The Situation in Xinjiang

The Australian Strategic Policy Institute (ASPI), has reported that in the last three years, the PRC built at least 380 ‘re-education camps’ in Xinjiang, with the intention to detain Uyghur Muslims and other supposed non-conformists. The official line will state that these camps were set up to help the Uyghurs, re-educate and ‘moderate’ an ethnic minority plagued by Islamic fundamentalism and boost their socio-economic outcomes by moulding them into citizens worthy of the PRC. In other words, the goal is to turn these supposedly hapless and anti-intellectual band of Turkic nomads into Han-Chinese model citizens. Any glance at the PRC’s aptly-named CCTV, or its Pravda-esque newspapers, will simply echo this lie.

What we are actually looking at is the systematic cultural genocide of Xinjiang’s majority Uyghur population and the incarceration of hundreds of thousands (if not millions) of Muslim Chinese citizens in internment camps, since at least 2017. One does not have to look long to figure out just how inhumane conditions and treatment in these camps are. The reports of brutish psychological torture involving sleep deprivation and threats to one’s family as well as slave labour; other sources have obtained testimonials by on-camp teachers revealing forced sterilisation as well as the brutal rape of female inmates, the details are too gruesome to spell out here. The UN’s own criteria would characterise this brutality as a genocide.

What is the EU doing?

Suffice it to say that Xinjiang’s camps are inhumane and an affront to human dignity as insidious and extensive as anything we have seen since the end of World War II. Surprisingly, we have yet to see an official confrontation or even condemnation on the matter by European leaders. We recently saw prominent European politicians mark Black Ribbon Day, a day on which we commemorate the victims of the 20th century’s violent totalitarian regimes. References to the ongoing repression in Xinjiang were notably absent.

Indeed, any consistent criticism of from Europe’s high political circles seems to originate with outspoken Belgian liberal MEP, Guy Verhofstadt. By contrast, his liberal compatriot Charles Michel, now president of the European Council, had little more to offer than happy musings about European cheese and wine during and after a recent virtual Europe-China summit, with human rights issues assuming a relative backstage role, being labelled under ‘International affairs and other issues’, by the Council website. The Commission President, Ursula Von der Leyen, at least made sure to save space in a tweet about the event for ‘fundamental values’. It seems that our Union of Values is all bark and little bite when it comes to the most pressing human rights issue of our time.

Taking part in our video conference with Chinese President Xi. Looking forward to frank & open discussions. Engagement at the highest level with China is crucial if we are to promote European economic interests, protect our climate & defend fundamental values and rights. #EUChina pic.twitter.com/n3eyWwckKO

— Ursula von der Leyen (@vonderleyen) September 14, 2020

No concrete steps have been taken to leverage a Chinese shift in policy regarding the Uyghurs of Xinjiang. Of course, the bloc’s armoury of policy instruments in external affairs is limited, but it can still rely on access to its internal market as a ploy. For instance, the EU could apply a surgical tariff, or ideally ban, on all goods imported from the PRC that are suspected or have been confirmed to have involved forced labour from Xinjiang.

For all his faults, President Trump is moving in the right direction, by considering to label what is happening in Xinjiang a genocide. Should he lose November’s election, his likely successor Joe Biden would do the same. Would it be too much for the EU to follow suit, or even go a few steps further? The EU’s economic soft power can easily be provided with a hard edge should access to its internal market be weaponised against transgressions demeaning human decency, including at the very least the cultural genocide being perpetrated in Xinjiang. Again, the US has already led the way in this regard, as the House of Representatives has voted in favour of banning import from Xinjiang over forced labour concerns.

The Economic Problem

The stumbling block, as per usual, appears to be internal. In this case, it appears to be of a Teutonic nature. Germany’s economy has become increasingly dependent on exports to China over the last few decades (€100bn alone last year). Increasingly as well, its car-manufacturing corporations are basing nodes of their value chains in the PRC. Most insidious amongst these must be Volkswagen’s factory in Xinjiang. As far as Berlin is concerned, Europe’s relationship with China is ‘complicated’ and ‘nuanced’, but most of all one defined by business interests.

