Yves here. We sometimes serve up posts for readers to have a hard look at what they say, and sometimes, here as to what they don’t say. This piece summarizes the “second Paris Report,” which addresses how Europe should de-risk, which apparently means becomes more of an autarky while preserving as many of the benefits of globalization and international trade as possible.
Perhaps I am too much of a critic, but this article, and I assume the underlying Report, stays comfortably at the 50,000 foot handwave level. It does single out some areas where Europe really really needs to relocalize, such as semiconductors and pharmaceuticals. Yet even where the authors identify an unambiguous need, they don’t suggest how to get there, as in timetables, government support, possibly selective regulatory waivers.
The authors do admittedly float one more concrete idea: that of more European economic integration, to increase its power as a buyer bloc.
The first major conclusion gives a clue as to why this problem is not tractable:
First, the identification of critical import dependencies is important but also extremely difficult. Progress has been made, with Mejean and Rousseaux going further than all previous attempts. But while there is consensus on a small list of products that should be de-risked – semiconductors, critical raw materials and some pharmaceuticals – this list is clearly incomplete (for example, by missing upstream products that enter many value chains). At the same time, it is hard to go much further without worrying about going too far. Improving analysis of vulnerabilities would require (1) more work on determining which imports are critical in the sense that an import disruption would have large costs; and (2) better data on indirect rather than just direct trade dependencies.
Some of you may recognize this as a case example of obliquity. Obliquity holds where a system is so complex than you can’t map it, and on top of that, its contours change as you act on it. In these highly complex systems, trying to navigate a straight path like “Maximize shareholder value produces worse outcomes than aspirational goals like that of Merck, which it apparently did once observe until late-stage capitalism caught up with them: “We use the power of leading-edge science to save and improve lives around the world.”
Perhaps I missed it but I see a lot of the “what to do” part articulating the need to be mindful of tradeoffs. Not a very rousing guide for action.
And the reality, as the post effectively says, is that much of the impulse for “de-risking” is reactive, and increasingly looks to be retaliatory, witness the US and now the EU going after China for its sin of being too helpful to Russia with respect to the Ukraine war. So the driver of this impulse looks not to be economic security but geopolitical dominance.
By Jean Pisani-Ferry, Senior Fellow Bruegel, Tommaso Padoa-Schioppa chair, in Florence European University Institute; Senior Fellow Peterson Institute for International Economics (PIIE) Beatrice; Weder Di Mauro,President Centre for Economic Policy Research, Professor of International Economics Geneva Graduate Institute (IHEID), Visiting Professor Hoffmann Global Institute for Business and Society INSEAD; and Jeromin Zettelmeyer, Director Breugel. Originally published at VoxEU
COVID-19 and the subsequent supply chain congestion, the wake-up call over the dependency of Europe on Russia for energy, and geopolitical shifts and the increasingly adversarial tone of the US-China relationship have underscored the need for a comprehensive reassessment of the EU’s economic security strategy. The second Paris Report examines where Europe is vulnerable and where and how it should de-risk. While the new global geoeconomic map may necessitate an EU pivot towards economic security, this must not become an excuse for protectionism, and it must preserve international cooperation. This requires innovative policy instruments, joint preparedness, contingency planning, and stronger governance mechanisms at both the EU and the international level.
The world has changed. The age of unfettered globalisation, systemic convergence and increasing cultural understanding is over and is probably not coming back in the foreseeable future. Instead, multiple fault lines are opening up (Campos et al. 2023, Aiyar and Ilyina 2023).
The role the EU played in the last few decades – building bridges, promoting increasing interdependence, supporting multilateral rules and institutions – seems to be out of date in a world of large-scale shocks, polarisation and power play. First, the outbreak of the COVID-19 pandemic and the subsequent supply chain congestion highlighted the vulnerabilities of Europe’s supply chains. Then, the Russian aggression against Ukraine served as a wake-up call over Europe’s dependency Europe on energy. Finally, economic coercion by China against Australia and Lithuania and the increasingly adversarial tone of the US-China relationship have underscored the need for a comprehensive reassessment of the EU’s economic security strategy. For a while, Europe nurtured the hope that it could avoid being engulfed in the US-China confrontation and could maintain good relations with the countries of the Global South. It gradually discovered the extent of the mistrust it elicited in many developing countries.
