er, though the EU is the largest trading bloc in the world, it cannot sustain a strong multilateral system on its own. The EU’s inability to replace the US as a global hegemon is partly for internal reasons (the state of the economy, a weak defence and security policy) and partly for external reasons (the world balance has changed with the increasing economic relevance of China and other emerging countries).
At the same time, all three leading global trade players have expanded the number of regional trade agreements. The world therefore is evolving from a multilateral system centred around the US into a more multipolar system resting on the three strong trading poles of China, the EU and the US, each with several bilateral and regional trading arrangements. This has been criticised as
already undermining existing multilateral frameworks¹³.
This raises two questions: whether the poles of the system are collectively interested in supporting at least the core of the existing multilateral system, and whether the EU and China are willing and able to jointly support the multilateral system as the US steps back from its central role.
While the EU and China each clearly has an interest in supporting the multilateral trading system, it is an open question whether they can act in a coordinated manner as the EU and the US have done in the past. This is not a trivial question because the European and Chinese economic systems are much more different from each other than the European and American economic systems.
Nevertheless, in certain areas, such as support for the WTO, EU-China collaboration should be relatively straightforward. The EU should also seek other partners for collaboration in support of the WTO.
THE EU NEEDS TO STEP UP INTERNALLY TO BECOME MORE CREDIBLE EX TERNALLY
For the EU to assume a bigger role in safeguarding multilateralism and in forming new, and deepening old, alliances, a number of reforms would be required. We see three main areas in which
reforms would increase the credibility of Europe’s claim to a bigger global role.
- First, addressing distributional concerns domestically is a prerequisite for entering new trade arrangements. Europe’s social model is a major factor in reducing inequality and is rightly thought
of as softening the impact of rapid change on citizens in an age of globalisation and technological change.
But many EU countries still need to reform their social systems to deliver inclusive growth and better social protection¹⁵. The EU’s role should primarily be to empower its members to achieve desired levels of redistribution by effectively combatting tax evasion and social fraud that relate to
the single market¹.
- Second, the governance of EU trade and investment policy has become cumbersome. The recent difficulties in signing CETA have increased partners’ doubts about the EU’s ability to deliver.
We consider it imperative that the EU institutions regain citizens’ trust so that they can negotiate trade agreements on citizens’ behalf. This requires more transparency in negotiations. It will
also be important to ensure greater EU legitimacy, including through a reformed European Parliament.
- Third, the EU as a large open economy cannot sustainably run large current account surpluses. The large surpluses, and in particular Germany’s surplus, are a result of imbalances in the euro area that need to be resolved irrespective of the global environment.
Strengthening domestic demand in Germany is pivotal. Structural reforms at the national level, for example by addressing the debt overhang and remaining banking problems in other countries, would further boost demand. Such actions in surplus and former deficit countries will help speed up the normalisation of European Central Bank policy and strengthen the euro, thereby also helping to address the large euroarea surplus.
WHAT BILATERAL ACTIONS SHOULD THE EU TAKE?
While future EU reforms can set new trends in motion in terms of the new global economic order, there remains the question of how to respond to a potentially antagonistic US administratio