” tariffs at 10 percent (temporarily reduced from 20 percent)—Italy could see its gross domestic product contract by 0.4 to 0.6 percentage points over the next two years, risking the loss of over fifty thousand jobs, according to an early report by Confindustria. For an economy heavily reliant on signature exports and deeply embedded into Germany’s industrial supply—and with limited fiscal leeway for countermeasures—the contraction would not only hit hard at home but also stoke unease in Brussels, where Italy’s poor economic performance linked to its immense public debt are a perennial concern for the European Union’s stability. As a further indication of the mounting pessimism about the country’s ability to absorb such shocks, Italy’s stock market was the hardest hit among Western economies in the days after April 2.

A calculated balancing act

Since taking office in 2023, Meloni has sought to brand herself as a pragmatic conservative—capable of bridging European priorities with her electoral base, all while remaining unexpectedly closely aligned with Washington’s evolving agenda. In a recent Financial Times interview, she dismissed the notion of choosing between the United States and the EU as “childish,” instead advocating for strategic engagement with both. She took a similar approach to recent Ukraine talks, offering cautious support for defense initiatives while avoiding moves that could alienate Washington—a reflection of Meloni’s broader strategy to engage without provoking.

That approach is now evident in her government’s response to US tariffs. While Paris has called for triggering the EU’s anti-coercion mechanism, Rome has prioritized dialogue. Foreign Minister Antonio Tajani underscored the “existential” urgency to avoid “a transatlantic trade war that would destroy our companies.” While there is logic in this approach, it risks weakening Italy’s ability to adapt to a fragmenting global trading system. While others begin exploring what an EU with a less involved United States might look like, Italy continues to advocate for a slower approach, one that seemingly does not yet accept that these changes are here to stay.

Advancing Italy by elevating Europe

Meloni’s visit is not just about Italy—it’s about Europe. As the first EU leader to travel to Washington since April 2, she has a unique opportunity to serve as a conduit between a strained EU and a transactional US administration. But that role is fraught with risk. A purely Italy-centric approach would play into Trump’s preference for country-by-country dealmaking, weakening the continent’s leverage and exacerbating its divisions.

Meloni should then frame European unity not as a threat to Trump’s agenda, but as a force multiplier for the transatlantic partnership, or the “West,” one of Meloni’s favorite terms. A “zero-for-zero” agreement on industrial tariffs could be a symbol of renewed cooperation, or at least a new baseline for broader adjustments, and drive home how much easier and efficient it is to deal with one bloc at the negotiation table, instead of twenty-seven individual countries.

Arriving in Washington shortly after EU Trade Commissioner Maros Šefčovič, Meloni has the chance to double down on Europe’s commitment to reducing intra-EU non-trade barriers, so the single market can “level the playing field.” This includes unleashing further investment opportunities for US export-driven sectors such as energy, tech, and defense, while defusing escalation over irritants concerning value added tax or digital service taxes. It will be essential to frame Europe as a trusted alternative to dependence on China, thereby aligning with Trump’s priority of repositioning industrial and economic policies to tackle those that have exploited the global trading system and address nonmarket practices, overcapacities, and intellectual property theft.

This meeting is not just about Italian exports. If tariffs escalate, Europe may retaliate, imperiling cooperation on broader issues and leaving Italy worse off. The transatlantic relationship has weathered trade spats before, but today’s stakes are higher. Ironically for a leader who rose to prominence in nationalist and Euroskeptic circles, a strong, united, EU-wide message may now be Meloni’s best chance at defending Italian interests. Meloni has a complex task ahead of her, presenting to Trump a unified, nonthreatening EU open to dialogue—but one with the tools to counter a prolonged tariff regime. Failure to achieve this balance risks backfiring, angering all of her constituencies on both sides of the Atlantic.

A strategic crossroads

The Italian leader has a history of defying expectations, especially in her foreign policy decisions. For example, upon taking office, she continued Italy’s support for Ukraine and did not renew Italy’s membership in China’s Belt and Road Initiative. Yet, this moment calls for more than tactical diplomacy. Meloni must resist the temptation of short-term wins and instead articulate a long-term vision of Italy—and Europe—as indispensable partners even in a reimagined global playing field. It would work in Italy’s favor, as well as that of the United States and the entire EU.

Rome has long punched below its weight on the international stage. This visit offers Meloni the chance to change that, and she has long wanted this moment to prove her leadership and leverage her established political capital. But she will succeed only if she steps onto the stage not just as Italy’s leader, but as a credible steward of transatlantic unity.

Nicholas O’Connell is a nonresident fellow at the Atlantic Council’s Europe Center.  

Jacopo Pastorelli is a program assistant at the Europe Center.

Correction: This article was updated on April 15, 2025, to reflect the fact that one quarter of Italy’s wine exports go to the United States. A previous version incorrectly stated that one quarter of Italy’s cheese exports go to the United States.  

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The “rally ‘round the flag” effect—a surge in public support for a government in times of international crisis—is a well-documented phenomenon in politics. In an increasingly unpredictable world, Europeans are now rallying around the EU flag in Brussels. This growing confidence in the EU as a political and economic actor matters—not just for Europeans, but also for Americans, who should recognize that Europeans have started to prepare for a world in which the United States is no longer a central part of the continent’s security.

The message from Europeans is clear: They still want allies. But at the same time, they are getting ready to stand on their own feet in an uncertain world.

Sweden offers a striking example. Historically, Sweden is a transatlantic-leaning country with deep cultural and political ties to the United States. And it has often maintained a cautious stance toward EU integration. Yet in this latest poll, 79 percent of Swedes say that EU membership has been good for the country. At the same time, a separate survey conducted the same month by Sweden’s largest newspaper, Dagens Nyheter, shows a dramatic shift in Swedish public opinion toward the United States. Only 10 percent of Swedes hold a positive view of the United States, down from 23 percent just two years ago. The shift correlates with US President Donald Trump’s return to office in January. A full 86 percent of Swedes express a negative opinion of him. This dislike is not just personal; Trump is seen as a symbol of a declining US commitment to democratic norms and multilateralism, which many Swedes value highly. A striking two-thirds of Swedes surveyed in the Dagens Nyheter poll say that the United States has lost its role as leader of the free world. This sentiment had already taken root before Trump’s April 2 announcement of major global tariffs, which included a 20 percent tariff on the EU.

Across Europe, 66 percent of respondents in the Eurobarometer poll say that the EU should play a stronger role in protecting citizens from global crises and security threats. Three out of four respondents want the EU to be equipped with more tools, financial or institutional, to tackle these challenges. That said, this surge in pro-EU sentiment is not uniform. In countries led by more Trump-friendly or Euroskeptic governments, such as Hungary and Slovakia, support for deeper EU integration remains more tempered. Yet even in these contexts, the broader shift is visible. In Hungary, where Prime Minister Viktor Orbán has long been critical of Brussels, an April 2024 Eurobarometer survey found that more than two thirds of Hungarians view EU membership as beneficial, marking an increase from previous years. In Slovakia, public frustration with Prime Minister Robert Fico’s pro-Russian stance has sparked mass demonstrations in the past few months, with tens of thousands protesting under the slogan “Slovakia is Europe” expressing their support for democratic values and closer ties to the EU and NATO. These developments suggest that even where political leadership leans Euroskeptic, citizens are increasingly looking to the EU to safeguard their security and sovereignty.

The EU has responded in unprecedented ways to the call from its citizens to step up on defense and security. In January, European Commissioner for Defense and Space Andrius Kubilius called for a “Big Bang” in European defense spending and policy changes to face the Russian threat. This was an uphill task, with frugal nations such as Sweden, Germany, and the Netherlands opposing initiatives to take out loans and raise debt ceilings, while other nations refused to make commitments to increase defense spending.

But with the push provided by the Trump administration’s clear signaling in recent weeks that Europe will become less of a US security priority, Kubilius got his wish. The ReArm Europe/Readiness 2030 program, presented by the European Commission on March 18, outlines a new era in European security. It should not be understood merely as a short-term reaction to the Trump administration, but a necessary response to a changing global order—one in which the United States pivots to the Indo-Pacific while Europeans can no longer fully rely on US protection to counter the existential threat posed by Russia. As Kubilius put it in a speech on March 20: “450 million Europeans should not ask 340 million Americans to defend us from 140 million Russians who can’t even defeat 38 million Ukrainians.”

The ReArm Europe/Readiness 2030 program marks a historic shift in EU defense policy, mobilizing up to €800 billion through a mix of new and adapted financial instruments. What sets this initiative apart is not just its ambition but how the funding is being unlocked. For the first time, the EU’s Stability and Growth Pact has been loosened to allow member states to undertake defense-related borrowing beyond national debt limits via the escape clause. The initiative also launched a new €150 billion joint-borrowing mechanism, comparable in scale to the EU’s COVID-19 pandemic recovery fund, to support collective procurement and help ramp up the defense industry, including cooperation with Ukraine.

In another radical departure from past practice, the European Investment Bank, which was previously prohibited from military financing, can now fund defense industries. These steps would have been politically impossible just a short while ago. Even Sweden, which has long been resistant to debt-financed EU initiatives, and other traditionally frugal countries are now prepared to take on loans to fund defense modernization. For example, Germany’s recent €100 billion national rearmament plan reflects a sea change in Berlin’s approach to military spending. These developments underscore that Europe is not merely responding to US disengagement but is building real capacity to act.   

The tendency for the EU to integrate during crises is not new. For instance, the COVID-19 pandemic resulted in the pan-European procurement of vaccines and the first issuance of an EU eurobond. Still, it is remarkable that no EU government outright blocked the path toward greater defense integration, as far-right parties that are sympathetic to Trump hold power in Hungary, Italy, Slovakia, and the Netherlands. To be sure, European unity on defense is neither unanimous nor uncontested. Some governments remain wary of surrendering sovereignty over defense policy, and debates over funding mechanisms and the scope of joint procurement highlight enduring divisions among member states. These reservations underscore that while the trend is significant, it remains fragile and a range of questions on the implementation of further defense integration remain unsolved. Even so, this is a moment the United States should watch closely. The renewed push for a European Defense Union is a strategic counterweight to the uncertainty coming from Washington. Rather than retreating into nationalism or disengagement, Europeans are choosing to strengthen the EU as a geopolitical actor.

Anna Wieslander, PhD, is director for Northern Europe and head of the Atlantic Council Northern Europe Office in Stockholm.

Louise Blomqvist is a project assistant at the Northern Europe Office.

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Introduction
Trump and the European Union
The EU response: A new transatlantic deal?
Building a series of deals
Beyond the deal
Mechanisms for a transactional relationship

Introduction

With the February 10 executive order renewing and enhancing US tariffs on steel and aluminum,¹ President Donald Trump has given shape to his vision of the United States in the global economy. It is a vision of economic security based on walling off the United States from free flows of international trade and no longer providing economic largesse to others for the sake of systemic stability. He is not alone in his views; indeed, his return to the White House signaled that much of the US public is tired of the obligations of international leadership, both political and economic. Trump won the 2024 Presidential election largely because of fears about the US economy, and tariffs were a prominent part of his campaign. Although his voters may not have fully understood the implications of such measures, the Trump administration is now demonstrating that tariffs—or at least the threat of them—are central to the US approach to the global economy. This shift will have economic and political ramifications around the globe.

For Europe, and especially for the unique institution that is the European Union (EU), this marks the beginning of a new phase in the US-European relationship, one based on different assumptions than those that have guided the transatlantic partnership over the last eighty years. Europe can no longer assume the existence of a strategic partnership in which the United States serves as the protector. Nor can Europe be passive in this new world and simply wait for the old pre-Trump consensus on US trade and foreign policy to reemerge. European leaders have long given priority to ensuring that it supports Washington’s choices and vice versa. Even the structure of Europe today—with its two premier institutions, NATO and the EU—came out of a European design built with strong US support. But today, Europe faces its own challenges: a faltering economy, an aggressive neighbor and unsettled region, a “systemic rival” in China, and a range of internal political challenges, led by far-right extremism. For Europe to deal effectively with the new US reality, it must have its own consensus, reflecting its own interests and environment.

One thing is clear: the new US-EU relationship will be far more transactional. The second Trump administration will not judge European countries as loyal allies, but rather according to their strengths and weaknesses as rival negotiators and what they bring materially to the relationship with the United States. In response, the EU and its member states should not depend on the idea of a strategic partnership but rather seek to conclude a series of deals. While the EU may also seek to maintain and support the international legal order—including the World Trade Organization-based trading system—it should not look to the United States to participate in this endeavor. If anything, the US approach is likely to challenge European efforts to strengthen the international legal regime and multilateral governance. Nor should European leaders imagine that the second Trump administration is an aberration; Trump’s victory has emboldened the isolationist and nationalist tendencies in the United States, and they will be a key—if not dominant—force for some years to come. The EU should plan accordingly.

Trump and the European Union

The possibility of a Trump presidency has caused much consternation in Europe, and deservedly so. The first Trump administration proved itself hostile to both NATO and the EU, and Trump himself has repeatedly criticized those institutions as well as many individual European governments, especially Germany. His second term may see less criticism of NATO since military spending by European governments has increased. Trump seems convinced that his earlier criticisms drove that increase and European leaders will not disagree, although an argument can certainly be made that Russian President Vladimir Putin was even more influential. But Trump may also calculate that even more pressure—including demanding military outlays at three, four, or even five percent of gross domestic product—could benefit his efforts to further reduce European reliance on the United States.

But whichever path he takes toward NATO, Trump is likely to continue his rants against the EU. Trump has long believed that the EU was set up to “take advantage” of the United States, especially through trade.² He has focused on trade in goods, where the EU has a significant trade surplus with the United States, second only to the surplus held by China. But the EU’s $202 billion imbalance in goods trade in 2023 is significantly offset by the US surplus in trade in services, bringing the total to $125 billion.³ Throughout the campaign, Trump made his position very clear, saying he would impose a 10 percent tariff on goods from Europe: “The European Union sounds so nice, so lovely. All the nice European little countries that get together, right? They don’t take our cars. They don’t take our farm products. They sell millions and millions of cars in the United States. No, no, no, they are going to have to pay a big price.”⁴

But Trump’s concerns about the EU are about far more than trade. His antagonism is rooted in the view that the EU itself was created so that a group of smaller countries could take advantage of the United States. In this view, the EU has become a trading and regulatory power that is protectionist at its core, while refusing to take on the security and defense responsibilities that such a status should require. In his first term, Trump was an active supporter of Brexit, and he and other officials repeatedly asked other EU member states when they would be leaving the Union. He also floated the idea of a bilateral US-Germany trade deal before then-Chancellor Angela Merkel told him several times that this was impossible; that only the EU could negotiate on trade.⁵

Every indication is that these long-standing views will remain constant throughout the second Trump administration. Thus, European leaders should not only expect criticism about their defense and trade policies, but also an intentional effort to divide EU member states from each other and weaken the institution. Given Trump’s transactional approach to foreign policy—it is all about the deal—negotiating with a divided group of small countries would be preferable to dealing with one of the most powerful economic blocs in the world. Moreover, Trump does differentiate between European countries and leaders. He has praised Hungarian President Victor Orban as “a great man,”⁶ and Prime Minister Giorgia Meloni of Italy as a “fantastic woman,”⁷ but has been openly critical of Germany and its current Chancellor Olaf Scholz and his predecessor, Angela Merkel.

The EU response: A new transatlantic deal?

Thus, as the second Trump administration swings into action, Europe—and specifically the European Union—finds itself in a challenging situation. With war on its doorstep and its economy slumping, Europe must now also renegotiate its most important international partnership. Moreover, it must do so with a partner whose leader is unpredictable and clearly not committed to long-standing assumptions about the desirability of a strong transatlantic partnership. In fact, the first challenge for the EU will be to convince the Trump administration that engagement with the EU can be worthwhile.

For that reason, in the short term the EU must respond to a transactional US president and his threat to renew steel and aluminum tariffs with a good deal—but one that also incorporates Europe’s interests. While some observers argue that the EU should respond to tariffs with retaliation, tariffs would raise costs in Europe at a time of already high prices. But tariffs do provide leverage; indeed, Trump often characterizes potential US tariffs as bargaining tools and clearly used them to elicit some concessions from both Canada and Mexico before suspending those tariffs for a month. And the EU must soon decide whether and how it will use its own leverage. It is now finalizing a retaliation list in response to tariffs the United States levied on black olives in the first Trump administration. And it must decide by March 31 whether to continue the suspension of retaliatory tariffs established in response to initial US tariffs on steel and aluminum.

The Trump administration, in announcing renewed steel and aluminum tariffs, cancelled the Biden administration’s arrangement with the EU to admit those goods under a tariff-rate-quota (TRQ). But it has also held off imposing those tariffs until March 12, leaving a window for negotiation. The EU should take full advantage of that window, resisting the temptation to retaliate immediately and instead focusing on developing a deal that could stave off US tariffs while also serving EU interests. It may be that the threat of retaliation will be required to get the United States to negotiate, as during Canada’s and Mexico’s recent experiences with the Trump administration. Even then, the question is whether EU threats of retaliatory tariffs will bring Trump to the negotiating table or reinforce his antagonism toward the EU. The answer is likely to depend on what else he believes could be gained by negotiating. Thus, any retaliatory tariffs—to be useful—should be part of a larger deal.