This author is not an anti-globalist but does question the usefulness of paying lip-service in voicing concerns over human rights abuses in Tibet and Xinjiang, while German companies (read: Volkswagen) allegedly benefit from forced labour practices in the PRC. Are we not a Union of Values? Why has the European Parliament’s call to apply targeted sanctions and freeze assets been ignored so far in the Council? Why is it that Germany is able to mobilise a moral spine in order to threaten a veto on the Mercosur deal on deforestation grounds, but not on any future deal with a communist regime perpetrating cultural genocide?

Instead, active European leadership on the matter has been reliant on Sweden’s H&M banning Xinjiang cotton yarn from its production chain. At a political level, however, the EU’s inaction on the issue, as with other policy fields, is determined too much by Germany’s lack of geostrategic intelligence and backbone. Domestic political costs associated with cancelling a deal with China are eroding the EU’s veneer of international leadership in the Asia-Pacific.

Our Responsibilities

As the COVID-19 pandemic has shown us, a (European) house divided simply cannot stand. In this case, it is unacceptable for the EU to turn its nose from the pungent smell of mass incarceration in Xinjiang, where the most heinous crime against humanity of our lifetimes is being perpetrated. What is being done, is an attempted ethnic cleansing at a scale and cold-hearted sophistication we have not seen since the 1940s. Hannah Arendt once said that ‘we must prevent wrongdoing because the world in which we all live, wrong-doer, wrong sufferer and spectator, is at stake.’ I fear that it might already be too late for Xinjiang’s Uyghurs.

Guest article by Adam Hall. The author is pursuing a PhD at the VUB in Brussels.

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The entire Cold War financial success of the United Kingdom was predicated on its ability to provide Eurodollars to the financial markets – that is, dollars sold in London and thus, critically, outside the regulatory scope of the Federal Reserve. With the coronavirus pandemic forcing central banks into panicked holding actions, moreover, the status of the Dollar as the Global Reserve Currency seems more entrenched than ever. But is that true? Could the Euro challenge this position, and should it?

The Dollar: Lifeblood of International Transactions

To begin with, let us define what a Global Reserve Currency (GRC) actually is. To put it into simple terms, it is the currency which Central Banks and other financial institutions maintain to prepare for financial actions, ranging from investments to variations in domestic exchange rates. Once a currency becomes used as a reserve all over the world, it naturally becomes a GRC.

Hoarding a single GRC has been traditionally appealing: a reserve currency removes the need to exchange currency every time when doing trade. This naturally reduces the exchange rate risk associated with currency exchanges. Since everyone holds the same GRC, they can do trade with the same currency, which helps facilitate investment and other transactions.

All of this global hoarding has a myriad of net effects. On one hand, it generates a massive import of capital to the issuer country; it increases the demand for the currency and hence increases its value; it allows the issuer to hold ”cheap” debt and ”live beyond its means” to paraphrase former French Finance Minister Valéry Giscard d’Estaing’s comment about the United States. Indeed, the endless appetite for dollars has allowed the United States to run a trade and financial deficit of immense scale, since American debt issues always invariably find numerous willing buyers. It has also allowed countries like China and Russia to avoid inflationary pressure on their expanding economies by siphoning money away from the money supply, through the mass purchase of American bonds.

On the surface, this might sound like an amazing deal: everyone else benefits from a stable currency, trade is facilitated and risks are lowered. The issuing country, meanwhile, gains capital and has access to ”cheap” and extensive financing. When one looks closer, however, one notices that not everyone benefits from this windfall. Capital inflow disproportionately benefits financial institutions, causing an increase in wealth disparity and inequality in the issuing country.

Especially in the current economic context, very few people are holding their breaths to see if the wealth will trickle-down. The gain in demand for the currency leads to the subsequent increased value of the currency. This bloated value damages exports and thus hurts the industry. The financial institutions grow wealthier at the expense of the country’s industrial base. While Asian industry keeps taking up more and more market share from the US, the difference between the industrial sector and the financial sector becomes unbearable, particularly as it also eats at the income and job prospects of the working class.

At present over 60% of bank reserves outside the United States are denominated in US-dollars. The picture is similar for global debt, with dollar denominations holding a share of approximately 40%. The thirst for dollars gives no sign of slowing down. In fact, after the 2008 financial crash, institutions around the world began hoarding dollars, a move exacerbated when the Federal Reserve acted as the lender of last resort to save the Eurozone from collapse in 2012. The same hoarding is taking place today, with the world economy reeling from the shock of COVID-19. One could say that the demand for US-dollars has never been higher than now. However, this hasn’t stopped some commentators from sounding the alarm bells.

