Watching China in Europe—December 2025
Three Futures
There are three ways that Europe’s economic relationship with China could develop in the years ahead, and none of the scenarios are particularly pleasant. This is not a choice between good, bad, and ugly outcomes. It is about degrees of bad and ugly. Let’s start with the least palatable of these pathways. This is a future in which Europe succumbs to defeatism, convincing itself that China has too much leverage, that de-risking is simply too hard to achieve, and that a bloc of 27 member states can never muster the unity required to mount a coherent and forceful response.
The supporters of this path don’t see themselves as fatalistic. They simply have a rose-tinted view of China’s economic, technological, and geopolitical might. And based on this, they have concluded that ever-closer integration with China is a desirable outcome, even if it means massive job losses and de-industrialization at home. They would happily gobble up the economic crumbs that the unstoppable industrial powerhouse leaves behind for European companies, and then channel their inner Oliver Twist: “Please sir, I want some more.” Their approach is defined by short-term economic opportunism. What keeps these people up at night, more than anything else, is the fear that tensions between Europe and China might stop the trickle of crumbs.
Hugging the Iceberg
These days, the proponents of this view can be found among representatives of German industry in China and in European capitals such as Budapest and Madrid, where Prime Minister Pedro Sanchez has taken his cynical charm offensive with Beijing to dizzying royal heights. If Europe is the Titanic of the 21st century, these characters will form the orchestra that plays on as the ship sinks, while trying to make nice with the iceberg. This may sound like metaphoric hyperbole, but before thou doth protest too much, have a look at the pictures from the annual gala of German business in Shanghai last week or the messages being sent by the lobbyists for German industry in China.
This one, posted on LinkedIn during German Finance Minister Lars Klingbeil’s recent visit to China, caught my eye: “More political tensions do not help us! On the contrary: they force us to invest even more in China in order to secure our supply chains. This comes at the expense of Germany as a business location.” Think about that message for a minute: The greater the political tensions with China, the more we will invest there, our own economy be damned. It’s Stockholm syndrome with a twist. Call it Shanghai syndrome.
The Least Bad
In the least bad scenario of the three, Europe refuses to give up without a fight. It deploys all the economic tools at its disposal to try to force China to the negotiating table. And it accepts the fact that China will retaliate, causing Europe economic pain in the short-term. This is a Europe that puts diversification from China, whether in critical raw materials or legacy chips, on the fast track, investing financial and political capital in an ambitious de-risking agenda. It is a Europe that puts up significant trade barriers to defend its industry against Chinese competitors, not because it believes the protectionism is a good thing but because it knows that if it doesn’t act, there will be no industry left to defend. It is a Europe that seeks to remove internal impediments to growth and innovation (the Draghi report) and build a like-minded economic coalition that includes countries such as Japan, the United Kingdom, Canada, South Korea, and Australia while leaving the door open to the United States if and when its political leaders dump “America First”.
In this scenario, Europe is not seeking a trade conflict with China, nor is it excluding economic cooperation with Beijing. In fact, it remains open to such cooperation, particularly in clean technologies, under the right conditions. This approach is based on the conviction that Europe’s best chance of remaining economically relevant is to use what leverage it has—above all its vast single market—to try to force a rebalancing of its relationship with China. The leading proponent of this course is the European Commission, which will unveil a series of measures in the coming weeks (more on this below) designed to deliver this economic rebalancing. The European countries that are most supportive of this approach are France and the Netherlands.
Pulling Punches
There is a third way that falls somewhere in between the two scenarios that I’ve sketched out above, and I fear that it is the most likely path for Europe based on its current trajectory. In this future, the problem is not in the diagnosis of the threat from China but in the willingness to respond to that threat with the forceful measures required to counter it. This is a Europe that continues to talk tough but allows China to play member states off against each other, weakening the bloc’s collective resolve through a combination of economic sticks and carrots.
It is a future in which countries such as Germany remain so wary of conflict with China, so paralyzed by cracks in the transatlantic relationship, and so wedded to a crumbling rules-based order and free-trade dogmas that they pull their punches with Beijing. It is a Europe that continues to talk earnestly about the need to de-risk but is not willing to do the hard work needed to operationalize de-risking. It is a future in which the Commission fails to get the support it needs from European capitals to deploy its tools in a way that would really get Beijing’s attention. In this scenario, Europe would not be capitulating preemptively to China because of a belief in its own weakness, as in the first scenario, but the end-result could be quite similar.
