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date: 19 November 2017

The Foreign Policy Implications of Financial Crises

Summary and Keywords

To what extent is the “Euro-crisis” a problem for the EU’s international standing and role? A conceptual framework has been developed based on the five distinct analytical categories: (a) financial resources, (b) changes in the internal political structure and balance of the European Union, (c) shift of priorities, (d) output and effectiveness of EU foreign policy, and (d) soft power and normative dimension. These categories reveal that in Europe, the crisis led to an erosion of the financial and budgetary basis of foreign policy—even if it is more pronounced on the national than the European level. It also accelerated a trend toward the economization of political priorities resulting—among other things—in deepening conflicts among EU member states. These developments have, in turn, eroded both the effectiveness and the soft power of EU foreign policy. The crisis is therefore not only a strain on the European integration process but also a central challenge for the European Union as an international actor.

Keywords: financial crisis, foreign policy, European Union, member states, political priorities, soft power, development cooperation, international financial governance, Common Foreign and Security Policy (CFSP)

Introduction

With the Lisbon Treaty finally entering into force on December 1, 2009, the foreign policy of the European Union seemed to enter a new—prolific as well as effective—phase of existence. The treaty altered the EU’s foreign-policy set up. Among its key innovations were the establishment of the function of the High Representative of the Union for Foreign Affairs and Security Policy which, at the same time, was designated as the Vice President of the European Commission (HR/VP) to align the various foreign-policy tools the European Union and its member states have at their disposal and the upgrading of the EU’s security and defense policy, which became the Common Foreign and Security Policy (CSDP).

Unfortunately, however, the Lisbon Treaty’s provisions for foreign policy coincided with the financial and debt crisis, which hit Europe and the Eurozone hard in 2010. What implications did the financial crises have for the foreign policy of the European Union?

Different Assessments

When the financial and debt crisis in the Eurozone become acute in 2010, political and academic attention primarily focused on its consequences for the single currency area and for the internal European integration process. Only belatedly have attempts been made to assess what the crisis means for the European Union as an international actor.1

A prominent strand in this latter debate was the “geoeconomics” perspective. It holds that, under the impression of the crisis, foreign policy has increasingly become an instrument of economic power politics.2 Moreover, economic policies have once more turned from more positive interdependence—where cooperation is mutually beneficial—to an area of conflict and competition for market access, financial investments, and natural resources. The geoeconomics perspective holds that, under the impression of the crisis, foreign policy has increasingly become an instrument of economic power politics.3 The assessment that the European Union and its member states more and more transform into geoeconomic actors relates to the work of Edward N. Luttwak. In the early 1990s, Luttwak stated that in the wake of the end of the Cold War, when the relevance of military power was (presumably) declining, economic factors became ever more relevant in foreign policy.4 Today, there is a revival of this concept: It has been proposed stated that economic policies have once more turned from more positive interdependence—where cooperation is mutually beneficial—to an area of conflict and competition for market access, financial investments and natural resources. In the words of Ana Echague: “Facing stagnating economies, European member states have become much more aggressive on chasing export and investment deals.”5 Such a realpolitik perspective suggests “a highly pragmatic foreign policy geared toward opening and sustaining market access.”6 Despite these claims, however, no consensus has yet emerged regarding the extent to which the crisis poses a problem for the EU’s international standing and role. In May 2012, Herman van Rompuy, then President of the European Council, for example explicitly refuted the view of those experts who had claimed that the EU’s foreign and security policy would fall victim to the crisis.7 Some academic analysts supported his opinion,8 but others, such as EU Commissioner Olli Rehn (who was responsible for the common currency), claimed the contrary. In Rehn’s opinion, Europe would lose geopolitical and economic influence as a consequence of the crisis.

Among those who think that the crisis has some effect on EU foreign policy, no consensus has emerged on its degree. While it is widely acknowledged that the shorter-term effects of the crisis combine with long-term and structural developments, the relative importance of short-term and long-standing factors is disputed. Simon Duke holds that the crisis has distracted attention from the debate “about the Union’s attempts to build a more coherent, effective and visible role for itself on the international stage in the face of a rapidly changing global order”9; yet he emphasizes that EU foreign policy is mainly determined by structural and long-term developments that are not directly related to the crisis. Longer-term factors include, for instance, the fragmentation of the EU’s foreign policy machine in Brussels.

There are at least four reasons why the assessments on the impact of the crisis on EU foreign policy vary to such a large extent. First, the foreign policy of the European Union covers a broad range of different fields that are most likely affected by the crisis to different degrees. Thus, according to the empirical focus of their research, analysts come to very different results with regard to the impact of the crisis. Second, researchers use different benchmarks and criteria to assess the impact of the financial and debt crisis on EU foreign policy. Third, a uniform perspective on the nature of “the crisis” does not exist. While some analysts refer to the current state of affairs as a financial crisis, others conceive of it as a sovereign debt crisis; a third group characterizes the present situation as an economic or a banking crisis, claiming that neither the European Union nor the Eurozone as a whole is facing a serious debt problem at all.10 Obviously, the “nature of the crisis” very much depends on the specific countries the observer is looking at. And last but not least, much of the work focusing on the impact of the financial and debt crisis on the EU’s foreign policy lacks a comparative analytical perspective. In most cases, the work is done from a global perspective, treating EU foreign policy “as such,” or the focus has been on individual policy fields, most notably on security and defense policy as well as on development cooperation.

