Reindustrialization might cause some above-target inflation. Deindustrialization, meanwhile, might take countries out of the running of the industries of today, and the future, too, said former European Central Bank president Mario Draghi.
Last week, Draghi released what amounts to a 397-page magnum opus on the future of European industry and a massive warning shot that called for nearly a trillion dollars in spending to make Western Europe at least as competitive as the United States and China. Inflation will come with the spending, but it might be worth it.
Mario Draghi was commissioned by the EU to examine solutions to Western Europe’s deindustrialization and competitiveness. His roughly 400 page report, titled “The Future of European Competitiveness” called for around 800 billion euros of investment, which is more than double that of the post-war Marshall Plan. That’s how bad Europe is right now. But is such a massive increase in investment macroeconomically sustainable? How can a country unlock investment of the desired magnitude? The European Commission and the IMF Research Department used multi-country economic models to simulate scenarios for investment packages in the EU and their macroeconomic implications. One key takeaway: G7 countries like the U.S. are going to have to tolerate some inflation, even if for a little while, if it wants to save its industrial base – a base that increasingly competes globally against low tax, low wage, low environmental regulation nations that have the scale and the port logistics to do the job for them.
Delivering such a massive increase in EU investment would reverse a multi-decade decline in most large EU economies. Europe has not had similar investment rates since the postwar period.
For Draghi, the 800 billion euro investments will increase European output and lead to limited and temporary inflationary pressure.
“The additional investment constitutes a positive demand shock, leading to an initial rise in inflation, accompanied by a lasting increase in output without long-term inflationary pressure,” the report stated in its Part B section of the two part report. “Across the various scenarios, output is projected to increase by around 6% within 15 years in response to additional investment in the magnitude of 5% of GDP when compared to a baseline without the investment package. Since supply adjusts more gradually than demand, the transition phase implies some inflationary pressure, and a temporary decline in net exports. But these inflationary pressures dissipate over time.”
Draghi mentioned China and the U.S. as Europe’s leading competitors, and judging by those pages – the U.S. and China are winning. He mentioned the Inflation Reduction Act (IRA) as a success story for the Biden administration. And noted that Europe’s push to build a post-fossil fuels energy grid caused higher energy prices than its competitors. Moreover, he noted that the solar industry in Western Europe has been completely taken over by the Chinese. And that the remaining companies in Europe that produce solar are either contract manufacturing in China for imports, or setting up shop in the U.S. He said that new solar innovation is promising, but questioned whether or not those innovators would be manufacturing domestically, or outsourcing to China. That would ultimately lead to China copying that technology and creating an instant, lower cost competitor to the European company that invented the product in the first place.
Deindustrialization in the EU has already started, and may accelerate without dedicated policies.
Europe’s low birth rate, coupled with a generally low skill imported labor force, has put Europe’s productivity rate below the U.S. In 1995, it was 95% equal to U.S. productivity. It’s now down to 80%. In an environment of historically high public debt-to-GDP ratios, potentially higher real interest rates than seen in the last decade and the increase in spending Europe wants in order to build a post-fossil fuels economy, plus the spending it will need to catch up to the U.S. and China in the digital economy and NATO defense spending, then stagnant GDP growth for Europe “could eventually lead to public debt levels becoming unsustainable and Europe being forced to give up one or more of these goals.”
On the digital economy, something Draghi worries about the most in his report, five of the top ten tech companies globally in terms of quantum computing investments are based in the U.S. and four in China. None are based in Europe. Europe’s native cloud computing companies have less than 5% market share at home.
Europe’s households have paid the price in foregone living standards. On a per capita basis, real disposable income has grown almost twice as much here in the U.S. as it has in Western Europe since 2000, long seen as the richest place in the world. Europe’s exporters have done okay and grown in emerging markets, mostly to China, which is both a blessing and a curse. It is why Europe is so skittish on doing anything to counter China’s industrials from taking over Europe’s market share on its own turf.
China is Already the EUs Solar OPEC. Draghi Presents No Solution.
The EU aims to achieve a minimum of 42.5% of its energy consumption from renewable sources by 2030, which will require it to nearly triple its installed capacity for solar.
China dominates global exports of most clean technologies. Last year, China’s Goldwind Science & Technology, a wind turbine player, tied for first with Vestas of The Netherlands as the world’s leading wind company. Goldwind will beat Vestas any day now.