The Currencies That Would be Kings

Recently Goldman Sachs strategists have warned that the US Federal Reserve’s reaction to the coronavirus crisis may end up destroying the Dollar’s reign as the pre-eminent GRC. The Fed has increased its balance sheet by around $2.8Tn, an absolutely astronomical amount, and has been busy printing money. A GRC requires for itself a certain level of stability, so that it is easily predictable and so that it carries little risk, but financial strategists are warning that the current monetary policy threatens to debase the currency over the coming years. In such a case there is a threat that the savings held by financial institutions globally will be worth much less than what they are now.

This warning has triggered an immediate market reaction. The demand for Gold and Bitcoin (and other alternative currencies) have soared. “Gold is the currency of last resort, particularly in an environment like the current one where governments are debasing their fiat currencies and pushing real interest rates to all-time lows,” commented Goldman strategists. It is important to note that such warnings have been issued before, and historically betting for the Dollar to fail has been a losing game.

For a long time, the Euro was seen as the next GRC, with Euro reserves seeing global growth and prominence at the expense of the Dollar. This progress came to a sudden halt around 2008, in the turbulent onset of the financial crisis. In the decade since, the Eurozone has shown itself to be a relatively unstable economy, which is one of the key qualifications institutions look for in a GRC issuer. This effectively ruled out the Euro’s candidacy for the time being. For the Euro to truly become a GRC it would require great strides from the Eurozone in terms of ensuring that the bloc is stable, including stricter financial controls and some form of internal debt mutualisation system, both of which are unpopular ideas within the bloc, albeit amongst different groups for each.

China, with their Yuan Renminbi (RMB), is the other natural contender to the status quo. For China, becoming the issuer of a GRC would be a chance to garner more financial independence as their trade would no longer be tied to US dollar issuance – although an alternative policy would need devising to contain inflation. In essence, getting onshore currency from the US is excessively easy. The idea of limiting dollar exports has been raised by some, but it has been noted that this could have catastrophic effects on US inflation rates. China has a myriad of other reasons to become a GRC. It would lower borrowing costs, increase Chinese prestige around the world, support Xi Jinping’s reform efforts, spread exposures of the RMB around the world and finally allow China to become a price setter.

All of this would support the CCP’s goal of creating a multi-polar world where the USA would no longer be a sole hegemon. This drive towards a greater prominence of the RMB has been built on increased Chinese market share of global trade and the addition of the Yuan renminbi into the IMF Special Drawing Rights basket – the basket of currencies which count towards the official reserves of nations. The SDR used to be tied to gold but is now tied to a basket of five major currencies.

The Yuan, however, still faces considerable difficulties. The currency is not fully convertible, the onshore version is hard to come by and no trade-safe asset is available. While both the RMB and Euro have become the reserve currencies of their respective regions – much of the non-EU European countries holding the Euro as their main reserve currency, and Chinese neighbours holding the Yuan or the Japanese Yen – there are significant obstacles for them to reach the status of GRC, even in a multi-polar system.

For the Euro, there are high risks in terms of prestige and economic policy. For example, if China were to peg the Yuan to the Euro, this would have severe implication on the value of the currency and on Europe’s ability to command their own monetary policy. At the same time, the ensuing over-valuation of the Euro could be catastrophic for the European industry, as the currency is already overvalued for much of the union – with the notable exception of Germany. This would also increase wealth disparities and most likely lead to social disruptions.

With all of these considerations in mind, elevating the Euro to GRC status would still lead to higher financial independence for Europe. Whether or not the Eurozone would be ready for the necessary reforms to push through a plan for a GRC – or whether it would even be smart to do so – is still questionable, although the promise of prestige may often be popular among federalist circles.

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Upsetting the balance

Heating tensions have been around for a long time, but we can pinpoint the 2018 G7 summit as the catalyst which triggered the worst of the conflict. The US’s aggressive, almost neo-mercantilist, trade policy headed by the Trump administration has placed the land of the free at odds not only with China but also with the EU and a number of African nations such as Rwanda.

