In This Geo-Economic Era, Europe Must Learn to Be a World Power

The US and China are racing, particularly in the high-tech and digital sectors, such as chips. Just days after Trump announced a $500 billion investment in the largest American AI infrastructure project ever, the Chinese company DeepSeek launched the AI model R1 (in Dutch), which can answer more complex questions than ChatGPT and OpenAI models and does so much more cheaply. DeepSeek created a reasoning model that requires significantly less computing power and energy, reducing dependence on the latest chips. The surprise is enormous, and the impact is significant. Stock markets in America and Europe plummeted, especially due to losses in chip companies like ASML, ASMI, Besi, and Nvidia.

This provides more reason to understand why the US imposed export restrictions (in Dutch) on American and foreign chip companies, such as ASML, to slow China's economic and military rise. The practical leverage for this is American hardware or software: processing this in a chip machine gives Washington control over these products from foreign companies. But more broadly, the use of export restrictions is an example of geo-economic policy.

The term geo-economics was introduced by the American Luttwak in 1990. After the fall of the Berlin Wall, the West needed non-military ways to steer the world order in the right direction. Luttwak argued that governments could increasingly use economic instruments strategically to secure their prosperity. The underlying idea is that great powers can strategically use their international trade relations and market positions, which give them advantageous asymmetric dependencies over other countries, to achieve their goals. We regularly see geo-economic actions in the news, encouraged by global power shifts: the US bans the export of the most advanced chip machines, China restricts critical raw materials, and Russia squeezes gas and oil lines.

Geo-economics is essentially the continuation of geopolitical logic in a globalizing world with international and digital value chains and rapid technological innovations. While geopolitics revolves around the 'sphere of political influence' on the political choices in another country, primarily through the use of military instruments, geo-economics focuses on the 'sphere of economic influence' on economic choices. Limiting one's own vulnerable economic dependencies and increasing one's own ability to exploit vulnerabilities in international value chains become vital issues. The goal is to influence economic or business activities in another country to one's own advantage. The favorable outcome is ultimately a growing market share for the great power itself, as the economic system in the logic of geo-economics (in Dutch) is a zero-sum game.

Trump seems to act along this line of reasoning to shape the economic world order to his liking. We can therefore likely expect reactive geo-economic steps from America. While the Centre for Economics and Business Research predicted on Boxing Day that the Chinese economy would not surpass that of the United States in the next 15 years, this is a real blow.

In Brussels, geo-economics is also gaining importance. Europe is stuck in a difficult position between America and China, with the EU seeking the best tone, policy interventions, and alternatives to reduce entrapment and dependence. In November, scientists Agathe Demarais and Abraham Newman argued in Foreign Affairs that Europe must unlock its geo-economic power and develop a joint strategy to defend itself against economic coercion. This is difficult for Europeans. While the US and China are used to reasoning and acting from international power positions, this is less true for individual EU member states. The main goal of the European project was 'never again war': securing peace by intertwining democratic and economic thinking and actions between European countries. At its core, the EU was an internal geopolitical project focused on economic and democratic relations within Europe and between member states - and thus indirectly the military relations - and not an externally focused geopolitical project on economic, democratic, and military relations with other power blocs.

The external geo-economic dimension and associated policy require a shift in thinking and action, which is difficult to achieve (in Dutch) with 27 divided member states and decision-making procedures primarily based on national sovereignty. With 450 million inhabitants, the EU is a significant factor, but it is challenging to take and implement joint economic measures. Political support arises for reactive and defensive measures after a crisis, but proactively developing and deploying geo-economic instruments is difficult. To find a daily way of working for this, institutional renewal is needed. This recommendation was in Draghi's report on the competitiveness of the EU, which is now the cornerstone for the new Commission. At the same time, it must be emphasized that geo-economic actions that aim to slow down market developments elsewhere can lose to investments in research, development, and innovation, which can create alternatives. DeepSeek proves this. Institutional renewal should therefore primarily enable EU member states to conduct a coordinated and targeted European economic and innovation policy with higher impact.

Von der Leyen warned last week at the World Economic Forum in Davos of a new era of geostrategic competition, in which economic means such as sanctions, export restrictions, and tariffs are used by blocs for their own economic and national security. In her speech, she celebrated the close economic bond between Europe and the US, in response to Trump's inauguration as president, and expressed the desire to improve free trade instead of setting up tariff walls. Nevertheless, the Commission President announced that her first working visit would be to India, now the largest country in the world with 1.5 billion inhabitants and a promising economic future due to its young workforce. This choice by Von der Leyen is therefore a conscious and reasoned one.

In this geo-economic era, Europe must learn to be a world power and take joint decisions and actions that go with it. The new Commission is trying to make that shift. On Wednesday, January 29, they presented the new Competitiveness Compass, also a recommendation from Draghi, which sets out several points on the horizon where the European economy should move. These are offensive proposals on economic and innovation policy in response to the rapid changes in the world economy. The first step has been taken. Now the question is to what extent the 27 member states want or can learn. The first week of Trump, the $500 billion investment in AI infrastructure, and the launch of DeepSeek have at least fueled the sense of urgency.