Credibility Problem
I don’t think it is an exaggeration to say that 2026, perhaps even the first half of the year, will be crucial in determining which of these three paths Europe walks down. That is because of the political calendar: France will shift into election mode as 2026 unfolds, complicating the push for a European consensus on China. It is also because the European Commission will be confronting EU member states with a choice in the coming months: Stand up to China or shut up. As one person involved in the Commission’s plans put it to me: “We have a credibility problem with China. We haven’t done nearly enough for them to take us seriously. They believe we will continue to undershoot, remain divided and wary to act. Now is the time to prove them wrong. We need to establish some credibility.”
This week, the Commission will unveil its economic security doctrine (although the communication will carry the more utilitarian title “The Strategic Use of Tools for Economic Security Purposes”) and its “RESourcEU” plan to reduce Europe’s dependence on critical raw materials from China. A week later, if the current schedule holds, it will unveil its internally contested Industrial Accelerator Act, in which it will spell out its approach to local content and the conditioning of foreign direct investment. The Commission may also soon clarify how it plans to tackle cybersecurity risks in a range of industries, from wind and solar to connected vehicles and telecommunications.
All at Once
The economic security communication, due on December 3, will not be a revolution. A big part of it will be about strengthening internal governance. The Commission will propose, for example, that member states name national economic security coordinators to liaise closely with Brussels. After a year of hushed whispers about developing an “overcapacity instrument”, the Commission has come around to the view that it already has, for the most part, the tools that it needs. “It would be nice to have 232s or 301s,” the person involved in the plans said, referring to US trade measures that give Washington broad latitude to impose tariffs. “But a new instrument would take a lot of time and we simply don’t have time.”
What the Commission will signal, however, is that it plans to use its existing tools in a much more aggressive and coordinated way. The Foreign Subsidies Regulation (FSR), for example, is a powerful mechanism that has been used sparingly since the Commission launched a flurry of cases in the spring of 2024. There is also a push to, in the words of one official, “de-nuclearize” the anti-coercion instrument (ACI), which has been gathering dust since its launch two years ago. Imagine a world in which the EU is hitting China with the FSR, the ACI, the International Procurement Instrument, local content rules, cybersecurity restrictions, and new trade defense cases all at once. “We will need to attack the problem by deploying all of our tools in a much more forceful way,” the person said. “We won’t solve anything with targeted actions.”
Extremely Nervous
Will European member states play ball? That is the million-dollar question at a time when capitals are extremely nervous about Chinese retaliation in the wake of Beijing’s debilitating controls on rare earths and Nexperia chips. French President Emmanuel Macron, who will travel to China this week, is the European leader with the greatest appetite for risk. He has pushed the EU to use the ACI against China and the United States. Some people in the Élysée Palace now muse that, in the end, Europe may have no choice but to erect a massive tariff wall that is aimed specifically at China.
What about Germany? There is no doubt that the China debate in Berlin has shifted as more and more German industries come under pressure. In recent weeks, Chancellor Friedrich Merz has offered strong backing for the Commission’s plans to defend Europe’s steel industry and vowed to remove Chinese suppliers from Germany’s telecommunications network. The government is now finalizing a China action plan (Maßnahmenkatalog) of roughly a dozen policy priorities, which in the words of one senior diplomat is “70% about economic security and de-risking”. Merz is expected to lay out the main elements of the plan, which will be kept confidential, in a speech or interview before he makes his first trip to China in February. One person close to chancellor, referring to China, told me: “The fence clearly needs to be much higher than it is now.”
Germany’s Choice
But there are also reasons to be cautious. My concern is that the appetite in Berlin for the sweeping measures that are necessary to tackle the economic threats emanating from China is not yet there. One reason is that there is no consensus across German ministries. There is, in the words of one German industry official, an “extremely dangerous ordo-liberal wind” blowing through the economy ministry. It is also clear that some corners of German industry have not learned the lessons of the past year. I was told that German carmakers, in a desperate push for chips, are now privately pressuring Nexperia’s European executives to withdraw their court order and welcome Zhang Xuezheng, the suspended Chinese CEO who tried to loot the company, back into the fold.
Ultimately, German leadership on China will be decisive. There is a German chancellor who seems to understand the challenge, a German head of the European Commission who has led the de-risking charge in Europe, and soon a German overseeing Asia policy in the European External Action Service. In January, diplomat Erik Kurzweil will take over the post vacated this summer by Niclas Kvarnström, now national security adviser in Sweden. All the pieces are in place. Over the coming year, Germany will have to choose which of the three China futures it wants—capitulation, vacillation, or forceful action.