Adapting to uncertainty: How the EU can navigate industrial and trade challenges in a fragmented world
Monday, 16 December 2024
In a rapidly changing global landscape, the European Union (EU) faces unprecedented challenges to its industrial production and trade relationships. From the impacts of the ongoing war in Ukraine to increasing tensions with the United States and China, Europe’s economic model, long reliant on exports, is being put to the test. This was the focus of the latest Future is Blue podcast episode, where I hosted Aslak Berg, Research Fellow at the Center for European Reform, and Miguel Ángel González Simón, economist at Funcas, for an insightful discussion on the EU’s vulnerabilities and paths forward.
🎧 Listen to the full episode of Future is Blue here.
Key vulnerabilities: Energy, trade, and growth
A primary vulnerability for the EU lies in its dependence on external energy sources, a weakness that has been exacerbated by the conflict in Ukraine. “Europe is an energy-poor continent,” noted Berg, highlighting how the disruption of Russian energy supplies has driven up costs and further exposed Europe’s reliance on imports.
In addition, the EU’s heavy dependence on exports makes it particularly susceptible to external shocks. This export-oriented model, which closely mirrors Germany’s approach, leaves the EU vulnerable in a world increasingly characterized by protectionism and trade barriers.
González Simón added another layer to the discussion, pointing out how the EU’s main economies, particularly Germany and France, are exhibiting weaknesses. In contrast, smaller EU economies seem to be performing better, further complicating the bloc’s internal dynamics.
Diverging paths: Germany and Spain
Germany and Spain, two of the EU’s largest economies, have experienced diverging outcomes in recent years, particularly in industrial production. While Germany’s reliance on manufacturing and exposure to Russian energy have made it more vulnerable to global disruptions, Spain’s service-oriented economy, driven by tourism, has allowed it to adapt better.
“Spain’s growth since the financial crisis is now equal to Germany’s—a stark reversal of fortunes from a decade ago,” said Berg. This shift underlines how differing economic compositions can influence resilience in an uncertain world.
Yet, challenges remain. Both economies must navigate global competition, particularly from China in sectors like electric vehicles, where Chinese manufacturers are rapidly advancing up the value chain.
Navigating dependence on the U.S. and China
The EU’s trade relationships with the United States and China are both a strength and a liability. While the EU depends heavily on China for goods like electronics and machinery, it relies on the U.S. for services and key exports like pharmaceuticals and motor vehicles.
Berg explained the balancing act the EU faces with China: “When do you accept the benefits of cheap, high-quality Chinese products, and when do you defend your industry?” The EU’s imposition of tariffs on Chinese electric vehicles underscores the bloc’s struggle to protect strategic sectors while avoiding retaliatory measures.
Similarly, the EU’s relationship with the U.S. is fraught with uncertainty, particularly with the return of Donald Trump to the White House. While Trump’s trade policies may simply be a tactic to negotiate better terms, the risk of sweeping tariffs remains. “The EU is not in a position to withstand a trade conflict with the U.S. right now,” Berg emphasized.
The path forward: Diversification and integration
As the EU enters a new political cycle under Ursula von der Leyen’s leadership, it must focus on adapting to this fragmented global environment. Diversifying trade partnerships is a crucial step. The long-delayed trade agreement with Mercosur, for example, could serve as a test case for Europe’s ability to champion open trade in a protectionist world.
Domestically, the EU must address stagnating consumption and revive demand. Berg highlighted the importance of leveraging Europe’s significant private savings and addressing clear investment needs, particularly in areas like green energy and digital infrastructure.
On the monetary front, González Simón pointed to the potential role of the European Central Bank (ECB) in mitigating short-term shocks. He noted that countries like South Korea have already adjusted interest rates in anticipation of economic challenges, suggesting that the ECB could consider similar measures.
In the long term, González Simón sees these challenges as an opportunity for the EU to implement the reforms outlined in the Mario Draghi report, particularly those aimed at boosting European productivity through greater investment in pan-European projects.
A critical juncture for Europe
The decisions the EU will make in the coming months and years will shape its ability to thrive in an increasingly multipolar and fragmented world. Strengthening domestic resilience, fostering new trade partnerships, and addressing internal disparities will be critical to ensuring the bloc’s competitiveness.
As the podcast discussion underscored, Europe must act decisively to adapt to the realities of this new global order. While the challenges are immense, the opportunities for transformation are equally significant.
🎧 Listen to the full episode of Future is Blue here.
Carlos Carnicero Urabayen