Europe’s green relocation dream

Christopher Dembik
Head of Macro Analysis

Summary:  It is essential to adopt a coordinated European approach to reduce the inherent costs associated with relocation. The least we can say is that Europe is not heading in this direction.

The coronavirus pandemic has highlighted Europe’s overdependence on Asia, particularly China and India, for the production of medical equipment and devices (e.g. hydroalcoholic gel, masks and resuscitation respirators) as well as the active ingredients that are key components of commonly used drugs. While in the 1980s and 1990s, around 60% of all active ingredients were of European origin, the situation was completely reversed from 2010 with China and India now jointly accounting for up to 60% of total production.  

The crisis served as a wake-up call to European governments and society on the urgent need to diminish economic and health dependence on the rest of the world. Emmanuel Macron called for “European and national sovereignty” and “full independence” for parts of the medical markets. Others, certainly inspired by Japan’s financial incentives to move Japanese companies’ production out of China, went further with this idea and asked for an European industrial policy that would aim to relocate as many economic activities as possible in Europe. 

Reshoring of value chains is not a new idea; it is as old as globalisation itself. But it has swung back into fashion in recent years on the back of rising protectionism – and it has gained more ground over the past few months due to the outbreak. From Trump’s 2016 campaign to UK manufacturing’s campaign today in favor of “aggressive” reshoring of supply chains in the UK, there is an underlying belief that if more products and goods are produced at home, the economy will turn better.  

In theory, relocation is a very attractive idea. It should bring many advantages: reindustrialisation, creation of new jobs, limiting supply chain disruption in the event of a new external shock similar to the virus and, above all, environmental sustainability. But the question is whether Europe has the means to realise its ambitions and become more self-reliant. 

The euro-area balance of trade provides us with initial answers. It shows the difference between sales and purchases made abroad and is used to assess relative import/export dependence to the rest of the world.  

Euro-area trade is characterised by a massive surplus, mostly due to Germany reaching a EUR 338-billion surplus in the twelve-month period to March 2020, which represents roughly 2.8% of euro-area GDP. This is the second biggest trade surplus in the world, behind China. Europeans, then, are selling more abroad (outside the Union) than they buy. The EU open trade regime is therefore marked by a strong reliance on exports and lesser import dependence – which means that the EU is broadly self-sufficient, notably in most primary agricultural commodities. 

That being said, can it regain autonomy in goods and products where it is not self-sufficient yet, such as medical equipment or printed circuit boards that are essential to smartphones and computer production? It is highly uncertain.  

Even if it can regain autonomy, relocation is far from the miracle solution that many claim it to be. At the very least, it requires resources, skills, leadership and a tolerance for higher costs – and that’s not even considering potential retaliation from China. It assumes that host countries have the requisite workforce and know-how, which is not always the case for manufacturing many products and goods.  

Creating a vibrant industrial base requires long-term vision, political leadership and the capacity to work hand-in-hand with the private sector. Relocation cannot be decreed, it is built over time. It involves long and risky processes – including reorganising value chains, which can take years.  

Plus, as we all know, there is no free lunch in economics. Reshoring usually leads to higher costs for businesses that are almost systematically passed to consumers. Thus, it is essential to adopt a coordinated European approach to create economies of scale and reduce, as much as possible, the inherent costs associated with relocation. The least we can say is that Europe is not heading in this direction.  

In the context of the seven-year MFF negotiations and “Next Generation EU” instrument, the European Commission has proposed to boost Horizon Europe – an already existing programme that is aimed at strengthening autonomy in strategic value chains, among other things.  

If validated by the European Council, the total envelope could reach EUR 94.4 billion over the period 2021-2027, versus EUR 80.9 billion initially. So the package allocated to reduce EU reliance on outside trade would represent, at best, 0.08% of EU GDP per year. Even considering other programmes, such as those targeting climate change impact and aiming to develop new industrial clusters, this is a mere drop in the ocean. The EU’s ambition to become more self-sufficient is nothing but empty promises.  

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.