Leaders would do well to review the June 2018 deal between then EU Commission President Jean-Claude Juncker and President Trump.⁸ In that statement, they agreed “to work together toward zero tariffs.” They also pledged not to “go against the spirit of this agreement,” which was widely interpreted as a “no new tariffs” pledge while negotiations were proceeding. Any new deal must begin with an understanding that new tariffs will not be imposed by either party in the wake of the deal, including the steel and aluminum tariffs announced on February 10. Ideally, one result would be to launch renewed negotiations to address the global steel and aluminum overcapacity issue—an issue of importance to both the United States and the EU—and remove those existing TRQs and threats of tariffs.

With tariffs put on the backburner, the deal must address the US trade deficit with the EU, and especially that of trade in goods. As mentioned above, in 2023 the US trade in goods deficit with the EU was significant, and it is on track to be even greater in 2024.⁹ But efforts to rebalance the number and type of goods traded across the Atlantic may be complicated by the high level of integration between the two economies. Much of transatlantic trade—perhaps as much as 65 percent by some estimates—is driven by strong mutual investment in which US and European companies have established major manufacturing facilities on both sides of the Atlantic.¹⁰ Thus, the direction and level of goods trade reflects supply chains in which auto parts, for example, move across the Atlantic several times during production of a finished product. Among the leading US imports from Europe are pharma products, chemicals, autos and components, and machinery. Similarly, the same industries are among the top US exports to the EU. Raising tariffs on EU imports in these industries could disrupt complex supply lines and may even complicate efforts to reduce the US deficit. Taxing components shipped by BMW in Germany to its US manufacturing facility not only raises the cost of a US-made car, but over the longer term threatens the cost-effectiveness of that facility and its jobs. Because BMW is the largest exporter of automobiles from the United States ($10 billion in 2021),¹¹ the health of that factory is important to the reduction of the trade deficit.

Instead, a US-EU deal should seek to reduce barriers to trade in the sectors where trade is heavily integrated, while looking for additional US exports in key commodities. For example, one longtime point of contention between Washington and Brussels has been the EU tariffs of 10 percent on passenger vehicles. These apply to all EU vehicle imports—not just to US vehicle exports—except where trade agreements have been negotiated. The recently updated EU-Mexico trade agreement included a removal of the 10 percent tariff on autos that met a 60 percent threshold of EU or Mexican content.¹² Despite the lack of a US-EU trade deal, this might be an opportune time to provide US exports with a waiver or suspension, especially given President Trump’s attention to this issue. The EU might take a page from Trump’s comments on reciprocity and reduce the tariff to the US level of 2.5 percent. Such a tariff reduction is unlikely to lead to a massive increase in cars entering from the United States as larger US vehicles have not proven popular in Europe. In 2023, the EU imported motor vehicles valued at approximately €10 billion from the United States (including US-manufactured German brands), while the EU exported automobiles totaling about €40 billion to the United States.¹³ A reduction in auto-related tariffs could be an important symbolic gesture, while not threatening the already struggling European car industry. Moreover, such a tariff reduction might lay the groundwork for a broader US-EU bilateral trade deal on auto parts and supplies.

The key element in any US-EU deal would be for the EU to provide assurances of continued significant growth in energy-related imports from the United States, especially liquified natural gas (LNG). This was a major part of the 2018 deal between then-Presidents Jean-Claude Juncker and Donald Trump. In fact, US LNG exports to Europe have tripled since 2021, from 18.9 billion cubic meters (bcm) to approximately 56.3 bcm in 2023.¹⁴ Even as Europe reduces its overall gas consumption due to energy efficiency gains and a shift toward renewables, there remains significant potential for expansion of US exports, which now make up about 50 percent of EU LNG imports. Thus, any deal should include steps to reduce barriers to LNG trade so that trade can grow as much as the market allows. On the US side, the cancellation of the Biden administration’s suspension in licensing new LNG projects—accomplished on Trump’s first day in office—should reduce EU concerns about the long-term availability of US LNG.

On the EU side, a pledge that new regulatory measures will not hinder LNG trade should be considered. For example, efforts to foster carbon capture utilization and storage—which are expected to be launched under the new European Commission—should not create requirements that US-based exporters cannot meet. Similarly, the scope of the EU’s Carbon Border Adjustment Mechanism (CBAM) should not be expanded to include LNG until after 2030. These are pledges that also preserve much-needed flexibility in European energy systems until renewables are sufficient.

Perhaps most immediately, consultations should be pursued to ensure that the EU’s new methane regulation does not inhibit the potential import of US LNG. Beginning in May 2025, that regulation establishes reporting requirements for importers, and in 2027 will mandate that EU importers ensure that imported LNG has been subject to methane reduction measures equivalent to those required in the EU.¹⁵ US methane regulations introduced by the Biden administration were a step in the direction of satisfying this requirement, but Trump is widely expected to rescind those rules. It may be that removing the financial penalties in the US rules but retaining other elements could provide a basis for a US-EU agreement that will allow US exports to continue unimpeded. A deal could include a pledge to begin consultations to resolve this challenging issue.

Finally, the EU could usefully add to the deal a pledge regarding defense procurement. European defense expenditures have grown significantly over the past three years and are likely to grow even more in the next decade. By some estimates, 80 percent of EU defense funds are spent on procurement from outside the EU, much of it from the United States.¹⁶ To date, the EU and its member states have provided more than €52 billion in military assistance to Ukraine.¹⁷ Making clear to the Trump administration how much the EU and its members plan to spend on US defense equipment over the next two to four years could be a significant element in a transatlantic deal. The EU could also pledge that there would be no discrimination against US defense companies established in Europe as it develops its EU defense industrial base.

Some may argue that such a deal will result in the EU giving more than it gets. That may be true, but these items also reflect Europe’s interests and likely behavior in any event: Importing LNG and buying weapons from the United States is going to happen. It is in the EU’s interest as much as that of the United States that methane requirements do not hinder the European supply of energy. And if removing a 10 percent tariff on US auto imports leads to an understanding that the United States will not impose more punitive tariffs on steel and aluminum, that would be a win for European industry.

Building a series of deals

Even if such a deal is reached, however, it will not fully resolve the trade tensions between the EU and the Trump administration. As a perpetual dealmaker, President Trump will soon start looking for the next deal that will reduce the trade deficit with the EU. The EU, in turn, will have to decide whether to engage. Depending on the situation, and the ambitions outlined by the United States, entering another negotiation may or may not support EU interests. However, there are some key areas where further deals might benefit both parties.

An area of increasing priority for both the United States and the EU is that of trade in critical minerals. Neither is a major producer of these commodities but rather must rely on imports to fulfill most of their needs. Extraction and processing of these minerals tends to be limited to a small group of countries, with China playing a large role. In 2022 the United States designated fifty minerals as critical to its economy, and China supplies more than half of US imports for nineteen of these minerals.¹⁸ The EU is in a similar situation, although it has set targets in its recent Critical Raw Materials Act to extract 10 percent of its annual consumption and process 40 percent of that consumption by 2030. It also envisions a major role for recycling of these commodities from used batteries, computers, etc.¹⁹ With the United States and the EU in similar straits, it makes sense to recognize any production from each other as suitable for barrier-free import into the other through an accord on critical minerals. The new administration is also unlikely to insist on the labor and environmental protections sought by the Biden administration in its version of a critical minerals agreement.

Aside from addressing the deficit in trade in goods, future US-EU deals could also include some key regulatory relief from European requirements for US companies. Too often, it is the regulatory differences that stifle US exports to Europe and increase the trade deficit. Europe has the right to regulate its own market and the products it allows into that market, as does any other jurisdiction. But while it is unlikely that any regulatory compromise could be achieved on such politically sensitive issues as GMOs or hormones in food, there are some pending rules in Europe that will cause serious transatlantic disruptions when they are enforced. Two key examples are the Deforestation Regulation (implementation was recently delayed until the end of 2025) and the Corporate Sustainability Due Diligence Directive (CS3D), which is scheduled to be applied in mid-2027. The European Commission has launched an effort to “simplify” both regulations, but it is not yet clear what that potential reform will include.

In its current form, the deforestation rules require companies to certify that products they place on the EU market do not come from recently deforested land, including land outside the EU. The stringency of these rules varies depending on whether the country of production is at a high or low risk for deforestation. To date, the European Commission has not started rating countries according to risk, and there are questions about whether the United States will qualify for low-risk status. But because these doubts are mostly focused on the lack of forest preservation regulations—rather than actual data about the growth or decline of forest cover—the EU should consider providing flexibility in order to find a way to provide the United States with an early identification as a low-risk country.

CS3D requires companies in scope and operating in Europe to identify and address any adverse human rights or environmental impacts resulting from their business. Moreover, they are to ensure that their subsidiaries and business partners also adhere to these rules. For those companies with global supply chains—including US companies—this could have an enormous impact. An offer to open early negotiations between the United States and the EU about how to enforce this rule could help identify ways to ease its implementation. It should be noted that both the deforestation regulation and CS3D have received a significant amount of criticism from within the EU—including from the major center-right political group, the European People’s Party (EPP)—as well as support from companies who have already taken major steps to comply. Even if the EU moderates some of the provisions of these rules in response to domestic criticism, an early beginning to transatlantic discussions on implementation would be worthwhile.

Finally, another area of potential agreement between the EU and the Trump administration is that of digital trade. At its most basic level, this is about agreeing on requirements for digital invoices and other necessities for buying and selling goods online. Negotiations over such an agreement had been underway at the World Trade Organization (WTO) for some time. The Biden administration pulled out of those talks last year, saying that the essential security exemption was inadequate to allow restrictions on data flows to some countries. With the United States moving away from its long-time stance in support of free data flows, there is more opportunity for a bilateral agreement with the EU. While European data authorities have not shown much concern until recently about transferring data to countries such as China and Russia—compared to their focus on US data transfers—that also is beginning to shift. As a result, the prospects for a digital trade agreement between the United States and the EU have improved.²⁰

This is hardly an exhaustive list of topics for a US-EU deal. While it is unlikely that a comprehensive free trade agreement is achievable, Germany’s designated chancellor Friedrich Merz has suggested this would be desirable.²¹ But even without such an umbrella agreement, there are opportunities for negotiating on specific topics. Key to identifying the most valuable areas for negotiation should be whether they improve the business climate across the Atlantic, and for the United States, whether barriers to US exports are reduced. A joint deal to resist Chinese overcapacity in steel and aluminum or to reduce the dangers posed by data transfers to China, whether in connected cars or through other modes, or an agreement on critical minerals that might boost US exports to Europe—these are just some of the specific arrangements that could be discussed. Initially a transatlantic deal might simply launch negotiations on such topics, giving both sides a further opportunity for hailing another agreement later. Even small deals can be instrumental in building some transatlantic good feeling, as demonstrated by the 2019 beef agreement, which was greeted with much enthusiasm by then-President Trump.²²

Organizing such a deal will not happen overnight. It will involve weeks, if not months, of building a case for cooperation and then careful negotiation. The EU has made clear that it is willing to move down this path, as Trade Commissioner Maroš Šefčovič stated soon after Trump’s inauguration.²³ President Trump began by announcing his America First Trade Policy but refrained from imposing trade penalties immediately. He then announced steel and aluminum tariffs but delayed their implementation until March 12—clearly opening a window for negotiations.

Beyond the deal

Even if the Trump administration and the EU succeed in concluding a deal, this will not resurrect the strategic partnership that has been central to transatlantic relations for the last seventy years. This will be a transactional US administration, and no single deal will lead to a long-term partnership. As with China, Saudi Arabia, Canada, Mexico, and others, Europe can expect the Trump administration to alternate threats with statements about the benefits of deals.

This method of operation is in part derived from the commercial real estate environment that is part of the president’s background. But it is also in keeping with the mood of the United States, as reflected in the 2024 election. Americans are largely focused on the domestic agenda, especially the economy and immigration, and they expect these to be the top priorities of the new administration. Whether it is justified by the data or not, many Americans believe that the economy is in poor shape and that trading partners have taken advantage of the United States.²⁴ Thus, they are willing to give President Trump an opportunity to try his strategy of reducing access to the US market and seeking investments that will boost US industry. While polls show that many Americans are supportive of NATO,²⁵ and believe the US should continue to support Ukraine,²⁶ the election demonstrated that economic concerns far outweigh foreign policy—and even long-standing partnerships—as priorities for the American people.

As a result, Europe must prepare itself for a new US foreign economic policy, one based on transactionalism and nationalism. The EU as an institution will face some particular challenges. The Trump administration is likely to differentiate between European countries based on their trade surplus or deficit with the United States and the level of their defense spending. Individual member states may be offered opportunities for special deals with the United States, even though it is the European Commission that holds legal competence to negotiate such accords. The Trump administration’s closeness to key tech industry leaders will lead to challenges to EU digital regulation as well as to its competence in competition policy.

Thus, beyond being willing to negotiate a deal, the EU needs to demonstrate that it is a strong negotiating partner. Europe should be able to provide real benefits if a deal is reached, but also to exact costs if warranted. The EU’s trade defense measures are little understood in Washington and not viewed as a serious retaliatory capability, if viewed at all. Moreover, the EU’s recent trade deals with Mercosur (the South American trade bloc) and Mexico have not stimulated any concerns in Washington that Brussels might be gaining an advantage in international trade, despite the European Commission’s messaging on this point.²⁷ Perhaps most importantly, sluggish European growth coupled with political weakness in two major member states (i.e., France and Germany) raise doubts about the value of Europe as an economic partner, despite the steady and significant increases in US-EU trade and investment. This skeptical attitude is only reinforced by the failure of Europe to grow global tech companies that would demonstrate prowess in the twenty-first century economy.

To be viewed by Trump’s Washington as an important economic and international actor, the EU must meet three challenges:

• It must jump-start its economy. The current debate over competitiveness, grounded in the Draghi²⁸ and Letta²⁹ reports of 2024, is a good first step, but there must be real action and measurable change. Reversing a slow-growth economy will not happen overnight, but a significant reform of capital markets coupled with a genuine simplification of some regulatory requirements and a focus on expanding the already vibrant European start-up environment would be good indicators that change is underway. The new European Commission led by President Ursula von der Leyen must meet this challenge or the EU will become increasingly irrelevant in the eyes of US policymakers.

• The EU, working with its member states, must clearly define its own interests. As the Trump administration is intently focused on the US domestic economy, the EU also must clarify its objectives and examine its priorities. It will not always be possible to pursue its own policy objectives while also aligning with the United States. Europe, for example, remains committed to decarbonization and the Paris accord, while the Trump administration seeks to ramp up fossil fuel production and restrict renewables. President Trump has a track record of relishing negotiations with those who act on their own interests first, such as China or Saudi Arabia. The EU should define what it wants from the United States and clearly understand its own position before entering negotiations with the Trump administration.

• European rhetoric must also change. In fact, it has already started to do so, as President von der Leyen’s speech at Davos demonstrated, laying out a willingness to cooperate with the United States while also clarifying how EU interests and priorities may differ from those of the United States. With Trump in the White House, disagreement with the United States may become more normal for the EU, but European rhetoric should focus on issues that can be negotiated or that directly affect EU interests. In the past, European criticisms of the death penalty or lack of gun control in America only exacerbated tensions. Also, many Europeans tend to be intensely critical of their own governments, including the EU institutions. Politicians, think tank analysts, and leaders frequently complain in public and private about disunity within Europe and the EU’s slow political process. Whether one agrees with these criticisms or not (and for many US analysts, our own government seems even more divided and dysfunctional), voicing them will not convince the Trump administration that the EU will be a credible interlocutor.

Mechanisms for a transactional relationship

European leaders and policymakers must be both realistic and imaginative about the mechanisms used to further US–EU discussions. Any deal is likely to create a need to launch consultations on specific issues, and there will be some who will use this to argue for a more comprehensive framework like the US-EU Trade and Technology Council (TTC). However, it should be remembered that the Biden administration accepted the EU proposal for the TTC in part simply to affirm the importance of the relationship with the EU. The Trump administration has no such ambition and is unlikely to duplicate a mechanism that took considerable time from several cabinet-level officials. However, the first Trump administration did convene two US-EU dialogues—the Energy Dialogue and the China Dialogue—and was willing to engage in consultations when they could see a clear US interest. Despite differences over tariffs and other matters, there are numerous issues that could be discussed productively between the United States and the EU.³⁰

During the second Trump administration, there are likely to be three distinct types of US-EU consultation mechanisms:

• A very specific, working-level consultation that addresses a particular issue, including issues identified during high-level meetings. These may at times veer toward real negotiations. But they will be limited in addressing only the specific topic, and they are unlikely to evolve into a more institutionalized task force or ongoing discussions after the specific matter has been resolved.

• A continuation of established but rather technical dialogues, such as the Joint US-EU Financial Regulatory Forum, which was established in 2016 as an enhanced version of the EU-US Financial Markets Regulatory Dialogue. The forum addresses money laundering, market stability, and banking oversight, as well as other financial market matters. But while the Financial Regulatory forum tackles issues of clear value to both the United States and the EU, the separate Joint Technology Competition Policy Dialogue probably faces a more uncertain future. Not only was it established during the Biden administration, but it reflects a desire on the part of both parties to use competition policy to restrain market-leading tech companies. While the Trump administration includes a range of views on tech and competition, it is unlikely to engage in a transatlantic discussion of competition policy while the president is criticizing Europe for fining US tech companies. Overall, these technical dialogues are likely to suffer, although some will survive. But without high-level encouragement, these are likely to be more restrained in terms of their scope and may become less frequent if leaders discourage staff from engaging.

