Economic Statecraft for the Green Transition

Jul 29 , 2023
By Laurence Boone

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The European Union currently faces two main challenges: achieving the green transition and exercising economic leadership. Both are existential in nature. Just as the green transition is vital to protect the planet on which our survival depends, economic leadership is essential to preserve the democratic, environmentally friendly, market-based model that underpins our way of life.

Economic statecraft offers a means of meeting both challenges.

For Europeans, the exercise of economic statecraft will require a radical change of mindset. We are accustomed to being an economic superpower, but we are still learning to wield political power. The EU has always refrained from thinking in terms of economic statecraft. Its development was driven by trade, and supported by a constantly evolving but ultimately predictable rules-based international economic order.

But the world has changed. Over the last two decades, and especially in the last few years, a series of shocks – from the COVID-19 pandemic to Russia’s full-scale invasion of Ukraine – have highlighted the vulnerabilities that can arise from interdependency. As a result, the EU has undergone a “geopolitical awakening,” with member states now recognizing the need for greater sovereignty to ensure their security, not only in defence terms, but also with regard to the economy and, more broadly, Europe’s vision of the world.

This is where economic statecraft comes in. We must design economic policies that reinforce the EU’s status as a sovereign power capable of ensuring the sustainability of its economic, social, and environmental model and projecting its values beyond its borders. Such a strategy must be built on four pillars.

The first is a European industrial strategy. The EU has made significant progress in this area in recent years, especially in the last few months. With energy, for example, the EU has adopted the "Fit for 55" plan, a comprehensive policy package aimed at reducing net greenhouse-gas emissions by at least 55pc by 2030 and reaching net-zero emissions by 2050.

The EU seeks to reform its electricity market for more flexible, low-carbon electricity generation. And it is deepening internal interconnections to secure European energy supplies, thereby reducing dependency on foreign energy imports and fossil fuels.

The EU is now working to finalize yet more initiatives that would help it to maintain its lead in green technology. For example, efforts are underway to streamline and accelerate the relevant administrative processes, such as permitting and state-aid screening. The Net-Zero Industry Act, recently proposed by the European Commission, is a case in point. At the same time, France has been advocating initiatives that would bolster strategic sectors, especially those linked to the digital and energy transitions.

For example, the European Chips Act and the Critical Raw Materials Act aim to boost European production of key components in the global technology supply chain. Europe also needs to accelerate progress on battery production, which is essential to achieving carbon neutrality.

The second pillar of European economic statecraft requires strengthening our internal market and trading relationships with the rest of the world. Already, the EU is expanding its toolkit for protecting domestic businesses, with measures linked, for example, to data security and critical infrastructure. At the same time, the EU is leveraging its size to ensure reciprocity from its partners. No third-country firm can bid for a public tender in the EU if its home country does not open similar tenders to European firms.

The EU is also addressing economic coercion and market-distorting practices. Its Anti-Coercion Instrument, on which the European Parliament and the Council recently reached a final political agreement, will enable the EU to respond to economic strong-arm tactics by adversaries. Similarly, the Investement Screening Regulations, adopted in 2019, enables the EU to block foreign ownership of, or acquisitions in, strategic companies.

The third pillar is the projection of our standards and ambitions beyond Europe. To this end, the EU has launched a coordinated effort to strengthen its influence in multilateral bodies and use its power to keep these organizations focused on their primary objectives and to promote governance reforms where necessary. With measures like the Carbon Border Adjustment Mechanism and the regulation on deforestation-free products, the EU ensures that the goods it imports meet international and (often stricter) European environmental and social standards.

And in negotiating trade agreements, the EU works to reconcile three criteria: environmental sustainability, European strategic interests, and a fair balance of concessions.

The final pillar of a strategy for European economic statecraft is the use of “offensive” instruments to deter malicious action by third countries. This, of course, includes economic and financial sanctions, which have been rapidly developed and expansively applied since Russia launched its full-scale war against Ukraine. But commercial policy, more broadly, should also be aligned with foreign-policy objectives.

The EU has been applying export controls on dual-use goods for some time and will continue to do so, coordinating its efforts at the multilateral level. But more should be done. Amid deepening Sino-American tensions, the EU must choose between full technological decoupling and strengthening export controls. France calls for an EU-wide discussion about which technologies it is unwilling to export.

Let us be clear: Europe is not seeking to establish itself as a geo-economic power in opposition to any other country; instead, we seek to ensure that we remain in control of our political, economic, environmental, and social trajectory. Even as we reconcile ourselves with the need to exert more power, we will not disavow the openness central to the European project.

As a result, our international influence will only grow, and we will be able simultaneously to play the complex game that geopolitics has become and lead the world on climate action.

This article was provided by Project Syndicate (PS).

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PUBLISHED ON Jul 29,2023 [ VOL 24 , NO 1213]

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