Quo vadis Europa post-corona?

by Katharina Krell, Entrepreneur, manager, project developer, senior expert in low-carbon economy topics

4 May 2020 | Reading 5 mins.

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Are we really going to return to business as usual as soon as possible to resume the hyper-globalized frenzy of chasing the margins through global arbitration? Insights from Katharina Krell.

Have you noticed how nature enjoys the fact that we humans are confined? The other day a pheasant was spotted in downtown Brussels, the sky is unscarred of aviation exhaust, the air in the city suddenly smells much better, and it is so quiet in the streets.

Well, we cannot stay home forever, and this is not the way to save the environment. However, this is the moment to think about our economic model and how we’ve arrived where we are today.

Until 1990, globalization was fairly conventional, rebuilding essentially the open economy of 1913 – but then something happened that Dani Rodrik calls “hyper-globalization”, meaning that the same product at various stages of production is being shipped around the globe several times before coming together in a final product. We saw a huge increase of trade of intermediate manufactured goods in the last three decades.

Internet had made the world ‘flat’. Communication had become cheap and instant, and logistics followed suit. At the same time, global trade had been largely liberalized by a string of international trade rounds. The average tariff levels fell from about 22% in 1947 to 5% after the World Trade Organization’s (WTO) Uruguay Round in 1999. China joined the WTO in 2001, and new free trade zones reduced the cost of trading goods. With the result that arbitrage was now happening on a global scale, with companies taking advantage of price differences between their home markets and the now accessible emerging markets on the other side of the world.

Arbitrage: 

the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset

At the same time, environmental damages were still treated as negative externalities that were not priced into the equation. Arbitrage was thus not only taking advantage of lower personnel costs in China or Bangladesh, for example, but also of the lower environmental standards that made the cost of manufacturing cheaper, not to speak of worker safety and social rights…

And so, as if there was no tomorrow, Europe started happily importing and consuming goods made far away, by cheaper labor with less social and safety protection, and in disrespect of the ever-tightening EU environmental regulations of which we are so proud.

With Covid-19, our honeymoon of living with this double standard seems to have come to an end as we are waking up to the reality of hyper-globalization and to the vulnerability it has brought along. The globalized value chains have also left us without control over a large part of production where European companies depend on parts and pieces to put together their final products or where the entire production is taking place in Asia. And, which is worse, this is true not only for leisure and pleasure items, but also for strategically critical sectors like healthcare as we have come to learn in the past weeks of corona crisis.

Two paths diverge in the woods… 

Every crisis is a potential point of departure for a systemic change. We can go two ways. Either this crisis will result in an ever-growing loss of civic rights and an increase in ‘Big Brother’ government control of citizens, introduced in the name of public health, and we’ll all return to business as usual as soon as possible to resume the hyper-globalized frenzy of chasing the margins through global arbitration.

Or, we can radically re-think our economic model, shorten our value chains, repatriate industrial activities outsourced two decades ago, re-discover the pleasure of producing and buying locally, while rejuvenating industrial jobs in Europe. This will result in higher environmental standards and reduce societal inequalities by sharing the added value of producing and selling goods between the shareholders that own the means of production and the EU workers that can enjoy EU-standard rights in their newly-created jobs.

Maybe the world will not be our oyster anymore, but Europe can be, with all that it has to offer in terms of diversity and synergies. And many EU thinkers and policy-makers are already exploring ways to shrink the value chains and to build new and more resilient local socio-economic models compatible with EU rules that protect the common good of our environment and the individual rights of workers. The new EU Industrial Policy Package (10 March 2020) can be a start. As Thierry Breton, European Commissioner for Internal Market, pointed out:

Europe has the strongest industry in the world. Our companies – big and small – provide us with jobs, prosperity and strategic autonomy. Managing the green and digital transitions and avoiding external dependencies in a new geopolitical context requires radical change – and it needs to start now.

I would happily subscribe to that.


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