What started as a US-China trade war has now evolved into a US-EU dispute as well. The US wanted the EU to support the US in their trade war against China, by limiting Huawei networks and joining in the USA’s sanctioning and admonishments of the actions of the CCP. On the other side of the Atlantic, though, China and the EU saw an opportunity to unite against Trump’s aggressive trade policies and began setting up negotiations to form a unified front against the US in trade issues.

However, Europe soon found that even a common enemy wasn’t enough for China to adopt fair trading practices. Currently, the European Commission’s web page on trade policy has a civil, yet telling paragraph: “The EU is committed to open trading relations with China. However, the EU wants to ensure that China trades fairly, respects intellectual property rights and meets its obligations as a member of the World Trade Organization (WTO).”

The text very politely implies that the EU doesn’t think that China trades fairly. Indeed there are deep problems with trading in China, everything from the legislation allowing China to exercise control over private companies to mandating that foreign companies have a designated national connection in China before they are allowed to do any business in China.

The EU has until recently allowed Chinese companies to operate relatively freely in the EU, just like other international companies. With no improvement of fair trading conditions in sight, now even the EU has had enough and has begun targetting Chinese companies much like China has targeted European ones, and it is China’s turn to complain. Reciprocity wasn’t supposed to be on the menu.

Will US-EU Trade Relations Keep Deteriorating?

The fallout between the EU and China could (and should) have opened up a pathway for Western powers to mend their broken relationship and form a renewed Trans-Atlantic front. Instead, earlier this year the EU-US trade dispute flared up with new tariffs.

At the end of 2019, the Trump administration announced that it would be placing higher tariffs on a multitude of European goods, especially alcohol and foodstuff – hitting a myriad of products with a 100% tariff. This came as a reaction to the EU’s illegal support of Airbus as well as France’s planned 3% digital tax. Later, in January 2020, France agreed to freeze the plan, as nearly 140 OECD countries negotiated new international tax plans to better account for digital giants like Facebook, Google and Amazon. However, as the COVID-19 drug and vaccine manufacturing disputes arose, France announced it would once again go ahead with the tax plan, which prompted the US to hit the EU with another barrage of tariffs.

Now, while the EU has also responded with a number of retaliatory tariffs on the US, it is possible that European leaders will yield to the US to protect their relationship with the EU’s largest export market. There is a long-lasting bias for favouring exports and demonising imports – stemming from the mercantilist age. This mode of thinking has lasted in the minds of policymakers.

Economics and trade are not so one dimensional though. They cannot be summarized as “exports good, imports bad”. This sort of autarkic way of thinking has caused many nations – from Fascist Italy to the Soviet Union – an endless amount of trouble in their time. Many modern businesses are built around international trade – many of them require imports to function and impediments to imports may cause them to fail, thus negatively affecting the national output of the importing nation. Showing that wealth can be generated from imports.

Looking Ahead

The US and China managed to arrive at a deal settling their trade differences at the end of 2019, which made many hopeful that this would be the end of the year-long conflict. Unfortunately, as the COVID troubles heated up, the trade war heated with it. The US has mounted attacks on China from within the international community, berating them for their early cover-up of COVID and eventually leading to the US exiting the WHO.

At the same time, China has been attempting to bring Hong Kong under control, which has prompted a fresh line of criticism towards the CCP. With the alleged genocide of the Uyghurs, the CCP has seen its fair share of criticism this year. However in a twist of fate, while these wars of words have gone on, both countries have been forced to exempt many of the tariffs they placed on each other out of necessity, as they’ve found that the current situation has increased the need for imports.

The danger in the trade wars between the US and China (and EU and China) is that decoupling economies in this day and age is horribly difficult, and possibly recession inducing. The same warning has been levelled about an EU-US trade war.

The COVID-19 crisis may have put a stop on any major changes in the trade war situation, but it is very possible that after the worst is past the US and China will once again slip into a trade war. While the EU-US war rages on and an EU-China trade war looms over the horizon, pitting each other’s largest trade partners in a cycle of trade battling risks closing Europe into a true Mexican standoff.

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China’s reawakening might not have been as abrupt and disruptive as Smaug’s, but it has certainly contributed to the narrative shift we are witnessing today: the centre of economic gravity will soon lie elsewhere, in what a 16th-century explorer from the West would have naively called “the rest”. EU’s share of the world GDP (PPPs) will almost halve by 2050 and the European powers are destined to lose their position as top global economies (Pwc 2017); major Chinese cities can already boast GDPs comparable to those of entire European countries, while the Old Continent is set to become a demographic pigmy according to most scenarios (European Environment Agency 2016).