A systematic and comprehensive research at the German Institute for International and Security Affairs/SWP, on which this article is based, closed this analytical gap. The project covers the full spectrum of EU external policies. It examines developments in nine policy fields: enlargement, European neighborhood, development cooperation, relations of the European Union with the “rising powers,” external economic policies, climate change policies, international financial governance, Common Foreign and Security Policy (CFSP) and European defense cooperation. Across these fields, a common analytic framework was applied.

The Conceptual Framework

Any conceptual framework applied to assessing the impact of the financial and debt crisis on the facets of EU foreign policy should be based on five distinct analytical categories:

  1. 1. Financial resources. This category relates to the question to what extent the financial and debt crisis has affected the budgetary basis of EU foreign policy—both on the European and the national levels.

  2. 2. Changes in the internal political structure and balance of the European Union. Has the crisis led to a shift of competences and power among EU institutions as well as between EU institutions and member states? Have specific EU or national actors been weakened or even marginalized in the course of the crisis? And—if so—which impact did this have on the common EU policies? Finally, have constellations of interests and conflicts changed?

  3. 3. Shift of priorities. The term geoeconomics implies that economic questions have gained importance in comparison to political and security considerations, or have “conquered” noneconomic domains. Burden sharing, economic competitiveness and access to markets thus become central policy goals to the detriment of more traditional foreign policy objectives. Whether or not such a shift of political priorities has actually taken place is potentially crucial for EU foreign policy.

  4. 4. Output and effectiveness of EU foreign policy. This factor can be defined “as the Union’s ability to shape world affairs in accordance with the objectives it adopts on particular issues.”11 To what extent has the EU’s effectiveness in foreign affairs been affected by the financial and debt crisis?

  5. 5. Soft power and normative dimension. Soft power, according to Joseph S. Nye, is “the ability to get what you want through attraction rather than coercion or payments. It arises from the attractiveness of a country’s culture, political ideals, and policies.”12 It is exactly its attractiveness as a socioeconomic and political model that many observers have seen as a significant source of influence of the European Union on the world stage.13 Has the financial and debt crisis damaged the EU’s soft power and thus also its normative credibility in foreign affairs?

These five categories incorporate the direct (resources, priorities) and indirect effects (through the internal workings of the European Union) as well as the effectiveness of EU foreign policy. While applying this conceptual framework, a range of methodological challenges need to be addressed. First, there is the problem of the proper level of analysis. As each domain of EU external relations is ruled by different legal and political regimes, comparisons are not straightforward. For instance, in international trade policy the European Commission is the most important actor because trade policy is a highly integrated policy domain where the EU institution is negotiating on behalf of the member states. By contrast, in security and defense-related policies, virtually all competencies rest with the member states. The appropriate focus on the actors thus depends on the field under investigation. In any case, a clear distinction between the European Union and its composite member states must be made.

Second, it is virtually impossible to attribute causal power to the financial and debt crisis. While the relative importance of both factors is contested, it is quite clear that crisis-related problems combine with long-term structural, institutional, and political developments to explain EU foreign policy. To circumvent this problem, it seems necessary to systematically distinguish between developments before 2007–2008 and 2010 and thereafter.

Despite the aforementioned definitional caveats, it is important to distinguish the two central and interrelated currents of “the crisis,” namely the global financial crisis that began in 2007 with problems on the American housing market and the crisis in the Eurozone, where—starting in 2010—Greece and eventually other countries of the common currency area saw themselves unable to finance their public debts.

In some respects—such as in budgetary resources—this is a rather straightforward undertaking. In others, notably with regard to “soft power,” the judgement is much more subjective. Despite these limitations, the conceptual framework provides a thorough insight into the effects of the financial and debt crisis on EU foreign policy.

Financial Resources for EU Foreign Policy

Most of the literature on the financial crisis and the EU’s foreign politics states that the crisis has undermined the EU’s and Europe’s power in both material and ideational terms.14 A comparative research on the financial resources for EU foreign policy, however, comes to slightly more nuanced conclusions. While it is true that money and resources devoted to foreign politics are diminishing on the national level and more and more also on the EU echelon, this does not result in a complete absence of EU political and financial activities. Quite to the contrary, the European Union and its member states have been apt to react to political changes, e.g., in North Africa, especially through the reallocation of funds.

In the European Union and on national levels, financial resources available for foreign policy have declined since 2007–2008, most obviously in national defense spending. Based on different scenarios, EU member states will reduce their combined defense-related expenditures from EUR 220 billion in 2011 to—depending on the study—EUR 195 to 147 billion in the year 2020.15 In most states this implies significant cuts in personnel, operations, and acquisitions. However, budgetary reductions will not continue to be limited to security and defense policies. In fact, member states that have been hit hardest by the financial and debt crisis—Spain, Portugal, Greece, and Italy in particular—have quickly decided to trim down their development aid as well.16 Moreover, in 2013, Spain reduced the budget of its foreign ministry by two-thirds (EUR 3.64 million in 2009; EUR 1.34 million in 2013). As a money-saving measure, the country negotiated to integrate some of its foreign representations into the European External Action Service (EEAS). Spanish embassies in Yemen, Zimbabwe and Syria will be closed and substituted by the respective EU delegations.17

To date there is no evidence that these cuts on the national level will be compensated on the EU level. Quite to the contrary, during the negotiations for the European Union’s Multiannual Financial Framework (MFF) for the period from 2014 to 2020, member states rejected a considerable increase of the common EU budget. In February 2013, the Heads of State and Government did not support the initial proposal by the European Commission to augment the heading on the European Union as a Global Actor from EUR 56 billion (2007–2013) to EUR 70 billion from 2014 onward.18 Instead, the European Council decided that the European Union should have approximately EUR 59 billion at its disposal for foreign affairs.19

After long negotiations, the European Commission and the European Parliament reached a political agreement on the Council proposal. The agreement was approved by the Parliament in a resolution in July, and it was finally adopted by an absolute majority in November 2013. In sum, the EU common budget will only slightly increase while national budgets in some countries and areas are set to decrease significantly. In that sense, the common budget has proven more “crisis resilient.” This resiliency can be attributed to the fact that the common budget emanates from a multiannual planning cycle and usually covers a period of 7 years, while national budgetary cycles tend to be considerably shorter.

