Europe has more bargaining strength than it thinks

But less than it would have if it were thinking straight

My quick read on the incredible events of the last 24 hours is as follows. We don’t know what went into the apparent (and still ambiguous) pullback on the threat of invading Greenland. One plausible story is that the Trump administration did not realize that the Europeans were willing to come together and push back, and had to revise their expectations rapidly over the last couple of days.

I present: Bessent and Lutnick: a Farce in Four Acts.

Act One: Europe Can’t Do Nothing to Stop Us!.

“Scott Bessent suggested the 27-strong group of nations’ slow decision-making would hamper its ability to put together a potent reaction or quickly wield the so-called anti-coercion instrument, its strongest trade measure. “I imagine they will form the dreaded European working group first, which seems to be their most forceful weapon,” Bessent told a small group of reporters in Davos, Switzerland, where he is attending the World Economic Forum.”

Act Two: Actually, Europe, We Don’t Want You to Escalate!

“What I’m urging everyone here to do is sit back, take a deep breath, and let things play out. As I said on April 2, the worst thing countries can do is escalate against the United States.” But he specified that “what President Trump is threatening on Greenland is very different than the other trade deals.” “So I would urge all countries to stick with their trade deals we have agreed on them,” Bessent added.

and

“Everyone, take a deep breath. Do not escalate, do not escalate. And President Trump has a strategy here.”

Act Three: Europe is Escalating But It Will All Work Out for America

Howard Lutnick, the US Commerce Secretary, projected calm, saying during a panel discussion that, “If we’re going to have a kerfuffle, so be it. But we know where it’s going to end. It’s going to end in a reasonable manner.”

Act Four: Exit, Stage Right, Pursued by Bears.

US commerce secretary Howard Lutnick was heckled at a World Economic Forum dinner in Davos, with European Central Bank president Christine Lagarde walking out during his speech. The gathering on Tuesday night descended into uproar after combative remarks from Lutnick, according to several people present, with widespread jeering amid appeals for calm from BlackRock’s Larry Fink, the host of the event and interim co-chair of the WEF. Lagarde was among the attendees who walked out during the speech, according to people familiar with the matter. This year’s gathering in the Alps has the theme: “A spirit of dialogue.”

But I also have a more structural read on Europe’s underlying strengths - and weaknesses - when escalation dynamics hit in the New York Times this morning. It focuses on the other side of Trump’s threats - economic coercion.

The fundamental message is that Europe needs to start thinking about political economy in a different way, drawing not on theories of market integration, but crisis bargaining from the nuclear era, if it wants to be able to push back against Trump (and China). I argue that:

The only way to maintain European independence is to escalate back. To do this well, Europe needs to incorporate ideas into its economic thinking that seem alien to a continent that prefers soft power to hard security strategies — deterrence, credible threats and escalation dominance.

Repeated submission has gotten Europe into a mess. To get out, Europe needs to commit to not back down.

Credible commitments and tripwires are the strategic concepts of Thomas Schelling, the Nobel-winning economist and national security thinker who died in 2016. Mr. Schelling’s ideas shaped America’s nuclear strategy in the Cold War. He saw proxy wars and threats of missile strikes as the brutal language in which the Soviet Union and the United States bargained with each other, each seeking political advantage while avoiding mutual nuclear annihilation.

The argument emphasizes how the anti-coercion instrument (see also Paul Krugman this morning) could be used to build leverage. It’s also worth reading a number of other people, starting from similar premises* to reach a variety of different conclusions.

There are two points that I wasn’t quite able to shoehorn into a NYT article that has word limits and is aimed at people who have almost certainly never heard of the anti-coercion instrument and may reasonably still not be sure why they ought care.

First, I suggest that the instrument can be thought of as a highly imperfect commitment mechanism but don’t explain why in any detail. The reasons have to do with the complications of EU decision making. How the instrument works is as follows (greatly simplified).

(1) The European Commission proposes an investigation into some other country that is apparently coercing the US. It can do this on the basis of a suggestion from the EU’s member states, or on its own initiative, but the politics suggest that it is unlikely to succeed unless it has substantial member state backing.

(2) It proposes a set of measures, which the member states can then vote up or down. To succeed, the measures need to get a ‘qualified majority’ (a weighted majority by number and population) of member states to agree to go forward. Member states can also come together to modify the proposals if they really don’t like them.

(3) The Commission then implements the measures until the coercing state gives in, or agrees to binding arbitration, or other less likely/relevant things happen.

The point is, then, that the process has some binding power over the member states once it begins. Individual member states cannot stop the measures from going through - they have to create a sufficiently large blocking minority (a minimum of four member states with sufficient population). That also means that an aggressive coercive power (say: the United States or China) can’t stymie action by getting a single member state (say: Hungary, which is close to Trump and also has a massive amount of Chinese inward investment) to refuse consent. Other instruments, such as economic sanctions, do require unanimous consent to go forward and are accordingly more difficult to deploy.