“Hide Your Strength, Bide Your Time”

The Dengist maxim “hide your strength, bide your time” was officially discarded in 2017, when China’s Paramount Leader Xi Jinping announced China’s grand entrance into the global geopolitical arena. Such participation had already begun when its markets silently opened to foreign investments, and the government promoted outward-looking policies such as Go Global/Go Out and Peaceful Rise. However, this new assertiveness has taken a bigger, forward-looking tone with the One Belt and One Road Initiative (OBOR) inaugurated in 2013.

The OBOR is more of a long-term vision than a clear project. The strategy entails a multitude of investments in infrastructures such as railways, pipelines, industrial parks, ports and highways along two main routes: the Silk Road Economic Belt and the 21st century Maritime Silk Road. OBOR involves more than 65 countries, the majority of which are in the Eurasian continent. Indeed, the Chinese government aims to develop the country’s western provinces further by bringing back the central role that the ancient Silk Road played in transcontinental commerce between Europe and the Far East; moreover, unstable countries in Central Asia and poor infrastructures along the maritime route to Europe curtail the potential economic gains that well-connected and economically prosperous countries could offer.

An Economic Uproar

The recent choice by the Italian government to sign a Memorandum of Understanding (MoU) concerning the Belt and Road Initiative (BRI) has shaken the West, with the EU’s budget Commissioner Oettinger even suggesting to confer the EU veto power over matters of such importance. The uproar comes amid parallel fears in different contexts, such as spying accusations involving the Chinese technology giant Huawei and disagreements at the WTO level, where China is constantly criticized for unfair practices like price dumping.

Researchers agree that Belt and Road could lead to great economic benefits, especially for those landlocked countries in Central and Eastern Europe (CEE) and the heavily indebted Southern member states. Overall, trade in the EU could increase by 6% (Garcia & Xu 2017). Moreover, the importance of the Mediterranean ports has steadily increased in the last years, with most of the traffic from the Suez Canal favouring them over the northern ports of Rotterdam and Hamburg (Prodi & Fardella 2017); Italy aims therefore to enhance the role of its ports (Genova, Venice and Trieste especially) as the fourth European economic power trails behind France, UK and Germany in imports and exports to and from China, and also lags behind in terms of investments and capital circulation.

The Belt and Road Initiative Between Wealth, Power and Politics

Despite assurances from President Xi Jinping that the strategy would only lead to economic prosperity, the EU is right to approach Belt and Road with caution: Chinese state-owned giants are privileged actors in this endeavour and their interests might not always overlap with the EU’s; transparency and project sustainability are also important issues that China has not sufficiently dealt with until now. Economic theory teaches us that trade and interdependence favour the well-being of consumers and create bonds that help prevent unwanted events such as wars. With wealth, nevertheless, power and politics come into the equation.

The EU is clearly divided on the issue: last week the French President Emmanuel Macron welcomed Xi Jinping together with Angela Merkel and EU’s Commission President Jean-Claude Juncker, seemingly signalling that a multilateral EU-wide framework is needed to gain the most benefits out of this challenge (or opportunity). Italy’s embrace of the BRI, the first G7 country to do so, could therefore push European member states to seek more unity, after the adherence to the MoU by other 11 member states (Croatia, Czech Republic, Hungary, Greece, Latvia, Luxembourg, Malta, Poland, Portugal, Romania and Slovakia) failed to attract the attention needed. Not coincidently, on March 12 the Commission issued a meaningful press release referring to China as both a negotiating partner and a “systemic rival promoting alternative models of governance”. It is quite a symbolic defeat to witness a systemic rival, embodied by the state-owned giant COSCO Shipping, owning 51% stakes in the Port Authority of Piraeus in Athens, the cradle of European democracy.

But it’s not too late. MoUs are non-binding cooperation frameworks and the agreements signed between Italy and China during Xi’s visit to Europe have limited economic impact and do not confer Chinese companies the ownership of vital infrastructures; more specifically, the arrangement concerning the ports of Genova and Trieste and the corporation China Communications Construction Company (CCCC) does not contemplate the acquisition of the ports’ authorities but rather aims to enhance connectivity to railway infrastructures. There is still time for the EU to find a more coherent approach and to take a leading role in the initiative: the EU represents the ending destination of all trade routes and has therefore leverage and say over the agreements taking place within its borders.

