Economic efficiency versus geopolitical resilience: strategic autonomy’s difficult balancing act

Since 2020, Europe’s economic policy has been characterised by a significant increase and intervention from the state into the economy. This policy shift has been driven by a series of shocks: the pandemic, the war in Ukraine and the overall international tensions linked to the geopolitical decoupling between the United States and China (of which the Inflation Reduction Act is, in part, a reaction). As a result, Europe has revisited the old debate on the extent to which governments should intervene in their economies to prevent or manage supply disruptions of critical items such as vaccines during a pandemic, natural gas during a major energy crisis, chips during the digital transformation or critical raw materials during the energy transition.

Over this period, an industrial policy debate has emerged in Europe based on the notion of strategic autonomy. The claim is that if governments just allow firms to make investment, trade and supply chain decisions based solely on their own economic interest, countries will develop trade patterns that might make them too dependent on unreliable partners or potential adversaries. This could cause possible geopolitical, economic and social adverse consequences.

However, the notion of strategic autonomy is not uncontroversial, notably as its ultimate goal remains unclear. In what circumstances would Europe be able to call itself strategically autonomous? While increasingly stressing the need to act to boost the continent’s strategic autonomy in a number of areas, European leaders have so far not explicitly addressed this fundamental question.

Behind this question lies a trade-off between economic efficiency and geopolitical resilience. Consider clean technologies, for example. China has developed a solid comparative advantage in the manufacturing of clean technologies and components because of low manufacturing costs, a strong base in materials production and sustained policy support for these industry segments. The economic-efficiency argument calls for European companies to continue importing those technologies from China. However, as China controls at least half of the manufacturing of these technologies, in particular solar panels and batteries, the geopolitical resilience argument calls for European governments to actively incentivise a diversification away from China (via re-shoring or friend-shoring strategies). This would avoid a potential geopolitical weaponisation of these exports in the future, similar to what Europe already recently experienced with Russian gas.

Therefore, at the heart of the strategic-autonomy discussion is the theoretical question of how far European governments are willing to move away from the economic efficiency paradigm and shift more towards geopolitical resilience. Phrased differently, how best can European governments balance the two competing objectives of efficiency and resilience? The question of diversification could, for instance, be conceptualised and tackled by using the so called N-1 formula adopted in the EU natural gas security of supply regulations. This formula estimates whether the gas infrastructure in a particular area has enough capacity as to satisfy that area’s total gas consumption in the event of a disruption to the single largest gas facility during a day of exceptionally high gas demand.

As diversification comes at a cost, the more practical question is who should pay for the security premium. Tangential to this is the issue of how to minimise this security premium (eg fostering technological innovation for critical raw materials substitution, rather than developing expensive domestic mining projects) or, ideally, even to turn it into an industrial opportunity for Europe.

To have a serious conversation on strategic autonomy, European policymakers must answer these fundamental questions. As Joseph Nye and Robert O Keohane wrote in 1977, “we live in an era of interdependence,” and there is nothing we can do to reverse this. If you believe this, strategic autonomy should not be an illusory search for independence, but rather a more strategic management of complex interdependence. Europe should first understand where it is asymmetrically exposed to interdependencies (or, more simply, where it is exposed to overdependencies). Second, it should understand if and how these asymmetrical interdependencies can be manipulated as a source of power. Finally, it should adopt sensible strategies to prevent or manage these manipulations, striking the right balance between economic efficiency and geopolitical resilience.