How should Europe respond? The second Paris Report (Pisani-Ferry et al. 2023) focuses on one of the major policy issues currently facing Europe: economic security challenges in the face of supply chain vulnerabilities and geopolitical shocks.
This report forms the first output from a new joint initiative between CEPR and Bruegel: Important Topics of Common European Interest (ITCEI). It comprises five papers that examine where Europe is vulnerable and where and how it should de-risk, taking into account history, trade dependencies and policy instruments. Morgan Kelly and Kevin O’Rourke examine the history of industrial policy in the shadow of conflict. Isabelle Mejean and Pierre Rousseaux identify trade dependencies that may expose the EU to trade disruptions using a novel methodology that considers the possibility of substitution away from disrupted input sources. David Baqaee, Julian Hinz, Benjamin Moll, Moritz Schularick, Feodora Teti, Joschka Wanner and Sihwan Yang quantify the short- and long-run effects on the economies involved of a hard decoupling between China and Russia on the one hand and the EU the G7 on the other, focusing on Germany. Chad Bown analyses the economic security of the EU from a trade policy perspective, while Conor McCaffrey and Niclas Poitiers discuss instruments of economic security.
How Europe Should Respond to the New Challenges
Europe retains an underexploited asset: the size of its market. This is why the right response must be more EU integration. Its still considerable economic weight should help buttress common defence against aggression and acts of economic coercion.
In addition, economic security objectives could justify policies that reduce the vulnerability to external disruptions through trade of financial channels. While firms have incentives to reduce risks to economic security with respect to trade by diversifying their suppliers and broadening their customer bases, they may overlook aggregate vulnerabilities across the supply chain. Moreover, they might fail to consider the broader societal costs of dependency and coercion, which can outweigh the private costs to individual firms.
At the same time, policy intervention must be mindful of costs to the gains from trade, multilateral cooperation and cohesion within the EU. Economic security should not become the entry point for wholesale protectionism, and it should not serve as an instrument to protect inefficient producers with powerful backing. Vulnerabilities also exist in closed economies, and openness is often the best insurance against them. The challenge lies in balancing the benefits of international trade with the need for de-risking.
Our analysis leads to four main conclusions.
First, the identification of critical import dependencies is important but also extremely difficult. Progress has been made, with Mejean and Rousseaux going further than all previous attempts. But while there is consensus on a small list of products that should be de-risked – semiconductors, critical raw materials and some pharmaceuticals – this list is clearly incomplete (for example, by missing upstream products that enter many value chains). At the same time, it is hard to go much further without worrying about going too far. Improving analysis of vulnerabilities would require (1) more work on determining which imports are critical in the sense that an import disruption would have large costs; and (2) better data on indirect rather than just direct trade dependencies.
Second, while the European Commission has done commendable work in beginning to address import dependencies and establishing the legal basis for responding effectively to economic coercion, its economic security strategy has some notable blind spots. While import vulnerabilities have received much attention, vulnerabilities via concentrated exports, which can make firms and entire sectors vulnerable to coercion, have received much less attention. Addressing these vulnerabilities may require instruments that incentivise firms to diversify exports, such as compulsory insurance against concentrated risks or export taxes. This will need to be complemented by a strategy to address exposures through local production rather than trade, making firms vulnerable to expropriation risk. Another major blind spot is the lack of instruments to address coercion through financial channels, such as interfering with payments. While European firms are not currently on the receiving end of such coercion, this may change if Donald Trump returns to the White House.