• A series of disconnected but parallel political dialogues, including the Energy, China, and Cybersecurity Dialogues. These are generally high-level dialogues, with a cabinet/commissioner-level leadership meeting annually and working-level continuing discussions throughout the year. In the past, they have been forums for discussion and debate, rather than negotiation, and have served to demystify decisions and build understanding, if not consensus. Such dialogues will either proliferate or disappear according to the interests of both the Trump administration and the EU. The Energy and China Dialogues are likely to persist, given the high priority both parties give to these issues. The Cyber Dialogue is also likely to continue and might be used to raise other technology-related issues where there is not enough harmony to convene a separate dialogue. Another potential dialogue could focus on Ukraine, including its reconstruction. In the absence of a comprehensive TTC-like forum, the question is whether these political dialogues could also address more technical issues. Could the Energy Dialogue, for example, work to address the potential conflicts in methane rules and other issues that could stymie future US LNG exports? Could the China Dialogue work to harmonize US and EU export controls on key technologies?

Given the Trump administration’s hostility to the EU as an institution, this disaggregated set of mechanisms is probably more achievable and effective than something like the TTC. The trick will be to identify issues on which there is some congruence on US and European priorities. Where there is not—with US and EU views far apart on issues such as climate change, for example, and potentially AI—such dialogues would be less productive unless there is a concrete pledge to seek to ameliorate differences.

During the next four years—and perhaps longer—we can expect the transatlantic partnership, and especially the US-EU relationship, to undergo a sea change. Long established assumptions about strategic alliances and jointly protecting the world order will have to change. The Trump administration will expect the EU to act in keeping with Europe’s interests, and especially for the short-term benefit of the European economy. This is, after all, the Trump plan for the United States. Thus, when dealing with the United States, European leaders should worry less about having the United States understand and support their position and instead be clear in promoting Europe’s interests. They should also understand that while deals and agreements are possible, under the Trump administration they will not lead to a rejuvenated US-EU strategic partnership. The calculation of Europe’s value to the United States will begin again the next day. In the end, the best strategy for the European Union will be to grow its economy and strengthen the unity of its members. When the EU can present itself as a strong and coherent actor, with an economy that is recognized as key to the success of US companies, it will find more opportunities to engage with Trump’s America—and to do so on its own terms.

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1. Who are the biggest winners?

The biggest winners are those parties on the political fringes—the AfD on the far right and the Left Party on the far left. Deep frustration with failed migration policies, the gridlock of the former government coalition, and a general sense of economic uncertainty and decline drove an expectedly strong performance from the AfD, placing second at around 20 percent. More unexpected was the surge of the Left Party past the 5 percent threshold to just under 9 percent. Under thinly veiled peace agendas, both parties question Germany’s NATO commitments, have strong pro-Russian sympathies, and call support for Ukraine into question. The success of both parties in these elections signal that the fragmentation of Germany’s party landscape is likely here to stay. It is also a call to action for those in the democratic mainstream to finally start focusing on the fundamental economic, social, and foreign policy challenges facing Europe’s largest economy.      

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

The biggest winner in Sunday’s election is certainly the AfD. This is a party barely over ten years old that has, until now, sat on the fringes of the German political landscape. A second-place finish for the AfD shows that Germany is roughly where the United States was about ten years ago: coming to terms with a completely new political reality and dealing with forces that many mainstream political players have tried in vain to subdue. At the same time, this is also a big moment for the CDU, which has evolved as a party since the days when it was led by former Chancellor Angela Merkel. The hope is that Merz sees this win as an opportunity to change Germany’s approach to its economy, its defense spending, and its general role as a leader within and beyond Europe.

—Rachel Rizzo is a nonresident senior fellow at the Atlantic Council’s Europe Center.

The biggest winner is the AfD. The party has doubled its vote share compared to the last election and has also successfully pushed the CDU/CSU, once the party of Merkel, much further to the right. It is less than fifteen years old, and it has now beaten several of the country’s oldest parties to become the second-largest German party. Although the “firewall” will likely hold and keep the AfD out of government, the party is undoubtedly a force that is too big to ignore.

But the Left Party should also be lauded as a winner. Just a few months ago, in the regional elections, it appeared to be on the brink of extinction. But it has since made a remarkable comeback as the definitive voice of the urban left.

—Carol Schaeffer is a Berlin-based journalist and nonresident senior fellow with the Atlantic Council’s Europe Center.

The biggest winner is the Left Party, which scored almost 9 percent of the vote. It should thank US President Donald Trump and his billionaire adviser Elon Musk for stirring up hostility toward the United States on the German left.

—Jacob Heilbrunn is a nonresident senior fellow at the Atlantic Council’s Eurasia Center and editor of the National Interest.

It is a remarkable victory for the AfD and a stark contrast to the state of play in Berlin even just a few years ago. Following its electoral successes last year in the European Parliament and the state elections in Saxony, Thuringia, and Brandenburg, the AfD now has its strongest ever presence in the Bundestag.

The CDU may celebrate today, but pressure will build quickly on Merz to deliver on his party’s new mandate. Voters may soon become reacquainted with the dissatisfaction toward the CDU that led to the party’s ouster after Merkel’s sixteen-year stint in power. If the CDU fails to address voters’ mounting concerns about the economy, cost of living, and migration—and especially if coalition-wrangling drags on in Berlin—then the AfD could make a winning case for voters in the next Bundestag elections, due by 2029 at the latest, that neither the center-left nor the center-right can fix Germany’s problems.

—Stuart Jones is a program assistant in the Atlantic Council’s Europe Center.

2. Who are the biggest losers?

Undoubtedly, Scholz and the SPD, Germany’s oldest party, are the biggest losers of the evening, having secured the worst result for the party in a hundred years. For Scholz himself, this will mark the end of his career in national politics. The party leadership chose not to pull a Biden-Harris move by swapping Scholz out for the most popular German politician, Defense Minister Boris Pistorius, at the beginning of the campaign. It will now have to answer for that move and oversee a complicated process of leadership change and party renewal while likely navigating coalition talks and then government responsibility as the CDU/CSU’s junior partner.        

A close runner-up is the former finance minister Christian Lindner and his liberal Free Democratic Party (FDP). Having gambled big on the breakup of the unpopular traffic light coalition, the FDP likely won’t make it into the next Bundestag. Lindner underestimated how effective his former coalition partners would be at offloading a great deal of frustration with the government’s infighting onto the FDP. Lindner, who previously brought the FDP back to the Bundestag after it missed the threshold in 2013 and spent four years in the wilderness, won’t be the comeback kid again. He announced the end of his political career on election night.

Germany’s voters will also not get the stability that so many hoped for after the traffic light coalition’s gridlock and infighting. Depending on whether the Alliance Sahra Wagenknecht (BSW) and perhaps the FDP make it past the 5 percent threshold, the CDU/CSU might need two partners to form a stable governing majority. There is already talk of a black traffic light, or Kenya, coalition—in German party chromatics, an alliance of the CDU/CSU (black), the SPD (red), and the Greens. 

Also among the losers are Musk and US Vice President JD Vance, who waded into German politics to an unprecedented degree to strengthen the AfD. At just over 20 percent, the AfD performed exactly how it polled when the previous government collapsed. If anything, Musk’s and Vance’s meddling fed into countermobilization. 

—Jörn Fleck

It’s a tie for me over the biggest losers—is it the SPD, who suffered the worst results in its entire party history, or is it the FDP, which, at time of writing, seems not to have reached the 5 percent threshold to stay in the Bundestag (again, that is: from 2013 to 2017, the FDP also failed to meet the threshold). The FDP has struggled to unify a strong base and was often blamed for obstructing the previous coalition government. Both the SPD and the FDP are among Germany’s oldest parties, and both will have a tough re-evaluation ahead.

—Carol Schaeffer

The biggest loser is certainly the SPD, whose support dropped 9 percent since Germany’s last election and saw its worst results in decades. Many Germans increasingly viewed Scholz as ineffective, especially during a time of geopolitical upheaval. He was never really able to send a message of strength and unity from the German government, never able to “get things done.” Rather, his governance was slow and bureaucratic and was hindered by weak messaging, causing the German public to view his coalition government with increasing consternation as time went on. That frustration was made clear in Sunday’s election results. 

—Rachel Rizzo

3. What does this outcome mean for Washington?

Under Merz, who is displaying great moral clarity, Trump will discover a more determined Germany that will seek to maximize the prowess of the European Union (EU) against the United States, whenever and wherever the CDU leader deems it necessary. Perhaps he can take comfort in Trump’s social media post hailing the conservatives’ victory, declaring that: “This is a great day for Germany, and for the United States of America under the leadership of a gentleman named Donald J. Trump.”

—Jacob Heilbrunn

A CDU chancellorship may be exactly what Germany needs to snap itself out of its political malaise, but we must wait and see what happens with coalition talks. In terms of how Washington might react, we should expect some loud criticism from Trump and his team toward the Germans for holding the “Brandmauer,” or firewall, and keeping the AfD out of a coalition government. They will say that Germany isn’t respecting the will of the people and will use this to further their own political messaging and claim that Europe is becoming anti-democratic. 

—Rachel Rizzo

Trump and his team should expect a stubbornly pro-European Germany that will not take any perceived US bullying lightly. Merz has already said that the United States’ interference in Germany’s election via Musk and Vance was as “brazen” as that of Moscow. He also had some strong criticism for the White House over Europe’s exclusion from peace talks in Ukraine. Trump and his team should be advised to proceed carefully, though that is not exactly their preferred style.

—Carol Schaeffer

Merz on election night vowed to strengthen Germany’s and Europe’s independence vis-à-vis the United States. That might suit a Trump administration just fine if that means a push to strengthen German defense capabilities and a new energy policy that focuses on transition fuels. Merz also has a personal affinity for the United States, has experience with the US business world, and could perhaps get off to a fresh start with Washington—if the new US administration doesn’t prematurely make this all too difficult for Merz domestically. Here the tariff threats—to which Germany’s sputtering, export-reliant economy is especially vulnerable—are the main focus. A future Chancellor Merz will also be more outspoken on US tariffs and is perhaps less likely to break EU solidarity on a common European response.        

—Jörn Fleck

“This is a great day for Germany,” was the message from Trump on Sunday. Indeed, Washington has reason to welcome the CDU’s victory. For instance, Merz and the CDU’s relatively hawkish stance toward China differs greatly from the caution of Scholz that often frustrated Germany’s allies—illustrated by Germany’s decision in October to vote against EU tariffs on Chinese electric vehicles. If Merz does ramp up Berlin’s rhetoric on China, it would be an important signal that Germany stands together with Washington on the most significant US strategic rival since the Soviet Union.

Furthermore, the CDU’s focus on the economy should also be good news for Washington’s economic priorities at home. A staggering 96 percent of German companies surveyed by the 2024 German American Business Outlook plan to invest more in their US operations over the next three years, particularly in the states of North Carolina, Pennsylvania, California, Illinois, and Texas. With Merz’s pragmatic, pro-business attitude and background in the private sector, his victory in Berlin should be seen by the White House as an opportunity to work out a good deal in both countries’ interests.

—Stuart Jones

4. What does this outcome mean for Brussels?

If Merz and the CDU/CSU can form a stable government—quickly and ideally with only one partner—this will be an important injection of stability for the EU from its largest member state. Germany has been AWOL as a political and economic leader of the EU, as part of the Franco-German engine, and as a security actor. At a time of tremendous instability, fraying transatlantic links, and fundamental challenges to Europe’s security and economy, Europe simply can no longer afford a Germany missing in action—as both a political heavyweight and an economic engine. Merz, as a committed European, can offer a fresh start if he plays his cards right. Rapprochement with Paris and early and convincing signals toward Warsaw and Nordic-Baltic partners, many of whom share party family links with him, could set a new tone on key initiatives.  

Merz said in his victory speech that the world won’t wait on Germany. It also won’t wait on Europe. And much of what Europe does next will depend on whether Merz can get his own party and people behind some creative solutions. This will be needed to tackle issues including European competitiveness, defense-industrial cooperation, funding both nationally and under a new EU budget, and a potential initiative for joint European debt. That will likely require flexibility on some German orthodoxies. Much will also depend on whether Merz’s party and coalition at home will allow him sufficient flexibility and stability to retake German leadership and initiative at the European level.

—Jörn Fleck

A Merz chancellorship will mean a stronger Brussels and EU. While another three-way coalition is hardly anyone’s preference, it appears the only other option would be a CDU/AfD alliance, which is all but unimaginable. The CDU’s pro-European stance is deep in its party roots and history. Merz is unlikely to turn away from the CDU’s pro-European legacy, partly because he desperately wants to be respected within his own party. Nearly the total opposite of the CDU on foreign policy, the AfD is a fundamentally anti-EU, pro-Russia party. But the AfD’s electoral successes will not be felt too strongly in Brussels, at least for now.

—Carol Schaeffer

The champagne corks should be popping in Brussels, as Merz will set out to strengthen the EU.

—Jacob Heilbrunn

5. What can we expect next in Berlin?

Next up are hopefully swift but likely difficult coalition talks. Merz announced Sunday night that he aims to form a coalition by Easter. That’s still two months away—a long span of time, during which Europe needs a reliable Germany to face numerous security challenges, especially to provide support to Ukraine and navigate an uncertain transatlantic relationship.

The shape of this coalition remains uncertain until all votes are counted and we know all the factions in the next German Bundestag. Two parties, the FDP and the newly formed BSW, failed to cross the 5 percent threshold to make it into the Bundestag, significantly impacting coalition possibilities.

A so-called “Große Koalition” (Grand Coalition) between the CDU/CSU and SPD—historically named as such because they were traditionally the two strongest parties—would have failed to secure a majority if either or both of the smaller parties had gained enough support to enter the Bundestag. This is especially due to significant losses for the SPD, which finished third, far behind the anti-democratic AfD—a party that Merz has ruled out of coalition talks. It would have marked the first time in the history of the Federal Republic that such a coalition lacks a majority.

—Theresa Luetkefend is an assistant director in the Atlantic Council’s Forward Defense program.

Despite its “catastrophic” defeat, the SPD will be the cornerstone of the CDU’s coalition negotiations, and expect Pistorius to become a more prominent figure in Berlin as talks get underway. After the results became clear, Pistorius signaled that the SPD is “negotiation-ready” for building a new government and that he envisions a “leadership role of the party” for himself in this process—a role that Scholz also officially abdicated from.

After the nail-biting conclusion of vote-counting late on Sunday which saw the BSW fall 0.03 percent short of entering the Bundestag, Merz will be counting his blessings that a two-party “Schwarz-Rot” coalition is possible with the SPD to pass the 316-seat threshold needed to form a majority. This will mean Berlin can avoid another three-party coalition, the likes of which proved unsustainable in the previous government, as well as keep the “Brandmauer” on the AfD still intact.

It is also worth reflecting that this election saw the highest voter turnout in Germany since reunification in 1989, at 83 percent—up from 76.4 percent in 2021. This should add to the pressure that Merz will be under to form a more cohesive government with more effective policies than the outgoing traffic-light coalition.

—Stuart Jones

Note: This article was updated on Monday, February 24, to reflect the fact that BSW did not reach the 5 percent threshold to enter parliament, and that the CDU, SPD, and Greens did not together reach a two-thirds supermajority.

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For transatlantic trade watchers, US tariffs on steel and aluminum imports provoke a sense of déjà vu. During Trump’s first administration, Washington and Brussels clashed over a 25 percent tariff on steel and a 10 percent tariff on aluminum, impacting 6.4 billion euros worth of European exports. Brussels responded with levies until then European Commission President Jean-Claude Juncker brokered a (sort-of) deal, promising increased purchases of US liquefied natural gas (LNG) and soybeans. During the Biden administration, Trump’s tariffs were suspended for two years, with the aim of negotiating a Global Arrangement on Sustainable Steel and Aluminum (GASSA), which would permanently replace the tariffs. Despite championing transatlantic relations, negotiation efforts on GASSA at the promising US-EU Trade and Technology Council sputtered, leaving the dispute unsolved and only temporarily suspending the tariffs until March 2025.

The incoming tariff on aluminum and steel would hurt Europe. It threatens the EU’s $3.1 billion worth of metal exports across the Atlantic. Particularly exposed are Europe’s major economies—Germany and Italy—as they are the sixth- and tenth-largest US suppliers of steel and aluminum, doing $4.5 billion and $2.7 billion in trade in 2023, respectively. Berlin and Rome exchange higher-end steel and aluminum, segments where demand tends to be less sensitive to price fluctuations and tariffs. With the White House granting no “exemptions” to partners and scrapping previous metal quota agreements, alongside the impending reciprocal tariff, European Commission President Ursula von der Leyen has vowed “firm and proportionate countermeasures.” The stage is set for Europe’s response.

Deep breaths

With the tariff deadline set for March 12, Brussels will first leverage this pivotal time window to seek a negotiated solution to avoid a “lose-lose” scenario with its largest trading partner. To safeguard the commercial relationship, accounting for $1.55 trillion in goods and services exchanged, Brussels has a few options to propose (albeit not without complications):

• Decrease its 10 percent import taxes on US vehicles (thereby further exposing the EU market to Chinese-made cars),
• Purchase more US LNG and agricultural products (although capacity constraints exist), and
• Buy more US-made defense equipment.

The EU could also get more creative. Further commitments could include toughening energy sanctions on Russia and aligning with the United States on a tougher China policy. While unlikely, the European Commission could also explore the idea of mandating EU member states to reduce their trade surpluses through increased domestic demand.

