Egypt tests Europe’s ability to influence events in its southern neighbourhood. In January 2011, the protestors in Tahrir Square brought down President Mubarak, despite lukewarm support from Western countries. After Mubarak’s removal from power, the EU adopted a new policy based on the ‘more for more’ principle; the more a country enacts democratic reforms, the more EU aid it can expect. In November 2012, after the elections that led to Mohamed Morsi’s brief presidency, the European Union announced a package of grants and loans totalling nearly €4.2 billion. The following week President Morsi announced his autocratic grab for Egypt’s constitutional powers. When European officials complained about the violation of religious or women’s rights in Egypt, Muslim Brotherhood officials would retort by pointing at rising Islamophobia in Europe. Now, in spite of intense American and European diplomatic pressure, the interim government has used disproportionate force to disperse the pro-Morsi sit-ins, killing more than 800. A cycle of violence has ensued as dozens of policemen and security officers have been killed in response. Egypt now balances on the precipice of further violent conflict.

Europe’s diplomatic relations with Morsi’s government were troubled, but things are no easier now. The liberals and the moderates in the current government  ‒ those that the EU and Washington considered allies  ‒  have either been co-opted or outflanked by the hardliners. Prime minister Hazem el-Beblawi, a liberal economist, supported the crackdown against the sit-ins and has suggested the Muslim Brotherhood’s licence to operate as a political party could be revoked. Another moderate and key interlocutor of the West, Mohamed ElBaradei, is no longer influential after he resigned in protest at the violence and even faces legal charges over that decision. Meanwhile, Tamarod, a grass roots protest movement which appeared to share Western values, is becoming more nationalist and has called for tearing up Egypt’s peace treaty with Israel and an end to American military aid.

Following last week’s violence, the EU has decided to stop the sale of all ‘arms that can be used internally’. In practice the EU measure is likely to halt the export of small arms, munitions and possibly armoured personnel carriers. The army and police are too powerful for the EU’s decision to influence the internal balance of power. And if the Egyptian military run out of guns and bullets, there are many more suppliers able to replenish its stocks. Given the proliferation of arms from places like Libya, the same also holds true for the Islamists. And so, the EU’s decision will do little to bring the parties back to the table. It seems calculated to make clear that Europe disapproves of the violence, but not of the new regime.

If it had wanted to make a stronger point, the EU could have suspended aid, withdrawn its ambassadors, made a common demarche on the Egyptian ministry of foreign affairs or slapped economic sanctions on the assets and movements of senior government or military officials. Of course, the EU could still do all these things, but it seems unwilling to antagonise the Egyptian government. Egypt is too important for several European interests; a secure Suez Canal, enduring Arab peace with Israel and the fight against militant Islam.

Behind closed doors US and European security and intelligence communities will have welcomed Morsi’s replacement by General Abdel Fattah al-Sisi. Morsi’s government looked the other way while lawlessness flourished in the Sinai peninsula. Militants have bombed the natural gas pipeline to Israel and Jordan thirteen times in the past two years. The peninsula has become a conduit for Libyan arms to Hamas and Syria’s rebel groups (intelligence agencies have been particularly concerned about the spread of shoulder-fired missiles that can shoot down helicopters and planes). In the Sinai, there are nearly daily attacks against the police and army (in mid-August 24 police officers were killed in an ambush). Despite their restrictions on arms exports, most European governments probably hope that Egyptian security forces have enough weapons to reimpose order in Sinai.

But the overthrow of Morsi is unlikely to bring peace. Al Qaeda’s chief, Ayman al-Zawahiri, has called on his followers to resist the interim government in Cairo. The Egyptian economy is on life support. Sectarian attacks on Coptic Christians and their churches have increased. The Suez Canal – a maritime chokepoint that carries roughly 8 per cent of global seaborne trade  ‒  is at risk. This puts Europe in the uncomfortable position of giving preference to its security interests over its liberal values, without being sure that it can protect either.