Despite the pressure for budgetary austerity, the European Union and its member states have been able—through the reallocation of funds—to increase available resources in some areas. This is true for the southern neighborhood, which has enjoyed a special status in EU external relations since the Arab uprisings began in early 2011. The financial endowment for the European Neighborhood Policy (ENP) was ramped up, and special programs such as Support to Partnership, Reform and Inclusive Growth (SPRING) were initiated. In the context of SPRING, the European Union mobilized approximately EUR 350 million for short-term support measures in Tunisia, Egypt, Jordan, and Morocco in 2011 and 2012.20 In addition, individual member states, such as Germany, devoted additional funds for this purpose.

The European Union was also willing to mobilize more money to help the states of the Western Balkans as well as developing countries to cope with the fallout from the global financial crisis. The latter has led to a significant draining of private capital from these countries. In May 2009, the European Commission alimented Serbia’s state budget with an additional EUR 100 million. Other Western Balkan countries benefitted from an extra EUR 150 million from the EU budget to support their economic development and mitigate the social consequences of the crisis.21 Moreover, the Commission created the so-called FLEX mechanism as another short-term instrument. It addresses the most vulnerable states in Africa, the Caribbean, and the Pacific.22

In sum, the financial and debt crisis has put pressure on both the European and on the level of member states. It did, however, not prevent the European Union (and some of its member states) from acting. To react to pressing political challenges—related to the uprisings in North Africa—and to coping with the direct impact of the crisis on vulnerable partners, money was made available for some European programs. This was possible due to the re-allocation of funds that have been made possible by the Lisbon Treaty.

Shifting Political Priorities

Geoeconomist claims are justified: The financial and debt crisis has triggered a shift in political priorities, most notably on the level of national governments. Economic considerations became ever more important in virtually all dimensions of European foreign policy. International climate diplomacy and enlargement policy are two important areas where this tendency has become most visible.

The protection of the world climate is one of the flagship projects where the European Union claims a special leadership position. This leadership role, however, came increasingly under fire. Reinforced by economic concerns, the discourse on climate policy within the European Union has changed. Today it is much less debated as a common EU project on the international stage. Instead, it is even more dominated by the discussion about its economic costs and potential disadvantages for the competitiveness of European companies and industry.

Already in 2008, Poland openly opposed the climate and energy package of the European Union because Warsaw feared negative consequences for its domestic coal industry. Its opposition could only be overcome after new arrangements on internal EU burden-sharing were agreed upon. However, since then, the internal EU climate policies have been more or less stuck. This is unfortunate because the EU’s credibility on international climate diplomacy depends on how ambitious it is with regard to its own commitments.23 The European Commission tabled the proposal to reduce CO2 emissions in the European Union by 30% until 2020 (the reference year being 1990). This proposal has not been included on the agenda of an EU summit meeting.24

Concerns about the economic costs have also gained importance in enlargement policy. Again, these concerns are not entirely new, but they have acquired new prominence since the beginning of the financial and debt crisis. Since the onset of the crisis, it is increasingly doubtful whether there could be more EU accessions during this decade after Croatia became the 28th member state in mid-2013.25 In national capitals (not least in Berlin), concerns are on the rise that the European Union would only face additional economic and financial burdens if it integrated new accession countries. This perception is reinforced by the fact that the crisis has aggravated the troubles in the candidate countries. For instance, western investments in the Western Balkans had, according to some experts’ estimations, been reduced by half.26

In this situation, the Commission was technically pursuing the enlargement process, but the political hurdles of accession have in fact increased. Skepticism toward enlargement was mirrored in public opinion surveys as well. By the end of 2012, on EU-average, 52% of those questions for Eurobarometer were against a further enlargement of the European Union.27

Economic considerations also played out in other areas of European foreign policy. When it came to relations between the European Union and “rising powers”—often summarized as “BRICS” countries (Brazil, Russia, India, China, and South Africa)—the exploitation of new markets and the attraction of direct investments have equally become even more central issues in the course of the financial and debt crisis. By contrast, “uncomfortable” topics, such as human and social rights, are happily delegated to the EU level by member-state governments.

In official development cooperation (ODA), the crisis has reinforced the pressure on budgets. Even if the cuts have not been as stark as in the defense area, decision makers have responded to these changes by a shift in their political priorities. To gain the most from the money spent on ODA, the visibility of their activities has become increasingly important to national actors. Sometimes this trend results in more symbolic activities, such as the introduction of a new emblem for development cooperation by the German government in 2012. But it may also have more substantial repercussions through increased focus on bilateralism in the area of development cooperation.28 If such a trend toward national priorities persists, it will make it even harder to harmonize EU-level and bilateral aid programs of member states. The crisis has also reinforced longer-term trends toward prioritizing development cooperation on fewer countries and sectors. This does not mean that there have been significant geographic or sectoral shifts in this cooperation. However, the European Commission and some member states recently announced their intention to focus development cooperation on fewer partners. For instance, the United Kingdom will reduce its partner countries from 49 to officially 27. Germany and France have also reduced or are planning to reduce the number of their cooperate partners.29 Donors want to use ODA where its impact on poverty reduction is clearest and where European and national security interests are most clearly affected, such as in failed and conflict states.

