The Red Sea Crisis Revives the Importance of IMEC

Despite the initial perception that a prolonged conflict in the Middle East could stall the implementation of the ambitious India-Middle East-Europe Economic Corridor (IMEC), the recent developments seem to prove quite the opposite. Paradoxically, the spillovers of the conflict between Israel and the Palestinian militias in the Gaza Strip have highlighted the importance of alternative connectivity projects to limit the impacts of external shocks. Notably, attacks by Yemen's Houthi rebels against commercial ships in the Bab el-Mandeb Strait have confirmed IMEC's potential as a complementary route to the Suez Canal, which is increasingly exposed to the risks of trade disruption.

To date, the series of attacks carried out with drones and anti-ship missiles against commercial vessels in the Red Sea has forced major shipping operators, such as A.P. Moller - Maersk, to divert cargo ships southward around the Cape of Good Hope. As a result, rising freight costs are likely to generate new inflationary pressures with negative impacts on global growth prospects^[1]. For the European Union (EU) Member States, the costs of the ongoing crisis are very high, and the impact of the conflict has not spared industry and the labor market. In January, many European companies had to slow down production, while two giants such as Tesla and Volvo announced temporary shutdowns of their plants in Germany and Belgium ^[2].

In this context, the three major European players that joined the Memorandum of Understanding on IMEC principles, unveiled at the G20 summit in New Delhi, in September 2023, seem to be particularly exposed. Germany, renowned for its export-led growth model, is specifically sensitive to slowdowns in international trade. Besides, the country's strong chemical sector has already been affected by delays in shipments through the Red Sea. Meanwhile, in order to circumvent the increase in insurance costs, the French energy giant Total Energies redirected its ships to alternative routes to the southern strait leading to the Red Sea and the Suez Canal, a decision that resulted in longer travel times for ships enroute to Europe. As for Italy, Confartigianato, a leading organization representing craftsmen and small businesses, estimated the damage to the country's foreign trade from the Red Sea crisis, between November 2023 and January 2024, at approximately 8.8 billion euros, or 95 million a day ^[3]. According to these figures, Italy has lost EUR 3.3 billion during the current crisis, or EUR 35 million per day, due to lost or delayed exports and EUR 5.5 billion, or EUR 60 million per day, due to the lack of supply of manufactured goods. All major Italian ports, from Genoa to Trieste and Gioia Tauro, have experienced declines in activity despite the fair ability to adapt to external shocks acquired over time.

In response to the ongoing crisis, the EU has approved the deployment of a naval military mission, named EUNAVFOR Aspides, whose headquarters will be in Larissa, Greece, another European player directly interested in the development of IMEC ^[4]. The presence of Greek Prime Minister Kyriakos Mitsotakis at the ninth edition of the Raisina Dialogue, an event that in past two years has hosted European Commission President Von der Leyen and Italian Prime Minister Giorgia Meloni, also seems to testify to the desire for greater cooperation between EU member states and India. Mitsotakis' trip to New Delhi appears relevant both to discuss the role of Greek ports, particularly Piraeus, in the new Indo-Mediterranean connectivity project, and to define the potential coordination between the proposed EU naval mission and the Indian Navy. The latter, in fact, has a large presence in the region and, specifically, in the northwestern sector of the Indian Ocean with at least 10 ships engaged in anti-piracy and anti-drone support activities ^[5]. The idea of a possible coordination, albeit indirect, between European and Indian naval forces had already emerged during French President Macron's trip to India at the end of January and now finds new ground for development with the arrival of the Greek Prime Minister in New Delhi a few hours after the approval of the EU mission ^[6]. Therefore, the current crisis seems to have brought the enlarged Mediterranean closer to the Indo-Pacific and the EU closer to India, and not vice versa, as many feared after Hamas' attack on Israel on October 7 ^[7].

Although the realization of IMEC requires a lasting political solution to the Middle East crisis, the project is likely to survive the current turmoil because it is tied to precise strategic imperatives that are inescapable in the medium to long term. First and foremost, IMEC responds to the need to create stable, diversified and, consequently, more resilient value chains, a factor that can no longer be postponed as demonstrated by the Covid-19 and Ukraine war crises. Secondly, the multimodal corridor looks perfectly in line with the broader “de-risking” strategy adopted by the EU vis-à-vis China and in which India plays a key role. While this appears relevant to Berlin, as Beijing's main economic and trading partner among the EU states, it nonetheless concerns Paris and Rome increasingly committed to diversifying their partnerships in Asia. The EU's new strategic approach toward China also includes finding new harbours for FDI flows exiting the Chinese market due to the economic slowdown and the limitations of an overly politicized and unpredictable business environment, as defined by European Trade Commissioner Valdis Dombrovskis ^[8]. Euro-Atlantic bloc investments, notably, seem to have been moving for months in the direction of alternative destinations, chief among them Southeast Asia and India ^[9] . Moreover, IMEC would provide a perfect framework for the development of the India-EU Free Trade Agreement, once the critical issues blocking its final approval are resolved. In this regard, the choice of the Italian G7 Presidency to include the Indo-Pacific as one of the priorities of the summit, in which India also participates, provides a perfect framework for discussing the next steps for implementing the project. This assumption seems even more likely if efforts are made in the months leading up to the summit for a solid diplomatic solution to the Middle East crisis. Finally, the interest of European transportation, telecommunications and energy companies also appears unchanged. Indeed, the current crisis in the Red Sea has only increased the business community's interest in creating alternative connectivity projects, such as the one represented by IMEC.

All in all, despite the difficulties posed by the conflict in the Middle East, IMEC still seems to represent the best opportunity to give substance to the goals set by the EU's Indo-Pacific strategy. Being aware of this, France recently decided to appoint former Engie CEO Gérard Mestrallet as a special envoy for the corridor. A similar decision is expected to be made by the other EU partners in the coming weeks, to facilitate the creation of a more streamlined and effective European coordination for the project. Indeed, the development of IMEC in parallel with the Middle East crisis appears now to be the only way to try to mitigate the impact of future crises that are increasingly likely given the growing polarization of the current international system.

References

^[1] https://www.jpmorgan.com/insights/global-research/supply-chain/red-sea-shipping [3]
^[2] https://www.lemonde.fr/economie/article/2024/01/15/la-crise-en-mer-rouge-commence-a-penaliser-l-industrie_6210873_3234.html [4]
^[3] https://www.confartigianato.it/2024/01/crisi-mar-rosso-in-3-mesi-88-mld-i-danni-per-commercio-estero-italiano-alti-rischi-per-mpi/ [5]
^[4] https://theprint.in/opinion/modi-govt-did-for-india-greece-ties-what-others-didnt-in-40-years/1968676/ [6]
^[5] https://www.vifindia.org/article/2024/february/08/red-sea-crisis-and-india-s-options [7]
^[6] https://pushstg.indiatimes.com/news/defence/india-france-to-collaborate-in-red-sea-region/articleshow/107191780.cms [8]
^[7] https://www.politico.eu/article/the-uncertain-future-of-the-india-middle-east-europe-corridor/ [9]
^[8] https://www.eeas.europa.eu/delegations/china/evp-valdis-dombrovskis-holds-press-conference-beijing_en?s=16 [10]
^[9] https://rhg.com/research/irrational-expectations-long-term-challenges-of-diversification-away-from-china/ [11]

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