Intra-European competition, however, represents a major restraint to the stronger coordination needed at the EU level. Ports in the Northern Range (Antwerp, Rotterdam, Hamburg) also benefited from Chinese capital; the hostility coming from Northern member states over the cooperation agreements signed between the Chinese companies and the Italian ports might, therefore, be driven by fears that the economic significance of such ports would be downsized. Indeed, Professor Bart Kuipers, an expert on port economics from the University of Rotterdam, argues that the planned railway connections in Southern and Central Europe would reduce the container traffic in the Northern range ports by 1,6%. New interconnection projects could even increase such percentage.

COSCO Shipping has a 35% stake in the new generation terminal Etr Euromax Terminal Rotterdam, and 20% in the Antwerp Gateway terminal, while a Chinese consortium led by CCCC (which also includes Ali Baba founder Jack Ma) has been awarded the contract for the construction of a new automated terminal in the port of Hamburg in 2017. The competition also arises within the Mediterranean, where ports in the Adriatic seek to supplant the centrality of the Piraeus.

The EU’s timid response to this reality does not offer an effective solution to China’s “divide et impera” strategy. Xi Jinping has been engaging with CEE countries through the “16+1 platform”, a transnational initiative which further endangers the cohesion of the EU on the matter.

A Commission Proposal Approval From the EU

After insistence from France, Germany and the previous Italian government, the European Parliament approved a Commission proposal contemplating a screening mechanism for Foreign Direct Investments (FDIs), already existing in the world’s major economies. The vote, which took place last month, saw an overwhelming majority (500 in favour, 49 against). While “critical sectors” to protect, such as aerospace, media and health, have grown in number thanks to MEPs, Member States will still have the final say over such investments.

Supranational institutions such as the Commission and the European Parliament have the potential to counter member states’ egoism and safeguard the Union’s common interest. However, the economic crisis has left economically weaker Member States in need of financial resources and are therefore more inclined to entertain bilateral relationships with foreign investors and oppose intrusion from the EU. Manfred Weber, formerly the European People’s Party’s Spitzenkandidat for the presidency of the European Commission, has spoken in favour of a measure that would allow the EU to decide on a case-to-case basis whether foreign investment is detrimental to the EU’s interests.

A Much Bigger Phenomenon

The role of the Belt and Road Initiative in Europe is only one component of a much bigger phenomenon:  the transformation of the world order as we know it. Regionalization has brought the emergence of power blocs and their respective spheres of influence without the need of a Cold War in the background; China’s rise is particularly worrying for the hegemonic United States, which fear that a Thucydides trap could be waiting at the next corner. Chinese claims over Taiwan, its unprecedented activism in Africa and assertiveness in the South China Sea, which threatens the international maritime law, also contribute to the cautious and often confrontational approach taken by Western powers over the OBOR.

The signature of the Memorandum of Understanding by a G7 economy might have offered an important boost towards a more harmonised line of action without having created irremediable rifts in the West and sold fundamental assets to a foreign power; moreover, the long-term essence of the Belt and Road Initiative and the usually short life-span of Italian governments might play in favour of those who are showing scepticism over the Chinese strategy, with an unexpected change in direction from the next Italian government.

The rationale behind this signature appears less surprising when Italy’s intra-government dynamics are taken into account: the two parties in power are divided on the issue; the Five Star Movement is championing closer relations with China in the likely intent to gain more leverage over Brussels with regards to budget flexibility. The North League opposed the signature, but it might have given up its opposition in a show of gratitude to the 5SM, whose votes in Parliament were crucial to forestall a trial on Matteo Salvini over the seizure of an NGO ship.

The Economic Relevance of the EU

Nevertheless, we should not let paranoia poison the debate. The stability of Central Asia is also in the interest of the European Union and so is the rebuilding of the hard-hit economies in Southern Europe. The Belt and Road Initiative presents an opportunity for both economic development and reform of domestic governance in the EU, provided that sensitive assets remain in control of European democracies. The issuing of the EU-Asia Connectivity Strategy last year may be the indication that the EU is ready to curb Chinese soft power in Asia, but the difference in terms of resources available and strategic capability does not play in favour of the Old Continent. Indeed, a more coherent structure, a bigger budget and more effective decision-making are needed for the EU to avoid losing economic relevance in the next decades.

