Strategic change in tack

A RESTRICTIVE MONETARY POLICY COINCIDES WITH A SHIFT TO REGIONALISATION IN INDUSTRIAL SUPPLY CHAINS

Clic?here?to read this article and many more at Empresa XXI's Hannover Messe Special Issue.

Europe’s economic and monetary policy has changed tack this year. The health crisis has prompted two key decisions in this field: the temporary suspension of the public deficit rule and the extension of its quantitative easing policy by the European Central Bank (ECB). These circumstances coincided in 2021 with a global increase in demand for goods and commodities, which was embodied in the almost complete breakdown in supply chains and a hike in prices.

This economic upheaval was reflected in Europe by the ‘microchip crisis’. This factor revealed the weakness of a substantial part of the continent’s manufacturing sector, which added to the macroeconomic imbalance and the risk of stagflation.

The EU is now facing the challenge of rolling out effective measures for the regionalisation of the industrial supply chain and the control of inflation. The former requires overcoming the weakness in the production of raw materials and basic components for industry.

In the latter, meanwhile, the restrictions imposed by the ECB and the increase in the price of money need to be tempered to avoid the most indebted countries triggering a euro crisis.

An opportunity for industrialising

These factors will help to raise the pace of industrialisation in Europe. Following the leap to globalisation over the past two decades prior to regionalisation, the EU will need to introducer more integrated supply chains within its frontiers. This is a clear opportunity for European manufacturing that, nonetheless, will not obviate the need to uphold a policy of regional multi-localisation.

The shift in industrial policy will be boosted by Next Generation funds, designed to facilitate the digital, ecological, and socioeconomic transition. The plan is to inject 750 billion euros, with 52% being nonrefundable and the rest in loans.

At the same time, the European Commission has begun to design plans for correcting the deficits incurred in the supply crisis. For example, Brussels has operationalised the programme for reducing outside dependency on the production of chips and other materials, and for promoting Europe’s technological leadership by increasing its capacity for the research, design, and manufacture of strategic components.

Digital sovereignty

As in the field of energy, the aim is to bolster the secure supply of a vital component in industrial operations. The new European Chips Act, announced by the President of the Commission, Ursula von der Leyen, will channel 43 billion euros from public and private funds with the remit to convert Europe into a chip manufacturing centre, capable of making 20% of the world’s output in 2030, compared to the current figure of scarcely 10%.

This legislation is designed to defend Europe’s digital sovereignty and regionalise production. This is the same approach being taken by the Chinese and US governments, which have implemented ambitious promotion plans for attracting investments.

This plan for European industrialisation will be backed, according to the promises made by the Commission, by a more strictly monitored import policy. The aim will be to reduce the negative impact prompted by the environmental demands imposed on European manufacturing. This requirement has been less stringent with components from outside the EU, thereby weakening domestic competitiveness. The plan now involves levying tariffs to even out the environmental factor and dumping, with the latest example being reflected in steels and wind towers.

ECB policy and the public deficit

Europe’s reindustrialisation will have to overcome another major obstacle, namely, the policies devised to control inflation and the public deficit. The question lies in the impact they will have on demand and economic growth. For the time being, the ECB has already announced a reduction in quantitative easing, which will boost the private market and investors’ trust in the debt of member states.

March last saw an end to the ECB’s pandemic emergency purchase programme (PEPP), which will now reduce its volume of purchases. Up until March, the ECB used this programme to purchase a net sum of 20 billion in assets per month. Nevertheless, between April and June 2022, the ECB has agreed to increase its purchases under the auspices of its standard asset purchasing programme (APP) to 40 billion per month (60 billion more than the figure foreseen for the entire quarter), although the volume of purchases will follow a downward trend until it reaches a net sum of 20 billion per month in the final quarter.

In Spain’s case, the EC’s purchases will cover 80% of the net debt to be issued in 2022. The problem in this case will be to decide upon the right interest rate policy. The upward pressure exerted by the US Federal Reserve and the Bank of England may undermine the plan not to alter the rates in 2022, although the Russian invasion of Ukraine, and its persistence over time, may maintain monetary lassitude. The ultimate aim is to control the stresses in prices and uphold the equilibrium between growth and inflation.

Industry, economic support

All the above should help to prioritise industry. Global data show that the EU manufacturing sector has played a key part in preventing the continent from sliding further down the table. In the first two decades, Europe’s GDP has shrunk by six points in the global total, from 22% to 16%. This drop was partly mitigated by industry, which fell from 17% to 14% in global terms.

It is worth stressing in this case that this more positive performance was partly due to Germany and Central Europe, which gave stability to the weight of industrial value added in GDP, with a figure of around 20%, while in France it fell from 14% to 9% over those twenty years; in Italy, from 17% to almost 15%; in Spain, from 16% to 11%, and in the Basque Country, from 25% to 19%.