Third, EU economic security requires a major reinvigoration of the Single Market agenda, as part of a general resilience strategy that complements the attempt to de-risk individual import and export dependencies. Unlike the latter, this does not involve trade-offs between security and growth, and it is not sensitive to assumptions about where the next shock will come from and which dependencies are particularly critical. It would help the EU resist external shocks and coercion – whatever the source and the channel – by allowing faster re-direction of trade and supply and by improving automatic risk-sharing. Better risk sharing, in turn, would make the EU more cohesive and would make it harder to exploit internal divisions. The speed of the EU response and its ability to deter coercion could also be improved by activating the retaliatory powers given to the Commission by the EU’s Anti-Coercion Instrument, without requiring confirmation from a majority of member states.
Fourth, there is an open question about whether in a world of heightened geopolitical risks, the EU is too trade-integrated with both China and the US, exposing itself to major economic disruption in case it is drawn into a trade conflict between or with these countries. With respect to the US, the probability of an all-out embargo seems sufficiently low to answer the question in the negative. Instead, the EU may need to prepare (mainly politically) to fight a trade war with the US if President Trump returns and reinstates tariffs on the EU. With respect to China, the answer is less obvious. Baqaee et al. show that the cost of reducing trade integration slowly is much lower than that of sudden decoupling. Whether the EU should purse broader de-risking thus depends on the likelihood of a sudden, embargo-like collapse in trade, compared to the benefits of maintaining integration. Whatever action the EU takes should remain within WTO rules, and it should preserve the ability to collaborate with China in areas such as climate change and WTO reform.
The new global geoeconomic map may necessitate an EU pivot towards economic security, even beyond the pivot that has already happened. But economic security must not become an excuse for protectionism, and it must preserve international cooperation. This requires innovative policy instruments, joint preparedness, contingency planning and stronger governance mechanisms at both the EU and the international level.
See original post for references
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Yves Smith, you aren’t overly critical. This article is how business-school types pose questions to themselves and answer them.
Let us not overlook this gem, brethren and sistren: “The age of unfettered globalisation, systemic convergence, and increasing cultural understanding is over.”
Who could possibly want “unfettered” globalization? And what “systems” are systemically converging–other than the usual Anglosphere verities and platitudes? And unfortunately for our authors, the rising resistance to the wars in Ukraine and Palestine indicates that cultural understanding has not diminished. It’s just that the Understanding (the Pensiero Unico) of our betters is currently not being received all that well.
Unfortunately, for the “de-riskers” there is a whiff of disobedience in the air.
Further, the stress on three or four high-flying “industries,” like pharmaceuticals and computers, overlooks the ravages that “unfettered” globalization has wrought to European health-care systems and to basic manufacturing.
The use of the vogue term “de-risk” reminds me of the way people throw around the term “kabuki.” I have a feeling that risk isn’t what these peeps think risk is, just as I know that people who throw around the term kabuki don’t have a clue.
What risk? What coercion? Were the Russians undermining the German government with Nord Stream? Is the Chinese Belt-and-Road Initiative causing Italians to parade around in Roma in Mao jackets extolling the Little Red Book? If anything, I am seeing here in Italy an upwelling of some rather tart criticism of the U.S. of A. and its imperial overreach and NATO and its fantasy strategies.
And the authors fail to mention agriculture, transportation (railways in particular), food distribution, ports, and the educational system, none of which require “de-risk” and all of which require much attention. The biggest risk in Europe right now (except for Joe Biden) is the dismantling of the social state, including the undermining of labor rights. But those are “risks” that peeps of the authors’ social class are only to happy to run.
Yves Smith, you are splendid in being a critic here. As DJG immediately points out, there is a questionable focus to deal with:
“The age of unfettered globalisation, systemic convergence and increasing cultural understanding is over and is probably not coming back in the foreseeable future.”
What China and peoples of the global south are arguing is that there needs to be increased globalization, there needs to be determined efforts at systemic convergence and assuredly at increasing cultural understanding.
“Is the Chinese Belt-and-Road Initiative causing Italians to parade around in Roma in Mao jackets extolling the Little Red Book? If anything, I am seeing here in Italy an upwelling of some rather tart criticism of the U.S. of A. and its imperial overreach and NATO and its fantasy strategies…”
Thoroughly splendid comment, all through.
Good post. Agree entirely.
I agree. NC has this good habit of discussing articles that seem fishy and Yves and the comments set things straight. It’s a good way to train ones bs detection skills.