More than ever, the EU’s policymakers should ask themselves whether it is time to step up the game and advance European integration or remain in the limbo where the European Union is currently stuck. Uncoordinated responses, diverging policies and overlapping initiatives do nothing but offer foreign powers the possibility to have the high ground in negotiations and extract concessions more easily. The Union has already shown its potential in matters of trade, where it has managed to carve out an important role as market power, and even in foreign policy, although exceptionally and with mixed results. However, with a budget representing only 1% of the EU’s GDP, the Union is unlikely to keep up with competing for power blocs in general investments and many of the relevant fields of the near future, such as artificial intelligence and space exploration/exploitation.  Of course, a long-term economic strategy such as the Belt and Road Initiative might not be the only factor. Donald Trump’s repeated criticism over Europe’s commitment to NATO, Russian rearmament, climate change migration flows can also change in the mindset of policymakers, both in Member States and EU institutions.

Bibliography

An earlier version of this article was originally written for the University of Leiden. 

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The long and painful Brexit negotiations have topped the headlines for the better part of two years, and it’s easy to view it as an isolated event. However, Brexit is part of a dramatic realignment of the British position on the world stage. The decision to leave the EU, of course, was determined by voters in a referendum. But the fact that a referendum was held in the first place is no coincidence, nor should we blind ourselves to the complex negotiations between London and Brussels prior to the Brexit referendum.

Cameron‘s domestic calculations in appeasing the far-right by pushing through a referendum are often discussed, but what typically goes under the radar is that the referendum proposal was part of a larger, if incoherent, high-risk foreign policy being conducted by his administration. Under Cameron, the United Kingdom sought a new place for itself in the world, one where British fortunes became inextricably linked with China.

In so doing, it sleepwalked into a dangerous position: it alienated its two major allies – the United States and the European Union – at the same time. The risks involved are massive, and this strategy’s failure – which seems likelier with every passing month – would have far reaching consequences on British foreign policy, and indeed, on the health of the UK as a whole.

The Post-Imperial Conundrum

Britain emerged victorious from the Second World War, at least on paper. In practice, however, it was left in financial and political straits, which made it impossible for it to maintain its empire and dependent on the United States for protection.

In this grim context, Britain found a new place in the growing Western bloc by closely aligning itself to the new hegemon, the United States. It did so not just in defense and foreign policy, but also financially. Britain quickly became the world’s one stop shop for Eurodollars. These were dollars, but made available for lending in Europe, and thus, critically, outside of the regulatory scope of the Federal Reserve.

This would prove particularly significant after the United States abandoned the gold standard. With American assent, the United Kingdom became the link in the financial chain between the two shores of the Atlantic – and later on, the rest of the world. On that bedrock, the City of London obtained its legendary status and spearheaded the phenomenal consolidation of European banks at the turn of the millennium.

Cameron’s High Risk Gamble

The meltdown of 2008 changed everything. It not only threatened to turn into a heart attack of the world economy, but it altered the geography of global finance, with American and Asian banks having more or less recovered, while European banks remained a shadow of their former selves. What, then, would be the UK’s role in this altered international environment? It is fateful that it would fall to David Cameron and his administration to answer this question.

As Prime Minister, Cameron quickly earnt for himself a reputation of a man who put party politics ahead of statesmanship. Starting with the Tory withdrawal from the EPP, Cameron pursued a confrontational strategy with the EU, in which he sought to win more concessions for Britain and placate the rumblings of Tory back-benchers.

It is undoubdted, therefore, that much of Cameron’s strategy of slamming the EU and undermining its authority was motivated by domestic calculations. However, it also fit the government’s vision for the future of the United Kingdom.

Cameron’s unimaginative strategy for the post-recession world was to replicate the strategy that had saved Britain’s prestige during the Cold War. After all, if the world was so hungry for Eurodollars, surely a market could be found for Chinese investment as well. With that in mind, London sought to reposition itself away from the Atlantic, and as the newfound financial link between China and the West.

Needless to say, the prospect of helping China’s grand entry into world finance and the world market held promises of great profits and geopolitical clout. When Tory politicians talk of a Global Britain, this is what they envision. And with HSBC in the lead, Britain has now been marketing itself as the door to China for a number of years.