Punch back

Should negotiation attempts fail, the EU will likely respond with retaliatory tariffs. A first move could be the reinstatement of suspended tariffs on US steel and aluminum, and target notable US exports to Europe, such as Levi’s jeans, Harley Davidson motorcycles, bourbon whiskey, cosmetics, cranberry juice, orange juice, peanut butter, and other agricultural products. Europe could also take a page from Canada and apply targeted tariffs on Tesla or Starlink, companies owned by Trump’s billionaire adviser Elon Musk. Back in 2018, Brussels hit 2.8 billion euros worth of US exports and held additional levies worth 3.6 billion euros ready to fire. This time, the proposed retaliation would amount to 4.8 billion euros’ worth of US goods. Additional ways to ramp up pressure on Washington might include tightening technical barriers to trade or restricting US companies from European public procurement tenders through its International Procurement Instrument.

Unveil the ACI

In parallel, by labeling the proposed US tariffs as “unlawful,” the European Commission laid the foundation to deploy, for the first time, its anti-coercion instrument (ACI). This legal framework enables the EU to retaliate against third countries that are “coercing” the European Union, a member state, or a European industry.

Established in December 2023, this new trade defense instrument fits within the EU’s open strategic autonomy strategy. The instrument draws lessons from both Trump’s first-term trade spat and China’s embargo on Lithuanian imports over Vilnius’s Taiwan policy in 2021.

While the primary objective of ACI remains deterrence, the instrument represents the toughest World Trade Organization–compatible tool at the EU’s disposal. The set of countermeasures include imposing higher customs duties and export controls, restricting or suspending intellectual property rights, banning services or applying duties to digital platforms such as streaming services, and enforcing investment restrictions and limits on foreign direct investment. Moreover, the ACI also enables the EU to engage and limit third-country access to public procurement tenders, restrict financial services companies’ access to EU markets, and curb the entry and use of US chemicals, sanitary products, and agricultural goods.

Speed and unity

Despite being dubbed the “bazooka” among Brussels’ trade policy wonks, the ACI faces two hurdles—speed and unity. First, to trigger the defense mechanism according to the letter of the law, the European Commission must conduct an “examination,” reach a “determination,” and engage in “consultations”—Brussels-speak for a drawn-out process expected to last between three to six months. Second, a qualified majority is needed to approve ACI countermeasures, requiring consensus from at least fifteen of the twenty-seven member states, representing 65 percent of the EU’s population—a high threshold in an often-fractious bloc. The EU’s deliberative process would likely run up against Trump’s often hasty decision making and his preference to deal bilaterally with countries, thus making the ACI difficult to utilize effectively.

However, encouraging signals are coming from European capitals. German Chancellor Olaf Scholz underscored the bloc’s preparedness “to act within an hour” if forced to, a sentiment echoed by French Industry Minister Marc Ferracci’s call for Europe to “respond in a united and firm manner.” Even traditionally tariff-averse countries in Northern and Central European—the Netherlands, Poland, and the Baltic states—have expressed support for a coordinated European response.

A transatlantic trade war would hurt both sides and do potentially irreparable harm to the transatlantic political and economic relationship at a time when the United States and Europe need each other more than ever. Europe especially is in a tough spot. Amid sluggish economic growth prospects, a wide trade surplus in goods vis-à-vis the United States, and Russia’s ongoing war in Ukraine, Europe’s priority should be to de-escalate tensions and rapidly mitigate the potential impacts of US tariffs. At the same time, Brussels cannot shy from difficult trade negotiations with Washington, doing “whatever is necessary” with the “same tools and weapons if need be,” as France’s minister of economy and finance warned on February 10.

A trade spat and the subsequent negotiations will be an early test for how the European Commission will navigate the geopolitical ambitions envisioned by von der Leyen since her first term. This latest chapter in US–EU trade will test Europe’s resilience and statecraft, as well as its ability to achieve its long-time ambition of “strategic autonomy” and reignite the eurozone’s global competitiveness. With the first official meetings between the US government and EU officials are underway in Paris and set to continue during the the Munich Security Conference over the weekend, these early negotiations will set the tone for transatlantic trade relations over the next four years.

 Jacopo Pastorelli is a program assistant in the Atlantic Council’s Europe Center.

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Just across the border in Kosovo, the ruling party’s narrative has been that of an imminent war with Serbia, especially after Russia’s full-scale invasion of Ukraine in 2022 and an attempted armed insurgency in the Serbian-majority north in 2023. Government officials and their media proxies have regularly framed the government’s critics—journalists, activists, and prosecutors—as being part of Serbia’s hybrid war against the country.   

Rule through fear is neither new nor unique to the Western Balkans. It has been the political zeitgeist in the region for a while, in part because there have long been valid reasons to be fearful.

The region continues to have an unresolved security architecture, with most of its countries still limping toward European Union (EU) and NATO membership, which were supposed to make its contested borders irrelevant. Insecurity about the future has paved the way for secessionist ideas to resurface. In 2022, Russia’s aggression against Ukraine sent this anxiety into overdrive, as Moscow actively sought—to no avail—to expand the front and stir trouble in the Balkans, primarily via its allies in Serbia.     

Yet these fears also gave regional leaders a useful tool to distract attention from poor governance and to suppress dissent. For Serbian President Aleksandar Vučić, who has pursued a policy of hedging between Moscow and the West, the threat of regional destabilization also serves as a bargaining chip with the latter.

Nevertheless, there are hopeful signs that people in the Western Balkans, as well as Western decision makers dealing with the region, are no longer buying into this blackmail. Throughout the region, leaders seem less able to distract their citizens from socioeconomic concerns. At the same time, the EU seems to be learning not to engage with regional troublemakers from a position of fear. Indeed, Brussels has shown that it has ample geopolitical and economic leverage to press its concerns on domestic reforms, Russia policy, and regional stability to Western Balkan nations while working to integrate them into the bloc.

Diminishing returns

The current wave of student protests in Serbia against government corruption has been the most successful and sustained opposition movement against Vučić so far. This is despite attempts to discredit the protests as sparked or supported by foreign governments. The demonstrations clearly have the government worried, as indicated by the resignation of Vučić ’s appointed prime minister. A recent poll by CRTA—a prominent pro-democracy nongovernmental organization in the country—shows that 61 percent of citizens support the protests and two-thirds believe corruption to be the country’s main problem.

In Kosovo, which holds national elections on February 9, the decision by popular Prime Minister Albin Kurti’s ruling party to run entirely on a “sovereignist” agenda with the nationalist slogan “from corner to corner”—highlighting its crackdown on Serbia’s structures in the north of Kosovo—and attacking his critics as unpatriotic, may turn out to be slightly backfiring. The two leading opposition parties, which are running on platforms emphasizing economic issues, seem to be having enough of a resurgence to complicate Kurti’s ability to form a government.

To be sure, there are still real risks of violent escalation due to miscalculation, and some degree of public angst about the potential for war remains prevalent in the region. A November 2024 regional Securimeter poll by the Regional Cooperation Council, an intergovernmental body, shows that while concern about war may be low in Kosovo (only 21 percent of citizens), it remains high in Serbia as well as Bosnia and Herzegovina, where more than half of those polled say they are concerned about a war breaking out. Yet region-wide, security concerns remain dwarfed by socioeconomic ones: the same poll shows poverty (49 percent), corruption (48 percent), and depopulation (36 percent) as being the top three priority concerns regionally. On top of that, a staggering 77 percent of respondents in the region identified the high cost of living and inflation as the main economic concern, followed by low wages (55 percent).

A position of strength

Part of the reason why fearmongering may no longer be paying political dividends in deflecting from citizens’ economic concerns is that, with time, the security threats have run out of credibility. Russia has failed to project meaningful power beyond its efforts in Ukraine. The West, for all its faults in mishandling the Western Balkans’ accession into the EU, proved it has the leverage and instruments for deterrence in the region. Indeed, NATO is present both within the region and around it, the EU is by far the region’s biggest trade and investment partner, and US and EU sanctions against Western Balkan nations can bite.

An attempt by Serbs in northern Kosovo to start an armed insurgency in October 2023 was quashed within a day by Kosovo’s Special Police, which was aided by NATO peacekeepers. Milorad Dodik, president of the Serb-majority Republika Srpska entity in Bosnia, has backed off his regular threats to secede from the country whenever he was threatened. Over the past year, Vučić was forced to admit that his hedging space has shrunk: Serbia purchased French warplanes, granted the EU access to its lithium resources, and now is being forced to nationalize its oil and gas industry from US-sanctioned Gazprom.

The West no longer seems to need to negotiate with Vučić from a position of fear—that is, treading carefully due to a concern that the Serbian president will turn further toward Russia or cause regional instability. Despite Vučić’s latest pro-Western moves, the European Council recently decided to keep Serbia’s accession talks effectively frozen due to concerns about democracy, relations with Kosovo, and nonalignment with the EU’s Russia policy.

This tougher stance on Serbia is a welcome departure from overly cautious EU policy toward the Western Balkans for the last ten years. While the EU has been right to fear that failing to integrate the Western Balkans would leave the bloc less secure, it was wrong to be afraid to dictate accession terms to Balkan nations given the EU’s leverage over the region.

Fear had driven the EU’s thinking about Western Balkan countries’ accession for most of the past decade. Some members were worried about the EU’s ability to absorb more Eastern countries with questionable governance standards and security postures. The EU’s far right also fueled xenophobia about the region’s Muslim-majority countries. As a result, the Western Balkans was parked in an effective containment policy, which empowered authoritarians who showed they could at least keep the peace.

Yet, after Russia’s full-scale invasion of Ukraine, the fears of bringing the region into the EU were dwarfed by fears of keeping it out. Gray zones like the Western Balkans turned out to be a security vulnerability. There is a growing recognition within the EU that it needs to bring the Western Balkans into the bloc. However, this is coupled with an awareness that Brussels can afford to make demands of aspiring members if their accession prospects are to progress. Reflecting this balance, the new momentum for EU enlargement has now opened a window for at least Montenegro and Albania—the countries with the least amount of obstacles to membership and which are undertaking some reforms—to be part of the next accession wave.

The Western Balkans’ peace and stability will, however, remain fragile for as long as its countries remain stuck in bilateral or identitarian disputes. But over the past few years, the EU has shown that it has the leverage to resolve the disputes that stand in the region’s way. The Western Balkans present the ultimate litmus test of the bloc’s geopolitical weight. Going forward, the EU should use the leverage at its disposal without allowing fearmongering from Western Balkan leaders to deter it from its efforts to bring the region into its fold.

Agon Maliqi is an independent researcher and political analyst from Pristina, Kosovo. He was the co-founder and longtime editor of Sbunker, a think tank and blog on Western Balkans affairs, as well as a former Reagan-Fascell Democracy fellow at the National Endowment for Democracy.

***

The Western Balkans stands at the nexus of many of Europe’s critical challenges. Some, if not all, of the countries of the region may soon join the European Union and shape the bloc’s ability to become a more effective geopolitical player. At the same time, longstanding disputes in the region, coupled with institutional weaknesses, will continue to pose problems and present a security vulnerability for NATO that could be exploited by Russia or China. The region is also a transit route for westward migration, a source of critical raw materials, and an important node in energy and trade routes. The BalkansForward column will explore the key strategic dynamics in the region and how they intersect with broader European and transatlantic goals.

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From the European perspective, these are legitimate causes of concern. But the United States and EU need each other now more than ever, particularly in the field of technology cooperation, where neither party can achieve its respective geopolitical objectives without a strong partnership. Recognition of this mutual need was the catalyst for the Biden administration’s push early in its term for the Trade and Technology Council (TTC)—a political-level, formal dialogue on technology issues with leaders from the United States and EU.

Whether Trump will ultimately decide to continue the TTC, aim to revamp it, or scrap the framework entirely, the format of cooperation on technology is less important than the cooperation itself. Continued collaboration between the two economies is paramount due to a combination of competition from nonmarket economies and a lack of capacity in three key geostrategic areas: telecommunications, semiconductor manufacturing, and critical minerals and raw materials. These areas are the basic building blocks of many of the products and services the United States and EU nations use across a variety of sectors, including for the operation of critical infrastructure, the manufacturing of medical devices, and numerous military applications. Thus, leadership in these sectors will define geopolitical outcomes for the next generation.

In telecommunications, US policymakers on both sides of the aisle understand the need to keep the global internet and Western networks free of Chinese surveillance and influence. After the United States placed bans on China-based telecommunications providers Huawei and ZTE, industry insiders and policymakers quickly recognized that the alternatives were mostly European. This led to the first Trump administration’s Clean Network initiative, which would never have gotten off the ground without European cooperation and companies. Nothing in the last four years has significantly changed this dynamic, which would suggest further transatlantic cooperation will be needed.

On semiconductor manufacturing, neither the United States nor EU alone have the capacity to replicate Taiwan’s semiconductor output anytime soon. Taiwanese companies produce more than 60 percent of the world’s semiconductors and over 90 percent of the most advanced ones. With both economies tying public funds to local chip manufacturing, continued collaboration will be needed to reduce foreign dependence on chip manufacturing and prevent unnecessary market distortion from zero-sum competition on chip manufacturing subsidies. The US Commerce Department has announced over thirty billion dollars in proposed CHIPS Act private sector investments, which it estimates could create more than 115,000 new jobs. The EU’s European Chips Act will see more than “€43 billion of policy-driven investment until 2030.” Fresh subsidies may indeed accelerate on-shoring trends, but a complete lack of cooperation regarding the types of semiconductors manufactured and their intended end use would be mutually destructive and is not in the interest of either the United States or EU.

Both the United States and EU have longstanding dependencies on China for critical minerals and raw materials, as well. Experts estimate that as much as 98 percent of the critical minerals used by the EU come directly from China, and this figure stands at nearly 60 percent for the United States. This overreliance is due to a range of local factors, such as mining and refining capacity, legal barriers to mining, and poor rates of return. Both governments have recently begun to de-risk with a trade pivot to Africa. As part of the Group of Seven’s (G7) Partnership for Global Infrastructure and Investment, it reached a 2023 agreement with the governments of Angola, Zambia, and the Democratic Republic of the Congo on further development of the Lobito Corridor, investing in local infrastructure in exchange for access to key resources. If this investment materializes, it could go a long way toward addressing the current dependence both the United States and EU have on China for critical minerals and raw materials while demonstrating an attractive alternative funding model to China’s Belt and Road Initiative.

In the coming months, the United States and EU must align on their mutual interests in bolstering technology cooperation and working together to compete with nonmarket economies. For this to happen, however, the EU will need to give flexibility and space to the Trump administration as it establishes its initial priorities. The EU will have to acknowledge differing transatlantic views in areas such as sustainability and green technology while negotiating hard on trade to demonstrate that mutually assured destruction does not benefit either party. A cooperative tone coupled with adept negotiations may very well stave off the possibility of blanket US tariffs against the EU. Such an outcome is in the strategic interests of both the United States and EU so that they can focus their attention where it is needed most.

Trevor Rudolph is the vice president for global digital policy and regulation at Schneider Electric where he directs the corporation’s technology policy and regulatory affairs strategy in North America, Europe, and Asia. His views are his own and do not necessarily reflect the positions of his employer.

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Yet working with France has sometimes been challenging for US officials. Where Washington sees an obvious case for alignment, France will sometimes assert independence. There is a consistent thread from General Charles de Gaulle’s assertive policies to President Emmanuel Macron’s semi-successful push for the EU to embrace strategic autonomy from everyone, including the United States. Macron’s cause célèbre is already getting a second hearing now that President Donald Trump will be returning to the White House.

Understanding how France “does” economic statecraft will be crucial for US and other Western policymakers in the months and years ahead. Therefore, over three months, we have conducted interviews with the relevant teams in Paris, Brussels, and Washington DC, which agreed to meet despite very busy schedules. The goal of this piece is to represent how these teams are organized and how they think about their issues.

Before delving in, it’s worth knowing the basics about France’s place in the global economy.

France produces competitive exports in the sectors in which it is specialized: aeronautics, beverages, and cosmetics. In these sectors, France is among the top five countries in terms of quality ranking, indicating high non-cost competitiveness. However, these export sectors make up less than 20 percent of France’s export revenues. The rest of France’s exports (mainly in electrical equipment, machinery, vehicles, plastics, and pharmaceuticals) have more average quality rankings and these have deteriorated over time. This makes French exports sensitive to cost competitiveness—which has been a problem in recent decades because of high unit labor costs. President François Hollande’s Tax Credits for Competitiveness and Jobs (CICE), as well as other steps taken toward flexibility in the labor market by Macron, have gone some way in addressing this. Even without the scale advantages of the US market, the French start-up ecosystem has produced unicorns like BlaBlaCar in the sharing economy and Mistral.AI—the highest-valued artificial intelligence (AI) firm based outside the San Francisco Bay area.

Still, France’s trade deficit, which has grown since the mid-2000s, remains a persistent concern for French voters.

France’s manufacturing sector relies heavily on foreign inputs. The French Treasury estimated that 40 percent of manufacturing inputs were imported in 2020, albeit predominantly from other European countries. The energy sector is the most dependent on non-EU inputs, relying on crude oil imports. The textile industry has seen the largest growth in import dependency over the past two decades, with more than 60 percent of inputs imported. The textile sector is the most dependent on Chinese inputs, followed by the electronics and transport sectors.

Meanwhile, high social spending—the legacy of COVID-19—has left France with a heavy debt pile. Paris has struggled to bring down deficits even as COVID-related and other price shields brought in at the beginning of Russia’s full-scale invasion of Ukraine have been phased out. The short-lived Michael Barnier government has already fallen before passing a budget for 2025. The successor François Bayrou government will probably succeed in passing a late budget, but with little margin for savings. Along with being costly, France’s debt can affect its credibility in EU debates. Yet it would be a big mistake to underestimate French influence in Brussels. Our journey through French economic statecraft will take us there first.

