Time for Europe to stick together on fiscal and industrial policy

The leaders of the world’s seven most economically developed countries left the south of France after this year’s G7 summit having done little to assuage fears that a global recession is looming. Indeed, the world’s economic climate is far from rosy: the ever-escalating China-US trade war has caused the German economy – the traditional engine of European growth – to falter, putting pressure on Berlin to deliver more fiscal stimulus in a bid to halt the slide.

With Brexit, slowing US growth and China’s aggressive attempts to seize European market share only adding to the turmoil, Europe stands to be the biggest loser in the nearly-inevitable downturn. As Washington and Beijing fight it out on the backs of the global economy, the EU needs to stick closer together on financial and industrial policy if it hopes to mitigate the most serious effects of rocky economic waters and safeguard its competitiveness in the long-run.

Tackling the imbalance

Compared to the last European recession from 2008 to 2013, analysts predict a new recession’s negative effects to be more evenly distributed across the entire bloc. Rather than just the Southern member states, as was the case before, France and especially Germany are expected to be hit particularly hard, consequently dragging the Eurozone’s smaller members further into the financial maelstrom.

Dealing with this kind of broad-side impact requires a common stance based on coordination and a common response. However, as is so often the case with EU politics, this condition will be difficult to fulfil. It first and foremost requires the completion of the long-touted supernational monetary and banking union in order to have a joint stabilisation mechanism to deal with stimulus packages. This is of special relevance since the European Central Bank’s policy of zero interest rates is already exhausted.

However, while some progress has been made in improving the framework surrounding the economic and monetary union, EU leaders have been unable to push forward into the implementation phase – largely due to Germany, which should be taking the lead on further financial integration, but has learned that there’s no point in doing so unless countries like Greece or Italy implement domestic reforms. But in the face of a recession set to be worse than the previous one and with a wider impact, all EU members would be well-advised to accelerate financial integration.

Adjusting industrial policy

But putting fiscal resentments aside to create an EU-wide insurance pot for the financial side of the economy alone won’t be enough. Brussels also needs to provide the framework to keep the economic engine running in the first place. To proof itself against an increasingly difficult global economic climate, competitiveness needs to be maintained. A revision of industrial policy is the most pressing problem. It’s also a relatively lower-hanging fruit which can yield comparatively quick positive outcomes – especially for the small and medium-sized enterprises (SMEs) that form the backbone of the European economy.

With 23.4 million SMEs in the European Union, these enterprises are dominating the EU’s largest, most productive industries. The challenge for governments is to improve policies to support entrepreneurship by helping SMEs to innovate, as well as relaxing the barriers that prevent business growth. Importantly, they’re also less cyclical, making them important pillars in helping economies to sail through stormy times.

SMEs in the aluminium industry’s downstream sector – those supplying parts to machine manufacturers and the car industry – have been hit especially hard by the European bloc’s current industrial policies. For example, Brussels maintains a 6 percent tariff on raw aluminium imports, a vital input for SMEs.

As a recently published study by researchers of LUISS University in Rome for the Federation of Aluminium Consumers in Europe (FACE) shows, the EU’s tariffs on imported raw aluminium have cost the downstream sector €18 billion since 2000. For an industry that is more than 70% dependent on foreign-sourced aluminium, this has been a major factor behind the EU’s falling global competitiveness.

Ironically, this extra cost occurred despite the fact that the downstream sector wasn’t even the policy’s target. In fact, the policy was meant to protect the fast-declining fortunes of primary aluminium producers ravaged by smelter closures – a sector already damaged by China’s relentless aluminium dumping. But while the tariffs have not halted the continuous decline of primary aluminium production in the EU, the LUISS study makes it clear that the additional duties have caused collateral damage in the downstream – with potentially severe consequences for the economic future of a strategic sector of the European industry.

Leveraging the might of the EU-27

Leaders in national capitals and the EU institutions have allowed policy-decisions of vital long-term importance to stay stuck in limbo for too long. Yet while movement on the monetary union seems unlikely in the nearer future, there has been a refreshing push in the industrial policy department.

The Franco-German industrial policy manifesto that was ratified earlier this year is a first step in rethinking policy in the face of floundering European competitiveness. Based on a simple proposition, the policy emphasizes the need for Europe to pool its strengths to retain its industrial power in the face of increasing global competition.

But any reforms need to take the wider European context into account if they are to be successful. Indeed, the EU must continue to push for brave fiscal policies, while – perhaps more importantly – supporting the industrial base largely responsible for Europe’s wealth.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.