The Future of the European Union

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The Future of the European Union

Aftab Abbasi 

Leaders of the European Union have been, of late, insisting that the 27-nation bloc needed to change. For instance, at the end of a frustrating six-hour teleconference with EU leaders at the end of March 2020, French president Emmanuel Macron warned that the Covid-19 pandemic was challenging “the survival of the European project.” These dramatic words, uttered to spur the European Union and its member states into action, revealed both the bloc’s fragility and its “pre-existing conditions,” which make it more susceptible to grave economic and political blowback from Covid-19. The European Union that emerges from this war will not be the same as it is today. With growing anti-globalization sentiment, xenophobia and nativism, European states are finding it increasingly difficult to form majority governments after inconclusive elections. Established political parties could no longer keep new and more extreme voices outside of governments as fragile, multiparty or minority governments became common place. 

The EU now faces a fundamental strategic dilemma. More than any ordinary nation-state, the EU is as pure a creature of multilateral globalization as exists in the world. It is most comfortable when the outside world mirrors its traditional internal principles of organization: free economic exchange and mutually beneficial cooperation.

When globalization really began to take off in the 1990s, the EU was ready to help shape it. It understood how to knock down barriers to market competition. The founding director-general of the World Trade Organization (WTO), Peter Sutherland, had been Europe’s competition commissioner at the height of the single-market program. In some ways, the EU was more comfortable with globalization than the United States was. After all, it had been founded on the belief that open commerce and shared institutions were a better guarantee of peace than great-power manoeuvrings.

Like the United States, the EU resisted multilateralism in areas of trade that might undermine internal political bargains or sensitive external relationships. Europe was slow to abandon restrictions on textile imports. It was notoriously opposed to free trade in bananas, which might damage its ties to former European colonies. Nonetheless, it grudgingly opened up.The Future of the European Union 1

The EU gradually discovered that it could turn its embrace of globalization into a strategy of influence. It could use the internal market rules and standards to shape the rules and standards of a globalized world. The EU’s combination of a large market and a common standard setting system gave it unique leverage in many sectors. While the United States had a big market too, its internal regulations and standards were often weak or created by squabbling private organizations. The European Commission was a sophisticated and internationally-oriented regulator, with decades of experience in making its regulations work across different countries. Often, it was able not only to impose its rules and standards on multinational firms that wanted to sell to Europe but to get them to apply these rules and standards outside Europe too. This subtle form of influence, often called the “Brussels effect,” reshaped global markets.

In short, the EU seemed well-adapted to a globalized world. The stronger the EU became, the easier it was to influence world markets in Europe’s direction. The relationship worked the other way too: The ideas of globalization helped EU officials push for further internal reforms. It was easier to push member states to accept more European integration in a world where everyone believed in open trade and free movement. Together, these created a feedback loop between European integration and global markets.

Now that feedback loop is breaking down. Just as the EU began to globalize before most other countries, it started encountering problems earlier too. International market integration necessarily limited national democracy. When EU leaders tried to introduce a new constitution in 2005, French and Dutch voters rejected it. A somewhat less ambitious follow-up document, the Treaty of Lisbon, was rejected by Irish voters in 2008 (though it passed when they were asked to vote again in 2009). The 2008 global financial crisis demonstrated the problems of easy financial flows across borders. The EU was especially weak in financial regulation, meaning banks could relocate their most risky and speculative lending to lax jurisdictions such as the United Kingdom and Ireland without difficulty. And as the Greek debt crisis mounted, power politics—and the self-interest of Germany—reemerged within Europe. German taxpayers were unwilling to support further integration if it meant they had to pay the bill.The Future of the European Union 2

The Brussels effect turned out to have limitations as well. The EU was able to spread its privacy rules worldwide, but it was too late to help European firms. Europe’s information economy had already been eaten up by Google, Facebook, Amazon, and other big technology firms. These are not just companies that can be tamed through ordinary antitrust regulation: They aspire to become economies in their own right. Even before 2016, it was clear that the EU’s approach to globalization needed to be updated to deal with market actors that were themselves effectively evolving into markets.

Now Europe is facing the new challenges of a de-globalizing world. The Trump administration wants to tear apart the existing globalized economy and replace it with an “America First” approach to trade. It scorns multilateralism in favour of threats and one-sided bargains. It fears China as an adversary and is trying to cut it out of global technology supply chains. When the Trump administration decided to withdraw from the Iran nuclear deal, it threatened to punish allies that were impertinent enough to uphold a treaty that the United States itself negotiated. In fine, the United States is weaponizing the trade and financial networks that wove globalization together and turning them into tools of coercion.The Future of the European Union 3

Unfortunately for Europe, the United States isn’t the only problem. China is not as powerful as the United States but is just as ruthless in exploiting what economic leverage it has. For example, it has threatened to retaliate against German car manufacturers if Germany gives in to US pressure to block the Chinese telecommunications firm Huawei. When a Swedish writers’ organization gave a prize to a dissident Chinese publisher late last year, China’s ambassador to Sweden said on Swedish public radio: “We treat our friends with fine wine, but for our enemies we’ve got shotguns,” warning of trade restrictions.

Globalization is unravelling as the United States and China face off against each other. It will not unravel completely: The world’s economies are too entangled to be easily separated from each other. But the way that the global economy works is now at odds with the way that Europe itself does business. De-globalization has especially imperiled the multilateral institutions governing trade. The WTO Appellate Body, which serves as a final court of appeal for trade decisions, cannot do its work because the United States is vetoing new appointments to it. The EU is trying to keep the appellate system on life support through independent arbitration.The Future of the European Union 4

The Trump administration’s invocation of a national security exception to justify its tariffs on steel and aluminum may be an even greater threat to the multilateral trade regime that Europe favours. Global free trade will not survive if states can invoke national security more or less on a whim, but the current US administration may provoke an even bigger crisis if the WTO rules against it.