What was perhaps underestimated in London was the political price of this strategy. The Chinese gamble profoundly displeased the United States, particularly as it became more and more apparent that the relationship was completely one-sided, with Britain giving way to increasing Chinese demands – a subservience that was strongly criticised by American diplomats in 2015.

Likewise, such a move put Britain on a clear course of competition with the European Union: not only was it harder for Britain to pursue a high-risk strategy as a member, but it was also harder to befriend the new hegemon. Neither the EU nor its members had any patience for the unilateral freedom of action the UK now demanded.

To reiterate: at the same time as Cameron was set on a collision course with Europe, he proceeded to also alienate Washington by enacting a policy of cooperation with a dictatorship that represents the greatest political challenge currently faced by the United States. The risks inherent to this strategy look high enough; they become even higher when we consider that there is a crucial difference between the Eurodollar system and the British-Chinese connection. The former was both an economic and a political alliance, but with Beijing there are no such guarantees. The financial ties are not shielded by friendly and long-standing political friendships.
The weakness of this strategy became fully apparent when Cameron lost control of his own referendum.

Intriguing with Allies: Brexit and Power Competition

If a recurring theme can be found when discussing Cameron’s tenure in government, it’s the complete failure to understand the priorities of his own allies. For years, Cameron shunned the EU and sought approval from Angela Merkel instead, firm in the belief that Brussels was powerless and that Germany ultimately called the shots. He also believed that German car-makers were the real grey eminence behind EU politics, and as such, they would eventually persuade Merkel to let Britain do what it wanted, so as not to lose export opportunities in the UK.

This, naturally, proved incorrect. Angela Merkel went on record multiple times, stating that the EU was far more important to German security, and the European Commission stubbornly refused to be sidelined. But all warnings fell on deaf ears in Downing Street. As recently as 2014, the administration claimed that Merkel viewed Cameron as the “naughty nephew”.

It is perhaps bewildering that one of the most developed countries on the planet based an extremely risky foreign policy on the assessment that its Prime Minister was simply too adorable to take no for an answer, but it is the reality we must contend with, when discussing the road taken by the United Kingdom after the recession.

After Cameron’s disgraced exit from politics in June 2016, the Tories have hardly abandoned this logic. David Davis and others were buoyant that Barnier and the European Commission could be bypassed entirely, if only an agreement was struck with Berlin.

Power is a word that is rarely mentioned in European politics these days, and yet there can be no doubt that the United Kingdom framed Brexit negotiations as a question of classic European power competition. By offering German carmakers access to the British market, London would in effect earn the right to become the leader of the continent. And if the bilateralism this requires led to the dismantling of the EU, so be it.

Just as with the American displeasure at British subservience to China, once again the miscalculation of its own allies made it impossible for Britain to pursue its goals. In the end, Brexit was negotiated with Barnier and the European Commission. Regardless of the outcome, which remains uncertain at time of writing, the fact of the matter is that the original Brexit strategy failed miserably.

The Die Is Cast

Independently of how Brexit ends and what lies in wait for British-American relations, the crucial part of Cameron’s plan has already been enacted. As revealed by the Bank of England, British banks are significantly more exposed to China than other European banks, not to mention the Americans. This represents a twin risk: political and financial.

Politically, as we have already seen, the idea (predominant in the 1990s) that power competition was no longer a factor in economic development is now no longer taken seriously. It is openly acknowledged that the rise of China presents a challenge to the West and to the United States. The comments by American diplomats that constant concessions are no way to handle a rising power are a case in point: it is highly doubtful that Britain can juggle a political alignment with its traditional allies, while giving way to Beijing on an increasing amount of matters.

Financially, exposure to China implies severe credit risks. Should Chinese finance so much as sneeze, the City of London would be the first Western financial hub to suffer the consequences – much like in 2008, when the meltdown of the recession nearly stopped the flow of transatlantic finance cold in its tracks.

Of course, in the complex reality of the world economy, everyone would suffer from a Chinese meltdown. Even the relative troubles of 2015 had profound effects on international finance. Nevertheless, in an attempt to salvage its primacy in world finance, Britain has already placed itself first in the line of fire, and this will remain true irrespective of future relations with the United States or the final outcome of Brexit. The future of British finance, and by extension the British economy, now lies with the fortunes of the Communist Party in China.

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