Eurasia Group | Risk 6: Geopolitical Europe

Risk 6: Geopolitical Europe

6 January 2020
Eurasia Group's Top Risks 2020—Risk 6: Geopolitical Europe

FOR YEARS, EUROPE HAS TALKED A BIG GAME about charting its own course on foreign and trade policy. So far, it has proven unable or unwilling to effectively push back where it disagreed with Washington or, increasingly, Beijing. This is about to change.

The new leadership of the European Commission and the European Union's most powerful leader at present, French President Emmanuel Macron, share a sober view of world affairs. They think the EU has been naive in expecting its main commercial partners to play by the rules and want to equip themselves to react to unfair practices and anticipate further unilateral decisions. European Commission President Ursula von der Leyen and Macron believe the EU should be “the guardian of multilateralism.” That such principles are under attack has convinced von der Leyen that the EU should actively defend itself against competing economic and political models.

On regulation, the European Union's top antitrust official, Margrethe Vestager, is battling North American tech giants through the innovative use of EU state-aid law to question their tax arrangements.

On trade, the EU will bring this more assertive approach to new areas, for instance by making compliance with the Paris climate agreement a condition for new deals and by retaliating in kind against punitive tariffs. Member states and the commission are also putting pressure on China to level the playing field on procurement, with the threat of using new “international procurement instruments” against Chinese firms if European firms don't get improved access to the Chinese market.

On military matters, the EU is not about to stand its own continental army, but it will take steps toward using the world's largest internal market to break down cross-border barriers to military trade and technological development. Seen from the US, this will be an affront, especially since few European capitals have fulfilled their NATO promises on defense spending.
The EU's new leaders think the bloc has been naive in expecting its main commercial partners to play by the rules, and they want to equip themselves to react to unfair practices.

This more independent Europe creates risks with the United States. Washington could lash out at Brussels, especially because Trump is no supporter of the European Union. Retaliatory tariffs are no longer taboo, and a Europe-wide digital tax could provoke punitive tariffs on some of Europe's more export-driven sectors, such as automobiles and consumer goods. Data sharing is also at risk. There is growing concern about the EU becoming too aggressive in pushing its regulatory lead, particularly via the so-far successful General Data Protection Regulation (GDPR). As the European Union takes on US tech giants, the United States is likely to pursue a more aggressive approach to countering the GDPR.

A more geopolitically active EU will also create more tension with Beijing. To date, China has achieved many of its goals in Europe: Firms are still welcome to invest in infrastructure and wariness of China's Belt and Road Initiative (BRI) has yet to spread to most member states. But Beijing fears that Macron will push for more binding EU-wide screening of BRI projects. A tougher EU stance on antidumping will exacerbate tensions. EU-China friction over issues such as Xinjiang and the South China Sea will intensify. Much as China insists that the world accept One China, Two Systems, a more geopolitical Europe will try to insist that China accept One System, 28 States. That's not going to sit well in Beijing.

Top Risks 2020: Chinese FDI into the EU by country, cumulative 2000-2018