The larger story of Europe’s pursuit of influence in Egypt relates to the changing balance of power in its southern neighbourhood. With America unwilling to get involved, European countries have tried, with mixed success, to take the lead on issues in Libya, Mali and Syria. In Egypt the EU now finds itself competing with the Gulf countries for influence. Saudi Arabia, Kuwait and the UAE – primarily concerned with domestic support for the Muslim Brotherhood – have welcomed the assault on the Brotherhood and have given the interim government a cheque worth $12 billion, almost €9 billion.  Reasoning that Cairo, if it wanted, could simply ignore Europe and rely on the Gulf states, the EU has decided to keep its aid and trade relationship intact. It is betting that by denouncing the violence, stopping arms sales but maintaining other ties, Brussels will be able to keep doors in Cairo open.

One positive for the EU in the Egyptian crisis is that member-states are allowing Catherine Ashton to coordinate EU policy. She was the first European leader to visit Egypt after the fall of Mubarak, and the only senior foreign official to have visited Morsi after his detention. This gives her credibility in Europe and in the region. European governments should mandate Ashton, and the EU’s Special Representative for the region, Bernardino Leon, to coordinate efforts with the Gulf states and the US and reach out to the interim government to help establish a national political dialogue.

Europe’s influence also relies on the power of its markets. Europe’s aid package is less than half of the Gulf states’ financial commitment, but Egypt needs foreign investment and deeper trade relations, rather than a line of credit. Once stability has been restored, the EU should be prepared to help the country deal with its vicious cycle of unemployment, inflation, capital flight, rising debts, falling currency reserves and increasing budget deficit (running at roughly 12 per cent of GDP) by further opening its markets to Egyptian goods. In time, the Egyptian government will have to reduce its subsidies on fuel and bread – actions that could spark popular unrest. The EU has also made macro-financial assistance to Egypt – worth €500 million – conditional on the successful negotiation of an IMF loan. European leaders should continue to push the interim government to strike a deal even though the political environment is not ready for this yet.

While the Brotherhood is suppressed, the military is the most organised political institution in the country. Under current conditions, a rush to the ballot box would almost certainly mean victory for the military’s candidate, perhaps al-Sisi himself, and enrage the Brotherhood’s supporters. At a conference in Cairo in March, one of the speakers, since elevated to a very senior position in government, said that if Morsi’s government failed, it would mean the bankruptcy of political Islam in Egypt. His words now read like a policy prescription. The interim government has detained 75 senior members of the Muslim Brotherhood, including Morsi himself. Under the existing electoral law, given their criminal indictments, many of the Brotherhood’s leadership would not be eligible to participate in the elections. By purging the Brotherhood, General al-Sisi hopes to stop his opponents from playing a meaningful role in Egypt’s politics.

The EU has an interest in a pluralist democracy, not in military rule sanctioned through quick elections. However difficult it may be, to give the opposition parties a fair chance it would be sensible to gather all parties (including the Brotherhood) in a process that lets them determine the timing of the elections. The recently created European Endowment for Democracy could also use its admittedly limited funds to support some of Egypt’s nascent political parties.

If the military insist on pushing the Brotherhood underground, however, this is likely to create security problems of its own. As avenues for democratic participation are closed to the Brotherhood, the likelihood increases that its supporters will resort to violence (as happened in Algeria in 1991 when the military intervened to deprive Islamists of their election victory, sparking civil war). The Brotherhood’s hardliners will gain influence, condemning the US and Europe as anti-Islamic and hypocritical for condoning the overthrow of a democratically elected government. The Brotherhood could also reverse its earlier renunciation of violence. Political Islam in Egypt would become more anti-Western and less amenable to democratic ideas, opening the way for a rise in violent extremism, including against Western interests, in a region that is rife with conflict. Tragically, Europe’s access to Cairo’s powerbrokers would then become even more important, even as its policy choices become more unpalatable.

Rem Korteweg is a senior research fellow at the Centre for European Reform.