France and EU economic statecraft

Through its membership in the EU, France participates fully in the Customs Union and the border-free Schengen Area. Any targeted sanction—such as an asset freeze or a travel ban—must therefore be applied in the whole EU, though implementation is carried out by national immigration and customs authorities. Even for a well-established EU tool like sanctions, the fact that they belong to foreign policy means that member state unanimity is required for renewal every six months. Teams at the European External Action Service (EEAS) decide whom to sanction—and national diplomats on loan are heavily present there. France’s permanentrepresentation tries to get involved early to avoid the leak of draft proposals that are difficult for France. Trade and regulation policy, on the other hand, tends to rely on qualified majority voting (QMV) in the Council of the EU. A timely example of this is France’s current effort to slow or block the ratification of the EU-Mercosur trade agreement by working with other member states with strong agricultural sectors.

Russia’s full-scale invasion of Ukraine forced France and the EU to beef up their activities in most of these clusters, while causing few if any recriminations regarding who’s in charge. The French interministerial process run by the General Secretariat for European Affairs(SGAE) in Paris and the permanent representation in Brussels have allowed France to bring a quick end to the rare initiatives that might have disproportionately affected the French economy, such as sanctioning Rosatom.

Perhaps counterintuitively, tensions have arisen more frequently in abstract discussions about which tools the EU should equip itself with next. The division of labor between the EU and national powers becomes muddier as newer tools are explored. National security remains the preserve of member states and is not as well defined in the treaties of the European Union as it is in the General Agreement on Tariffs and Trade. On the other hand, economic statecraft touches on trade, regulation, and competition rules, which are the EU’s prerogative and areas in which the European Commission has the sole power to initiate legislation. The following chart shows there is a sliding scale of policy clusters. These are not exhaustive, nor is their position set in stone. However, the chart provides a fairly accurate map of where Paris’s preferred mix of pooled sovereignty and national competence currently lies for each cluster.

There has been a trend of President Ursula von der Leyen’s European Commission publishing turnkey compromises on newer areas of economic statecraft, such as outbound investment screening. The January 2024 white paper on outbound investment conspicuously avoids mentioning “national security” and instead refer to risks to “common EU security.” Paris argues that trying to replicate instruments born in the US approach to national security is counterproductive and that respecting the committee-based process for using existing tools and elaborating new ones will lead to better outcomes.

The Council of the EU hosts myriad committees focusing on thematic areas pertaining to economic statecraft (customs, trade, financial regulation, and merger control), each with its own communities of experts and preferences. France is represented in each one and is confident in its abilities to shepherd discussions. The SGAE plays a key role in coordinating between ministries so that the French positions on different committees are compatible. The French Treasury (DG Trésor) and its trade and investment policy office (MULTICOM) are competent authorities for investment screening in France, making them an important knowledge hub for where France’s interest lies in these discussions.

In Paris’s view, allowing time for comitology has two other advantages. It enables member states to find the right balance between the ability to intervene and block an investment when necessary and creating rules to prevent the profligate use of new tools by some capitals. It also allows the EU to devise economic statecraft tools in a way that is coherent with its internal rules. For example, the Carbon Border Adjustment Mechanism will use the Emissions Trading System’s method to calculate adjustments due on third-country goods. A new challenge will be making inbound investment screening more explicitly compatible with competition rules on mergers.

Paris is focusing carefully on how the European Commission is preparing to divvy up the economic statecraft brief over the 2024–2029 term. The clearest owner of the issue, alongside von der Leyen herself, will be four-time Commissioner Maros Sefcovic, whose portfolio now includes trade and economic security. In his mission letter, he is also instructed to lead work on a New Economic Security Doctrine for the EU.

The inner workings of French institutions in shaping economic statecraft

The French Treasury and its MULTICOM office fit within a wider ecosystem feeding into French economic statecraft policy. The SECFIN office of the French Treasury is the most competent authority on sanctions and controls. It runs regular dialogues with the Office of Foreign Assets Control and the Bank for International Settlements and oversees the work of the customs service (la douane). The Directorate General for Firms (DG Entreprises) is a separate directorate within the Economics Ministry that helps the private sector with compliance. A subdivision created in the 2019 reform of French economic security policy, the Strategic Information and Economic Security Service (SISSE) also fulfils an economic intelligence role and can contact and support firms of strategic importance which it believes are being targeted by foreign economic statecraft or simply by investors the French government deems inappropriate. Ever since a blocking law was passed in 1968, French firms have needed to seek permission from the French government before transmitting sensitive information to foreign governments or justice systems. The 2019 reform makes SISSE the point of contact for seeking this authorization.

Paris argues that its rules on inbound investment are clear, as are its demands when it intervenes in a transaction. These demands usually include key elements like research and development and production staying in France. US investors certainly don’t seem to fear politically motivated or arbitrary interventions. France usually tops the list for US foreign direct investment into Europe and US firms’ direct investment position in France was in excess of $100 billion in 2023. This doesn’t make the investment screening mechanisms totally immune to political pressure, but this tends to be exercised for firms with high symbolic but low strategic value, as in the recent case of Sanofi’s attempt to spin off its Doliprane painkiller brand.

While it sits in the imposing Economics and Finance Ministry, which is sometimes described as a fortress, the French Treasury is comfortable with Brussels’s process and pooling sovereignty because its areas of competency are already quite Europeanized. But it’s important to understand which other ministries have an economic statecraft role.

Though it is not the hub of economic statecraft thinking, the Ministry for European and Foreign Affairs plays an important role. The main reason is that its diplomats are likely to be present when policy deals are struck at a political level, be it Joint Comprehensive Plan of Action (JCPOA) negotiations in Vienna or more recent Group of Seven (G7) meetings focused on responding to Russia’s aggression against Ukraine. The need for in-house coverage is mainly fulfilled by the globalization directorate, which has several teams working on economic diplomacy, including a deputy director for sanctions, economic norms, and the fight against corruption. But because of the EU components, the deputy director for external relations of the European Union and the deputy director for EU and international economic law will also be heavily involved in interministerial discussions before every new EU sanctions package or white paper on economic statecraft.

Collaboration between the foreign and economics ministries works well, and it is useful to meet and discuss matters with both. The Foreign Ministry is more comfortable than the Economics Ministry in owning France’s independent streak and justifying the need to stand up to the United States on occasion. The historical purpose of the office of the deputy director for sanctions was to deal with the spillover effects from US economic statecraft, as demonstrated by the 1990s blocking regulation meant to protect EU firms investing in Cuba or setting up the Instrument in Support of Trade Exchanges to maintain some economic relations with Iran when the United States left the JCPOA in 2018, leaving French banks and energy firms particularly exposed. Today, the Foreign Ministry’s sanctions team thinks of itself as the knowledge hub on sanctions complications—which can also mean anticipating unintended consequences from European sanctions. Foreign Ministry teams are also keen to remind interlocutors that none of the tools built for economic statecraft are targeted only at China and will be careful to make sure this remains the case in European policy.

Not all policy issues are coordinated through the SGAE. The same ministries can also be summoned to coordinate through the Defense and National Security Council Secretariat (SGDSN), which prepares Defense Councils. In addition to the sliding scale of instruments—some more national than others—France also guards some sectors from European policy. Everything related to civil nuclear contracts is kept quite separate from the EU, as are military export contracts. This may be part of the reason why France is cautious about outbound investment screening, as some of these contracts come with local production partnerships (offsets or mesures de compensation).

The 2019 reform also instituted the Economic Security Liaison Committee (COLISE) meetings, which include ministries that weren’t historically alert to these risks, such as the Education and Research Ministries. The public financial institutions that form France’s robust infrastructure for positive economic statecraft are not officially part of COLISE meetings but can be invited. The French Development Agency (AFD) and its development finance subsidiary PROPARCO are powerful instruments, but their status as a bank makes them quite independent from political priorities in Paris. The Public Investment Bank (Bpifrance), a joint venture between the state investment bank and previous iterations of strategic investment funds, can be asked to make domestic investments—including when the French government has blocked an inbound investment.

All of these ministries and coordination bodies are meant to answer to the top. But even in France’s presidential system, the prime minister can sometimes assert themself. There have been no obvious divergences while Macron has had prime ministers from his own or allied parties. Still, the SGAE explicitly sits under the prime minister, so a more assertive prime minister from a political party different from the president’s can heavily influence what position France takes on EU policy. Still, the presidency will always remain heavily involved through the president’s own presence at European Councils and at G7 summits. Macron’s diplomatic adviser Emmanuel Bonne was on the now notorious WhatsApp group used to finalize the first salvo of G7+ sanctions in February 2022, as was von der Leyen’s Chief of Staff Björn Seibert.

Putting collaboration on a more sustainable footing

If our interlocutors in Paris would like US readers to take one message on board, it would be that they should have more faith in the EU’s way of doing things. Provided there is enough time for comitology, they say, EU economic statecraft can have formidable effects. The often-cited Anti-Coercion Instrument—which is meant to allow the EU to respond as one bloc when coercion is being exercised on one member state—was first introduced in 2018 and work was stepped up in 2021 when China started piling economic pressure on Lithuania. The instrument entered into force in December 2023. This might seem slow to Washington, but this is the price to pay for a policy with which all member states are comfortable. This, in turn, relies on two crucial elements. First, new tools must be country agnostic. Setting up China-specific instruments will alienate key member states and—even if the instruments are set up—will require starting all the comitology from scratch if a new threat emerges from a country other than China. Second, there needs to be trust that there are sufficient guidelines to prevent a minority of member states from free riding on others’ efforts.

The EU’s fourteenth sanctions package against Russia from June 2024 provides a more recent example of just how effective EU measures can be when a consensus is finally reached. In this case, the EU gave itself the legal basis for sanctioning Chinese firms with extensive activities in Russia. While the EU didn’t even designate any bank, the news drove many Chinese banks out and commercial interest rates in Russia up. Paris would argue that this was worth the wait.

Attempts by Washington to hasten progress haven’t necessarily been productive. The clearest example concerns outbound investment screening. Von der Leyen’s endorsement of this approach during her March 2023 US visit, and the last-minute addition of a white paper on the topic to the January 2024 package of papers on economic statecraft, has generated rumors about pressure from the White House and poisoned the committee-based discussions on the topic. Going forward, the fact that Macron’s former Europe adviser Alexandre Adam now serves as von der Leyen’s deputy chief of staff should avoid a repeat of this kind of hiccup.

There is a conundrum for the three EU member states that are also part of the G7, including France. Washington sometimes takes the shortcut of assuming G7 statements commit the EU to a particular course of action, when the reality is that comitology will need to take place anyway. There is also a lesson here for the EU institutions, which tend to be quiet in G7 working groups when they should instead provide feedback on what is feasible for the EU and how long it will take.

In a way, the US-EU Trade and Technology Council (TTC) was designed to build trust between technical teams so that this type of hurdle would be less of a problem. It isn’t clear whether the format will survive under Trump. In any case, imposing solutions on Europe is bound to backfire and to return knee-jerk criticism of extraterritorial justice. Instead, experts are capable of having a nuanced debate and can see how EU law also carries global implications, though without the same means of enforcement.

As one experienced practitioner told us, “If Europe is both taken for granted and collateral damage of US economic statecraft, this makes it harder for us to push back on extremist parties’ arguments against any sort of restrictive measures.”

Strategic empathy is therefore crucial. This is especially true as our interlocutors tended to land on the same parting thoughts that any US policymaker might share at the end of a similar discussion, such as the need for a doctrine of economic statecraft.

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

The report is part of a year-long series on economic statecraft across the G7 and China supported in part by a grant from MITRE.

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

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What are the economic and political implications of this massive trade agreement? And what hurdles remain before it can be finalized and implemented? Our experts freely exchange their insights below.

1. Why is the deal moving forward now?

On the one hand, this agreement has been in process for a long time, so at some point, the EU just has to move forward, and a fresh start with a new European Commission is a good excuse and as good a time as any. On the other hand, it’s hard to ignore that the main opponent of the agreement, France, is in a weak position politically, as is Germany, and that the portfolio structure of the new Commission gives von der Leyen more power to advance her priorities. Therefore, there is likely an element of “striking while the iron is hot” to the timing of the agreement.

—L. Daniel Mullaney is a nonresident senior fellow with the Atlantic Council’s Europe Center and GeoEconomics Center. He served as assistant US trade representative for Europe and the Middle East in the Office of the United States Trade Representative from 2010 to 2023. 

Both sides clearly felt the global circumstances made the deal even more important for their respective interests. From an EU perspective, it’s about having new destinations for EU exports if President-elect Donald Trump raises US tariffs and the Chinese economic slump continues. More broadly, it’s a win for the EU’s longstanding approach to economic security: instead of using economic coercion, the EU prefers to use the attractiveness of its single market to secure bilateral deals on market access. But this approach has become less and less fashionable, including in the EU, so von der Leyen felt the months ahead were the last chance to get a Mercosur deal ratified. But its passage is still far from certain.

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

The deal is moving forward now in large part because the negotiations have produced a text that most parties believe they can live with; the deal is “ripe,” so to say. But three other factors have been influential in why the deal is being signed right now: 

1. The most vocal opponent of the deal, French President Emmanuel Macron, has been politically wounded, perhaps mortally, by the collapse of Prime Minister Michel Barnier’s government, although it remains to be seen whether he can marshal a blocking minority in the European Council. 
2. Von der Leyen is in a strong political position, and she knows there will be opposition, so she might as well get this done early in her term. This also allows her to give a gift to the country she knows best—Germany—which looks to the Mercosur countries as a valuable market.
3. The Commission is well aware that it needs to be seen as engaging with developing countries, and it needs to bring them on as economic and political partners, especially as relations with the United States could become difficult. If you see this as, in part, a signal to Trump, you are probably right.

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

The current geopolitical landscape—marked by rising global protectionism and economic uncertainties—has created momentum for finalizing the deal. Both blocs view this agreement as a strategic move to bolster economic ties and secure a stronger position in global trade.

—Abrão Neto is a nonresident fellow with the Atlantic Council’s Adrienne Arsht Latin America Center and a former secretary of foreign trade of Brazil.

2. What are the pros and cons for Mercosur members?

For Mercosur nations, the agreement unlocks significant access to the European market, a major importer of key Mercosur exports, such as food and critical minerals. It also positions these economies to attract greater investment, driven by the EU’s stringent criteria. On the other hand, the influx of European manufactured goods will challenge Mercosur industries to modernize, digitalize, and boost efficiency to stay competitive.

—Valentina Sader is a deputy director at the Atlantic Council’s Adrienne Arsht Latin America Center, where she leads the Center’s work on Brazil, gender equality, and diversity, and manages the Center’s Advisory Council. 

The agreement improves market access for Mercosur exports, reduces costs for importing essential inputs and machinery, attracts foreign investment, and fosters economic growth and job creation. However, local industries might face heightened competition from EU manufacturers, and there is concern that EU-imposed environmental and sustainability standards could disproportionately affect Mercosur producers, potentially offsetting some benefits.  

—Abrão Neto

3. What are the pros and cons for the EU and EU member states?

Improving trade integration with a significant part of the Western Hemisphere will be a useful diversification of the EU trade portfolio, as US-China and US-EU trade relations shift to a potentially more disruptive period with the incoming US administration. The other side of the coin is that providing agricultural market access to Mercosur has been very controversial, particularly in France (whose government is weakened, perhaps only temporarily, by political challenges from the left and the right). Some of the “sustainability” practices in Mercosur countries have also drawn controversy. So while this may be a wise economic choice, it could trigger significant political backlash.

—L. Daniel Mullaney

The pros are clear. In addition to better market access terms to Latin America for EU goods, the bloc hopes to access the critical minerals available in the ground in Mercosur countries and stymie China’s increasing influence in that sector.

The cons are supposedly a glut of cheap Argentine beef and Brazilian bananas. But there are tough quotas in the deal, including a limit equivalent to one Mercosur steak per EU citizen per year. So European farmers’ objections are not entirely justified, although the complaint that they have to follow more constraints (on emissions and the use of fertilizer and pesticides) than Mercosur farmers do is probably more reasonable.

—Charles Lichfield

This agreement has the potential to bring serious economic benefits to the EU in terms of new markets. In 2023, the EU had a slight trade surplus vis-à-vis Mercosur, and certain European countries had a significant surplus. Germany’s surplus was nine billion euros, Belgium’s was three billion euros, and even France had a two-billion-euro surplus. These countries are all in a position to benefit from the Mercosur arrangement. But in every trade deal, there are winners and losers, and clearly some of the losers in France, especially the farmers, are very powerful politically. It is also true that critics of Mercosur have ignored some of the provisions in the deal that answer their concerns, such as a ban on imports of hormone-fed beef.

In this partisan environment, the economic advantages of the deal may be cancelled out by the political disadvantages. The signature today will only exacerbate the anger of those in Europe who believe the Commission acts in its own interests and fails to protect the interests of European citizens. While the German government and mainstream parties may support the EU-Mercosur arrangement, there are many in that country who feel left out economically and who are likely to see this as another reason to vote for a Euroskeptic party. Thus, while the agreement brings many economic benefits, these might be outweighed by the political costs.

—Frances Burwell

4. What do the next steps look like for the deal?

The process involves legal scrubbing, translation into multiple languages, formal signing, and ratification by national parliaments in both blocs. While this agreement represents a historic milestone, significant political and stakeholder debates are anticipated, presenting challenges before full implementation.

—Abrão Neto

In the EU, the next steps are a likely challenging process of approval from the member states and consent by the European Parliament. The debate over the positive and negative aspects of this initiative will play out very publicly among relatively new actors in the EU institutions and member states. In the meantime, France’s and Germany’s political challenges may or may not endure. Fasten your seat belts and pass the popcorn! 

