Eurozone finance chiefs fear trade jitters could get in the way of EU competitiveness plans

Eurozone finance ministers are pushing trade higher on their agenda to ensure increased geopolitical focus on economic security and ‘de-risking’ strategies do not hinder their plans to shore up the bloc’s competitiveness.

As ministers from the 20 euro member states – also called the Eurogroup – meet in Brussels on Thursday (11 April), their focus on trade is meant to clear the path for next week’s special summit of EU leaders, who are expected to sketch out a strategy for boosting Europe’s single market and competitiveness.

“The euro area is a highly open economy, and deeply integrated in global supply chains. We have seen global trade has decelerated [and] the risk of fragmentations are real – and maybe increasing,” a senior EU official told a press briefing ahead of Thursday’s meeting.

“Clearly there is agreement that adding to trade fragmentation is not in the EU interest,” the official added, saying that “supply-side resilience and strategic autonomy,” as well as industrial policies, needed to be “balanced against” and “reconciled […] with the single market, which everyone agrees is really the EU greatest asset.”

“We know very well that the issue of competitiveness will be high on the EU policy agenda in the months to come,” the official said.

“Finance ministers have a holistic responsibility over the economic performance of the euro area – and are well placed to assess those trade-offs.”

According to a draft document seen by Euractiv on the priorities that will be agreed at next week’s council meeting, EU leaders will lay out a ‘competitiveness plan’ that will call “for a new horizontal single market Strategy by June 2025”  but also for “pursuing an open and fair trade policy […] while reinvigorating global trade”. 

Emphasis is expected to be put on “promoting open trade relations and respect for WTO rules-based order.”

Concerns over trade fragmentation as a key headwind for the bloc’s economy have been magnified by Russia’s war in Ukraine and ongoing tensions between the US and China.

Risks to Europe’s economy were emphasised in a recent European Commission study highlighting that increased trade tensions and trade-restrictive policy measures including subsidies led to “an increasingly restrictive landscape in cross-border trade”.

The paper warned that decoupling policies, including “new protectionist industrial policies”, are poised to carry “significant repercussions”.  

“Sustained trade fragmentation could entail significant potential economic costs,” the paper warned, with potential permanent global output losses “up to 7% of GDP” depending on the severity of fragmentation.

In some more exposed countries, “scenarios that combine trade fragmentation with technological decoupling could lead to output losses between 8% and 12% of GDP.”

Overall, the paper indicated that de-risking strategies should be carefully targeted to “areas where the benefits of inducing the re-location of value chains would outweigh the costs”.

The single market as a panacea for trade uncertainties

Focusing on targeted de-risking, another Commission report published in February said that “severing ties with ‘riskier’ partners [such as Russia and China] is costly”, with costs heterogeneous across sectors and countries. 

Notably, the study found that these costs would be “only a fraction of the gains” that could be made from deepening the bloc’s single market – which the Eurogroup has named as one of its five priority policies for 2024.

“Removing persistent trade frictions within the EU can offset the losses from severing ties with [these] partners,”  it said.

The study calculated that trade among EU countries has jumped 63% thanks to the single market – resulting in a cut in trade costs equivalent to a 12% cut in trade tariffs.

A further reduction in internal single market trade costs equivalent to a tariff decrease of about 6% would be sufficient to fully offset the losses from cutting trade with non-EU partners, it said.

Trade scenarios: ‘Death by a thousand cuts’?

Meanwhile, Philipp Lausberg, an analyst at the European Policy Centre, told Euractiv that deepening the EU’s single market and maintaining trade links with Beijing were both highly desirable, “not only for economic but also for political reasons”.

Victor De Decker, a research fellow at the Egmont Institute who has studied the security implications of China’s dominance of the global critical raw materials (CRMs) market, noted that a cessation of EU-China trade ties “is not necessarily the main risk we are facing” with regard to CRMs.

Contrary to Europe’s “concentrated dependence on fossil fuels from, e.g., Russia or Saudi Arabia,” the bloc’s dependence on China for the supply of multiple CRMs including lithium, magnesium, and rare earths “is not the major threat given the nature of the product: CRMs can be used, reused and recycled”.

Instead, he emphasised that the more likely danger is a “death by a thousand cuts” scenario whereby China “weaponis[es]” its CRM dominance to enact “an erratic series of export restrictions over an extended period”.

A recent paper by analysts at the IMF, the London School of Economics, and other major research institutes estimated that a complete suspension of trade with China would cause Germany to lose 1.26% of gross national expenditure (GNE) per year over the long run.

More specifically, if this “hard decoupling” occurred immediately and all EU trade with China ceased from day 1, Germany’s GNE would tumble by 5% in the short-term, and then inch gradually closer to the 1.26% long-term trend. Despite the magnitude of the fall, it would still undershoot the 5.7% contraction suffered by Europe’s largest economy following the financial crisis in 2009.

The permanent long-term loss compares with an annual 2.05% fall in China and a 4.94% plunge in Russia. 

Julian Hinz, director of trade policy at the Kiel Institute and one of the study’s co-authors, argued that a hard decoupling would “absolutely” be worse for Beijing than it would for the EU.

“I think that’s often a dimension that’s really overlooked,” Hinz told Euractiv. “The discussion in Europe is really about [how] we’re dependent on China, just as two years ago it was all about how we were dependent on Russia. But these dependencies are never one-way,” he noted.

“European economies are much more diversified than people tend to think.”

The EU’s current strategy of “de-risking” – but not decoupling – from Beijing, Hinz also argued, works as an “insurance premium” that EU countries are paying to limit the immediate impact of a potential hard decoupling from China.

By de-risking, he explained, “you’re essentially paying for not having this immediate deep cut [in trade]”.

“If we were to decouple ‘cold turkey’, we would face this sudden drop [in GNE] comparable to the financial crisis.” 

In the area of critical materials, De Decker agreed that “[EU] planning capacities should not overemphasise” the scenario of a cessation of all Chinese supplies.

“Rather, we should be preparing and acting in a smart and long-term strategic manner apt for an unpredictable, protracted time of friction.”

[Edited by Anna Brunetti/Zoran Radosavljevic]

Read more with Euractiv