Toespraak minister Kaag Transatlantic Forum on Geo Economics

Toespraak van minister Kaag (Financiën) tijdens het Transatlantic Forum on Geo Economics bij de Atlantic Council in Berlijn op vrijdag 22 september 2023.

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Hello everyone,

‘The war of ideas is a Greek invention’, Karl Popper wrote in Conjectures and Refutations. ‘It is one of the most important inventions ever made. Indeed, the possibility of fighting with words and ideas instead of fighting with swords is the very basis of our civilization.’ End of quote.

I am sure we all agree with Popper that anything is better than reaching for the sword and reverting to the barbarism of warfare. For this reason alone, it is good that there are alternatives – be they words or ideas, as Popper argues, or the tools of modern-day economics.

Geo-economics – the use of economic means to achieve political ends – has gained traction in recent years. Figures show that international conflicts are increasingly being fought out on economic terrain: between 2014 and 2022, the amount of trade restrictions increased fivefold.

Seen in this context, the war in Ukraine is as exceptional as it is horrific. And, lest we forget, there are also significant geo-economic components to this “hot conflict”.

Before sharing my views on how to face up to this development, allow me to briefly outline the causes.

  • In the field of technology in particular, it is increasingly difficult to see where economics ends and security begins: the latest developments in AI are of huge importance both economically and militarily.
  • In addition, it is essential to recognise that, in relative terms, the importance of the West is declining. In 2005, the GDP of the G7 was still six times that of BRICS; now it is one and a half times. The implications of this downward trend are still unclear. Are we moving towards a bi-polar world? A tri-polar world? Or should we be gearing up for a ‘world order à la carte’?
  • We have also had to reconsider our assumption that economic cooperation can always be relied upon to drive political cooperation. The end of the end of history, as some people have put it... Connectedness also creates areas of dependence that can all too easily be weaponised. For the EU in particular, this has proved to be a disruptive insight. After all, the union is founded on the idea that economic cooperation fosters political cooperation, and as such, it has traditionally focused on an open economy that relies on international rules and mutual dependencies.
  • This remains an important principle but it is also good to face that it does not always work the way it was intended.
  • Last but not least, we are also seeing a backlash against globalisation in the public debate. Growing inequality, and the greater coverage being given to it, are a factor here. However, it is also worth remembering that globalisation can be an easy target for populists who offer no real solution to current problems.
  • Partly due to these structural causes, there seems to have been a negative spiral in recent years: trade restrictions, protectionist policies and assertive diplomacy appear to have generated a tit-for-tat dynamic between actors that has led to a hardening of international relations.

In the US, economics is increasingly being seen as a central battleground in geopolitical competition. We are also seeing a similar shift within the EU. The latest edition of Foreign Affairs even refers to the ‘geo-economic awakening of the EU’.

This brings me to the matter of how we should be dealing with these developments. What is the role of the Netherlands, the EU, and the transatlantic alliance in this changing world order? How can we sustainably ensure our security, prosperity, environment and way of life, now and in the future, on an increasingly complex international playing field where ‘Western’ power is waning?

Before we get to these questions we must first take a good look at ourselves. First of all we should improve our own political-economic foundation, as this determines our geo-economic position to a large extent.

We need to make our economies more competitive, innovative and resilient. On top of that we need effective solutions to our internal policy questions. In that light I hope we can find a quick compromise on the Economic Governance Review. And finally we should deepen the Capital Markets Union: EU capital markets are under-developed and fragmented, hampering early stage investment in innovation for sustainable growth.

Back to the geo economic developments we’re facing. Let me state my position up front: As I see it, a mix of defensive and open policy is needed to meet these challenges.

It's a bit like how our country deals with water. As you know, part of the Netherlands is below sea level. The water is too powerful to hold it back just with dikes, so we also give the water space. We move with the water. We let it flow through the meadows and store it underground. But if the space is not enough and we can no longer store the water in the floodplains, we have the levees - as an ultimum remedium - to stop the water as a last resort.