Moreover, “protectionist reflexes” have been reinforced over the course of the financial and debt crisis—leading to a shift in political priorities as well. In international trade and investment policies, EU member states have increasingly relied on measures that are not yet regulated by the World Trade Organization (WTO) and are still in their national competences. These measures include, for instance, bidding procedures for public procurement, access of foreign workers to the labor markets, or the establishment of foreign companies.30 Member states such as Italy, Spain, and France rendered their policies on these issues more restrictive since the beginning of the crisis. Policies of EU member states toward the southern neighborhood have as well become more protectionist. The EU member states in the south are essential for the effectiveness of the European Neighborhood Policy (ENP). The fact that Spain, Italy, Greece, and Portugal were hit hardest by financial and budgetary problems, and thus by social protests, led to declining support in these countries for open markets, financial support for the democratic transitions, and mobility. This impacted EU policies because “money, markets and mobility” are the three central pillars of the “new” ENP that was pronounced after the political upheavals in Northern Africa and other parts of the Arab world began.

Last, but not least, in security and defense policy, the financial and debt crisis led to a situation in which defense and armaments planning is more and more dominated by the question of which capabilities can be afforded in the short and medium terms. Here too, the impulse has been strong to safeguard national capabilities rather than to think in European dimensions. Political and strategic considerations addressing the security problems that member states face and the capabilities needed to cope with these problems have been increasingly marginalized in this environment.

In conclusion, across all policy fields analyzed, economic aspects and interests have become more pronounced in the wake of the financial and debt crisis.

Changes in the Internal Structure and Balance among EU Institutions

Most of the scholarly work on the link between the financial crisis and the foreign policy of the European Union bemoan the fact that the crisis has hindered the European Union to fully implement the institutional changes via the Lisbon Treaty, which entered into force on December 1, 2009, at a time when rating agencies, for the first time, downgraded the credit-worthiness of Greece. This assumption, however, has been falsified by our comprehensive research. In conclusion, the impact of the financial and debt crisis has affected the EU internal constellation of power and interests only to a relatively small degree. Much more significant is the fact that the crisis has contributed to rising tensions and conflicts among member states as these relate to different dimensions of EU foreign policy. This becomes obvious in international economic and financial governance but also in other foreign policy fields that are linked to economic aspects only to a lesser extent.

The G20 has developed into one of the most important forums for international economic governance. Unlike in the International Monetary Fund (IMF), the European Union has its own seat at the table of the G20. However, the controversies on the management of the Eurozone crisis have reproduced themselves on the international level and have rendered the formulation of common EU positions virtually impossible. Individual EU states were able to punctually assert their interests, but the dominance of national positions hindered the European Union to collectively make its voice heard in international financial governance.

Three examples illustrate this finding: (a) The German government saw (and still sees) the reduction of public spending deficits and structural reforms as the most important means to address the crisis, especially in the southern Eurozone countries. (b) By contrast, Italy, Spain, Greece and France, among others, stressed more forcefully stimulating measures to ease the downturn in their economies. (c) When it came to addressing macroeconomic imbalances, Germany opposed specific goals for trade balances, while France and other European partners exerted pressure on Berlin to reduce its trade surpluses. Paris and Berlin were, however, on the same side when it came to pushing for an international financial transaction tax on the G20’s agenda. This was vocally opposed by the British government.31

The eroding consensus within the European Union did not only prevent the European Union to speak with one voice in the G20. Moreover, it was further weakening the power of the European Union and its institutions on the international scene. Conflicts among EU member states also hampered the EU’s coherence in international climate policy negotiations. In November–December 2012, representatives of the European Commission had no agreed mandate for negotiations during the United Nations climate policy conference in Doha. In this area—as in others—it is of course true that differences among member states and EU institutions predated the beginning of the financial and debt crisis. The crisis, however, has reinforced these tensions. More so than in the past, ambitious climate policy goals are being assessed on the basis of the costs they may impose on EU member state economies.32

Shifts within the European Union were also discernible in the relationship of the European Union with emerging powers, notably China. During the crisis, the relationship between the European Union and China narrowed further at its economic core—to the detriment of more political aspects. On the one hand, the economic focus has strengthened the Commission vis-à-vis other EU organs. On the other hand, however, EU institutions have become weaker in relation to individual member states, not least Germany.33 Berlin has advanced to being the preferred interlocutor of Beijing.

Last, but not least, tensions among EU member states have also been rising in the Common European Security and Defense Policy (CSDP). In this policy area, the High Representative (HR) of the European Union for Foreign and Security Policy shall, together with the European Defense Agency (EDA), help reduce redundancies among the defense establishments of member states, harmonize defense planning, and promote defense cooperation among the member states. Already before the crisis, both institutions (HR and EDA) had only a limited impact on political coordination, military cooperation, and joint capability development. The financial and debt crisis, however, did not trigger more European cooperation. To the contrary, national capitals have mostly reacted to austerity pressures along exclusively national lines.

