The COVID-19 pandemic and subsequent economic and financial shocks exacerbated the Eurozone's preexisting macroeconomic imbalances. At the same time, the war in Ukraine and the related sanctions on Russian energy products created additional divisions on long-term commitments to 'abandon' Europe's dependence on Russian energy.
Before COVID and the Russian invasion of Ukraine, the central problem was the unequal debt distribution among Eurozone economies, complicating monetary and fiscal policy. The lack of appropriate adjustment mechanisms to distribute the debt burden and support economic growth is at the heart of the ongoing Eurozone development crisis.. Its growth struggles and overall resilience to economic shocks varied mainly across the EU, with the most vulnerable southern or periphery member states.
Therefore, the EU could not address macroeconomic imbalances without a coherent fiscal union. Now, these different interests are exacerbated because European countries vary in their dependence on Russian oil and Chinese manufactured goods.
In short, not all EU states have the same interests, debt profiles, or trade profiles with China and Russia. Therefore, each additional division creates more political risk and room for disagreement. We can already observe the increased political tension within the European Union, primarily because of the varying energy dependencies on Russia. In the event of a future more aggressive decoupling between China and the United States, the consequences for European economies could be even more damaging.
Can the EU members agree to completely abandon Russian energy imports as a long-term commitment? In the event of heightened Sino-American tensions over a similar 'red line'- would the European Union abandon its ties with its largest trading partner in Beijing?
The 'core' European countries, or pentagon and growth zones (Germany, the Netherlands, etc.), are the growth generators of Europe that traditionally maintained substantial current account surpluses. Most of these countries depend significantly on Russia for gross energy imports and China for manufactured goods and Chinese markets to fuel current account surpluses.
China is the world's largest exporter and second or first largest importer (roughly tied with the United States). China is also one of the EU's top-three most prominent export destinations (10 percent), and the EU's largest partner for importing goods (about 23 percent).
There are significant differences in overall trade profiles within the EU concerning China and trade. For example, Germany is China's 5th largest trading partner, while France is 17th or 18th.
Before the COVID-19 pandemic and the war in Ukraine, the Netherlands and Germany were hesitant about 'Euro bonds' and other mechanisms that could effectively deleverage or redistribute unionwide debt.
The different trade relationships vary across the EU and further create competition for national interests when the broader European Union aims to develop a coherent 'China policy.'
Imports from both China and non-EU countries continue to increase while exports to China and non-EU countries have decreased. Therefore the EU is increasingly more dependent on imports than exports. If a decision to boycott or limit imports from adversaries of the U.S. arises, the EU would significantly need to become more self-sufficient, an approach taken by the U.S. in the post-pandemic era in regards to critical medicines and security equipment.
In 2021, only three Member States had a trade surplus with China: Germany (€ 6,624 million), Ireland (€ 4,014 million), and Finland (€ 277 million). There were 24 member states that had a trade deficit with China. The Netherlands held the most significant debt (€ 94.514 million), followed by Poland (€ 28 057 million) and Italy (€ 22 834 million). The importance of the goods being imported is also worth considering. The EU mainly imports telecommunications equipment and other manufactured goods critical to European industry.
America was the EU's top trading partner, but in 2020 China surpassed the U.S. A $26.7 billion boost for Chinese imports and a $5.3 billion increase in EU exports resulted in China officially becoming the EU's largest trade partner. Displacing the U.S. as a trade partner is another reminder that China is playing catch up to America's economy. In 2020, there was an approximate $5.6 trillion gap in nominal GDP between the two nations, and a decade ago, the gap was more significant at $9 trillion. China's incredible rise has had the United States concerned about Beijing's efforts to become more involved in Europe with its export of telecommunications equipment and digital services via mobile applications.
The European Union contains states with highly different macroeconomic and trade profiles before the coronavirus pandemic and the war in Ukraine. These differences often led to animosities and disagreements between the EU's core and periphery. The European Union member states also have different relationships with both China and Russia, on which some are highly dependent on energy and manufactured goods imports. Completely sanctioning or isolating China or Russia would be catastrophic to some of the EU members. China, like Russia, has clear red lines associated with its view on territorial integrity, sovereignty, and the future of the international order. China would likely retaliate in one way or another if the United States and its allies crossed a perceived line. One form of retaliation could be denying much-needed goods or market access. Some wealthiest European nations rely on Chinese imports and markets as export destinations. The European Union's dependency on China is not slowing down. The imported goods from China are critical for telecommunications infrastructure, automatic data processing, electronic equipment, electrical machinery, household equipment, and base metals for manufacturing. The same countries dependent on China for imports also rely on Russia for gross available energy.
The European Union's dependency on Russian gross energy imports revealed that the metrics used to evaluate the importance of national economies to global supply chains were inherently flawed. Europe is facing an energy and food crisis that could have been avoided with more careful diplomatic negotiations.
Like Russia, China has the potential to disagree with the United States and its allies on some pretty tricky topics – one of which is the question of Taiwan and another in the South China Sea.
In the event of an aggressive U.S. position toward Chinese interests, the cost could be incredible for the EU. The European Union could lose access to affordable energy, critical Asian markets, and cheap manufactured goods.
Europe should try to develop a more coherent and unified foreign policy that considers and prioritizes its interests first, rather than allowing the U.S. to dictate them as it did during the Ukraine war. The European position, encouraged mainly by London and Washington, has divided the EU and will likely lead to catastrophic economic impacts over the following years.
History has shown us that Europe is prone to violence and social instability during periods of severe economic stress. The pandemic, coupled with inflationary pressures and increased energy prices, is creating an economically untenable environment in most of the less wealthy member states.
Europe should use the war in Ukraine to develop a more independent industrial and energy base that can fuel the manufacturing of necessary goods critical to the entire European Union so that future geopolitical tensions between the United States and its adversaries do not jeopardize the standards of living for hundreds of millions of Europeans.