I will start by looking at the defensive measures.

One thing we must not be is naive. An accusation that perhaps could have been levelled at the EU at the beginning of the century. When other actors seek to use economic resources for political purposes, they can undermine, not only our interests, but also the economic level playing field as a whole. And this can have major consequences for our prosperity and security.

This is why defensive measures are important, also for the EU. These may take the form of instruments designed to counter economic coercion, or to defend the level playing field.

Examples of how the EU has already adapted to the changing world order include the FDI screening mechanism and the anti-coercion instrument.

But defensive measures also have their drawbacks, not least: negative economic consequences. A study commissioned by the IMF has found that far-reaching geo-economic fragmentation could lead to a worldwide drop in prosperity of up to 7% of global GDP in the worst case scenario, with poorer countries being particularly badly hit. That is the equivalent of at least Germany and Japan disappearing from the global economy.

Decoupling is therefore not an option for us. It is good to see that the concept of de-risking is getting more and more attention.

And the damage goes beyond the economic arena: a fragmenting geo-economic world order impedes our ability to address global issues such as climate change. Fragmentation tends to be less efficient than cooperation. Thus, fragmentation is likely to come at the expense of issues such as poverty reduction, education and climate change mitigation.

And this is taking place at a time when our troubles – in this era of polycrisis – have increased significantly.

In other words, the adverse effects of defensive measures are major, and have perhaps been a little underexposed in recent times. As a result, dependencies have gained a bad reputation – perhaps unfairly so. Because where there are dependencies, there is trade, with all the benefits that trade entails.

As international relations become grimmer, a defensive reflex is the logical response. I understand that. But this same defensive reflex can trigger a self-reinforcing mechanism: a process in which the world order becomes ever grimmer.

It is therefore vital that – in addition to the necessary defensive measures – we make a concerted effort to shift our focus towards building cooperation. In the Netherlands, we see this as emphasising the ‘open’ in the term ‘open strategic autonomy’: international economic and political cooperation that contributes to our security and prosperity, supports climate transition and prevents further fragmentation.

In an ideal world, extended cooperation of this kind is governed by multilateral rules and takes place in a spirit of cooperation. The WTO has a key role to fulfil in this regard. Reinstating the WTO’s dispute settlement mechanism is therefore crucial.

That said, multilateral cooperation is not always equally effective in times when the world order is changing. No surprise then, that we are seeing a trend towards plurilateral cooperation between various parts of the world. This is a second best choice. And in times of geo-economic fragmentation, it is sometimes the only route left open to us. When multilateral cooperation becomes mired in difficulty, other forms of cooperation may be needed.

The EU is making a concerted effort in this area: the work taking place in the Technology and Trade Council, and the 2019 trade and investment agreement with Japan are two examples of this approach. Meanwhile, negotiations are also ongoing with other countries, including Chile and Australia. EU expansion is also an example of further engagement in international partnerships.

The benefits of these kind of partnerships are multiple.

  • Diversification allows external shocks to be absorbed more effectively. For example, through diversification you are able to spread the risks of climate change.
  • In many cases, diversification is also a preferred way to reduce high-risk strategic dependencies, compared to industrial policies such as onshoring. Just look at the crucial role played by international actors, including the US, in supplying gas to the EU.

Dear friends,

The benefits of open geo-economic measures and building broader cooperation are obvious. But there is no denying that the world has changed.

This means that cooperation cannot focus simply on the usual suspects, our closest allies.

I would therefore urge you to look at cooperative ventures – in both the public and private sectors – with third countries that have an outward-looking stance and have a shared interest in a rules-based trading order. Countries that can offer mutual gains in prosperity and for which we, as the EU, can serve as a reliable partner. In saying this, I look to the Global South with particular attention.

This too represents a geo-economic policy, but one that is open as opposed to defensive and which offers far more advantages than disadvantages.

Thank you.