[Reuters Breakingviews] Europe will struggle to slip US economic chokehold

LONDON, March 5 (Reuters Breakingviews) - Over the past two decades, the United States has become highly skilled at waging economic warfare. Far from the front line of military battles, low-profile officials have used U.S. financial and technological dominance as potent foreign-policy weapons. Now that Donald Trump has returned to the White House, European leaders worry the president will turn his fire on erstwhile allies. If he does, there’s little the continent can do other than threaten to escalate.

The United States has weaponised so-called chokepoints in the global economy. It rolled out financial sanctions after the September 11 attacks in 2001, using the U.S. dollar’s dominance of international payments to cut off adversaries like Iran and North Korea. It later deployed the same weapons against Russia and punished Chinese companies like Huawei for circumventing Iran sanctions. More recently, it has used export controls to try to stop China from getting advanced semiconductors.

European countries have often supported and at times participated in these campaigns. After Russian President Vladimir Putin’s 2022 Ukraine invasion, the European Union, United Kingdom and others joined the United States in launching a barrage of sanctions and export restrictions, including the unprecedented freezing of $300 billion of Russian central-bank currency reserves. The following year, leaders of the Group of Seven wealthy nations declared a common approach to “economic resilience and economic security”.

That harmony is now a distant memory. In the weeks since returning to power, Trump has promised a 25% tariff on U.S. imports from the bloc, saying it was “formed to screw the United States”. His administration has cast doubt on U.S. support for NATO and on Monday paused U.S. military aid to Ukraine.

It’s not the first time the EU has faced the possibility of financial conflict with the world’s largest economy. During Trump’s first term, the United States withdrew from its nuclear deal with Iran and reimposed sanctions, putting European companies that had returned to the country in a bind. The White House threatened them with penalties, forcing the EU to cobble together a response. U.S. regulators have also extracted large fines from European lenders like HSBC and BNP Paribas after threatening their U.S. banking licences. This has turned international lenders into enforcers of Washington’s sanctions. Export controls are another risk. In January, the outgoing Biden administration restricted sales of sophisticated artificial intelligence chips to all but 18 countries.

From Europe’s perspective, these tensions represent the dark side of the interconnected global economy that emerged after the Cold War. While free trade and financial flows promoted growth and innovation, they also created the basis for conflict. Edward Fishman, a former U.S. diplomat and adjunct professor at Columbia University, says policymakers face an “impossible trinity” of economic interdependence, economic security, and geopolitical competition. “Any two of these can exist but not all three,” he writes in “Chokepoints: American Power in the Age of Economic Warfare”.

This creates an acute dilemma for European leaders. They have responded by pledging to become more self-sufficient in defence. But the EU remains susceptible to U.S. pressure in other areas – particularly energy, technology, and finance.

Europe’s reliance on U.S. energy is relatively new but growing quickly. After the bloc turned away from Russian gas in 2022, the United States stepped up. In 2023, almost a fifth of the bloc’s gas imports came across the Atlantic, up from just 6% two years earlier, according to the European Commission. Indeed, Trump has talked up the prospect of shipping more U.S. liquefied natural gas to Europe, increasing the continent’s dependence on U.S. hydrocarbons.

In technology, European subservience is almost total. The EU’s share of global revenue in information and communication technology fell from 22% to 18% in the decade up to 2023, according to a report by former Italian Prime Minister Mario Draghi. Three U.S. tech giants – Amazon.com AMZN.O, Alphabet GOOGL.O and Microsoft MSFT.O – account for two-thirds of the European market for cloud computing. The continent has no credible home-grown alternative to Apple’s AAPL.O iPhone, or to the software that runs on smartphones. It is largely dependent on imported semiconductors. The vast sums the largest U.S. tech groups are pumping into artificial intelligence look set to extend their lead.

In finance, U.S. lenders like JPMorgan dominate the market for wholesale banking services, while fund management giants like BlackRock BLK.N oversee a big chunk of European investments. The continent sends a growing proportion of its savings to the United States, which accounts for more than two-thirds of global equity value. Access to the dollar system is near-existential for Banco Santander SAN.MC, Deutsche Bank DBKGn.DE and other local lenders.

What can Europe do? Achieving genuine self-sufficiency is a decades-long task, if it’s possible at all. Reducing dependence on imported energy, meanwhile, requires years of sustained investment in renewable power. Suggestions that the EU could build a “EuroStack” of home-grown technologies are vague and fanciful. And while Trump’s antics may weaken the U.S. dollar’s appeal as an international currency, it’s far from obvious that the euro, which currently accounts for about a fifth of foreign exchange reserves, would be the main beneficiary.

Europe can identify and exploit chokepoints of its own, however. After the showdown over Iran, for example, researchers at the European Council on Foreign Relations suggested that the EU require foreign banks to obtain licences which could be withdrawn if those lenders participated in sanctions against European borrowers. In 2023 the European Commission adopted an anti-coercion instrument, which in theory gives the bloc sweeping powers to impose tariffs, restrict trade in services and even intellectual property rights if it comes under attack.

Leaders in Brussels, Paris, London and Berlin can only hope that the prospect of full-blown economic warfare is too scary even for Trump to contemplate – akin to the doctrine of mutual assured destruction which kept nuclear rivals in check during the Cold War. However, the former real estate tycoon’s unpredictable approach makes for an uneasy equilibrium. “As soon as government or business leaders come to view an economic dependency as a vulnerability, they cannot unsee it,” Fishman writes. That is the dilemma Europe must now confront.

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Graphic: The euro remains a distant second to the US dollar in international finance

Graphic: EU gas imports from the US have soared as Russian supply has shrunk