Commentary | Strategic autonomy or strategic alliance?, by Maria Demertzis | Bruegel

It is hard to imagine how either the EU or the US can do better on the big issues if they pursue their interests separately.

On the day of the United States presidential inauguration, European Union leaders lost no opportunity to express relief that the world hegemon was back, ready to cooperate and help solve common problems.

But the truth is that, during the last four years, the world has not simply stopped and waited for the US. The EU in particular took important steps in understanding the importance of strategic autonomy. Pushed by the uncooperative Trump administration, the EU pursued bilateralism, aiming to protect its own interests.

This pursuit of strategic autonomy by the EU is de facto an attempt to separate from the US. The big question now a new US president is in place, is whether we need to continue such a pursuit.

The answer to this question should depend on how aligned the new US administration will be with the EU on fundamental issues. There is great scope for the two to align on climate change and on how to fight the pandemic. However, there is also scope for significant disagreements.

The most obvious is how to deal with big tech companies that are considered to have acquired too much power to the detriment of good economic outcomes. In particular, given their global nature, it is not clear how to tax the services these companies provide.

The EU appears a lot more decided on this. The European Commission in December issued a draft law, the Digital Markets Act, in which it proposes to monitor and ultimately prevent the built up of power for those big digital firms. What is interesting about this proposal is that it is extra-territorial in nature: it applies to all firms operating in the EU irrespective of whether or not they have a physical presence in the EU. This was a necessary feature or otherwise the Act would not capture the big firms, which are all non-EU based. But it also creates the impression that the EU is looking to attack US firms, a fact that will not sit well with the new administration.

If regulation is about controlling the size of big firms, taxation is about redistributing their profits. After many attempts to coordinate, at the Organisation for Economic Cooperation and Development (OECD) level, President Trump withdrew from international tax negotiations in the summer of 2020. The French authorities have repeatedly argued that if there is no agreement at the international level, they will unilaterally tax the big technology groups. The US considers this an unfair practice as, again, it affects largely US firms and has threatened retaliation. With the transition to a new administration, the two sides have called a truce and have agreed to discuss again within the OECD multilateral taxation framework. This will be the first challenge for the new OECD leadership.

And then, there is of course China. The change of administration in the US will not change its policies towards China. If anything, the Biden administration will seek to strengthen the US stance by calling a “democracy summit”: a place where like-minded countries meet to form a front against China. The EU, on the other hand, is very reluctant about this and insists that it does not want to take sides, preferring instead to maintain a very transactional relationship with China. Public opinion in the EU is turning increasing unfavourable but also recognises that China is the world’s biggest economy. But while the EU could afford to play the waiting game when the US administration was perceived to be unreasonable, fence-sitting will be a lot more difficult with a much more amicable President.

So, when it comes to concentration of market power in big tech companies the EU is clear on how it wants to proceed. The US is less clear. On China, the US is very much decided on the level of antagonism it wants. But the EU hesitates.

But while economic interests may not be always aligned, there is much more at stake than economics alone. It is hard to imagine how either the EU or the US can do better on the big issues if they pursue their interests separately. The new US administration provides an opportunity to restore not only what the previous administration so carelessly risked, but to advance on issues that will reduce divisions in an ever-more divided world.

On the 20th of January, Council President Charles Michel talked about a “Europe that plays a stabilising and constructive role …in line with our true weight in the world….” But true weight comes with building strategic alliances.

About the author

Maria Demertzis is Deputy Director at Bruegel. She has previously worked at the European Commission and the research department of the Dutch Central Bank. She has also held academic positions at the Harvard Kennedy School of Government in the USA and the University of Strathclyde in the UK, from where she holds a PhD in economics. She has published extensively in international academic journals and contributed regular policy inputs to both the European Commission’s and the Dutch Central Bank’s policy outlets.