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Europe and the Gulf

New dialogue opportunities between the E.U. and GCC countries, against the background of shared concerns and goals.

by Duccio Maria Tenti
01 April 2019
7 min read
byDuccio Maria Tenti
01 April 2019
7 min read

Trade complementarity and investment flows between the European Union and the Gulf region make them strategic partners. The E.U. promotes integration in the region through its ongoing dialogue with the Gulf Cooperation Council (GCC). The GCC alone, with its six member countries–Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates–accounts for one fifth of the European Union’s export market (amounting to EUR100 billion in 2017). The E.U. is in turn the region’s main trading partner, with total trade in goods amounting to EUR144 billion, accounting for 15 percent of GCC global trade. E.U.-GCC trade has been steadily growing, and rose by 53 percent in the ten-year period between 2006 and 2016, peaking in 2013, coinciding with the peak in oil prices.

Trade

From a sector-based perspective, trade relations are even more extensive. Trade in energy products between E.U. and GCC countries follows traditional complementarity criteria between consumption and production patterns. Thus, while the European Union runs a net trade surplus with Gulf countries, it is heavily dependent on oil and gas imports from the region. Trade in fossil fuels accounted for over 65 percent (up 17 percent on 2016) of European imports from Gulf countries in 2017, amounting to an annual total of EUR29 billion. Efforts have also recently been made to expand cooperation beyond traditional trade relations between consumers and suppliers. Cooperation has been broadened to include additional activities linked to the energy sector and decarbonization, such as the development of new technologies, regional integration of energy markets, renewables, energy efficiency, CO2 capture and storage (CCS) and sustainable use of natural gas. The E.U.-GCC Clean Energy Technology Network was launched in 2010, with the aim of strengthening E.U.-GCC cooperation in the "clean" energy sector, and this is only one of the many potential areas of cooperation in which the E.U. and GCC can engage in over issues of common interest.

Tensions

E.U. trade relations with the Gulf states are nevertheless subject to the region’s typical geopolitical and security challenges. The Middle East has been the stage of major conflicts for many decades now, but new fault lines have opened in recent years coinciding with the crises in Syria and Yemen. U.S. foreign policy towards Iran has also fuelled further polarization in the region. In addition to the historical rivalry between Riyadh and Teheran, new forms of competition in the Gulf region are introducing further challenges into the framework of controlled instability. The most dynamic economies in the Arabian Peninsula–Qatar and the UAE–are competing for regional primacy. The embargo imposed on Doha (in June 2017) and parallel decline of the Gulf Cooperation Council (GCC), as well as Qatar’s exit from OPEC (December 2018), are a clear symptom of this. Moreover, leading global players, foremost among them Russia and China, are taking advantage of America’s gradual disengagement in the region, further contributing to the changing balance of power.

Oil prices

The region is undergoing radical change not merely on account of old and new polarizations, but also due new needs linked to energy transition. For decades now, the Arab monarchies have strengthened their political power through the distribution of oil revenues, so that entire generations of citizens have become accustomed to benefiting from state subsidies and favorable tax conditions in exchange for their lack of engagement in the dynamics of political participation. Due to the collapse of crude oil prices in 2014, the volatility of the price of oil, and especially the energy transition and associated uncertainty about the future, the Gulf countries are now faced with the need to diversify their economies. But for the monarchies of the Arabian Peninsula, especially those with better access to the Indian Ocean and its maritime routes, that need has coincided with the opportunity to become global logistics hubs and enter into strategic partnerships with the leading Asian players.

Security

Understanding the dynamics of these changes and, wherever possible, helping the shift in that direction, is a key element for the European Union. Actively supporting the resilience strategies of the countries in this region is pivotal for the E.U. and for its interdependence ties with the Gulf economies. Europe, moreover, has every interest in carving out a role for itself as a more legitimate and widely recognized political player, as clearly demonstrated by the progress made by the E.U. Global Strategy and the summit between the E.U. and the Arab League held in Cairo in late February.  Greater economic cooperation as well as security cooperation on a range of issues, from the fight against terrorism to combating illegal migration, is in the interests of both sides. And, more generally, there is a perceptible urgency for Europe to adopt a bolder stance in regional diplomacy. A key issue in this respect is the European Union’s attempt to safeguard the cooperation agreement on Iran’s nuclear program, to avoid any knock-on effects on the region’s security and political dynamics. It is also a starting point for bolstering the E.U.’s independent strategic role in the region.

Strategy

In parallel with the above, a pragmatic approach to a number of specific cooperation issues can also help strengthen relations and political dialogue between the E.U. and the GCC. Following the failure of the 2008 free trade agreement, and the opening of a decade that has seen Gulf countries become strategic investors, particularly in Great Britain and France, thanks to sovereign wealth funds like Qatar’s or Abu Dhabi’s Investment Authority in Europe, the E.U. is rediscovering a political dialogue with the Gulf that is increasingly crucial for protecting its interests.

Firstly, Brexit could drive European Union and Gulf countries to further strengthen their cooperation. While the GCC states have traditionally secured access to Europe’s markets by concentrating their investment flows on London, the separation between the two shores of the English Channel could push the Arab states to further diversify their investments into continental Europe, even more so in the case of a No-Deal Brexit scenario.

Furthermore, in view of the economic ties between the Gulf countries and the European Union, and the major trade flows between them, it will be crucial to assess the potential impact of Europe’s new strategy to use the euro as their trading currency, especially in the energy sector. The euro is the second most widely used currency in terms of its share of international transactions, and Europe’s new strategy aims to dislodge the U.S. dollar as the currency for energy related payments between the E.U. and third countries. Europe’s global credibility and greater closeness to the Gulf will depend on the degree of success achieved by this strategy.

The author: Duccio Maria Tenti

He is expert on energy policy and on the European Union, he studied at the London School of Economics. He worked with Eni between 2018 and 2019.