Writing of “Italians parading around in Roma in Mao jackets,” notice the ways in which Prime Minister Meloni chose to parade around before and right after election:
https://www.nytimes.com/2022/11/09/style/giorgia-meloni-style.html
November 9, 2022
Giorgia Meloni and the Politics of Power Dressing
The first female prime minister of Italy can’t avoid people caring about what she wears, but she can use it.
By Vanessa Friedman
The first female prime minister of Italy wears Armani.
It began in late October, when Giorgia Meloni, the founder of the hard-right Brothers of Italy party and the leader of the conservative coalition that won the national election, wore three dark Armani pantsuits on the three days of formal transition of power from Mario Draghi’s government to her own. She wore an Armani with a black shirt for her first official photograph with her ministers, an Armani with a white shirt for her handover meeting with Mr. Draghi and a navy blue Armani in between. And so it continued…
Is Armani one and only Italian cloth designer of note? And what would happen if Armani would refuse to supply Madam Prime Minister? Reliance on a single supplier calls for de-risking.
“Reliance on a single supplier calls for de-risking.”
Wonderful. What the fashion critic has not yet explained in the article is how Meloni dressed in the days before she was elected prime minister. How did Meloni dress all through the campaign? Did clothes make the woman? Do they now?
One question that one might have is how have the last decades of single market policies assisted Europe in terms of competitiveness? Many believe that the EU centralization greatest success was opening Europe to cross-border financialization.
While industrial policies regarding semiconductors etc. could be of great importance, it is a bit difficult to understand how such policies would have a chance of working in the EU as currently configured.
FInally, given the “vassalization” of the EU to the US, it is difficult to see how any industrial policy that could create real independence is possible. For example, any move to exclude the US platform firms from Europe in favor of European entrants would result in a very strong US reaction — and the EU would almost certainly buckle under real pressure.
https://fred.stlouisfed.org/graph/?g=1kf33
August 4, 2014
Real per capita Gross Domestic Product for European Union and United States, 1977-2022
(Percent change)
https://fred.stlouisfed.org/graph/?g=1kf3R
August 4, 2014
Real per capita Gross Domestic Product for European Union and United States, 1977-2022
(Indexed to 1977)
https://fred.stlouisfed.org/graph/?g=17hBA
August 4, 2014
Real per capita Gross Domestic Product for European Union, United States, China and India, 1977-2022
(Percent change)
https://fred.stlouisfed.org/graph/?g=17hBF
August 4, 2014
Real per capita Gross Domestic Product for European Union, United States, China and India, 1977-2022
(Indexed to 1977)
“FInally, given the “vassalization” of the EU to the US, it is difficult to see how any industrial policy that could create real independence is possible…”
The answer would seem to be China; clearly China:
https://english.news.cn/20240412/a62be83c56924ec7b1182cccde6b5c08/c.html
April 12, 2024
Xinjiang’s railway ports handle over 4,000 China-Europe freight train trips
URUMQI — The Horgos Port and the Alataw Pass, two major railway ports in northwest China’s Xinjiang Uygur Autonomous Region, have handled more than 4,000 China-Europe freight train trips since the beginning of this year, accounting for over 40 percent of the national total.
To date, the number of China-Europe freight train trips passing through the two ports has exceeded 72,000 since the ports kicked off operations, Urumqi Customs said on Friday, adding that the two ports have continued to enhance their services for the freight trains.
Xinjiang has adopted paperless operations for information exchange between customs and railway departments, effectively streamlining procedures for freight trains. These measures have played an important role in boosting trade among the countries and regions participating in the Belt and Road Initiative…
Two mentions of energy but neither of them in the “what to do” section. That alone tells me this is unserious.
No mention of the decline of financial colonization of say, Africa?
“It gradually discovered the extent of the mistrust it elicited in many developing countries.”
No mention of BRICS or USA? EU has a long way to go.
Remove the current crop of rotten heads of the PMC as they are clearly not getting through to their masters. Populism is knocking … Tick Tock!!!