19 April 2023

The EU cannot afford to take sides in the contest between the US and China

Europe’s economy, dependent on global supply chains, is not built for Cold War-style relations.

Illustration by Gary Waters / Ikon Images

Here are a couple of statistics for all those wishful-thinking academics, think-tankers and journalists who believe that power in the EU is shifting towards its eastern member states. Three of the EU’s 27 countries – Germany, France and Italy – account for more than a half of the EU’s gross domestic product. The 11 countries of central and eastern Europe make up just over 10 per cent. Germany, France and Italy are also China’s largest trading partners in the EU. When it comes to industrial policy, Europe’s centre of gravity rests firmly in the west.

Emmanuel Macron’s endorsement of a close industrial relationship with China shocked many commentators in the UK and the US, but only very few people in western Europe. It is one of the few issues on which the German chancellor Olaf Scholz agrees with Macron. The French disagree with their president’s pension reforms, not his foreign policy. Giorgia Meloni, the Italian prime minister, is no friend of Macron either, but she is in the same camp as him on China. China is a big investor in Italy.

Just look at EU-China relations from the position of European industrial companies. In the space of only a few years, they lost the UK as a privileged trading partner. They lost Russia. They cannot afford to lose China as well. East Europe has different priorities, for sure. The war in Ukraine has brought eastern European politicians a media presence they were denied previously. They are the strongest Atlanticists in the EU. But it would be a mistake to think that they speak for the EU. They just happen to be aligned with the UK’s position on many issues.

The concrete question the EU will soon face is whether to follow the US, on which it depends for its security, into a confrontational position with China – or whether to strive to become more independent of the US, with all the consequences that such a step would imply. I recall it was already the big question when the euro was launched in 1999. Many of us were asking at the time whether the EU should develop the euro into a geopolitical instrument as an alternative to the US dollar.

This did not happen. On the contrary, the dollar’s role in US and global security policy has strengthened since then. The US has developed the instrument of indirect financial sanctions, which it levies on third countries that don’t comply with US policies. Financial sanctions have become a primary tool in security policy.

But the Europeans have discovered, to their dismay, that this is a power the US is not hesitating to use against Europeans. The Biden administration recently slapped sanctions on a Hungarian bank over its ties with Moscow. It previously used this instrument to force compliance with US sanctions on the Nord Stream 2 gas pipeline.

The Biden administration also initiated the 2022 Inflation Reduction Act, a programme of green subsidies the EU views as a hostile move because it offers incentives to European companies to move to the US.

The 2024 US presidential election and the potential return of Donald Trump also loom large. Europeans are well aware that Joe Biden as president is probably as good as it will get for transatlantic relations. The question is therefore not only whether Europeans want to align with the US, but whether a future US administration will want to align with Europe.

A full-blown Chinese invasion of Taiwan would bring us closer to a moment of truth in this debate. Europe’s dependency on the US for its defence narrows its freedom of manoeuvre. But I see no way the EU can fully align with the US in an all-out conflict with China over Taiwan. Would the EU agree to freeze Chinese official reserves as it did last year with Russia? And stop investing in China?

I don’t think so. The EU economy is not built for Cold War-style relations because it has become too dependent on global supply chains.

As so often, the position of Germany could be critical. Relations with China are a source of disagreement within Scholz’s coalition. Scholz’s SPD favours Macron’s more nuanced approach. The Greens are saying the SPD is repeating the same error with China that it made with Russia, by creating new dependencies.

It is a powerful argument, but ignores three realities: the dependencies already exist, they are large, and they are very hard to avoid. For example, China controls most of the global market in lithium, a metal critical in the production of electric batteries. It has a near-monopoly in some rare earths. Russia has a strong market position in two other important industrial metals, aluminium and palladium. German industry has been heavily dependent on these materials.

My own expectation is that the pro-China lobby in Germany will win this debate. It is also a subject with the power to rekindle the Franco-German alliance, which often lies dormant for many years but re-energises when it really matters.

The underlying reality of modern-day Europe is that it cannot easily extricate itself from its relationship with China, just as it cannot extricate itself from the US. The EU needs both, and will straddle the two worlds as best as it can. It is the interests of old Europe’s economic heartlands that will ultimately determine policy. There is no power shift. The only shift I detect is that British EU narratives carry less weight than they used to.