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27 November 2022

Strategic autonomy, how it's done

Strategic autonomy should right now be the number one priority in the EU. But strategic autonomy requires deep thinking about what it is you want to be autonomous about, and the institutional changes this needs. What constitutes our strategic interest is not synonymous with the interests of companies, which has been how European politicians of previous generations, the Roundtable types, have defined it. We Europeans never properly identified strategic interests. We defined values instead. The two are related, but not the same thing. 

Nor can the notion of a strategic interest be reduced to security interests alone. I would not start the debate with defence and foreign policy. Instead, I'd begin with what the EU actually does for a living: running a customs union, a single market, a single trade policy, a single competition policy, and a single currency. The first goal should therefore be to achieve strategic economic autonomy. That alone would be a big deal.

My two priorities would be strengthening the international role of the euro and ensuring supply chain security. The first requires massive policy shifts that cannot be done under the existing treaty. To dislodge the dollar as the world's leading currency, you cannot blindly follow strict fiscal rules, set price stability as the sole objective of monetary policy, and be the export world champion at the same time. To strengthen the euro's international role, you need to absorb some of the world's surplus savings. This means running deficits, and letting the central bank finance them. The US has been running twin deficits for a reason. It's not a bug, but a feature, as they say. 

Monetary policy, too, needs to come under a wider umbrella. A sole price stability target is too narrow. My own preference is for the Federal Reserve's dual mandate of price stability and full  employment. This mandate acknowledges the innate conflict of monetary policy, and encourages the central bank to strike a balance. It's never a good idea in economic policy to cling on to a single target, and forget the rest. Before the Ukraine war, Germany and the Netherlands targeted fiscal balance, but allowed their current account surpluses to shoot through the roof. The high priests of stability themselves constituted a source of macroeconomic instability for the EU as a whole.

My second priority is for the EU to reduce its critical supply chain dependencies on others. The EU would of course still need to import oil and gas, rare earths, and other goods. The goal is not total supply chain independence, the North Korea option, but diversifying and de-risking supply chains to prevent a re-run of the Russia-problem.

What is essential is that the notion of a critical supply chain is not defined in terms of the needs of companies but, of society. This is to a large extent a political decision, not one to be left to the lobbyists.

Both goals cannot be achieved on the basis of inter-governmental co-ordination. This hasn't happened in the past, and it won't happen in the future. Governments change every four or five years. All prioritise their own perceived self-interest. European strategies are designed to solve the collective action problem from the outset, and extend beyond the lifespan of a parliament. The single market was a multi-decade long programme, one that is still ongoing. The single market was preceded by treaty change, and so was the monetary union. Strategic autonomy will need this too. A limited fiscal union would have to be part of it, if only to fund the policies needed to achieve strategic autonomy. You also need it to absorb other countries' debt.

In the absence of treaty change, don't expect much. When the US launched the highly distortive inflation reduction act, the EU was not in a position to respond because it is constrained by existing policies: the stability pact, competition policy, and the lack of discretionary fiscal instruments. I am not saying that the EU should respond with its own version of an inflation-reduction act. There are reasons not to. But it would be seriously unwise to deprive yourself of the policy instruments in a world of competing economic zones. The EU thrived in the age of globalisation, but is not prepared for this new Hobbesian world.

So what is stopping us? I think it is a combination of muddled thinking and cheerleading. The EU's worst enemies are also its biggest fans. They defend the EU no matter what it does. They will tell you that there is a lot that can be done within the existing Lisbon Treaty, but they also have a fuzzy notion of what strategic autonomy implies. They focus on inter-institutional battles, but tend not to see the bigger picture.

If you say that treaty change is unrealistic, you have given up on strategic autonomy. In that case, it becomes rational for member states to organise their strategic interests in other ways.  

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