Keeping Friends Closer: Why the EU Should Address New Geoeconomic Realities and Deepen Partnerships with its Neighbours

Economic relations are increasingly being weaponised in the intensifying geopolitical rivalry between Western-style democracies led by the US and autocracies led by China. It is not a prophecy to say that those states and groups of states that are best able to use economic interdependence to serve their interests and values will determine the rules of tomorrow’s world. Accordingly, if the EU wants to play an active role in shaping this new order, it must learn to manage its economic relations – geo-economically. This is especially true for the EU’s immediate neighbourhood, i.e., the Eastern Partnership, the Southern Neighbourhood and the Western Balkans alongside Turkey.

With our new study, Keeping friends closer: Why the EU should address new geoeconomic realities and get its neighbours back in the fold, prepared in cooperation with the Vienna Institute for International Economic Studies (wiiw), we want to contribute to the EU learning how to better recognise and exploit its opportunities to pursue a geoeconomic approach in its neighbourhood.

To that end we measured for the first time the degree of economic, financial, and technological interconnectedness the EU has with its neighbourhood using a comprehensive set of indicators. In addition, we have compared the results of these measurements to the degree of interconnectivity of the EU’s peers and rivals, the United States, China and Russia, in the named regions, to illustrate the geopolitical dimension.

The EU is the dominant actor in terms of trade in its neighbourhood

Up to 80 percent of all exports of EU neighbourhood countries go to the EU, while the EU also accounts for up to 62 percent of their imports. The EU is a more important trading partner than its peers and rivals in almost all neighbouring countries.

In addition, for all of the countries in its neighbourhood, the EU is the most important route for integration into global value chains. The EU is also more ambitious than its peers and rivals in concluding bilateral trade agreements with the neighbourhood countries.

However, this prevalent model of trade integration leads to lasting trade deficits between the EU and its trading partners in its neighbourhood. Our study also shows that this trade integration does not provide enough of a ‘push’ to incentivise reform and political alignment with the EU.

China’s influence as a trading partner in the EU neighbourhood is increasing rapidly. The country especially competes with the EU in the Eastern Partnership and Southern Neighbourhood as it is becoming a source of inputs for production.

Actions by the EU should include giving its neighbourhood more access to the EU market, using a partnership-approach on standard-setting and regulation, incentivising the EU private sector to ‘near-shore’ its production, and enforcing high standards to ensure fairer, deeper and more sustainable trade relations.

Finance: EU devotes limited resources to non-members, but more money would make a big difference

The EU has the geoeconomic tools to defend its interests and improve its regional security in coordination with the U.S. The EU is by far the dominant partner for its neighbouring countries in terms of FDI, banking, remittances, and budget support.

However, it has the potential to engage with its neighbourhood a lot more, for instance by further increasing its budget support of non-members, and considering the Human Rights situation and Rule of Law conditions in the neighbouring country, which would increase the EU’s credibility for a relatively low cost while enhancing its influence in its neighbourhood.

The neighbourhoods’ Central Bank foreign currency reserves of the Euro are high, and especially in the Western Balkans even higher than those of the U.S. Dollar, while Turkey has its international reserves split almost equally between Euros and U.S. Dollars. This shows the strength of the Euro.

The Eastern Partnership countries have become more dollarized over the observed period, with the Euro accounting for at most 20 percent of international reserves, namely, in the Republic of Moldova.

China’s influence is also clear in finance, as it is increasingly engaged in less conventional forms of financing in the EU neighbourhood, primarily by providing debt financing for investment projects as part of its Belt and Road Initiative, giving it an important lever in the region.

Our study highlights that the EU should harness the full potential of its financial strength in the EU neighbourhood, for instance by focusing investments on renewable energy, easing access to private capital, tying incentives to tougher conditionality, and strengthening the Euro as a reserve currency.

The EU is not using its full potential in technology and knowledge-exchange, losing out to Chinese competition

Concerning technology and knowledge-exchange, the largest share of ICT imports into the EU neighbourhood still originate from the EU. However, China´s share in ICT imports is growing rapidly throughout the neighbourhood while the EU´s share is declining,

Our study shows that China is a strong competitor in high-tech manufacturing imports, with its share in the EU neighbourhood roughly equal to that of the EU. At the same time, the EU’s share of high-tech imports decreased significantly in the last years, creating a comparative advantage for China.

In terms of exchange students, our study outlines that the EU receives the highest numbers of them coming from its neighbourhood compared to the U.S., China or Russia, with the number, from the majority of countries, increasing over the last years.

It is essential for the EU to remain competitive in this area and deepen its integration with its neighbouring countries. Important fields of action for the EU include increasing investments in technological competitiveness, integrating the EU and its neighbourhood’s digital markets, and expanding the ERASMUS+ program.

Infrastructure: EU left gaps in financing in the Western Balkans that China has stepped in to fill

In terms of infrastructure, we find that China is seriously challenging the EU. Especially in the ownership of strategically important infrastructure, China increased its investments, particularly in transport and logistics as part of its Belt and Road Initiative.

The value of Chinese infrastructure investments in the Western Balkans and Turkey almost tripled from 4.4bn USD in the time frame 2007 – 2014 in comparison to USD 12.2bn in 2015 – 2021. Our study identifies this as a potential strategic threat to the EU’s geoeconomic interests.

Fields of action for the EU include taking more of a lead on regional infrastructure financing and fully including its neighbourhood countries in the transition towards green energy.

Push/Pull Factors continue to drive migration towards the EU, with an increasing share of future arrivals from the Southern Neighbourhood

Our study identified a very high level of interconnectivity between the EU and its neighbourhood in terms of labour mobility. While high unemployment rates in its neighbouring countries act as a push factor, workers are pulled towards the EU by its higher wages.

Using recent data, we also find that the EU is attracting a large share of highly skilled workers from its neighbourhood. Based on demographic projections, we expect the demand for migration towards the EU to remain high, with the Southern Neighbourhood and Turkey providing the largest numbers of workers during the coming decades.

Our data shows that it is time for a new strategy that balances the needs of the EU, its neighbours and neighbourhood emigrants to the EU. The current model is problematic in that it encourages neighbouring countries to export many of their high-skilled workers.

Moreover, based on demographic projections, neighbouring countries, except those in the Southern Neighbourhood, are not going to be able to provide workers to fill shortages in the EU as in the past.

Based on these findings and projections, our study shows that the EU should formulate a new approach to labour migration based on partnerships with its neighbouring regions.

While China’s influence is growing, Russia is rarely a rival in the EU neighbourhood

The study presents evidence for the fact that Russia is rarely a rival in geoeconomic terms. However, China’s influence in the EU neighbourhood is growing and it increasingly acts as a serious competitor to the EU.

Furthermore, the EU’s economic, financial, technological, infrastructural, and labour-mobility links in its neighbouring regions are not complemented by comparable degrees of political influence. In today’s situation of increasing geoeconomic rivalry, this is problematic.

Finally, our study shows that the EU should focus more on its partnership with the U.S., but also be prepared to act alone. Pushing back against China will be essential, and decoupling from Russia should continue.

About the authors

Anneke Grosskreutz currently works as an intern for the Bertelsmann Stiftung, where she supports the Project “Sovereign Europe: Strategic Management of Global Interdependence”. She recently graduated from the University of Groningen, where she studied International Relations and International Organizations with a specialization in International Development Studies.

Stefani Weiss is Senior Expert for EU Governance, Foreign and Security Policy in the Bertelsmann Stiftung’s ‘Future of Europe’ programme and currently in charge of the project “Sovereign Europe: Strategic Management of Global Interdependence”.

Download the study here

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