Europe, the Old Continent far from the United States
Europe and America, in terms of competitiveness and employment, are increasingly distant. All of this has been happening in a steady trend over the last 20 years. American productivity has grown more than double that of the Old Continent. Among the various causes: insufficient public and private investment, dramatic lack of technology companies and venture capital funds and, last but not least, the demographic crisis spreading across the Eurozone. But there is another cause that is often underestimated and concerns the constant decrease in foreign direct investment (FDI). Unfortunately, this very important value has fallen by 4% in the past year and now FDI is 14% lower than the high levels of 2017. A prime example of this trend is Germany, the European locomotive, which has entered a sort of technical recession after a 12% drop in foreign investment. In the UK too, foreign investment has fallen by 30% since 2016-2017, while Brexit has redirected its investments towards other European countries.
Europe, the two challenges of the coming years
Never before has it been more vital for the Eurozone to attract foreign direct investment. There are currently two challenges: to reduce their supply chains and prevent member states’ economies from suffering a China shock on a par with the one in the United States after Beijing joined the World Trade Organization in 2001. Climate change and the winds of war have made global supply chains increasingly vulnerable. Primary materials for green industries (semiconductors and battery cells for electric vehicles) come from Taiwan, South Korea and China. These concentrations, like those of oil or energy, are very risky for the planet. An example of this weakness came in 2021 when Taiwan Semiconductor Manufacturing Company (TSMC) closed some factories due to Covid, causing a global halt in automotive production.
Europe, the responses of the Old Continent
To limit these risks, the EU is encouraging foreign investment in battery cells and semiconductors through the European Chip Act and the European Battery Alliance. Like the Inflation Reduction Act and the Chips and Science Act in the United States, the new regulations seek to reduce risk by expanding the supply of suppliers. But it is still not enough because the crisis is spreading in the Eurozone. In 2022, for the first time in history, Germany imported more cars and machinery from the Asian giant than it exported. According to a study by Allianz Research, China has surpassed Germany in key sectors of the global export market. China’s share of machinery and equipment exports rose to 29% in 2022, compared to Germany’s 15%. While Germany still leads in automobile and transportation exports, with a share of 17% compared to China’s 9%, the lead is narrowing. This being on the brink of the abyss should make European politics think carefully. In the United States, the Chinese shock of 2000 had a severe impact on manufacturing regions. Workers laid off by companies had trouble finding work. This led to an epidemic of “deaths of despair” with suicides, drug overdoses and alcohol-related liver disease. All of this laid the foundation for Donald Trump’s victory.
Europe, crises bring right-wing winds into politics
The victory of the right in Italy and France is no coincidence. A trend that could expand. US decisions could help. US President Joe Biden’s decision to impose a 100% tariff on electric vehicles produced in China will likely redirect Chinese EV exports from the US to Europe, leaving European policymakers with no choice but to impose their own tariffs on imports. Such a move could have the added benefit of increasing Chinese FDI flows to the EU, while Chinese automakers could seek to avoid import tariffs by building new factories in Europe and selling EVs directly to European consumers.
In any case, by forming alliances with companies from technologically advanced economies such as China, Taiwan, South Korea and Israel, European companies could bridge the gap in the electric vehicle and digital knowledge sectors and increase foreign direct investment flows to the EU. Previously, it was China that absorbed European technology, now it is exactly the opposite. The roles are reversed: China is currently a technologically advanced economy seeking access to the large EU market for its electric vehicles, and European countries lack the technical expertise to remain competitive. To increase FDI flows and improve its competitiveness, the EU should reverse China’s industrial policy and require Chinese EV manufacturers to form joint ventures with domestic companies in exchange for market access.
#Europe #Continent #Productivity #Technology #Crisis