The EU framework does not play a meaningful role when it comes to jointly sustaining military capacities. Despite austerity some member states were striving to fill their military capability gaps, while others were falling further behind as a consequence of the financial and debt crisis. Thus, it became harder and harder to integrate their assets into the framework of common operations. Conflicts among member states over a fair burden sharing are thus now playing out more vigorously.

Output Effectiveness and Soft Power

The two analytical categories output effectiveness and soft power are obviously interrelated. Distinguishing both categories theoretically and empirically is not an easy task. Without producing overly artificial dichotomies, one can conceptualize output and effectiveness as the “hard” counterpart of soft power. In terms of international diplomatic bargaining, this category involves offering incentives (such as payments) and disincentives (such as sanctions or threats). Soft power, on the other side, has been defined by Joseph Nye as “the ability to get what you want through attraction rather than coercion or payments.”34 Its influence on third countries has never been derived from a standing army, the possession of nuclear weapons, or other military assets, but rather from its norms, values, and policies. Unsurprisingly, a number of authors claim that the soft power of the European Union has been affected—or at least challenged—by the crisis most, when Europeans could no longer credibly prove that their model was working.35

Although looking at the EU’s international performance from different theoretical angles, both concepts attribute to the European Union an important amount of bargaining as well as persuading power. Interestingly, from a theoretical perspective, both effectiveness of the EU’s foreign activities as well as the soft power of the European Union have been significantly thwarted by the financial and debt crisis in the areas of international climate politics as well as in the field of international financial governance. Contrary to these findings, with regard to enlargement (probably the most important tool of EU Foreign Policy), the European Union has lost much of its effectiveness. The EU’s soft power in the candidate countries of the Western Balkans, however, has remained untarnished by the crisis.

In international climate politics, the effectiveness of the European Union as a core actor has been diminished mostly due to the lack of institutional coherence. The crisis hit the member states’ economies to different degrees. As a consequence, the Council of the European Union found itself unable to agree on the climate target to reduce emissions by 30%.36 At the height of the financial and debt crisis, some member states of the South and East opposed to the Commission’s proposals.37 Thus, the European Union could not act as a strong and coherent actor in international climate change negotiations. Internal conflicts have negatively impinged upon the output of the EU’s external climate policies. This inconsistency also reached out to the EU’s normative influence. For many years, the European Union has been viewed as a “leader by example” in tackling climate change due to its ambitious policies and far-sighted climate change agenda; measures taken both at European and national level have been applauded—and perhaps envied—across the globe. The crisis has changed this picture considerably as financial effects on domestic industries and economies gained predominance in most counties. As a result, the advancement of national climate change agendas was stalled. This lacking commitment of national politicians has in turn weakened the performance of the EU’s climate diplomacy. When the European Union is no longer able to credibly present itself as a forerunner in fighting global warming, its recognition in international climate change negotiations sharply diminishes. The soft power of the European Union in the global climate change regime has therefore suffered as a result of the financial and debt crisis.

A similar observation can be made in international financial governance. Different opinions on how the world economy should withstand the crisis prevented the European Union from speaking with one voice within the G20.38 After the crash of the global economy, the member states of the European Union overcame the bottom of the recession at different speeds. While Germany re-emerged with a real growth of 4% in 2010, France and the United Kingdom lagged behind with 1.7% and 1.8%, respectively.39 As those divergences grew even bigger in 2012, the sovereign debt crisis among southern member states intensified. Overall, the debt level of the European Union rose from 64% to 87% in 2012—with vast differences among the single member states.40 These differences were mirrored by the countries’ behavior in international fora: While Germany, spurred by its positive postcrisis growth rates, preached austerity and structural reforms, the United Kingdom and France, alongside many of the southern and eastern member states, called for stimulating fiscal policies. As a result, the European Union could not stage itself with a coherent position within the G20 and other international institutions, and promote a “European model” for overcoming the crisis. The effectiveness of the European Union in the form of representation in the international financial governance, therefore, has been severely undermined by the effects of the crisis.

At the same time, the EU’s soft power in international financial organizations, such as the International Monetary Fund, almost disappeared in the early hours of the EU’s financial and debt crisis. IMF-assistance loans to Ireland, Greece, Romania, and Hungary turned the European Union into an object of international financial governance.41 The European Union was no longer able to act like a sovereign subject. Certainly, the attractiveness of the Western economic model—of which Europe is clearly perceived to be part of—was fundamentally depleted as a result. Former Brazilian President Lula da Silva illustrated this point, stating that the crisis is the result of an “irrational behavior of white people with blue eyes who before the crisis appeared to know everything but are now showing that they know nothing.”42

As a counterpoint to the negative findings of the study on output and effectiveness of EU foreign policy, the bilateral relations of the European Union and the People’s Republic of China have been strengthened over the course of the financial and debt crisis.43 The EU-China dialogue serves as a framework for more than 60 mixed “sectoral working groups” that debate several aspects of economic, technological, and cultural cooperation. In 2012, the existing formats were complemented by a high-level meeting on energy as well as a dialogue on opportunities for cooperation on space technology and a high-level people-to-people dialogue (HPPD).44 Even though the relationship was incrementally focused on economic matters since the emergence of the financial and debt crisis, the relations have overall deepened and intensified. Despite the ongoing financial and economic upheavals, the European Union has pursued its objective to building strong partnerships with the emerging economies of the Global South.45

The picture looks again less optimistic regarding the enlargement policies of the European Union. Considering candidate countries, the prospect of accession has always been the most effective catalyst in inducing political and economic reforms and, therefore, a manifestation of the EU’s soft power. The impact of the financial and debt crisis on enlargement has essentially been twofold: First, by dealing with internal economic straits, the EU leaders’ commitment to a further widening of the European Union has weakened compared to the enthusiasm in the run-up to the eastern enlargement. Undoubtedly, this perceived alienation has been met with disappointment by the candidate countries.

