Tuesday, July 16, 2024

A maker, not a taker: Why Europe needs an economic security mechanism

Must read

Europeans were caught off guard last year when the US administration – with China in its sights – passed sweeping new laws on controlling the export of advanced semiconductors and the tools to produce them. This was soon followed by the announcement of a deal between Washington, The Hague, and Tokyo to align their controls in this space. Because of the centrality of Dutch companies’ equipment to this sector, the deal has the potential to single-handedly reposition Europe in what is a signal battleground in the great power technology war.

But, despite the geo-economic gravity of the episode, the European Union’s response was cumbersome at best. In this void, it was Washington’s interpretation of economic and national security risks – combined with the United States’ extensive control over this industry – that effectively decided the matter for Europe.

Irrespective of whether one believes the deal was in the European security interest or not, the episode is instructive as to what is to come. New US controls on particular investments and financial flows into China’s technology ecosystem could erect extraterritorial hurdles – US laws directly regulating European business – for EU investors. Chinese decisions could end up having even more serious effects: Beijing is growing increasingly assertive in tapping European companies’ know-how while controlling the flow of critical technology inputs.

Europeans have been slowly developing a shared understanding of the risks they face in their economic and technological relations with other powers. This summer, the European Commission announced it would assess four key economic security risks (supply chains, critical infrastructure, technology leakage, and coercion) as part of its more comprehensive economic security strategy. This is a good basis to build on. But the spectre of national sovereignty has already in the past weakened Europe’s resolve in questions of economic security. For example, many member states have yet to introduce (serious) national foreign direct investment screening tools, which means the EU is not as well protected from the actions of other powers as it could be. On 5G, the bloc agreed on minimum security standards, but member states interpret them in widely differing ways. Is this sort of patchy response really the best Europeans can hope for when it comes to protecting their economic security?

In order to avoid repeating the same errors elsewhere, the EU needs to think more ambitiously about its own economic security architecture. To do this, it should create a European economic security mechanism to better structure cooperation within the EU.

This would be a pragmatic step forward – and the EU should build the mechanism in three tiers.

The first tier would see Europeans pool their techno-industrial expertise and knowledge in order to gain deeper understanding of the strengths and weaknesses they face. In the second tier, they would draw up EU-wide economic security risk standards. Critically, in the third tier they would agree to trigger a coordinated EU response to defend their economic security interests when these come under pressure. As a whole, this mechanism could create a stronger Europe which can bolster international economic security rather than fall victim to rising insecurity and uncertainty.

Tier 1: Share expertise and knowledge

The EU needs to enhance its understanding of innovation, production, and trade patterns in critical supply chains and technology industries, the vulnerabilities and strengths these face, and the policies of other powers affecting them. The constantly shifting nature of these patterns alongside incomplete national efforts require the establishment of a standing analysis body at the EU level.

Winning over Europe’s industry will mean instilling confidence that the EU is acting in its best interests as well as by providing clear incentives

There will be obstacles to such sharing of knowledge by member states, which can be fierce economic competitors in different sectors. Their national laws may limit this sort of exchange, and a centralised repository of sensitive information could indeed be vulnerable to cyber-attacks from China in particular. Trust among member states and strong security architecture is therefore necessary, for example by agreeing to strong limits on how this shared data can be used. Even more challenging is cooperation with the private sector, which holds most of the techno-industrial knowledge but is by and large reluctant to share this with governments. Winning over Europe’s industry will mean instilling confidence that the EU is acting in its best interests as well as through providing clear incentives. The EU can do this by, for example, explicitly linking industry cooperation in this mechanism to additional financial and research promotion tools such as those considered in the Strategic Technologies for Europe Platform.

Tier 2: Set European risk standards

The EU must define those economic security risks which are of EU-wide concern and which it decides therefore require a coordinated response – especially in the contentious critical technology space, such as with semiconductors, AI, or biotech. It therefore needs to agree standards that target specific security risks without fragmenting the industries they apply to. They thus need to be sufficiently aligned with emerging and existing standards elsewhere, such as those in the G7, and with key principles of the WTO such as non-discrimination and transparency.

The goal for the EU must be to become a proactive global standard-setter. Unfortunately, the European Commission’s risk assessment process is rushed and lacks transparency. The commission is aiming to complete the task by the end of the year – which does not inspire confidence that the process will produce deep insights and carefully weighed standards.

Two economic security risks are of particular importance to the EU. The first is the strategic dependencies Europeans have in critical supply chains. Though uncontroversial in principle, Europeans have yet to agree on a gold standard of what this means in practice. Some member states are developing their own supply chain metrics and analyses; others are not doing much. What is still missing is a strong lead by the European Commission to forge an EU standard. Without it, national de-risking agendas could be ineffective. Joint analysis could help much more clearly map out the risks for the single market.

The second risk is the loss of the EU’s technological edge and indispensability. In cases in which an export or an investment of a critical technology would contribute to the EU becoming strategically dependent on that country, or would otherwise undercut a critical EU technology advantage, EU economic security can be at risk and will require a common approach. This requires both a focus on “strategic indispensability” as a form of EU geo-economic leverage, as well as the need to identify the technological edges which can support EU-wide economic security (as argued in previous ECFR commentaries).

Tier 3: Agree an EU mandate and response trigger

Finally, and most importantly, to avoid the mistakes of the 5G toolbox and other efforts at coordination, the economic security mechanism will need to contain a hard trigger for EU action. To be able to respond to a threat or other challenges in areas of EU-wide economic security risks, the bloc needs a credible policy toolbox and mandate to defend its interests writ large.

Policymakers should draw inspiration from other tools. The EU’s recently agreed anti-coercion instrument is able to give the commission a mandate to use countermeasures against another country if a member state is being coerced. Similarly, the European Chips Act provides the commission with an emergency toolbox to intervene in the single market if it can identify evidence of a serious risk to supply disruption. Additionally, the single market emergency instrument, which is currently under negotiation, could activate emergency tools in response to different crises in the single market.

European policymakers need to think more broadly about what joint action they could take in the context of the EU’s recent economic security strategy. Novel tools they could develop include a strategic technology control instrument to impose EU-wide technology restrictions. More importantly, the EU needs to find ways to trigger existing tools and develop new positive tools. For example, daunting strategic dependencies in raw materials or critical inputs such as permanent magnets could see a European economic security mechanism trigger joint financial support tools, such as the European Commission’s proposed sovereignty fund, to address the most urgent risks. As the semiconductor incident demonstrates, the carving up of global industries and supply chains shows that only if Europe is united will it be able to take a place at the global table where battles over rules and standards are already playing out. The European economic security mechanism is Europe’s best shot to be a maker, not a taker, in this new world.

The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.

Latest article