—L. Daniel Mullaney

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Online Event Wed, October 23, 2024 • 10:00 am ET

European Central Bank President Christine Lagarde on Europe’s economic outlook

AN #ACFRONTPAGE EVENT—European Central Bank President Christine Lagarde discusses Europe’s economic challenges and the path forward during IMF-World Bank Week at the Atlantic Council.

Digital Currencies Digital Policy Economy & Business European Union

Speaker

Christine Lagarde
President, European Central Bank

Moderator

Frederick Kempe
President and CEO, Atlantic Council

Introduction

Josh Lipsky
Senior Director, GeoEconomics Center, Atlantic Council

Event transcript

Uncorrected transcript: Check against delivery

JOSH LIPSKY: Good morning, and welcome to the Atlantic Council. I’m Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Center. And it is truly my honor to welcome you today to our AC Front Page conversation with the president of the European Central Bank, Christine Lagarde.

This morning’s event keynotes our series of interviews with leading financial policymakers during the IMF-World Bank annual meetings. Both here at the Council and live from our studios inside the IMF, we are hosting fifty conversations this week on a range of issues, from China’s economy to digital currencies to the future of the Bretton Woods system.

And I wanted to take a moment this morning to explain why we’re doing that. When we launched the GeoEconomics Center nearly four years ago, it was founded on a simple premise: Finance, economics, foreign policy and national security are deeply interconnected. The events of the intervening few years have proved the point. Think of the pandemic and the resulting supply-chain shocks. Think of Russia’s illegal invasion of Ukraine and the way the tools of economic statecraft have been deployed by the G7 to respond.

This center, through our research, our convenings, our fellowships with young economists, has sought to be the place that delivers new solutions for the challenges of our time. In fact, it was on this very stage two years ago that US Treasury Secretary Janet Yellen delivered her friendshoring speech, just before the IMF-World Bank annual meetings.

She called upon all of us to channel the spirit of Bretton Woods, to remember that 44 countries met in New Hampshire not after war but during war, six weeks after D-Day. She said at the time that they sought to build the future they hoped to win.

And so the IMF and the World Bank to us are the quintessential geoeconomic institutions. They are proof that even in crisis, international collaboration works and can deliver something better than what came before. And there is no one who more embodies that principle than our guest today.

Time and again over the past two decades, President Lagarde has been called upon to lead in extraordinarily difficult moments. In 2007 she became French finance minister, the first time a woman was appointed as G7 finance minister. Only months into the job, she helped not just her country but the rest of Europe and her counterparts here in the US navigate the global financial crisis.

In 2011 she became the first woman to lead the International Monetary Fund. Here she was asked to help manage the unfolding eurozone crisis and strengthen and stabilize the IMF after a difficult period.

In 2019 she became the first woman to lead the European Central Bank, just before a global pandemic and a land war in Europe would send shockwaves through every economy in the euro area.

In each of these roles, she demonstrated what true leadership looks like. And on a personal note, for me, the opportunity to work for her at the IMF was an incredible honor, as I know it is for all those who have had the chance to learn from her. And many of them are here in this room.

So it is truly my pleasure today to welcome President Lagarde back to the Atlantic Council as she joins the president and CEO of the Atlantic Council, Fred Kempe, for this special conversation.

Fred, over to you.

FREDERICK KEMPE: Thank you.

So, Madam Lagarde, first of all, you trained Josh really well.

CHRISTINE LAGARDE: He came with high recommendation from you.

FREDERICK KEMPE: So salute to Josh and his remarkable GeoEconomics team; another amazing week you’re putting together. And you’re putting it together as we dismantle our offices here.

Good morning to all of you for this, our last major event at our old headquarters. We’re already moving into our new headquarters at 1400 L. I think you’re going to be amazed at the new convening space.

And good afternoon in Europe. Good evening in Asia. Hello all over the world. We’ve got people tuning in all over the place because they want to hear what you have to say. So if you have questions we’re going to do them online today. All those in the audience live here can send them in through your phone if you like, and it’s AskAC.org. Send it to AskAC.org.

Let me get started with monetary policy, which seems like the right place to start with you, and I’m really interested in a situation where you’re looking at inflation coming down. One point eight percent in September. It was as high as 10.6 percent October 2022.

So that’s the good side. The bad side is growth is slow. In Germany it could be negative this year, probably will be negative this year, and they may be on the edge of a recession.

GDP outgrowth—growth outlook forecast under 1 percent for the euro zone. As you weigh these factors looking at future decisions how do you weigh inflation coming down but growth—which is a good thing, but growth being as slow as it is, which is not a good thing?

CHRISTINE LAGARDE: Thank you, Fred. Thank you, Josh, very much for your way too kind introduction and it’s really a pleasure being here.

I was wondering whether you follow a tradition that is often observed where when you leave a place you allow anybody who is here for the last time to pick up something from the—

FREDERICK KEMPE: That’s the end of our program today.

CHRISTINE LAGARDE: No, but it’s wonderful to be back at the Atlantic Council and congratulations for having expanded so much the scope of your work and your research, bringing together geopolitics, economics, and security under one single roof.

Back to your question, and thank you for starting with monetary policy because this is really my business. So at the European Central Bank we are driven by a mandate which is pretty simple and straightforward, which has a primary objective which says price stability.

It’s upon us to define what it is and we have in our last strategy review defined it as 2 percent medium term symmetric. So we, first of all, look at inflation, at prices. We dissect inflation as much as we can and we try to distinguish what is sort of headline inflation, which is what is felt and resented sometimes by people, from what is permanent, from what is temporary, to really understand where it is heading and how our decisions on interest rates in particular are going to affect inflation.

So that’s what we look at primarily. But, of course—and we are—at this point in time we are rather satisfied with the progress made because, as you just mentioned, we started off back in October two years ago at a reading of 10.6 percent on average and we are now below 2 percent for the moment.

We have reasons to believe that it will move up again above 2 percent in the next few months but it’s really good progress that we have contribute—we have largely contributed to.

Growth. So we are attentive to growth, of course, because it impacts on inflation and it is that impact of growth on inflation that we are attentive to. It’s different from the Fed. The Fed has this dual mandate of price stability but also growth, economic activity, employment. The ECB does not have that. We have a primary mandate which is price stability.

FREDERICK KEMPE: And so let’s get to European competitiveness and growth. Your predecessor Mario Draghi just released a major report on the future of competitiveness. As Josh said in his opening, you’ve not just been in your current job as a central bank governor but you’ve been a minister in France. You’ve been the head of IMF. You were in the private sector for twenty years, and so you know that it all links together in how competitive a place is.

He raised many issues that fall on the fiscal side—not your job—but the ECB does play a role in financial regulation of capital markets. You have urged people to swiftly follow up on Draghi’s plan, I think particularly on capital markets. But I guess the question behind this is, how concerned are you about European competitiveness, and what’s most urgent in the Draghi report?

CHRISTINE LAGARDE: Well, first of all, his report is comprehensive, analytical, documented, and, as I said, a severe but just diagnosis of where Europe is. From my position, as president of the central bank, I’m particularly attentive to three directions that he’s identified. The first one—because they matter for monetary policy.

So the first one is productivity. Europe lags in productivity way behind the United States. Just to give you a number, between 1995 and, say, 2020, US productivity has increased by 50 percent. Europe, productivity has increased by 28 percent. So Europe is lagging behind in terms of productivity. That’s objective number one, improve, catch up, and identify which sectors are going to drive productivity. When you look at the gap between 50 and 28 percent, you see that a lot of that results from the tech sector. Very obvious.

Second item, which he also identifies, is energy costs, and what can Europe do about it. If you look at the price of energy, it’s about two or three times higher in Europe than it is in the US If you look at the price of gas, it’s four to five times higher in Europe than in the United States. So are we suddenly going to find oil, find gas? Do we actually want that? No. What he identifies as the way forward is rapid and smart decarbonization of the economy so that Europe can lead in terms of non-fossil energies, where we are a little bit ahead of the game—with caveats—but which would lead to a much cheaper source of energy once the investments are made, once the transition is completed. And which would also be a good way to adapt—to adapt to the climate change impacts that we are suffering more and more by the day.

The third dimension which he identifies as well is digitalization of our economies. And that is one where the productivity gap is obvious, and where a collective endeavor by the Europeans is called for. What is needed behind it and why does it matter to us, you know, in terms of monetary policy, is the financing. To progress in digitalization, to move into the innovation journey that is needed for that, you need capital. And you need capital that is prepared to take risk. This is not something that we are very good at in Europe. If you look at the volume of venture capital that is raised in Europe, it’s minimal relative to what is raised in the US, or even China.

So he advocates, and I have advocated before that myself, for a capital market union that is common to all, at least, countries of the euro area, if not the whole of the European Union. And for that we need a single, integrated market from a regulatory point of view, from a supervision point of view, with common trade and post-trade infrastructure, where we are completely scattered all over. So those are the three directions where it matters to us—improved productivity, of course it matters to us, especially with an aging population as we have in Europe. Cheaper energy. Of course it matters, because it’s clearly one of the domain that can shock our economies, and has shocked all our economies but Europe in particular recently. And digitalization, because there will be productivity improvement as a result as well.

FREDERICK KEMPE: So, coming back to the core question behind this, how worried are you about it, we’ve known that these things need to be fixed for a long time. And so you look at the Draghi report, and you can’t help but embrace it. But how does one now—what would be different now that one would actually execute on something like capital markets, when one hasn’t before?

CHRISTINE LAGARDE: You remind me of a famous Margaret Thatcher comment. You know, don’t tell me what to do, tell me how to do it. And that’s exactly where I think Europe is. Because, yes, those things have been identified—probably in a more piecemeal way. One of the great values of the excellent Draghi report is that it brings it all together by someone who’s been in all positions. National central bank, so he knows about the territorial aspects of some of the reforms. He has been president of the European Central Bank before me, so he knows how bringing everyone together is necessary and relies also on other unions than just monetary union. And he’s been president of—prime minister of Italy, so he appreciates the politics that is behind it. So value is comprehensive by somebody who has a holistic view of the issues.

He doesn’t go, in my humble view, deeper enough into the action list, what needs to be done. And that’s probably not—you know, it’s—this is now going into the weeds and rolling sleeves up and getting the job done, but this is what the European leadership at all levels of institutions will have to do. How do you go about a capital market union? What do you need to tackle first? Who do you need to bring around the table to say, OK, you have your territory at the moment, it’s not a question of taking it away from you, but bringing it to a level where major operations, major issuance, will be taken at a different level? So all this needs to be done, and the urgency of the matter is now.

FREDERICK KEMPE: Thank you for that very clear, clear statement.

So I won’t—we don’t want to turn this into a press conference; that’s not the purpose of the Atlantic Council. But I do have one follow-up question on your first answer, from Mark Conahan: Is it appropriate for markets to begin pricing in an aggressive rate-reduction path in anticipation for economic data even when the ECB’s forecasts seem more sanguine? And this really gets to the point that if you look only at the inflation data you may go in one direction. It’s not your mandate to look at the economic data, but you’ve said how much it’s linked. I think the real question behind this is: Are you being too sanguine?

CHRISTINE LAGARDE: What we have done since last June on the basis of the data that we had and our baseline, we have gradually cut interest rates once, in June; then we held, in July; then we cut again, in September; and we cut again, in October. So we do not have a linear, systematic sequence that would be, you know, the way to go.

We have reiterated many times—and I’m happy to do it again, because it’s really the way it works—we are data dependent and we look at everything that’s available. And we analyze those data on the basis of three key criterias, which include the inflation outlook, the underlying inflation, and the transmission of monetary policy. And when we last cut, in October, we were confident on the basis of the data that we were receiving and observing that the disinflationary path was underway and that we could continue to dial back the restrictive monetary policy that was in place—that is in place.

But of course, we need to be cautious. We need to be cautious because data will come—will come up and will indicate to use what is the state of the economy, what is the state of inflation, of underlying inflation, and there will be a judgmental aspect to our decisions. But we will, indeed, have to be cautious in doing so.

FREDERICK KEMPE: Thank you for that.

So from the immediate to the generational question, you’ve delivered a truly fascinating speech last month at the IMF, and you said central bankers today—and any of you who have not read it, you should go and read the whole thing.

CHRISTINE LAGARDE: Oh, thank you.

FREDERICK KEMPE: As you know, I’m an amateur historian as well as a think tank leader. But you talked about how central bankers today have better tools to manage structural changes than the 1920s, even if some of the headwinds are similar. Here’s your quote: “Two specific parallels between two ‘twenties’, the 1920s and the 2020s,” which I found fascinating. “Then, as now, we’re seeing a setback in global trade integration and a stride toward progress in technological progress.” So AI on the one side and decoupling/derisking. I would add a third element to this that was there in the 1920s, which is a rising geopolitical risk.

So we all know how the 1920s ended, which is the disasters of the 1930s, whether it was the Great Depression or whether in the end it was world war. What makes you more confident of our challenges today? You know, if you’re looking at the 1930s versus the potential 2030s, how do we avoid wrong turns at this point?

CHRISTINE LAGARDE: OK. Well, each one of us has to do what one has to do. So you are the historian and you can do the sort of geopolitical comparative analysis between the 1930s back then and the 2030s now. I will not venture in that area, because I have to focus on what impacts monetary policy. And you would take me into too political direction.

But what gives me more confidence today—maybe it’s twofold. One is, if you look at trade, back in those days, in the 1920s, trade went down significantly. In a couple of decades, trade went down by 20 percent—down. The numbers we have on trade are not downward. They are up. So if you look at the forecast by the IMF for the next couple of years, it’s an increase of trade. I think it’s 3.1 next year and 3.4 the year after.

So we are not in a world where trade stops and trade declines. We are in a world where trade continues. But it continues in a different way. And I think we have to be attentive to the composition and the distribution; so no less trade, but trade with other partners, trade in a different risk distribution, if you will.

It’s the whole, you know, strategies of corporate to have China plus one or to have plus one, but certainly to continue to use the world in order to benefit from elasticity or in order to benefit from larger market outside home base. So I don’t think that trade is here to go on the basis of the information that we have and the analysis that we can conduct.

I think the second reason I’m more optimistic is that central banks in those days, they exacerbated the problems because they were operating within a rigid framework. And I think that we don’t have that rigid framework anymore. I mean, the gold standards and the reference that currencies had vis-à-vis each other with gold as the standard is no longer with us. And we have invented, over the course of the last few decades, a much more flexible system which allows for that room to maneuver in a less brutal and rigid way on the economies.

Second, still in that monetary toolbox that we have and the way that framework is organized, inflation expectations is one of the major compass that is being used in order to make sure that inflation comes back to that target that most of us around the world have of 2 percent, more or less.

So those are two reasons, in my field, that give me hope that those twenties, while there are interesting similarities in terms of decline of trade and massive technology breakthrough, will not give rise, I hope—and I’m sure you do as well, Fred—to the thirties.

FREDERICK KEMPE: Thank you for that, because the saying, those who forget history are condemned to repeat it, I hope you’re right.

I’m going to ask for a visual aid here from our AV team, because I’m going to talk here about central-bank digital currency, which I know is, you know, something of a passion of our GeoEconomics Center here. We’ve studied central-bank digital currencies closely. What you’re seeing right now is one of our most clicked-on and most-viewed webpages of the Atlantic Council, which tells you what geeks follow the Atlantic Council. But the ECB is currently in a two-year preparation phase of the digital euro, so you’re testing it for real-world-use cases.

Two questions from this, really. What are the factors that are going to lead to a decision on whether a digital euro will be deployed at the end of the two years? Aligned with that is you’ve made an argument for digital euros, a European sovereignty issue. So I’d like you to elaborate on this.

So I guess there’s actually three questions, those two questions, and then the third is we’ve been pushing for the US participation and leadership on this issue of digital assets. As a peer central bank, how do you view the role of the US on central bank digital currency? So it’s really a three-part question on digital currencies.

CHRISTINE LAGARDE: So your second—or, it was—sorry—

FREDERICK KEMPE: The first one is, how are you going to make a decision to go? The second is, what is the sovereignty issue? And the third is, how does the US play?

CHRISTINE LAGARDE: OK. You know, I might start with your second question, because—no, I’ll tell you where we are. So we are, as you rightly said, in the—what we call the exploratory phase. And it’s a phase that will finish at the end of 2025. So we have still one year to go. And at the end of 2025, provided that the legislative process is completed, then the governing council of the euro system will decide to launch for real or not.

Why do I say the legislative process? Because in Europe, it follows this two-prong approach that hopefully will work, and do work at the moment, in parallel, where we explore from a technological and practical point of view how the digital euro will work. And the legislator, meaning the European Parliament, will have to pass a law that will define what the digital euro is, what its threshold is, how it will operate, whether it will be fiat—well, whether it will have tender status, rather, with fiat currencies. And those two tracks are working in parallel.

My hope—because a lot of work has already been covered under the previous Belgium presidency—my hope is—and Hungarian presidency, to a certain extent. But we now have a new European Parliament which has, you know, now a lot of work on its—on its plate, and will look at that, I hope, in the not-too-distant future. My hope is that in the course of 2025, the law will be voted by parliament. We will have a legal framework in which our technology efforts and definition will be inserted. But the two are coming together.

Your second question, which is more fundamental, is, you know, why do we do that? I think the reason we do that is that everything is digital. And what is not digital, is gradually—and more rapidly than gradually—becoming digital. You buy digitally. You we speak digitally. There are lots of things that are taking place that way. So why wouldn’t currency also be digital? I’m going to oversimplify it. You have central bank money, which is essentially, let’s say, banknotes. And that central bank money is critically important for the trust that people have in the system.