Second, the effects of the crisis have not been limited to members of the Eurozone. The economies of the Western Balkan states are, to a large degree, dependent on EU members. Exports from and imports to the European Union account for approximately two thirds of the region’s total trade. As a result, of the turbulences within the Eurozone, shrinking financial resources have limited the candidate countries’ ability to implement domestic reforms required for the entry into the European Union. This vicious circle made the prospect of EU accession recede into the distance. In consequence, the ability of the European Union to influence political reform processes in the Western Balkans—as an element of its soft power—has significantly dwindled.

Beyond the Analytical Framework—Internal and External Dynamics Unleashed by the Financial Crisis

The financial and depth crisis did, however, have implications beyond the EU’s foreign policy. It unleased a couple of external and internal dynamics leading to one of the biggest crises the European Union has ever been confronted with.

Externally, a financially weakened European Union was not helped by its closest ally in foreign and security politics, the United States. Quite to the contrary. When the Arab uprising erupted in 2010–2011, the European Union was neither able to financially support the nonviolent demonstrations, protests, and reform movements, nor to end the civil wars erupting only a few months later in Libya or Syria. The United States, much to the despair of some major EU member states, did not help the European Union offer a common vision for the development of the countries and the region in turmoil, but it made it clear that it was at best to “lead from behind,” leaving the burden of crisis management in and democratization of the region with the European Union.

The U.S. position only changed when Russia militarily intervened in Ukrainian territory in 2014, annexing Crimea after a disputed referendum in which Crimeans voted to join the Russian Federation. It can, of course, only be speculated, whether a financially and, consequently, politically weak European Union incited the Russian leadership to violate the post–Cold War European security architecture. The U.S. investment in the North Atlantic Treaty Organization’s (NATO’s) forward presence at its eastern border and the transatlantic agreement on a continuously reapplied sanctions regime against the Russian Federation led to a ceasefire and a freezing of the conflict. With the chance of leadership by the United States, the American engagement in NATO was perceived as unbalanced: The U.S. security guarantees for the European continent seems to depend on the European members of the Alliance paying a fair share.

With the “ring of friends,” the European Union wanted to build around its territory, turning into “a ring of fire” internal commitment to integration and solidarity declined. The European Union and its member states have not been able to reach an agreement on the internal resettlement of refugees. The EU’s incapacity to react to foreign and security policy crisis and to protect its citizens, which felt increasingly insecure the more member states where hit by terrorist attacks, made the populist movement gain power in many countries. While the British population decided for its country to leave the European Union, opponents to EU integration got elected in other member states. This trend, however, seems to be dwindling. A decade after the beginning of the financial and debt that the European Union, its member states seem to have rediscovered the added value of common action, on the international stage as well as in internal reform processes. Thus, the era in which Europe was hit hard by the financial crisis and was forced to withdrawal from the international arena has come to an end.

Conclusions and Outlook

The financial and debt crisis in the Eurozone has had a negative impact on different dimensions of EU foreign policy. The crisis led to an erosion of the financial and budgetary basis of foreign policy—even if more pronounced on the national than the European level. It also accelerated a trend toward the economization of political priorities resulting—among other things—in deepening conflicts among EU member states. These developments have, in turn, eroded both the effectiveness and the soft power of EU foreign policy. The crisis is, therefore, not only a strain on the European integration process but also a central challenge for the European Union as an international actor.

Comparing the impact of the crisis across different policy fields, however, does not reveal a systematic pattern, for instance, that the crisis had a deeper impact in “intergovernmental” fields compared to more integrated policy areas. Yet, potentially relevant differences across fields are still detectable. While integrated policy fields like trade policy were not per se more (or less) affected by the crisis, the EU level in some respects was more crisis resistant than the national level, at least considering budgetary aspects. This is partly due to the multiannual character of the EU budgeting process. Moreover, common EU institutions such as the European External Action Service and the European Commission have been quite proactive in some areas (e.g., the development cooperation and climate change policy) to prevent or mitigate the financial erosion of the EU’s engagements.

All areas of the EU’s foreign policy have in common that the crisis was not the only—in some policy fields not even the major—reason for the declining effectiveness and soft power of the European Union as an international actor. Rather, the crisis-related effects have combined with structural and longer-term developments, a fact that Richard Youngs and others call “crisis-upon-decline.”46 Here too, differences across policy fields were detectable. In the EU’s neighborhood policy toward northern Africa, for instance, structural and long-term developments had much more weight than crisis-related challenges. In other words, the EU’s policies vis-à-vis the MENA region were hardly effective even before the financial and debt crisis.47

In external economic policies (trade and investment) longer-term developments within the international trade regime, with the WTO at its core, are also more important than crisis-related factors when it comes to explaining EU policies in this area. By contrast, the crisis has had a much more visible and direct impact in security and defense where declining military budgets clearly have negative repercussions for policy effectiveness and outcome.

The combination of more immediate or crisis-related and longer-term and/or structural challenges does not bode well for future EU foreign policy. There is the clear danger that “crisis-upon-decline” produces a “lock-in effect,” which could eventually lead to a persistent downward spiral of the EU’s foreign and security policies. In any case, “crisis-upon-decline” indicates that the problems and deficiencies will not simply disappear with the eventual end of the financial and debt crisis. While this may happen with regard to budgetary resources—for instance, the Organization for Economic Cooperation and Development already forecasts a slight increase in member states’ development budgets, but less tangible resources, such as credibility in foreign policy, cannot be restored easily.

