The global economy is undergoing significant changes that go beyond American tariffs, and Europe must begin to seek growth opportunities on its home turf as traditional sources of income dry up, said the Chief Economist of the European Central Bank (ECB) Philip Lane.
The European economy has barely grown since the pandemic, facing increasingly fierce Chinese competition in key export markets, a weakening industrial competitiveness, and a heightened tendency among citizens to save. This year, European exports have also been called into question by American tariffs.
China has long been the main buyer of European goods, but in the meantime, it has built competitive companies with top-notch expertise, transforming from a buyer into a competitor and narrowing the space for European exports, Lane told Reuters’ Econ World podcast.
– The pattern of comparative advantage in the world has changed, and China is now very strong in many sectors – emphasized Lane.
– Alongside geopolitics, there is also a fundamental economic reality: the relative attractiveness of exports compared to domestic sales has changed – concluded the ECB’s Chief Economist.
Major Changes
American tariffs could exacerbate the problem of European exports, but Lane is optimistic, arguing that the boom in artificial intelligence and high government spending are maintaining strong demand in the U.S. and limiting the trade impact.
– In such circumstances, companies can reasonably expect that increased tariffs can be passed on to the American importer and the American consumer. The U.S. is important, but it is not the dominant driver of the European economy – explains Lane.
However, tariffs have redirected global trade, especially in Asia, and Europe is now facing greater Chinese competition even at home, claims Lane.
– China now exports more to Southeast Asia, which in turn exports more to the U.S. China also exports more to Europe and other parts of the global economy – he explains.
These are major changes on a global scale, concludes the ECB official.
The American Lesson
Europe should never voluntarily withdraw from export markets because trade can benefit everyone, but the domestic market of 350 million people offers plenty of growth opportunities, provided the Union can remove more internal barriers, he said.
– The U.S. has taught us that we need a true single market. For a real return on the most relevant investments in the basic digital economy… we need scale, and that is hard to achieve when the EU is divided into 27 countries – he added.
– ‘Scale’ would require a lot of reforms in each individual member state, and those would need to be thorough, difficult, and long-lasting – believes the ECB’s Chief Economist.
Numerous countries on the periphery, especially Spain, have already begun this process and are now enjoying the benefits of faster growth. Europe, in his view, should consider creating conditions for stronger domestic demand, both through fiscal policy and reforms, to stimulate investment and innovation.
– Autonomy is much easier to achieve if domestic demand is strong enough – concluded Lane.
