Munich Security Conference: wiiw and Bertelsmann Stiftung presented study on EU’s geo-economic influence

08 March 2023

The EU is the economically dominant player in its neighbourhood, but does not use this leverage to support its interests. It should do more to counter Russia's and China's influence there

image credit: Bertelsmann Stiftung

On 17 February, Richard Grieveson, Deputy Director of the Vienna Institute for International Economic Studies (wiiw), and Christian Hanelt, Bertelsmann Stiftung’s Senior Expert on Europe, Neighbourhood and the Middle East, presented our joint new study on the EU’s geo-economic influence at the prestigious Munich Security Conference 2023. Among the audience were prominent experts and EU representatives such as Valdis Dombrovskis, Vice President of the European Commission and European Commissioner for Trade.

The liberal paradigm of ‘change through trade’ is under intense scrutiny. The fallout from Russia's invasion of Ukraine, and especially Russia’s decision to drastically reduce gas deliveries to Europe, is the latest example of how the economic interdependencies generated by the last few decades of hyper-globalisation can be used as a weapon. But is it true that economic interdependence has had its day as a political tool? For the EU, the answer is clearly no.

The new study quantifies the EU, US, Chinese and Russian interconnectivity with the EU neighbourhood. It stresses that EU economic and financial influence in the region remains strong, and that economic integration would be an important policy instrument when used strategically. The authors compare the economic linkages of the EU with its neighbouring regions (Western Balkans, Eastern Partnership, Turkey and Southern Neighbourhood) and EU political influence there. The result: the EU is the economically dominant partner for most countries, with exceptions such as Belarus or Armenia. However, this high level of interconnectivity does not always translate into political influence, and the EU faces competition from Russia and China. Moreover, in the case of the latter, the study finds that competition has increased strongly in some areas since 2008.

The EU's goals are clear

‘Russia and China use economic dependencies in a targeted manner to push through their own geopolitical interests’, said Richard Grieveson in Munich. The EU has been much more hesitant here so far. When it comes to regions like the Southern Neighbourhood, i.e. the Southern Mediterranean, this may be because the Europeans, as a union of 27 nation states, lack common geo-economic goals. But in regions like the Western Balkans, the EU's goals are clear, Grieveson explained: ‘Ultimately, the goal is to bring these countries into the EU, and as part of that to improve governance standards, combat corruption, and make progress on the green transition.’

The fact that these goals are only being achieved to a limited extent is also due to the fact that the EU has turned inwards after the financial crisis, Grieveson pointed out. The momentum for enlargement has largely come to a standstill, and with it the Western Balkans’ hope of joining the EU in the near future has dwindled. Nevertheless, the prospect of accession is an important driver of reforms. And without this prospect in the near future, it is also difficult for these countries to attract large foreign direct investments.

Many geo-economic levers

Europe has many potential geo-economic levers in its near abroad, the study concludes. The EU buys up to 80% of the exports of the regions studied, and supplies up to 62% of the imports in Europe's neighbourhood. The EU has a particularly strong presence in the Western Balkans, Turkey and parts of the Eastern Partnership and Southern Neighbourhood. Its economic weight is smaller in the Caucasus countries and on the eastern Mediterranean coast.

In the financial sector, too, the EU is a far more important player in its neighbourhood than the US, Russia or China. Here, China's influence has been growing steadily for years. China is increasingly financing important infrastructure projects in the Western Balkans, for example. Even if the investment volumes remain far behind those from Europe, Beijing is strengthening its political influence in the region – and increasingly competing with Europe.

China is also transferring more and more technology and knowledge to the EU neighbourhood. Especially as a technology supplier China is preparing to overtake the Europeans. Russia, on the other hand, with a few exceptions such as Armenia and Belarus, is a lightweight here, at least in terms of its economic presence.

The US is also an important economic player in the EU neighbourhood, for example as a key trading partner for Morocco, Tunisia and Israel. The dollar makes up a large share of foreign-currency reserves almost everywhere and, combined with the euro, accounts for over three-quarters of total reserves in most of the neighbourhood. The study identifies finance as an area where the collective West – meaning, above all, the EU and the US – should intensify their partnership to use their combined economic and financial leverage to protect their interests in the neighbourhood. ‘Although we are clearly in a multipolar world in many respects, financially the global economy remains quite unipolar, with the dollar and euro together still strikingly dominant’, said Grieveson.

Where ‘change through trade’ works

‘Change through trade’ is clearly no longer a sensible strategy when dealing with neo-imperialist nuclear superpowers. Yet for the EU to abandon this strategy when dealing with its neighbourhood would be a mistake. To safeguard its interests in its own neighbourhood, the EU must therefore learn geo-economics and play out its economic dominance, the study argues. This includes closer and fairer integration of trade in goods as well as a more proactive role, for example when it comes to infrastructure investment. The EU should pull its neighbourhood along in the energy transition and invest more in infrastructure projects. Incentives for European companies to increase production in the EU’s immediate neighbourhood (nearshoring) would also make sense. However, increased EU involvement must be tied to strict conditions for political and economic reform, and close partnership with the US and other democracies.

The war in Ukraine has demonstrated both the way that economic interdependence can be weaponised and the huge impact that events in the neighbourhood can have on the EU itself. The EU should use this as a lesson – and also an opportunity – to integrate its neighbourhood more closely, and to use this integration to incentivise the political, economic, social and environmental reforms it wants to see in the region. If the EU fails to act strategically and deepen integration with neighbouring countries in order to influence political and economic developments there in its own interest, it will remain vulnerable to shocks from its neighbourhood in the future.

The full study is available for download here.

It is also available for download at Bertelsmann Stiftung.