When turning to the possibilities and limitations of reforms to strengthen the European Union’s foreign policy in the face of the financial and debt crisis, one central conclusion is that the political environment for the European Union as a foreign policy actor has significantly deteriorated since the beginning of the crisis. Divergences and conflicts among EU member states and institutions in Brussels have increased. In such an environment, large gains in the foreign and security policies of the European Union are unrealistic—especially if such initiatives are tied to changes in treaties. Consequently, “more Europe” continues not be the answer, especially in areas where national sovereignty and sentiments play important roles, not only in the Common Foreign, Security and Defense Policy (CFSP and CSDP) but also in external financial policy.

Another central conclusion flows from the observation that in some respects, the EU level has proven to be more resistant to the effects of the financial and debt crisis compared to that of its member states. On this basis, it is reasonable to argue that the strengthening of the common EU institutions, such as the European Commission, the EEAS, and the European Parliament, in the area of external relations would especially make sense where long-term time horizons, planning reliability, and credibility to partners are crucial. This is the case in development cooperation, climate policy, and the longer-term aspects of international financial reforms.

Obviously, these two central conclusions—the limits of “more Europe” and the rationale for strengthening common institutions and policies in some areas—contradict each other to some extent. Taken together, they point to the need for pragmatism and well-dosed reform initiatives. Some of these are already on the table. For instance, the High Representative of the European Union for Foreign and Security Policy and the EEAS could be strengthened when it comes to the negotiation and implementation of longer-term Association, Partnership, and Cooperation Agreements. Joint programming of development aid between the European Union and its member states should become more common, as has already been proposed by the European Commission. Finally, there is certainly room to improve cooperation between EU delegations and national EU embassies within the partner countries.

Even if relatively modest, such initiatives should be forcefully pursued by the High Representative, the Commission, and EU member states. Such actions are urgently needed to prevent the financial and debt crisis from triggering an unstoppable downward spiral of EU foreign policy. The deteriorating security situation in the EU’s immediate neighborhood, which has also led to internal friction and noncompliance with the rules of solidarity all by alienating the United States and Europe, underlines the importance of a vibrant EU foreign policy.

Acknowledgments

This article is based on the results of a collaborative research project of the German Institute for International and Security Affairs (SWP) in Berlin. The project, which systematically and comprehensively assessed the impact of the financial and debt crisis on the EU’s foreign policy, took place between January 2012 and April 2013. It involved 14 specialists of the respective areas of the EU’s foreign policy and was led by Ronja Kempin and Marco Overhaus. The empirical findings in the specific policy fields of EU external relations are based on the research and sources of the individual authors: Dusan Reljic, Muriel Asseburg, Barbara Lippert, Anna Lauenroth, Isabelle Tannous, Hanns W. Maull, Bettina Rudloff, Susanne Dröge, Ognian N. Hishow, Stormy-Annika Mildner, Nicolai von Ondarza and Christian Mölling. The full text of the study is available in German only: Ronja Kempin & Marco Overhaus eds., EU-Außenpolitik in Zeiten der Finanz- und Schuldenkrise (Stiftung Wissenschaft und Politik, April 2013). In the notes section, specific references are cited as author in SWP Research Paper S 9/2013.

Notes:

(1.) The following text is based on Ronja Kempin, Marco Overhaus (2014), “EU Foreign Policy in Times of the Financial and Debt Crisis,” European Foreign Affairs Review, 19(2), 179–194.

(2.) See Ana Martini & Richard Youngs (Eds.), (2011), Challenges for European Foreign Policy in 2012. What Kind of Geo-economic Europe? (Madrid: FRIDE); Hans Kundnani (2011), “Germany as a Geo-economic Power,” Washington Quarterly, 34, 31–45; and Ana Echague (2012), European Commercial Diplomacy: the Hunt for Growth (Madrid: FRIDE).

(3.) See Ana Martini & Richard Youngs (Eds.), (2011), Challenges for European foreign policy in 2012. What kind of geo-economic Europe? (Madrid: FRIDE); and Hans Kundnani (2011), “Germany as a Geo-economic Power,” Washington Quarterly, 34(3), Summer, 31–45.

(4.) Edward N. Luttwack (1990), “From geopolitics to geo-economics: Logic of conflict, grammar of commerce,” National Interest, 20, 17–23.

(5.) Ana Echague, European commercial diplomacy: The hunt for growth, Policy Brief No. 138, October 2012 (Madrid: FRIDE).

(8.) See for instance Kyle Victor, The Euro-crisis and the future of the EU foreign policy (London: Metropolitan University, November 2012).

(10.) Holger Schmieding (2012), Tough love: The true nature of the Euro crisis (Hamburg, Germany: Berenberg Bank, August).

(11.) Daniel C. Thomas (2012), “Still punching below its weight? Coherence and effectiveness in European Union foreign policy,” Journal of Common Market Studies, 50, 457–474.

(12.) Joseph S. Nye (2004), Soft Power. The means to success in world politics (New York: Public Affairs Books).

(13.) Ian Manners (2012), “Normative power Europe: A contradiction in terms?” Journal of Common Market Studies, 40, 235–258.

(14.) Jan Zielonka (2013), European foreign policy and the Euro-crisis, EUI Working Papers, RSCAS 23, 1.