The fact that you hold a dollar, that I hold a euro, is—you know, in euro we trust. And we know that that bank note is always going to be honored. It is central bank money. Then you have commercial bank money, which is what commercial banks create by activating, granting loans. And it’s a whole different situation. But if you just look at central bank money, why would it not also turn digital? Why would we always and forever rely on banknotes as our basis for the currency?

So I think we owe it to future generations, and to all of us, to build that alternative of digital currency, which is, you know, to—again, to put it—to oversimplify it, it’s digital banknote. With less total anonymity, which is probably right given, you know, the security that we want to give each other, and the respect that we have for both the confidentiality of information, which we’re working hard so that there is as much privacy as possible, but equally the fact that it cannot be totally, totally anonymous and facilitate the likes of money laundering, financing of terrorism, and what have you.

So, number one, everything is digital. Central bank money should be digital as well. And there are countries in Europe where banknotes are hardly ever used. So we need to have that anchor established in digital—in a digital way.

I think the second reason we are doing that is the fact that payment systems are not exactly sovereign, and more to the point they are very fragmented. In Europe, you know, if you want to pay digitally, there are at the moment thirteen countries that are operating in an isolated manner and which are not linked to the rest of the system. Having a digital euro is a way to actually bring that together on the back of whatever infrastructure will be available, but which will essentially facilitate peer-to-peer point of sales off-hours payment between people in the trade, people between themselves in a cheap, fast, transparent manner. That’s the objective that we have. And I think it’s—you know, if you look after your currency, it’s also a way to really establish your sovereignty, which is what we are all doing.

FREDERICK KEMPE: Well, let’s drill down on the sovereignty issue. Ananya Kumar from our team is asking about the parallel conversations happening about undercutting the international role of the dollar and the euro at the BRICS summit this week. How do you view the geoeconomic role of the digital euro within this context? And perhaps we could add the digital dollar to that, but your business is the digital euro.

CHRISTINE LAGARDE: Yeah.

So I think here we’re touching on two different things. One was the digital euro, which I tried to explain and which we are working on, we’ll continue to work, and we’ll hopefully launch at the end of 2025.

I think what is also important is linkages between payments systems, because at the moment we have too fragmented a payments system around the world, as a result of which if, for instance, people want to remit money back home—and it is the case for a lot of migrants who are working away from home and want to send their salary back home—it takes forever, it’s very expensive, it does funny loop-the-loop circuits around the world for some countries. So interlinking payments system so that people can actually transact easily and cheaply and transparently, so that remittances can go back to the Philippines or to Thailand or to Mexico in a smooth and cheap way, that is important.

And it’s the reason why we in Europe, we have a system which is called TARGET Instant Payment system, which applies to retail transactions and which, within Europe, work in that fashion—fast, cheap, transparent. And yesterday or a couple of days ago, we announced that we were prepared to link that TIPS—this instant payment system—with other instant payment systems around the world, and they are blossoming.

And I would like to pay tribute to your CBDC Tracker, which is really elaborate and top quality. But I think it would be interesting to also track the instant payments systems that are blossoming around the world. If you look at India, if you look at Brazil, if you look at Europe, we are heading in that direction. And it’s a system that should not be closed off or restricted to the G7 countries, for instance. It’s a system that has vocation to open up to multi-countries around the world in order to serve consumers and people who transact in the best possible ways, in the cheapest way, and introduce good competition.

FREDERICK KEMPE: Fascinating. And, obviously, you can’t comment or instruct the US what to do on its own digital currency, but we seem to be a little bit behind on that from that the European—

CHRISTINE LAGARDE: Can I say something on that?

FREDERICK KEMPE: Yeah. Yeah.

CHRISTINE LAGARDE: I will not comment on it. But I think we need to be really attentive to developments around the world. We publish annually the International Role of the—of the Euro. That’s an ECB annual publication. And we follow, you know, in which currency people transact, in which currency they keep reserves at the central banks in which currency they do trade finance. And the role of a currency should never be taken for granted.

Now, of course, the dollar has the dominant role, and has had it for a long time. It’s the exorbitant role of the dollar that Giscard d’Estaing, the former president of France, had identified. And the dollar is at around 50 percent of all those transactions, when the euro is just below 20 percent. But we have to be attentive and careful. And there is—there are rising—there are phenomenons of rising movements concerning gold, notably. I mean, China has been buying gold like never before. Russia is supporting gold because it is extracting a lot of gold out of its underground, and there are clearly attempts to push other currencies. The renminbi is neck to neck with the euro on trade finance.

So I think we all need to be attentive to developments. We all need to be attentive to new technologies. We need to listen to our customers and our compatriots to see what will serve them best with the concern of defending the currency, establishing the sovereignty as it should be by legitimate means, but clearly defending finance.

FREDERICK KEMPE: That’s an excellent answer. Thank you.

So let’s talk a bit about Russia and its immobilized reserves. Six months ago at the last IMF World Bank meetings we’d been through several months of negotiations between the US and EU on the use of $300 billion of frozen Russian reserves.

G7 announced in Italy—brought forward interest income into a fifty-billion-dollar payment, though not yet delivered. It seemed like something as a breakthrough. The CFR—the Council on Foreign Relations—I think it was back in April you were talking about how freezing assets is different than confiscating assets and the global legal consequences of that.

How do you view this new idea? What role would the ECB play now in getting the fifty billion dollars plan over the line?

CHRISTINE LAGARDE: OK. Maybe let me describe what the new idea is so that it’s—we all understand what the difference is with the old idea.

So the new idea that is being discussed is to use the interests generated by those frozen—not confiscated, frozen assets. So this interest generated by the frozen assets that actually belong to the CSD—Euroclear—and to use that in order to serve the debt of Ukraine vis-à-vis the European Union, Japan, the US, the UK. And this is—and, of course, Canada. I don’ t want to forget anyone in that game but, yeah, Canada is also part of the proposal.

So it’s very different from confiscating the capital. What I think the analysis is the interest generated do not belong to Russia. They’re generated by the capital. The links between the CSD and Russia did not provide for any attribution or ownership of those interests as a result of which it is in the books and in the accounts of the CSD—Euroclear—and can be used for the purpose that is intended by the lenders.

So that’s really what is at stake and I think it’s vastly different from saying we confiscate your assets. No, there’s no such thing. Assets are frozen. They will remain frozen as long as it’s determined by those who made the decisions and the interest generated that do not belong to Russia but to the CSD are used to serve the debt of—that is, to Ukraine.

FREDERICK KEMPE: So you’re comfortable with that approach it sounds like. We’re at work—Ukraine’s at work. This is ongoing. Why can’t it move faster and what would be the ECB role in this?

CHRISTINE LAGARDE: No. No. It has moved. I think it was two days ago that the European—I think it was the parliament or the three institutions together have actually decided to issue the loan, which the exact amount I can’t remember—I think it’s thirty billion—that is backed—guaranteed, if you will, in terms of debt services—by the interest generated as such. And I know that other G7 countries are moving in that direction. I think the UK is fairly advanced, as well, and I don’t know about the US You’d have to—you’d have to ask Janet.

FREDERICK KEMPE: Let’s go back to US and China and trade. You talked—it’s one of the overwhelming themes of this week. And so on the one hand you have, you know, European-US tariffs, the danger or potential of more. On the other hand you have manufacturing over capacity of China being imposed on the world.

What are the specific long-term risks of what’s going on with this potential decoupling between Western economies and China? How concerned are you about the Chinese manufacturing overcapacity on the one hand and rising tariffs on the other?

CHRISTINE LAGARDE: I’ll start with that. I think that trade, according to the rules that partners have agreed with each other—meaning essentially the WTO rules—is beneficial for innovation. It’s beneficial for the development of the activity. Has proven extremely good for some countries that have managed to reduce poverty as a result of extended activity and development of the economy, as a result of trade being the major driver. And I think that we all stood to benefit from trade in many respects. So trade barriers, whether they are tariff or nontariff barriers, are likely to have a negative impact on that. On growth, certainly. On—I think it would have an impact on inflation as well. And not one that, you know, would be—would be particularly welcome.

There is clearly overcapacity in certain sectors in China. And we have to remind our partners that there are rules by which we trade, which they have consented when they joined the WTO, and that they have to abide by. And that not being the case, then decisions have to be made. But I think that jumping to the conclusion that the economy will fare better at home because we have a big market, simply because we will raise tariffs, I think is a bit of a far-fetched conclusion that I don’t—I don’t see in the history of large economies. Because when you look at that—you’re a historian—when you look at that, it’s pretty clear that periods of restrictions and barriers have not been periods of prosperity and strong leadership around the world.

So whoever in this country is ultimately the president, I think should at least bear that in mind. The times when the United States has been in strong leadership, and when the economy has been prosperous, have most often coincided with periods of trade around the world and engagement of the country. Because the US economy is such a large and powerful economy, and it has to project in the world on the global stage.

FREDERICK KEMPE: Thank you for that. I’m going to call for another visual aid. And this gets to the question of leadership at central banks and finance ministries. And we’d like to show you the disparity here between—this is our own data visualization, so the team is very good at this kind of thing. Twelve percent of the world’s finance ministers are female. Thirteen percent of the central bank governors. This is fact. You can see it on the chart very strongly. But are there implications for the global economy? Is this something we should fix just because it doesn’t seem right, or is there actually implications for the global economy in this—in this visualization?

CHRISTINE LAGARDE: I think it’s abysmally small and does not reflect the availability of talents and merits that many economists, and macroeconomic experts, and financial experts have around the world. So it does not—there’s a whole pool of talent that is not tapped into, and clearly not reflected on this chart. Thank you, by the way, for putting that in in such a colorful way.

FREDERICK KEMPE: And but so the economic impact is we’re not tapping enough—

CHRISTINE LAGARDE: But, going beyond that, it’s talent—a pool of talent that is untapped. But it’s also a lack of diversity as such. And we all know from, you know, having studied that and practiced it, that diversity is a source of better decision, of more stability, of, you know, better outcome altogether. Whether it’s in the financial sector or otherwise. And I think we should just, you know, learn that lesson, and do it. Just do it.

FREDERICK KEMPE: OK. Thank you for that.

CHRISTINE LAGARDE: I know you do here.

FREDERICK KEMPE: Well, look, first of all, you look at the facts. And if the facts don’t seem right, then you start—you change.

The final question. And I don’t expect you to prognosticate what will happen here in November or give a view on that. But we’re the Atlantic Council. You’re one of the most remarkable transatlantists/atlanticists we know. You lived in the US for a long time. You have a great appreciation of this country and the transatlantic alliance. What message would you share with our American audience about how their decision now and through December 5th can impact not just Europe, but the rest of the world? I’ve had ministers of foreign countries complain to me that they don’t get to vote in the US elections, because they have so much at stake. But what do you think the stakes are in our own democratic process and elections?

CHRISTINE LAGARDE: I agree with them that a lot is at stake, actually. And the domestic decision, that belongs only to the American people, will have ramifications around the world in a very significant way. So it’s not just a decision at home, although I understand the concern is much more at home on inflation and the economy and all that. But it has massive implications outside the United States because of what I’ve just said. The United States is leading in multiple ways and has to deploy its leadership for the common good. That’s what we should always keep in mind.

FREDERICK KEMPE: And maybe then let’s put this a little bit of a different way. For Europe and the US to maintain their leadership role in this inflection point in history, where we’re going to be shaping the global future yet again together, from your standpoint, what you’re doing, what do we need to do better together?

CHRISTINE LAGARDE: I think we need to remember what history has forged between us. And, you know, I don’t want to go back to Washington and Lafayette. But reading their letters, reading the letters that these two men exchanged and how they played a role in structuring that history, which led to this extraordinary country, should always be a reminder that in whichever position, in whichever situation, we need to be together. And I think that there are some bounds of history that is seen on the Normandy beaches, that is seen on the East Coast of the United States, that cannot go to waste. So we are together, and we should stay in this together.

FREDERICK KEMPE: I think Washington and Lafayette is probably a good spot to close. So please join me virtually and also here in the audience in thanking Christine Lagarde, president of the European Central Bank, for this fascinating discussion.

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Transatlantic Forum on GeoEconomics

SEPTEMBER 30, 2025 BRUSSELS, BELGIUM The Transatlantic Forum on GeoEconomics is an annual conference convening economic and financial leaders from both sides of the Atlantic.

Daleep Singh, US deputy national security advisor for international economics, emphasized on Thursday, September 26, that we are in the “most intense period of geopolitical competition since the Cold War,” with Russia and China seeking to disrupt the US-led order. He argued during the Transatlantic Forum on GeoEconomics in New York that economic and technological competition will dominate future conflicts because nuclear powers will try to avoid direct military conflict.

On the issue of immobilized Russian assets, Singh underscored that “political will” should ensure the G7 follows through on its commitment to bring the interest revenue forward into a $50 billion aid package for Ukraine by year’s end. “We are going to get to the finish line on Russia’s reserves.” He highlighted the historical significance of this multilateral effort, stating that “never before in history has a multilateral coalition frozen the assets of an aggressor country… and found a way to harness the value of those frozen assets to fund the aggrieved party.”

He acknowledged technical challenges but, when referring to Russian President Vladimir Putin, emphasized that “the choice is ours, not his.” Singh named Hungary’s Prime Minister, Viktor Orban, as the only European Union leader obstructing the legal changes the United States is asking for to unlock its participation—but suggested that Orban “doesn’t have as much leverage as he may perceive.”

Regarding economic statecraft, Singh advocated for a balanced approach, warning that restrictive tools like “sanctions, export controls, [and] tariffs” don’t “win hearts and minds.” He emphasized the need for positive tools that promote “supply chain resilience,” “technological preeminence,” and “energy security.” This aligns with the GeoEconomics Center’s expertise in the matter, with research from last year’s Transatlantic Forum in Berlin and Nonresident Senior Fellow Nicole Goldin’s recent issue brief, “Toward a financial inclusion agenda for the global majority.”

He also expressed concern over the lack of financial firepower for large-scale investments, arguing that the private sector lacks the incentive to invest in long-term, high-risk projects. Singh called for initiatives like a “strategic resilience reserve” or public authorities with more flexibility and scope to fill this gap. More highlights from his conversation with Atlantik-Brücke CEO Julia Friedlander are below.

Industrial policy and global competition

• Singh argued that industrial policy is crucial because the private sector alone cannot address major challenges like the “loss of supply chain resilience,” “fading technological preeminence,” and the “hollowing out of our industrial base.”
• He highlighted the positive results from recent government interventions, such as tax incentives and research and development investments, which have driven “sustained above-trend growth” and a resurgence in “innovation and productivity.”
• Singh noted that the delay in adopting a more active government role was due to policy muscles which had “atrophied” over the past forty years. It has taken time to “course correct” from a laissez-faire approach.
• On global competition, Singh stressed the need for a “multiplayer, multistage game theory” approach, especially regarding China, which “floods the market” with state-backed overcapacity in key sectors like steel, solar, and semiconductors.
• He outlined the US strategy to strengthen domestic capacity, form alliances with countries that “play by the same rules,” and use “restrictive measures” like tariffs to prevent unfair competition and safeguard national security.

China’s role in Russia’s war machine

• Singh emphasized that Russia has turned its economy into a “war machine” and is now relying on rogue states like Iran and North Korea, which have become “witting cogs in this arsenal of autocracy” to sustain its military capabilities.
• Singh found China’s actions over the last years particularly baffling, questioning why a country that claims to seek “better relations with Europe” and wants to be seen as a “responsible stakeholder” is now supporting the biggest threat to European security and aiding Pyongyang’s nuclear program.
• Singh noted China’s deflationary slump and reliance on external demand but questioned why it continues to “antagonize all the major sources of external demand,” calling Beijing’s role in the war a “strategic wedge” rather than a win.
• Singh stated that sanctions aren’t about shock and awe but about “stamina,” pointing out that there are signs of China pulling back from financing Russian military inputs.
• He suggested that China has the power to “pull the plug tomorrow on the factory to the war machine” and warned that failure to act would result in “profound reputational damage” for Beijing.

Humility, creativity, and structural reform

• Singh emphasized the importance of humility in addressing global challenges, especially in light of “the uncertainties of our domestic political climate, geopolitical backdrop, and global macroeconomic regime,” which are all intensifying and feeding on one another.
• He called for a cultural shift in national security, advocating for “bottom-up creativity” and less top-down hierarchy. Singh stressed the need for individuals to “speak up, take risks, admit when you’re wrong,” and challenge assumptions to avoid risk management failures.
• Singh underscored the importance of historical perspective, drawing parallels between the current era and the early twentieth century. He cited examples including the first US-led wave of globalization (1870–1913), emphasizing structural reforms like the creation of the Federal Reserve and income tax to address inequality, as relevant lessons today.
• Singh highlighted the need for modern structural change, pointing to recent legislation like the Inflation Reduction Act, CHIPS and Science Act, and infrastructure bills as good steps, while also urging policymakers to focus on repairing the social contract at home and rebalancing global leadership.

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While the EU has taken important steps toward solidifying its strategic compass, as well as strengthening its defense industrial base and common defense funding, it remains a nascent defense actor. It’s difficult for Europe to build out a common strategy and properly fund common defense projects when member states not only have individual national defense priorities, but disagree on the usefulness of common funding at all. Consequently, European unity on defense hinges not only on political will, shared strategy, and the readiness to act collectively, but also on decisions about funding.

