EU pushes back on IMF criticism of ‘inward-looking’ industrial policies

EU leaders scrapped the second day of a Council meeting as soon as top jobs had been assigned, without even pretending that the summit had ever been about anything else (such as Strategic Agenda, migration, defence and competitiveness discussions). And yet, policy talks never cease in Brussels.

On Wednesday (26 June), for example, a senior EU official pushed back on the International Monetary Fund’s recommendation that countries should pursue policies that encourage the diffusion of new technologies, arguing that the EU must sometimes introduce “protecting” measures to ensure its economic security.

Roman Arjona, chief economist at the European Commission’s Directorate General for Internal Market, Industry, Entrepreneurship, and SMEs, told a Bruegel-hosted event that the IMF’s recent report criticising “inward-looking” industrial policies should be tempered with the recognition of economic security’s increasingly central role in EU policy planning.

“I agree with the statement of the IMF report in general, but I think some of them might benefit from certain nuances,” said Arjona. “We have to take into account that protecting is also important—protecting from economic security risks.”

Arjona pointed to the EU’s recent efforts to diversify its supply of critical raw materials away from China as an example of the bloc’s growing emphasis on security.

He also referred to the export restrictions imposed by Beijing last July on gallium and germanium, used to manufacture semiconductors and fibre optic products respectively, as an instance of the “weaponisation” of the bloc’s strategic dependencies that the EU is keen to protect itself against.

In addition, he warned that foreign direct investment into the EU, while economically beneficial in some respects, can often pose a security risk.

“Foreign direct investment can be a source of growth, but certain investments may also affect security—for example, when EU businesses supply critical technologies and then these EU businesses get acquired,” he said.

By contrast, Era Dablas-Norris, the deputy director in the IMF’s fiscal affairs department, said that policies that encourage the spread of innovation and technologies are “absolutely critical” to combat climate change and digitalise the world economy.

“The focus really should be on what kind of policies are going to spur technology diffusion,” she said at the event.

“Closer international cooperation and greater exchange of knowledge are absolutely critical… if countries are going to harness the benefits of ongoing green and digital transformations that are ongoing,” she added.

Dablas-Norris emphasised that protectionist measures would ultimately prove counterproductive even if introduced in advanced economies like the US.

“Even large economies rely on innovation that is done elsewhere,” she said. “So it could be a little bit of sort of shooting yourself in the foot if you build large walls.”

Moreover, she noted that relying on innovation originating from elsewhere can help countries “be more cost-effective in a fiscally constrained world” and warned that protectionist measures could lead to “costly” retaliatory measures.

She also stressed that protectionist policies would especially negatively impact emerging markets, which must import advanced technologies in order to develop.

“Emerging market and developing countries… they’re relying on innovation that’s done elsewhere. So how will they fare in all of this if countries start adopting inward-looking policies?”

“We believe that emerging markets and low-income countries have the most to lose.”

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[Edited by Anna Brunetti/Zoran Radosavljevic]

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