That is why I suggest that the anti-coercion mechanism is plausibly the best option to increase EU credibility if it wants to promise broad-scale retaliation against threats like Trump’s tariffs. Equally, it would be much more credible if it had greater binding force.

One of the most fundamental and useful points that Schelling makes is that there is often a stark trade-off between flexibility and control on the one hand, and ability to make credible commitments on the other. Making a credible commitment or credible threat (from a game theoretic perspective, they are much the same thing) involves binding yourself to do something in the future that might be painful or unpleasant, because it allows you to change other actors’ expectations about you today. I sign a contract to deliver a good, which stipulates that horrible things will happen if I fail to deliver, because this enables my customer to trust me enough to pay in advance. I station troops in West Berlin (Schelling’s example, which I use in the NYT piece) because they will die if the Soviets pour in, and this will oblige me to escalate and retaliate, perhaps to the point of precipitating war. The Soviets consider my credible threat, and decline to invade.

The implication, then, is that the European Union might be much more credible with the Bessents of the world if they could more readily bind themselves to take painful or difficult steps to counter aggression. However, the European Union’s member states often look at the problem differently. They are worried about delegating security power to the European Commission, for fear it will do something that hurts their economic interests or other national interests. The Schelling argument is that this increases their flexibility, but weakens their ability to demonstrate resolve against outside threats.

Other possible systems would lower flexibility but increase the Commission’s bargaining strength. If, for example, the member states had to reach a qualified majority to block the Commission from acting, it would greatly increase the risk that the Commission could ignore, say, the specific desires of Germany and its friends. But it would also correspondingly increase the credibility of the EU’s threat to retaliate against other countries that hurt it.

That suggests that the European Union might want to reconsider its priorities. The anti-coercion instrument is much less credible than it might be, because the member states worry that it will be used in ways that hurt their interests. If they want to increase their credibility ex ante in discouraging attacks, they are going to have to weaken their degree of ex post control, so that they are less tempted to back down when the going gets rough. That, in turn, lowers the chance that the going will get rough, because potential aggressors will see that the Europeans have bound themselves, and desist from attacking. This is one of Schelling’s most important arguments, and while it may seem counter-intuitive at first, it makes a lot of sense when you think about it.

This framework may be extremely dangerous if applied in stupid ways- one of the reasons that the US made such a disaster out of the Vietnam war is that it feared damaging its credibility if it withdrew. Still, the EU is some very considerable distance from even notionally being able to make such grievous mistakes.

The second point is that if we think about this in terms of escalation dominance, Europe has more options than it might initially seem to have. And this morning’s more conciliatory speech suggests that that Trump knows it.

Here, Paul Krugman has arguments from the economic side; I have ones from the strategic perspective. The first, which is mentioned in the NYT piece, is that the Greenland gambit is wildly unpopular among US citizens, and perhaps not enormously popular among Republican politicians either.

The most difficult point, which will likely arise again in other disputes, is that the ultimate doomsday weapon stems from America’s national security role as guarantor. The immediate risk is not that the US invades Europe, but that it withdraws support from Ukraine. That would be a disaster for Europe if it happened. Equally, it would be a disaster for the US on two mutually reinforcing fronts. It would precipitate a major crisis in transatlantic relations, causing likely economic crisis, as the stock market wobbles suggest. And it would mean that the US would suddenly lose its major hold over Europe, making Europe much more likely to start pulling out of the US technology stack, arming up even more quickly, and start using the actual economic leverage it has to hurt the US back.

This has implications for escalation dominance, which you ought think of in game theoretic terms. You look to the end-stage of the game, and see who wins and loses, then you reason backwards to see how this affects the ways in which actors ought behave (if they figure that they are going to ultimately lose if they play a belligerent strategy of always escalating, they will just not play that strategy at all).

If you are Europe, and you think of the end-stage as ‘the day that the US pulls out of Ukraine,’ then you may have strong incentives not to challenge the US, since it is going to be less hurt in the end than you are. If you are Europe, and you instead think of the end-stage as ‘the day after the day that the US pulls out of Ukraine, when Europe erupts and the US economy goes to hell,’ you may very plausibly revise your calculations, and be more willing to escalate.

It is clear from Trump’s speech that he backed down in part because of how markets were reacting to the Greenland dispute (even if he confused “Iceland” for “Greenland” when he was talking). Europeans should take note of this, and update their understanding of escalation dominance accordingly. Equally, if they want to be able to act strategically in a world that is much less friendly to them, they may need to sacrifice flexibility and member state control so as to enhance their credibility against outside threats. Other news today suggests the EU isn’t nearly there yet. It needs to get there, and soon.

* It is a bit startling to see everyday commentary homing in on “escalation dominance” as a key concept.