Europe now finds itself caught between two unattractive alternatives. It can accept de-globalization and embrace geopolitics, pushing to protect its own businesses as the United States and China protects theirs. Already, there are moves within Europe in this direction: Politicians are talking about watering down antitrust regulations and building and promoting European businesses. However, this would mean giving up on the multilateral institutions that Europe has relied on and hoping that soft power can be transformed into hard bargaining strength. That may be possible, but it will require luck, time and profound internal transformation.

For example, the EU is unhappy with how the United States has used the dominance of the dollar to bully European officials and firms. If it wants to build the euro as a credible alternative, it will have to create a real system of common banking regulation and shared fiscal capacities, as well as offer stability to non-European currencies in times of economic crisis, just as the United States has. Even this might be insufficient. Europe has just lost its greatest geopolitical asset: the city of London, which is one of the core nodes in the global financial network. Building up clout would require the EU to figure out practical ways to bring London back into its orbit.The Future of the European Union 5

Alternatively, Europe can double down on protecting the existing multilateral system, working with other states such as Japan and Canada to build an “alliance for multilateralism.” The problem is that the two other great economic powers are taking just the opposite course. Even if the Trump administration is replaced by a Democratic leadership, the days of easy multilateralism will never return. Democrats, too, are hawkish about China, and presidential candidates like Bernie Sanders (Mr Sanders has abandoned the race for Democrat nomination in favour of Joe Biden) are sceptical about the old free trade nostrums.

Europe needs more than knee-jerk multilateralism or geopolitical cunning if it is to prosper. Naive multilateralism would lead to the EU getting squashed. Geopolitical cunning on its own would suggest that the EU should adopt Trumpism (or Xi Jinping-ism) with European characteristics, championing national firms at home while aggressively pressing its interests abroad. This is a recipe for failure. Europe’s external influence is based on patience and persuasion rather than brute force; it would wither if it became a crude proxy for self-interest. Without a shared commitment to problem-solving, Europe’s internal market would degenerate into a sordid squabble among member states, each favouring its own politically connected firms. Even worse, the political union might disintegrate, as member states absorbed the lesson that national interest trumps all. The EU can manage some temporary national ruthlessness, of the kind exhibited in the Greek debt crisis, or the decision of some member states to close their borders to prevent the spread of the coronavirus. But even this is damaging, and it would undermine the EU if it continued indefinitely.The Future of the European Union 6

What Europe needs is a new understanding of its place in the world to connect its internal and external environments. EU experts used to describe the “bicycle theory” of European integration, claiming that, like a bicycle, European integration must keep on moving or it will fall over. In its golden age, globalization acted as Europe’s bicycle chain connecting the gear of its inner order and the gear of its outside environment, propelling the whole system forward. Now it needs a new strategy and a new bike chain.

It is a mistake to think of de-globalization as a universal withdrawal of nation-states from the world economy. It is altogether more complex. The push toward economic decoupling goes together with new needs for global engagement. The challenge of climate change will require extensive global cooperation. Under the digital platform economy, algorithms designed by market actors inevitably allow global information flows to impinge on national-level democracy. (New forms of machine learning, for example, can lump users of digital services into self-perpetuating disadvantaged categories such that a person’s online habits might make it nearly impossible for them to find a job or to get a loan on reasonable terms.)

Both of these challenges provide new ways to connect Europe’s inside and outside. If Europe is to tackle them, it will need to move to an unparalleled level of internal integration, where it thinks about internal market rules—right from the beginning—as external means of projecting European interests and values. Responding to climate change will require large-scale regulation and coordinated investment. Properly regulating information platforms will mean a fundamental shift in how the EU thinks about market power so that it incorporates an understanding of how the accumulation of data creates its own forms of influence.

Yet integration on its own will be insufficient: Both are global problems. Europe’s challenge, then, is to figure out how climate globalization and information globalization can become a new bicycle chain, using the smaller gear of European integration to propel change in the global economy and the larger gear of the global economy to power change within Europe.

Europe is taking initial steps in this direction. The new proposals to price carbon emissions into border taxes provide one example of how this can be done, creating a virtuous cycle between Europe’s own efforts to reduce carbon emissions and those of other world producers, which will either have to match these efforts or pay a surtax when selling to the European market. In contrast to traditional tariffs, the ideal outcome of this border tax is that no one will have to pay it because the hope is that everyone will move to more carbon-efficient forms of production. Even better would be if Europe’s competitors introduced carbon taxes and carbon regulation too, making it easier to eventually build a global institutional infrastructure.

Antitrust regulation, too, is changing. Sutherland’s distant successor as EU competition commissioner, Margrethe Vestager, is pioneering a new approach to global enforcement. Privacy regulation, citizen protection and traditional antitrust regulation are no longer seen as separate priorities but as different aspects of a single problem: reducing inequities of power within the market to prevent abuses. Again, this promises to help create a mutually-reinforcing relationship between European and global rules—although here the challenge is far greater, since what European and other democracies value may be seen by countries such as China as undermining their domestic system of rule. The EU will have a hard time figuring out creative rules to tame big tech companies, but if it succeeds, it can use the Brussels effect to spread these values to other jurisdictions.

None of this will be easy in a world where the United States and China weaponize their economic clout. Yet it is necessary. Europe’s apparent dilemma between geopolitics and multilateralism reflects a much deeper problem. De-globalization has broken the relationship between Europe’s way of organizing itself and Europe’s way of acting in the world. Rebuilding that relationship will require Europe to discover new ways to couple the engine of integration to the engine of globalization so that strategy and multilateralism point again in the same direction.

The writer is a member of staff.

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