(15.) Christian Mölling (2013), Europäische Verteidigung in der Krise (SWP Research Paper S 9/2013, supra n. 1), pp. 88–94; and Joachim Hofbauer, Priscilla Hermann, & Sneha Raghavan (2012), European Defense Trends 2012: Budgets, Regulatory Frameworks, and the Industrial Base (Washington, DC: Center for Strategic and International Studies, December).

(16.) Isabelle Tannous & Anne Lauenroth (2013), Unter Rechtfertigungsdruck: Europas Schuldenkrise zwingt die Entwicklungspolitik zur strategischen Anpassung (SWP Research Paper S 9/2013, supra n. 1, pp. 30–39). Both authors base their assessment on data provided by the European Commission and the Organization for Cooperation and Development (OECD): European Commission, Preliminary Data on Official Development Assistance 2012, MEMO/13/299 and OECD, Aid to Poor Countries Slips Further as Governments Tighten Budgets.

(17.) Ester Barbé & Laia Mestres (2013), Spanien, in W. Weidenfeld & W. Wessels (Eds.), Jahrbuch der europäischen Integration 2012 (pp. 485–492) (Baden-Baden: Nomos).

(18.) For the Commission proposal see European Commission (2012), Amended proposal for a council regulation laying down the multiannual financial framework for the years 2014–2020, 388 (Brussels: European Commission).

(19.) European Council (2013), Conclusions, multiannual financial framework (Brussels: European Commission).

(20.) Muriel Asseburg & Barbara Lippert (2013), Die EU und die südliche Nachbarschaft: Weder Aufbruch noch Rückschritt (SWP Research Paper S 9/2013, supra n. 1, pp. 20–29). See European Commission, Commission implementing decision of 26/09/11.

(21.) Dušan Reljić (2013), EU-Erweiterungspolitik im Westbalkan: Missliche Zeiten für schwierige Kandidaten (SWP Research Paper S 9/2013, supra n. 1, pp. 11–19). See also http://europa.eu/rapid/press-release_IP-09-1213_en.htm

(22.) Dirk Willem te Velde, Stephany Griffith-Jones, Christian Kingombe, Jane Kennan, & Judith Tyson (2011), Study on shock absorbing schemes in ACP countries: FLEX study (London: Overseas Development Institute).

(23.) Simon Schunz (2011), Beyond leadership by example: Towards a flexible European Union foreign climate policy (SWP Working Paper FG08, 1/2011).

(24.) Susanne Dröge (2013), Europäische Finanz- und Schuldenkrise: Negative Folgen für die europäische Klimapolitik (SWP Research Paper S, 9/2013, supra n. 1, pp. 59–68).

(25.) Dusan Relijc, Andrea Despot, & Günter Seufert (2012), Ten years of solitude. Turkey and the Western Balkans require practical integration measures to bridge the hiatus in the European Union enlargement process (Berlin: SWP, May).

(26.) Valerija Botrić (2010), “Foreign direct investment in the Western Balkans privatization, institutional change, and banking sector dominance,” Economic Annals, 55(187), 7–30.

(27.) Standard Eurobarometer 78, 71 (autumn 2012).

(28.) Lauenroth & Tannous, supra n. 16.

(29.) Lauenroth & Tannous, supra n. 16.

(30.) Bettina Rudloff (2013), Außenwirtschaftliche Strategien der Europäischen Union in der Krise (SWP Research Paper S 9/2013, supra n. 1, pp. 50–58).

(31.) Ognian Hishow & Stormy-Annika Mildner (2013), Zaungast mit Ambitionen: Die EU in der G20 und der globalen Finanzpolitik (SWP Research Paper S 9/2013, supra n. 1, pp. 69–78).

(32.) Dröge, supra n. 25.

(33.) Hanns W. Maull (2013), Die Europäische Union und die aufsteigenden Schwellenländer: Das Beispiel Volksrepublik China (SWP Research Paper S 9/2013, supra n. 1, pp. 40–49).

(34.) Nye, supra n. 12.

(35.) Sven Biscop (2011), Foreign policy and the Euro: We have an idea, Egmont Security Policy Brief 30 (Brussels: Edmont Institute); Simon Duke (2012), The Euro crisis, the other crisis and the need for global thinking, EIPASCOPE 2/2012, 5–12 (Maastricht: European Institute for Public Administration); and Daniel Möckli (2012), “The strategic weakening of debt-ridden Europe,” Strategic Trends (pp. 55–57) (Zurich: Center for Security Studies).

(36.) Dröge, supra n. 25.

(38.) Hishow & Mildner, supra n. 32.

(42.) Lula da Silva, cited after Maull, supra n. 34, at 46.

(43.) For the information in this paragraph, see Hanns W. Maull, supra n. 34.

(44.) European Commission, DG Energy, Energy from abroad: China; and European Commission, DG Education & Training, http://ec.europa.eu/education/policy/international-cooperation/china_en.

(45.) Former High Representative Catherine Ashton named the EU’s strategic partnerships as one of the three priorities of EU foreign action in 2010; and Catherine Ashton, The EU and the World, speech at Megaron, Athens, Greece, July 8, 2010.

(46.) Richard Youngs (2013), “Reviving Global Europe,” International Politics, 50, 475–495, at 476.

(47.) This is at least true if the promotion of political reforms and democratization is taken as the major assessment criteria. See Rosemary Hollis (2012), “No Friend of Democratization: Europe’s Role in the Genesis of the ‘Arab Spring’,” International Affairs, 88, 81–94.