By Jeffrey Frankel
October 26, 2026
In the corridors of power, the shift from traditional globalization to "geoeconomics"—the strategic use of economic interdependencies to advance geopolitical objectives—is no longer a theoretical debate; it is the defining reality of the current decade. During last month’s 11th annual European Central Bank (ECB) Research Conference, held in Frankfurt, Nobel laureate Paul Krugman delivered a keynote that challenged conventional wisdom regarding the global hierarchy of influence.
Krugman’s central thesis—that the European Union possesses a latent capacity for "weaponized interdependence" that potentially exceeds that of the United States and China—has sent ripples through the international policy community. However, beneath the surface of this bold assertion lies a complex methodological debate. By relying on Purchasing Power Parity (PPP)-adjusted GDP to measure economic heft, Krugman inadvertently highlights the very volatility that threatens to destabilize modern geoeconomic analysis.
Main Facts: The Rise of Weaponized Interdependence
The core premise of geoeconomics is that the globalization of supply chains, financial networks, and digital infrastructure has created "chokepoints." When a state controls a critical node—be it the global financial messaging system (SWIFT), the semiconductor supply chain, or the extraction of rare-earth minerals—it gains the ability to coerce, sanction, or isolate rivals.
Krugman’s argument posits that the European Union, despite its internal divisions and fragmented foreign policy, remains the world’s most potent "regulatory superpower." Through the "Brussels Effect," the EU dictates global standards in data privacy, environmental regulation, and antitrust law. Because the EU market is the world’s largest integrated consumer bloc, firms globally must align with European standards to remain viable, essentially exporting EU policy to the rest of the world.
However, the definition of "power" in this context is contested. While China exerts power through the physical control of raw materials—demonstrated by its repeated threats to restrict rare-earth exports—and the U.S. exerts power through the centrality of the dollar and the reach of its secondary sanctions, the EU’s power is institutional and legal. Whether this "soft" power can translate into "hard" geopolitical leverage remains the primary point of contention in the academic and diplomatic spheres.
Chronology of the 2026 Geoeconomics Pivot
The discussion at the ECB conference was not an isolated event but rather the culmination of several years of escalating economic friction:
- 2023–2024: A period defined by the normalization of "de-risking" strategies. Major economies began prioritizing national security over pure economic efficiency, moving to repatriate critical manufacturing.
- January 2026: The launch of the EU’s "Economic Security Strategy" (Version 2.0), which empowered the Commission to screen outbound investments in critical sectors like artificial intelligence, quantum computing, and biotechnology.
- September 16, 2026: The 11th ECB Annual Research Conference. Paul Krugman presents his paper on the comparative advantages of the EU, U.S., and China in the context of weaponized interdependence.
- October 2026: Following the conference, central banks and trade ministries globally began recalibrating their "geoeconomic risk indexes," leading to the current debate regarding the accuracy of GDP-based power assessments.
Supporting Data: The PPP Methodology Trap
The crux of the technical disagreement between Krugman’s recent conclusions and orthodox economic analysis lies in the choice of metrics. To compare the relative weight of the EU, the U.S., and China, Krugman utilizes GDP adjusted for Purchasing Power Parity.
The rationale for using PPP is clear: nominal GDP figures, calculated at market exchange rates, often distort the actual living standards and domestic purchasing power of countries, particularly in emerging markets. By adjusting for the relative price of goods, economists hope to arrive at a "truer" sense of an economy’s size.
However, as I argued during the post-presentation panel, this reliance on PPP-adjusted data is increasingly problematic in a world of volatile exchange rates. While nominal exchange rates fluctuate based on interest rate differentials and capital flows, PPP data is notoriously unstable. PPP calculations rely on the "International Comparison Program" surveys, which are conducted intermittently and often struggle to account for the qualitative differences in goods and services across borders.
In times of high inflation or sudden supply-side shocks—such as those seen in the energy markets of 2022 and the subsequent inflationary surges—PPP figures can swing more violently than nominal figures. If we are to measure a nation’s capacity to "weaponize" its economy, we are interested in its ability to project power abroad. That power is usually denominated in international currencies, not domestic purchasing power. Therefore, over-relying on PPP may be providing a false sense of security regarding the EU’s structural dominance.
Official Responses and Academic Discourse
The reaction to the conference has been polarized. EU officials, naturally, have embraced the narrative of the "regulatory superpower." In a briefing following the event, an ECB spokesperson noted that "the European market remains the indispensable anchor for global trade, and the resilience of our regulatory framework provides a unique form of leverage that is often underestimated in traditional security calculus."
Conversely, American analysts have pushed back, citing the U.S. dollar’s role as the world’s primary reserve currency. "You cannot talk about geoeconomic power without discussing the dollar," noted one senior fellow at the Peterson Institute for International Economics. "The EU can regulate the market, but the U.S. can cut off the liquidity. Those are two very different tiers of power."
Chinese state media, meanwhile, framed the debate as an admission of Western decline. They argued that the focus on "weaponization" reflects a failure of neoliberal globalization and a desperate attempt by the EU and U.S. to contain China’s inevitable rise through protectionist barriers rather than economic competition.
Implications: A World of Fragmented Hegemony
What does this mean for the future of global markets and international relations?
1. The End of Neutrality
The era of neutral global infrastructure is effectively over. Businesses can no longer assume that a neutral platform, such as the internet or the global financial clearing system, will remain open to all participants regardless of political affiliation. We are entering an era of "balkanized" infrastructure where firms must choose their technological and financial allegiances.
2. The Volatility of Policy
Because geoeconomic power is often exerted through sudden executive orders or regulatory shifts, the "policy risk" for multinational corporations has reached record highs. The debate over how to measure this power—PPP versus nominal GDP—is not just an academic exercise; it dictates where firms choose to locate their production, their R&D, and their capital reserves.
3. The European Dilemma
The EU stands at a crossroads. If it leans too heavily into "weaponizing" its regulatory power, it risks provoking a backlash from trade partners who may seek to circumvent European standards by building alternative, non-EU-aligned supply chains. If it does not use its power, it risks being sidelined by the more aggressive, top-down approaches of the United States and China.
4. The Need for Better Metrics
We are in desperate need of a new framework to measure "geoeconomic potential." GDP, whether nominal or PPP-adjusted, tells us little about a country’s control over specific chokepoints. We need a "Geoeconomic Vulnerability Index" (GVI) that tracks:
- Concentration of critical imports: How dependent is a nation on a single adversary for essential technology?
- Financial reach: To what extent can a currency be used to impose extraterritorial sanctions?
- Regulatory stickiness: How difficult is it for firms to opt out of a specific regional regulatory regime without losing access to the global market?
Conclusion
Paul Krugman’s presentation at the ECB serves as a necessary wake-up call. We have been too slow to acknowledge that economic policy is now the primary instrument of statecraft. However, we must remain rigorous in our analysis. Weaponized interdependence is a double-edged sword. While the EU’s ability to set global standards is a formidable tool, it is not a panacea for the fundamental geopolitical challenges of the 21st century.
As we look toward the remainder of the decade, the focus must shift from merely measuring the size of these economies to understanding the nature of their entanglements. We are no longer living in a world of simple trade—we are living in a world of strategic interdependencies where the miscalculation of one’s own power can be just as dangerous as the miscalculation of an adversary’s. The ECB’s conference has set the stage for a critical debate; now, the work of refining our understanding of this new geoeconomic reality must begin in earnest.
The volatility of our metrics reflects the volatility of our world. If we continue to rely on flawed data to inform our geopolitical strategies, we risk not only economic stagnation but a profound misreading of the balance of power that will define the next generation of global history.
