Dealing with Transition in 2025

By Krišjānis Kariņš, former Prime Minister of Latvia, now Senior Advisor at KREAB Brussels

We are living in a time of transition and are undergoing a huge shift in world affairs not seen since the collapse of the Berlin wall 35 years ago in 1989, and in some ways larger than any changes since the end of the Second World War (WWII) almost 80 years ago. The incoming Trump presidency is in many ways a symbol of what is changing. During these past 80 years, the US has taken the role of leader of the democratic world. It helped to create the international framework following WWII including the United Nations, World bank, and International Monetary Fund, among others. It faced off against the Soviet Union during the Cold war, which it won and subsequently helped European countries emerging from the yoke of communism to embark upon the path of freedom, democracy, and the rule of law, encouraging them to join the EU and accepting many of them into NATO. The US is now in the process of reassessing its leadership role in the world, with profound ramifications for everyone.

For a number of decades, the US has strongly supported free trade, which has underpinned tremendous economic growth, innovation, and overall more choice and lower costs for consumers around the world. Unfortunately, not all countries have embraced free trade equally. Importantly, while China has gladly accepted investment and technologies from the West, as well as access to Western markets, it has continued to heavily subsidise various export industries that have had an unfair competitive advantage compared to US or European companies. China’s economic growth over the past few decades has been paralleled by a steady loss of manufacturing jobs in the US and Europe.

Companies will always strive to maximise profit, and a cheaper manufacturing base is often a big part of investment considerations. This has led to both the US and the European Union (EU) having a trade deficit in goods with China while maintaining a trade surplus in services. The incoming president Trump is intent on realigning its trade flows with its partners, particularly with China, with proposed import tariffs being one of the main instruments to make the change. This will inevitably affect the EU, which has important trade relations with both the US and China. Unlike the US, the EU is not a single country with a clear leadership structure. This places the EU at a distinct structural disadvantage in navigating the coming change.

Regarding world leadership, in many ways, the US overtook the role that the British empire played prior to WWII. At the time, a large portion of the US population still had strong ties to Europe on a family level. This has changed along with the demographic makeup of America, whose proportion of citizens of European origin has been steadily decreasing. Simply put, for more and more Americans, Europe is no longer the “old country”. Thus, ties with Europe are undergoing a deep change, rooted in demographics and independent of any incumbent president. Of course, democratic and market economy traditions, as well as access to the English language will ensure that ties with Europe remain important, but they will have less deep emotion tied to them.

What is clear is that the US, especially under a Trump administration, no longer feels the need to be the main guardian of European security. From the US point of view, Europe has been a huge success. Following the Second World war, it has become wealthy, and through the EU, a much more united continent free of communism and dictators (Russia and Belarus excluded), something that one could only dream of in 1945. The corollary of this is that for the Americans, the EU is wealthy and stable enough to take over the main responsibility for its own security. While I do not see that a withdrawal from NATO in any way would serve US interests under any administration, letting (or insisting that) Europe provide for the lion’s share of its own security simply makes sense. The key is for Europe, or in this case, the EU, to take up the challenge in spite of its lack of political unity.

Regarding free trade, China has been dealing unfairly not only with the US but also with the EU. Western companies have neither open access to the Chinese market nor the subsidy support that China provides its own. While the US has realised this and through Trump will give a huge push to realign the trade relationship, the EU has not collectively accepted that this is a problem. Indeed, the EU lacks a coherent China policy precisely because different member countries have different trade (export) exposures to China. Until recently, China was still realising its “belt and road” initiative in parts of Europe, which essentially provided loans for huge infrastructure projects that were “too good to be true”, and through this was gaining ownership of key assets in some European countries (as in Africa and other developing regions). While this initiative has now mostly fizzled out due to a realisation of the huge political, economic, and security risks involved, the US is clearly ahead of the EU in defining what kind of a relationship it wants with China. For the US, this is decoupling. For the EU, more of a “de-risking” approach is currently in place, which is an ambiguity that China will certainly try to exploit as its exports get pushed out (or priced out) of the US market. China will look to increase exports to the EU and will try to exploit a “divide and rule” approach, by utilising the leverage that it has with some European countries through their Chinese investments and trade exposure.

The US is turning its attention from Europe to China (both economically and militarily), and the Trump administration will most likely step back from its role as a clear leader of the democratic world, instead being much more confrontational and transactional to friend and foe alike. This leaves Europe with a choice. It can either step up to the challenge and strive to become a true geopolitical player on the world stage complete with military power, or else risk becoming in many ways more and more irrelevant to world affairs as the US and China line up more strongly against each other. Indeed, if Europe does not align with the US as a strong partner regarding China, it would leave itself vulnerable not only economically, but also from a security point of view. One cannot forget that Russia is still very much in the picture, continuing its bloody war of conquest in Ukraine. Recent events in Georgia show that Russia’s expansionist agenda is in force elsewhere as well. As the US turns more to confronting China, Russia will be following very closely what Europe will do. If Europe shows indecision, Russia will take that as a sign of weakness, which would not bode well for future European security. China is, after all, one of the countries supporting Russia in its aggression.

In this time of transition, Europe needs to decide whether it is ready to break away from the status quo and come into its own as a truly global power. Currently, the odds are against this. Political turmoil in France and Germany, combined with a spirit of “less Europe” prevailing among many voters throughout the continent will provide a strong headwind. However, the realisation that the US is in many ways turning away may provide the necessary push needed to rethink what Europe’s role in the world should be. Investing seriously into security and defence is the obvious place to start, given its aggressive Russian neighbour. Tackling the problem of overregulation, gummed up capital markets and high energy costs is the next step to take in order for the European economy not to be squeezed in the vices between the US and China.