EU aims to minimize divisions ahead of major security shift

The headlines following this week’s European Council meeting of EU prime ministers and presidents are likely to be dominated by Ukraine. However, under the radar, Europe’s leaders are also discussing a major and consequential shift in economic security policy toward a US-style approach that integrates security and defense.

The proposed EU measures are by no means an isolated development and come as other nations are also seeking to “de-couple” from Russia and “de-risk” from China. So, across much of the Western world, policymakers are debating the issue of how best to update their economic security regimes in light of the geopolitical, technological and wider changes. The central policy challenge is how best to combine toughened national security safeguards with as open an approach as possible to international economic affairs.

The key driver for change in Europe has been Russia’s invasion of Ukraine, but it goes much broader than that. The COVID-19 pandemic also exposed the EU’s supply chain dependencies.

The US has long been a pioneer on this geoeconomics and geopolitics agenda through mechanisms like the Committee on Foreign Investment in the United States, which is an interagency committee of the US government that was first established by President Gerald Ford in 1975 to study foreign investment. In the 1980s, Congress passed an amendment that empowered it to reject deals.

The EU’s proposed changes seek to set up a common strategic framework for the bloc’s economic security to commonly identify and assess risks, from the resilience of supply chains to the physical and cyber security of critical infrastructure, plus technology security and technology leakage. There is also a focus on using strategically available tools for dealing with these risks and developing new tools where needed.

In recent months, the EU has been developing a suite of measures, such as the new Critical Raw Materials Act, with which the bloc wants to become less reliant on Chinese refining capacities. Brussels has also introduced tools to disadvantage the Chinese producers of renewable energy technologies that are participating in European public procurement.

Moreover, the EU is planning to roll out foreign subsidies regulation, giving it extra muscle to fight distorting subsidies that firms get in third countries. The ambition is to give it greater powers to prevent state-subsidized companies from China — or other nations — from producing in Europe.

Another tool that the EU looks set to develop is what European Commission President Ursula von der Leyen calls “a targeted instrument on outbound investment,” especially for sensitive technologies that can lead to the development of military capabilities that pose national security risks. In her own words, “we need to ensure that our companies’ capital, expertise and knowledge are not used to enhance the military and intelligence capabilities of those who are also systemic rivals.”

Beyond that, Von der Leyen believes that the bloc needs to better “define its future relationship with China” in sensitive high-tech areas. These include microelectronics, quantum computing, robotics, artificial intelligence and biotech. There are also plans for a new policy against economic coercion, with an instrument to help the bloc fight off attempts from third countries recently agreed by the European Parliament and member states.

Brussels will also broach the topic of screening EU investments abroad in strategic sectors like technology. This controversial discussion could potentially happen as part of the EU’s review of its foreign direct investment screening, which is likely to include better use of existing export control, FDI and foreign subsidy instruments.

Moving beyond Von der Leyen’s prescriptions, wider policies being debated across the bloc include strategic stockpiles of critical minerals. For example, at current interest rates, the EU could store a year’s worth of rare earth minerals (which China has a huge hold over) for less than €5 million ($5.46 million) annually, given that total imports in 2021 amounted to €120 million.

Where possible, this emerging European framework will also be strengthened by close cooperation with international partners, including the G7. For instance, last month’s G7 agenda in Japan included a discussion of measures to counteract economic coercion.

While there is widespread recognition across the 27 EU nations that a move toward a tougher economic security regime is needed, there are some divisions within the bloc. For instance, long-standing advocates of international trade liberalization such as Nordic nations like Sweden do not want Brussels to overshoot on this security agenda.

There are also some nations, including Germany, that have deep economic ties with China (and, prior to the Ukraine conflict, Russia too) and worry that this process could mean Europe de-couples from rather than de-risks with Beijing. This particularly concerns key policymakers in Berlin, which is by far Beijing’s biggest trading partner in the EU, with the nation’s firms also holding sizable investments in China.

There are also some nations, ever wary of the balance of power between Brussels and the member states, that are concerned about a transfer of power to the center. However, the European Commission pushes back on these suggestions by arguing that there will be no big transfer of competencies. On export controls, for example, Brussels is proposing the creation of more EU-wide coordination, rather than a power grab. However, skeptics argue that this could only be the first point in a longer-term transfer of powers.

These ongoing debates mean there remains significant unknowns about how comprehensive the EU package will ultimately be, as well as how it will work and evolve in practice. Yet, for all that uncertainty, it is clear that the EU is embarking on a potentially huge policy shift that will have implications beyond the continent in the fast-changing geopolitics of the 2020s.

• Andrew Hammond is an Associate at LSE IDEAS at the London School of Economics.