The EU’s geo-economic revolution

Russia’s war on Ukraine has plunged it into an economic conflict with all of Europe, fundamentally changing the European Union’s geo-economic position and economic security. It took Europeans just days to revolutionise their geo-economic policies and formulate unprecedented sanctions by working alongside their partners. Having often been criticised as too siloed in its approach, the union is now pursuing a strategic geo-economic response to Russian aggression across various fields, mixing financial sanctions with export controls and trade. The EU acted with unity even though some member states had major incentives to oppose tough action, fearing for their energy security. The union’s sanctions packages were crafted by the European Commission centrally and proposed to member states. Although export controls are the responsibility of member states, the EU even established a central export control regime from scratch to block Russia’s access to a vast range of key technologies.

Europeans could take these successes as proof that they are sufficiently prepared for the new geo-economic order and a drawn-out economic war – but that would be a mistake. The world is now entering an even more difficult era in which economic relations based on rules are increasingly losing ground to those based on power alone. The EU needs to brace for a long-running economic war: Russia will pose a threat of energy cut-offs, cyber-attacks, and seizures of European assets for years to come. And China could start to pressure European companies in grey zones (through measures such as informal boycotts). Beijing has put in place a range of ‘squeezing’ laws that prohibit sanctions compliance, even if it will not enforce them immediately.

Economic war is here to stay – and could intensify over new disputes. Europe’s successes in imposing sanctions on Russia resulted not least from the urgency of the moment. President Vladimir Putin may have been surprised by the severity of Western restrictions on the Russian Central Bank – which, for now, will prevent him from using energy supplies to blackmail Europe. But there is no guarantee that the EU will be able to count on similar unanimity among member states in the coming weeks and months.

A comprehensive resilience architecture

After Russia’s all-out invasion of Ukraine, there can be no doubt about the need to adapt to the geo-economic age. Europe should make a determined effort to build an advanced, powerful, and permanent resilience architecture for economic warfare. The Ukraine conflict marks the beginning of a new era of hot and cold warfare, as illustrated by the unprecedented nature of EU measures targeting Russia. The union’s institutional, strategic analysis, and policy architecture needs to become more integrated – to support that same mix of responses across policy areas that it has employed this time around. The economic war with Russia could continue for many years, Taiwan could be the next Ukraine, and Donald Trump or someone like him could win a future US presidential election.

The importance of unity

The current unity of the EU and the G7 is impressive but it may be unstable. Indeed, Russia’s massive strategic mistakes – not least in Putin’s rhetoric and his all-out assault on the European security order – made anything but full unity and the toughest sanctions unthinkable. This is starkly different from the usual way in which third countries attempt to coerce Europe.

Russia could have easily used energy blackmail to try to dissuade Europeans from supporting robust sanctions. It could still do so – be it in negotiations with Ukraine or the EU, in attempts to formalise a potential occupation of Ukraine through economic threats, or in efforts to undermine a settlement on the conflict, for instance. Moscow could also have tried to use more subtle means to overthrow the government in Kyiv or spark a civil conflict in Ukraine. And it could do so with Trump or one of his followers – who would have little concern about Western unity and might even sympathise with Putin – in the White House.

An economic deterrent for the next phase of the war

It is a critical vulnerability for the EU that it has no economic policy options other than to sanction a coercer through a long process and by unanimity. The EU needs to build a strong Anti-Coercion Instrument. The idea behind this is to equip the union with tough and highly efficient economic countermeasures that the Commission could trigger with the support of a qualified majority of member states. The EU could implement the Anti-Coercion Instrument quickly: now that the Commission has proposed it, member states and the European Parliament should recognise the urgent need to create such a defence mechanism.

A strong Anti-Coercion Instrument could have empowered Western deterrence before the war. Before the invasion, Putin likely believed that he could gain control of Kyiv before the EU and the G7 imposed strong countermeasures – and that, as discussed, he could undermine these measures with energy blackmail. A strong Anti-Coercion Instrument could have changed this calculation because the EU could have more credibly threatened a severe economic response.

In the months leading up to Russia’s all-out invasion of Ukraine, the Kremlin strategically reduced energy supplies to Europe in preparation to limit the ways in which Europeans could retaliate through sovereign policy choices. At the time, this may not have been fully clear – although European Commission President Ursula von der Leyen stated in February that Russia was using energy as a weapon. When the war erupted, the coercive character of Russia’s actions became clear. At that point, the EU could have triggered the Anti-Coercion Instrument if it had been in place. It is difficult to know whether this would have prevented the offensive, but it would have helped address one of the weaknesses of the West’s pre-invasion deterrent: widespread doubts about Western unity.

An EU economic security office

The EU needs its own economic security office at a high level in the Commission, one that is in close contact with the European Council and national security councils in member states. The union’s response to Russian aggression does not separate finance from trade or even military affairs. As this needs to be reflected in the structure of the EU’s strategic institutions, the office could bring together experts from all fields to shape its overall economic statecraft. As one recent study on energy blackmail argues, Europeans now need to carry out in-depth analysis of their energy vulnerabilities. They should do so before Europeans find themselves in a similarly grave situation. An EU economic security office (or resilience office) could regularly conduct economic war-games to understand how to respond in various stand-offs with third countries. In the case of Ukraine, the office could plausibly have done so after Russia first began to mass its troops near the Ukrainian border in late 2021, if not years earlier.

An economic security office could also prepare top-secret plans for the EU’s response to escalation. For instance, the union’s current controls on exports of aerospace and other high-tech equipment to Russia could have been even more effective if it had long since identified more accurately the small key components that Europeans produce and that certain Russian industries need most and cannot easily replace. In any case, the EU will require advanced export controls in situations in which it aims to calibrate its response rather than cause as much economic damage as possible.

A new era for EU economic security policy

In the age of Putin, Trump, and Chinese President Xi Jinping, it would be deeply unwise for the EU to avoid taking these steps to enhance its geopolitical capacity to act. The government in Berlin has announced the birth of a geopolitical Germany and is making massive investments in its military capabilities to match. Following their tough sanctions on Russia, Germany and other EU member states should be similarly assertive on economic security by building the permanent resilience structure they need.