In order to bring the European Defense Union to life, EU institutions and heads of state must recognize that economic and industrial policies can lead to effective defense cooperation. The European Commission appears to be in favor of such a strategy. Spearheading this effort is the European Defense Industrial Strategy (EDIS). EDIS aims to enhance defense industrial readiness across EU member states by promoting coordinated investment, joint research and development, synchronized production, collective procurement, and shared ownership of defense assets within Europe. This strategy seeks to bolster strategic autonomy and reduce reliance on non-EU suppliers, ensuring that Europe can independently meet its defense needs. Additionally, there are significant comparative advantages and benefits from a Europe-wide division of labor in the defense sector.

Joint procurement is a key priority for EDIS because it promotes collaborative investment and fiscal savings, which would lead to purchasing economies of scale and more effective allocations of defense budgets. Recently, member states indicated a willingness to cooperate with the Commission to combat the surge in wildfires with the joint order for purchasing Canadair DHC-515 water tankers. The funding structure consists of a hybrid approach, with orders to purchase the tankers placed by both the EU and individual member states. The size of the order achieved purchasing economies of scale, leading to a much more competitive purchase price.

The EU has already begun utilizing joint procurement to solve its fractured landscape of military equipment and defense systems. The European Peace Facility (EPF), off-budget funding mechanism, was used to oversee the approval of funding of military equipment for the Ukrainian Defense Forces. This success should be built upon to reach a more efficient system of procurement across the board. EDIS guidelines suggest that member states procure at least 40 percent of defense equipment collaboratively by 2030. Indications show that joint procurement could increase savings by up to 30 percent.

Another area for improvement relates to targeted multinational investment in the EU defense industry. Leveraging resources from the European Investment Bank’s (EIB) €550 billion pool of funds can significantly upgrade the EU’s defense capacity and innovation. Traditionally, the EIB was restricted by its statutes to funding any defense initiative apart from certain dual-use equipment. However, this past May, the EIB Board of Directors endorsed the Eurogroup’s Action Plan for Security and Defense, adapting its lending policy to expand the definition of dual-use equipment, such as drones, and “to open its dedicated SME credit lines to companies active in security and defense”, therefore allowing the direct funding of such dual-use tools.

Despite their significance, however, joint procurement and increased EIB financing cannot cover the preexisting investment gap in Europe’s defense capabilities. Between 2009 and 2018, member state cuts amount to an aggregated underinvestment of around €160 billion, compared to the 2008 spending level. Given the changing attitude of governments and EU financial institutions, formulating an equitable funding model remains a pivotal challenge. While straightforward and aligned with each country’s ability to pay, a simple GDP-based approach may generate resistance from wealthier nations that could feel burdened by disproportionately high contributions relative to their needs and may bear public backlash. This challenge is also preventing further talks surrounding a recovery fund specifically for defense. Joint borrowing, proposed by Spain, France, and Belgium, aims to build on the €800 billion joint debt to tackle the challenges of COVID-19. This proposal has already ignited negative reactions from more fiscally conservative member states.

A more sophisticated model that adjustsfinancial contributions to a joint investment fund or other funding structure based on strategic priorities could address these concerns by increasing buy-in from countries with heightened security risks, such as Greece and Poland, two countries with a high percentage of defense spending. However, this model’s complexity and potential disputes over threat assessments make its implementation challenging. Hybrid models of mandatory and voluntary contributions are another possibility, offering flexibility and ensuring a baseline of collective action tailored to specific security challenges.

In any case, robust governance mechanisms will be required to ensure efficient resource use and avoid duplication with NATO efforts. The success of any funding model depends on clear strategic objectives, robust oversight, and the political will to transcend national differences for collective security.

Overall, to properly improve the European defense industry it is key to incentivize European defense firms to raise their level of investment in new capacity to achieve economies of scale and lower unit costs. The creation of a bigger European defense market, coupled with increased official financing through national funds, incentivizes higher research and development activity and a stronger drive for increased production efficiency to gain market shares in a growing market. These provide incentives for increased start-up and merger and acquisition activity. This, coupled with a strategy to integrate more European firms into the supply chain of the European defense industry and higher political coordination in identifying and pursuing common defense needs, could establish a European market where member states enjoy lower prices per unit and priority service. Moving forward, the harmonious cooperation of the public and the private sector, under more coordinated political oversight, could transform Europe’s defense capabilities.

Konstantinos Mitsotakis is a former Young Global Professional at the Atlantic Council’s Geoeconomics Center.

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The announcement of the Commission’s incoming leaders—officially called the College of Commissioners—completes an important step in the EU’s leadership transition this year. But the process is far from over. Before the next Commission and its twenty-six commissioners (one per EU member, not including von der Leyen, who is Germany’s) officially take office this fall, commissioner-designates must pass muster at the European Parliament.

Like the US Senate’s grilling of cabinet secretary nominees, the European Parliament will conduct hearings. These hearings will be no rubber stamp. The European Parliament will likely reject one or more candidates as a display of the body’s institutional power, and some nominees—including Hungary’s commissioner-designate, slated for the health and animal welfare portfolio—are already seen as unlikely to get the nod of approval. However, the initial lineup already gives a good picture of von der Leyen’s vision for her second term.

Washington, focused on in its own upcoming leadership race in November, may be loath to tune in to the politicking in Brussels. But US policymakers should care. Like in Washington, personnel is policy, and the proposed makeup of the Commission provides an opening salvo for the bloc’s policy agenda and priorities. Moreover, whoever wins in November will need to pay attention to the direction of Brussels’ policy on the issues that will most deeply impact the United States and the transatlantic relationship.

There are three primary takeaways to note from von der Leyen’s proposed Commission.

First, the Commission is getting serious about its geopolitical and defense ambitions, and the Atlanticists are ascendent. Announced over the summer, Kaja Kallas—Estonia’s former prime minister, a noted Russia hawk, and an architect of some of the EU’s initiatives to arm Ukraine—will be the EU’s chief diplomat. Joining Kallas will be Lithuania’s former Prime Minister Andrius Kubilius, who will hold the inaugural post of commissioner for defense and space. He will build on the EU’s defense industrial strategy and will be responsible for overseeing the Commission’s efforts to ramp up defense production with EU funds. These efforts will cost money. The budgetary portfolio will fall under Poland’s Piotr Serafin, who will be responsible for navigating the EU’s upcoming negotiations for its next seven-year budget framework. In what promise to be tough negotiations among member states, the EU will have to prove that it can put its money where its mouth has been. The EU will need to find the political will and financial muscle to reallocate resources away from traditional areas, such as agriculture and regional funds, toward shoring up a fragile and insecure Europe amid a daunting geopolitical context, from defense-industrial capacity to emerging technologies, innovation, and competitiveness.

All three nominees are also unapologetic Atlanticists who value Washington’s engagement in Europe, and they are all in on supporting Ukraine. They come from member states historically oriented toward Washington and will likely continue to bring that philosophy to their new posts in Brussels. With Atlanticists in strong foreign policy and economic roles, Washington could see an EU eager to drive a more ambitious security and defense agenda, but one that includes—not excludes—the United States in that effort, especially in the financing of defense-industrial projects.

Second, several familiar faces are returning with top jobs in the next Commission. Valdis Dombrovskis, the current executive vice-president overseeing trade, will take on the economy and productivity portfolio. Maroš Šefčovič, another current executive vice-president currently responsible for the European Green Deal and interinstitutional relations, will lead the trade portfolio. Both will be critical interlocutors for Washington on issues of trade and industrial policy—areas to which both are already well attuned. Dombrovskis, for example, was a co-chair of the Trade and Technology Council and will surely play a role in US-EU negotiations under the next Commission. Even those who are new faces in the Commission are not newcomers to Washington. France’s nominee, Stéphane Séjourné, is Paris’s foreign minister. This experience will matter for discussions with Washington, especially on trade and industrial policy. Their nominations suggest von der Leyen is serious about her prioritization of a Clean Industrial Deal and her de-risking push.

Third, Washington will likely share many of the broad priorities for the next Commission, even if the devil remains in the details. The themes running throughout the reshuffled portfolios presented this week suggest convergence with where US policy is trending. There is a strong focus on economic security, defense, and protecting Europe’s key industries and technology leadership. The portfolios von der Leyen assigned and the Commission she set up suggest she is serious about moving the bloc closer to realizing the vision of a geopolitical Commission—even if much work remains to be done to achieve it. And Washington can find much to like about her priorities. Von der Leyen’s Commission is taking more ownership and responsibility for Europe’s own defense, a frequent topic of discussion and debate in Washington. Europe’s growing apprehension toward China, and a focus on greater competitiveness and innovation, will likely require greater collaboration with the United States.

Brussels will have to back up its personnel decisions with policy. But all indications from the reveal of the next College of Commissioners should make Washington consider the EU to be an increasingly cooperative and able partner.

James Batchik is an associate director at the Atlantic Council’s Europe Center.

Jörn Fleck is the senior director of the Europe Center.

Ian Cameron and Thomas Goldstein, young global professionals with the Europe Center, also contributed to this article.

The post What Washington needs to know about the makeup of the next European Commission appeared first on Atlantic Council.

In the complex and often opaque world of EU governance, not all European Commission portfolios carry the same weight. Some hold significant sway over the direction of the bloc while others carry more limited influence. If the new commissioner can generate consensus among member states and is given sufficient tools, then the creation of this new role could prove to be an important step toward developing an EU defense strategy that is better equipped to deal with the security challenges facing the continent.

Evolving EU defense capabilities

Von der Leyen’s announcement of a defense commissioner follows several years in which the EU’s defense capabilities have undergone a significant evolution, driven by a desire to ensure the security and strategic autonomy of the region. Global military spending is on the rise, with EU member states increasing their defense expenditures by 20 percent in 2023, reaching a total of $311.2 billion. The EU has responded by stepping up its own defense investments, marking a departure from previous norms where such involvement was considered taboo.

This shift is also evident in the specific funds allocated to member states. The European Defence Fund, introduced in the 2021-2027 budget cycle, earmarked nearly eight billion euros (approximately $8.8 billion) for the research and development of military technologies. Previously, the focus was primarily on coordinating small and medium-sized enterprises through the European Network of Defense­–related Regions, which aimed to create dual-use clusters within the EU. However, this initiative lacked sufficient financing and did not achieve significant success.

Additionally, the 2023 Act in Support of Ammunition Production allocated five hundred million euros (approximately $552 million) to boost ammunition production, while the European Defence Industry Reinforcement through Common Procurement Act set aside more than three hundred million euros (about $342 million) for joint arms procurement.

In part, the European Commission has sought to reduce the EU’s reliance on non-EU arms. Between Russia’s full-scale invasion of Ukraine and June 2023, 78 percent of member states’ procurement spending went toward defense acquisitions from outside the EU, mostly the United States. In accordance with the European Defence Industrial Strategy, the Commission aims for EU member states to allocate 50 percent of their procurement budgets to EU-made equipment by 2030, with an increase to 60 percent by 2035.

The new commissioner for defense and security

The creation of a new commissioner for defense and security within the EU signals a significant shift. The commissioner will likely oversee the Directorate-General for Defence Industry and Space, which was established in 2019. While the EU does not have its own standing army, it can provide funding and coordinate member states’ efforts. Unlike a traditional defense minister, this role will focus on enhancing coordination and procurement across the EU’s defense industry, addressing the longstanding fragmentation that has hampered Europe’s ability to respond effectively to emerging security threats.

While the high representative for foreign affairs and security policy will continue to steer the EU’s overall military strategy through the Strategic Compass, the new commissioner will likely aim to complement these efforts by focusing on defense industry integration and capacity-building. As a result, the Internal Market portfolio will lose one of its crucial elements.

A significant question mark looms over the future of the European Defence Agency (EDA), which is currently supervised by the high representative for foreign affairs and security policy. Until now, the EDA has played a crucial role in coordinating EU military cooperation, particularly through the Permanent Structured Cooperation framework. If the EDA does not fall within the new commissioner’s purview, the scope of their powers will be considerably limited.

Looking ahead, the European Defence Investment Plan (EDIP) has been proposed as a new framework to further strengthen EU defense capabilities until the end of the current budget cycle in 2027, with a budget of 1.5 billion euros (approximately $1.65 billion). Unfortunately, the funding for this plan has been modest.

Challenges ahead

The most pressing challenge for the new defense commissioner will be securing adequate funding. While Internal Market Commissioner Thierry Breton has suggested allocating one hundred billion euros for an EU defense fund, the reality is far more complicated. Reaching consensus among all EU member states to increase the budget before 2027 seems improbable. Opposition from countries such as Hungary, which has resisted deeper EU integration, will undoubtedly be a significant obstacle. Although some member states, particularly France and Estonia, have advocated for more common debt as a potential solution, this idea has struggled to gain sufficient support across the bloc.

For an industrial policy to succeed, the EU needs more than just regulation; it requires robust financial incentives. The current budget allocations may be too limited to foster meaningful cooperation among member states, potentially undermining the overall strategy. Without significant financial backing, the ambitious goals of the industrial strategy may fall short.

The EU also faces a sobering reality: Among the world’s one hundred largest defense corporations, 51 percent of revenue is generated by US companies, while only 3.5 percent comes from EU-based firms. This stark imbalance underscores the significant challenge ahead for the EU as it seeks to build a defense industry that is more capable of competing with the United States’. Unlike their US counterparts, European companies did not undergo the same process of consolidation, and the market remains fragmented, further complicating the effort.

One of the key proposals under the EDIP is a set of crisis measures similar to the United States’ Defense Production Act. This toolbox could be activated by a qualified majority vote of member states rather than a unanimous vote, which is typically the case for defense issues. In a crisis, the Commission would have the authority to compel firms to pivot their production toward defense materials. Additionally, the Commission could enforce measures to ensure the free flow of military components across the EU, strengthening supply chain resilience.

However, these proposals are highly controversial. Member states have previously rejected similar powers for the Commission during negotiations over earlier defense funds, citing concerns about sovereignty and the centralization of authority in Brussels. This resistance underscores the delicate balance the defense commissioner will need to strike between advancing EU-wide defense initiatives and respecting national autonomy.

The creation of the defense commissioner’s role is undoubtedly a significant step toward breaking the EU’s longstanding reluctance to engage in security-related matters. However, it may not meet expectations in critical areas. Instead of emerging as a strategic leader in European defense, the defense commissioner risks being reduced to a procurement manager, perpetually entangled in turf wars with national defense ministers (or even other commissioners) who are reluctant to cede control over their defense policies. Additionally, smaller countries may hesitate to participate in tenders where larger nations like France or Germany are likely to dominate, potentially channeling funding toward their own munitions industries.

The role may not immediately transform the EU into a defense powerhouse, but it represents a critical first step in what will likely be a long evolution. If the defense commissioner can build consensus, effectively leverage financial incentives, and overcome resistance with the EU, this new position could lay the groundwork for a more cohesive and self-reliant European defense strategy—one that could eventually reshape the global defense landscape and strengthen Europe’s role on the world stage.

Piotr Arak is the chief economist at VeloBank Poland.

The post Europe’s new defense commissioner: Game-changer or procurement manager? appeared first on Atlantic Council.

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.

The post The EU needs to adapt its fiscal framework to the threat of war appeared first on Atlantic Council.

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 post How are markets reacting to the French snap election? appeared first on Atlantic Council.

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.

The post The Enrico Letta Report and the state of the EU’s Capital Market Union appeared first on Atlantic Council.

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

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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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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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.

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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.

The Eurasia Center’s mission is to enhance transatlantic cooperation in promoting stability, democratic values and prosperity in Eurasia, from Eastern Europe and Turkey in the West to the Caucasus, Russia and Central Asia in the East.

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The post Ukraine’s EU membership bid set to receive big boost in November 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

“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.

Watch the full remarks

The post Robert Habeck on Germany’s new approach to ‘economic security’ and ‘selective multilateralism’ 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

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.

Watch the full remarks

The post Financing Ukraine’s defense is a down payment for peace in Europe, says Dutch deputy prime minister 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

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.

Watch the full remarks

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

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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

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.

Watch the event

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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.

Watch the event

The post Dutch Deputy Prime Minister Sigrid Kaag on how the EU can use geoeconomic tools to ‘assert itself on the international stage’ appeared first on Atlantic Council.

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.

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

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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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The post Loss of investor confidence and the banking crisis  appeared first on Atlantic Council.

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.

The post It’s not 2008: Keep calm as central banks carry on appeared first on Atlantic Council.

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.

The post Five takeaways from the Estonian elections, where security trumped inflation by a landslide appeared first on Atlantic Council.

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.

Learn more

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. 

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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…

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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.

The post ECB chief Christine Lagarde: ‘Our primary objective is price stability’ appeared first on Atlantic Council.

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 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.

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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.

Learn more

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.

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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.

View the full issue brief below

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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.

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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

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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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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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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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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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Ben Judah

Former Director

Europe Center Transform Europe Initiative

Economy & Business European Union

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Gérard Araud

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Europe Center

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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 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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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

Baerbock, a candidate for chancellor of Germany, spoke at the EU-US Future Forum about her plans for boosting US-Germany relations, the future of Nord Stream 2, mitigating climate change, and more.

Coronavirus Elections

New Atlanticist Aug 23, 2021

The coming storm for a post-Merkel EU

By Ana Palacio

No matter who succeeds Angela Merkel as German chancellor, EU leaders are going to have to start making real decisions.

European Union Politics & Diplomacy

New Atlanticist Sep 3, 2021

Germany’s defense minister: Only political will can protect Europe

By Annegret Kramp-Karrenbauer

The debate over EU security and defense should be about political will—not institutions.

Defense Policy Europe & Eurasia

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

A conversation with European Commissioner for the Internal Market Thierry Breton

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.

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