In a world marked by systemic rivalry, economic policy is increasingly shaped or even dominated by foreign and security policy considerations. The European Union is no longer adhering to the principle of pure delocalization but is instead embracing selective decoupling and recoupling. This means staying open where it benefits the Union's competitiveness while fiercely protecting strategic sectors from vulnerability and foreign takeovers of influence.
The challenge for Europe is to maintain transatlantic alignment while preserving its strategic autonomy. Investment screening and industrial policy measures are becoming more prominent as European governments seek to protect key sectors from foreign influence. This shift is driven by the renewed pressure from Donald Trump's return to the White House, which has raised the spectre of troop withdrawals and triggered a bruising trade clash with NATO allies.
To counter these pressures, the EU is accelerating the Capital Markets Union to strengthen its financial independence. The Union is also looking for unexpected allies in the global trade system. A 'coalition of the willing' led by China, Brazil, and Mexico could join forces to uphold a rules-based trade system that would benefit the EU, potentially offering a counterbalance to US and Russian pressures.
The emergence of a group of countries committed to the World Trade Organisation, including China, represents an unexpected ally for the EU in this turbulent era. As the EU adapts its economic model to a world defined by geopolitical rivalry, its ability to execute this selective decoupling strategy will be crucial for its long-term security and prosperity. The Union must navigate these complex trade dynamics without sacrificing its core democratic values.