Context-

The ongoing conflict in the Middle East, particularly the clashes between Israel and Palestinian militias in the Gaza Strip and the attacks by Yemen's Houthi rebels in the Red Sea, has created significant disruptions to global trade. The spillover effects have forced major shipping operators, including A.P. Moller - Maersk, to divert cargo ships southward around the Cape of Good Hope, leading to rising freight costs and potential inflationary pressures.

European Union's Economic Fallout

The European Union (EU) Member States have been severely impacted by the Red Sea crisis. In January, several European companies had to slow down production, and automotive giants such as Tesla and Volvo announced temporary shutdowns of their plants in Germany and Belgium. Germany, known for its export-led growth model, faces sensitivity to international trade slowdowns, affecting its strong chemical sector. Italy, represented by Confartigianato, estimates significant damage to its foreign trade, indicating the economic toll on European nations.

Specific Country Impacts

Germany's Export Vulnerability: Germany, heavily reliant on exports, is facing challenges due to the slowdown in international trade. Delays in shipments through the Red Sea have particularly affected the country's strong chemical sector.

France's Energy Sector Response: French energy giant Total Energies redirected its ships to alternative routes to mitigate the increase in insurance costs. This decision resulted in longer travel times for ships en route to Europe, impacting the efficiency of supply chains.

Italy's Economic Losses: Italy, through Confartigianato, reports substantial economic losses during the Red Sea crisis, amounting to approximately EUR 8.8 billion between November 2023 and January 2024. The damage includes lost or delayed exports and a lack of supply of manufactured goods, impacting major Italian ports.

European Union's Response and Naval Mission Deployment

In response to the crisis, the EU has approved the deployment of a naval military mission named EUNAVFOR Aspides, headquartered in Larissa, Greece. The presence of Greek Prime Minister Kyriakos Mitsotakis at the Raisina Dialogue signifies the EU's interest in greater cooperation with India and potential coordination between the proposed EU naval mission and the Indian Navy.

EUNAVFOR Aspides Mission: The EU's approval of the naval mission reflects its commitment to addressing the security challenges in the Red Sea. EUNAVFOR Aspides aims to safeguard commercial vessels and ensure the safety of maritime routes. The mission's headquarters in Larissa, Greece, strategically positions it in proximity to the crisis zone.

EU-India Cooperation:  Greek Prime Minister Kyriakos Mitsotakis' visit to New Delhi emphasizes the desire for cooperation between EU member states and India. The discussion involves the role of Greek ports, particularly Piraeus, in the new Indo-Mediterranean connectivity project (IMEC) and potential coordination between the EU naval mission and the Indian Navy. This collaborative approach aims to enhance security and stability in the region.

Potential Indo-Pacific Cooperation: The interest in coordinating European and Indian naval forces, emerging during French President Macron's visit to India, gains momentum with the Greek Prime Minister's visit. The crisis has brought the enlarged Mediterranean closer to the Indo-Pacific, fostering increased cooperation between the EU and India.

IMEC's Strategic Imperatives and Enduring Relevance

Despite the challenges posed by the Middle East crisis, the India-Middle East-Europe Economic Corridor (IMEC) continues to hold strategic importance in the medium to long term. The project is tied to specific imperatives that remain essential amid geopolitical uncertainties.

Resilient Value Chains: IMEC responds to the imperative of creating stable, diversified, and resilient value chains. The Covid-19 pandemic and the Ukraine war crises underscore the need for such resilience, making IMEC a crucial component for future trade stability.

EU's "De-risking" Strategy: The multimodal corridor aligns with the EU's broader strategy of "de-risking" its economic ties, particularly concerning China. As the EU seeks alternative destinations for FDI flows exiting the Chinese market, IMEC offers a strategic framework for diversification.

India's Key Role: India plays a pivotal role in the EU's strategic approach toward China. IMEC provides a platform for strengthening economic ties and fostering a more balanced and diversified partnership between the EU and India.

Potential for India-EU Free Trade Agreement: IMEC could serve as a catalyst for the development of the India-EU Free Trade Agreement. Once critical issues blocking its final approval are resolved, the corridor provides an ideal framework for enhanced economic cooperation between India and the EU.

Strengthening Diplomatic and Economic Ties: The current crisis in the Red Sea has prompted intensified diplomatic efforts and economic collaborations, indicating a commitment to mitigating the impact of future crises.

EU's Indo-Pacific Strategy: France's appointment of former Engie CEO Gérard Mestrallet as a special envoy for IMEC reflects the EU's recognition of the corridor's significance. This move is expected to streamline and enhance European coordination for the project.

Diplomatic Efforts and Summit Priorities: The inclusion of the Indo-Pacific as one of the priorities of the Italian G7 Presidency provides a diplomatic framework for discussing the next steps in implementing IMEC. The assumption gains more weight if efforts are made for a solid diplomatic solution to the Middle East crisis leading up to the summit.

Business Community's Interest: Despite the challenges in the Red Sea, the business community's interest in alternative connectivity projects, such as IMEC, has increased. European transportation, telecommunications, and energy companies remain committed to exploring and developing alternative routes to ensure the continuity of global supply chains.

Conclusion:

In conclusion, the Red Sea crisis has posed significant challenges to global trade and  European economies. However, the India-Middle East-Europe Economic Corridor (IMEC) emerges as a resilient and strategic solution to mitigate the impact of external shocks. The crisis has prompted collaborative efforts between the EU and India, reinforcing the importance of diplomatic and economic cooperation. IMEC's enduring relevance lies in its ability to create stable value chains, align with the EU's de-risking strategy, and foster stronger ties between India and the EU. As diplomatic initiatives progress and economic collaborations strengthen, IMEC stands out as a beacon of stability in an increasingly polarized international system.

Source- ORF