Europe’s green relocation dream

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.  

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