Draghi knows it.
“Europe retains primacy in wind turbine assembly – serving 85% of domestic demand and acting as a net exporter – but it has lost significant market shares to China in the last few years, declining from 58% in 2017 to 30% in 2022,” he said.
On solar, Europe is completely AWOL. “On solar PV, the EU has already lost its manufacturing capacities, with production now dominated by China,” Draghi noted in Part A of his report.
China’s annual manufacturing capacity for solar photovoltaic cells and panel types is expected to be double the level of global demand, but judging by the report, Europe is ready to soak it all up. While Draghi says the U.S. is an exemplar here with the IRA, he fails to mention the Section 201 solar safeguard duties and tariff rate quotas. He doesn’t seem to like them at all, meaning Europe has already decided to be a solar importer.
We can tell where American policy makers and diplomats get their language from when it comes to solar deployment and climate change: it comes from Europe, at great benefit to China solar corporations. “Black-and-white solutions are unlikely to be successful in the European context. Emulating the U.S. approach would likely set back the energy transition and therefore impose higher costs on the EU economy,” Draghi said. “It would also be more costly for Europe to trigger reciprocal tariffs: more than a third of the EU’s manufacturing GDP is absorbed outside the EU, compared with only around a fifth for the U.S.”
China Cars: Let them All In
This July, the European Commission imposed tariffs on China EVs ranging from 17.4% to 37.6% on top of Europe’s universal 10% tariff on all cars. They based this tariff on the conclusion that EV production in China benefited from subsidies, a call the White House made in May when Biden imposed a whopping 100% tariff on China EVs.
Structurally higher energy costs and labor costs – up to 40% higher nominal unit labor cost in the EU compared to China – contribute to the serious competitive disadvantage for the EU. Higher energy costs are especially relevant for energy-intensive EV battery production. Labor is becoming an increasing bottleneck for the automotive transition to EVs, but again Draghi does not propose any solutions here. Even quotas seem to be off limits.
One can imagine that the likes of Volkswagen and Mercedes sell a lot of cars in China and so diplomats in Beijing and Berlin might be telling EU leaders that treating Chinese auto imports differently than American or Japanese ones might hurt their sales in China. Afterall, Beijing can simply say to its people ‘here is a $5,000 tax break if you buy a Chinese automotive brand.’
But China does not need to do those things, because Europe’s global automotive industry in Germany and Sweden, where Volvo is now majority owned by Geely from China, are against continuing these EV tariffs. The EU-wide tariff was only for four months. It will likely end in November. Draghi’s clarion call for reindustrialization will probably end right along with it.
MADE IN AMERICA.
CPA is the leading national, bipartisan organization exclusively representing domestic producers and workers across many industries and sectors of the U.S. economy.
Mario Draghi Says Reindustrialization Will Cause Inflation, But It Will Be Worth It
Reindustrialization might cause some above-target inflation. Deindustrialization, meanwhile, might take countries out of the running of the industries of today, and the future, too, said former European Central Bank president Mario Draghi.
Last week, Draghi released what amounts to a 397-page magnum opus on the future of European industry and a massive warning shot that called for nearly a trillion dollars in spending to make Western Europe at least as competitive as the United States and China. Inflation will come with the spending, but it might be worth it.
Delivering such a massive increase in EU investment would reverse a multi-decade decline in most large EU economies. Europe has not had similar investment rates since the postwar period.
For Draghi, the 800 billion euro investments will increase European output and lead to limited and temporary inflationary pressure.
“The additional investment constitutes a positive demand shock, leading to an initial rise in inflation, accompanied by a lasting increase in output without long-term inflationary pressure,” the report stated in its Part B section of the two part report. “Across the various scenarios, output is projected to increase by around 6% within 15 years in response to additional investment in the magnitude of 5% of GDP when compared to a baseline without the investment package. Since supply adjusts more gradually than demand, the transition phase implies some inflationary pressure, and a temporary decline in net exports. But these inflationary pressures dissipate over time.”
Draghi mentioned China and the U.S. as Europe’s leading competitors, and judging by those pages – the U.S. and China are winning. He mentioned the Inflation Reduction Act (IRA) as a success story for the Biden administration. And noted that Europe’s push to build a post-fossil fuels energy grid caused higher energy prices than its competitors. Moreover, he noted that the solar industry in Western Europe has been completely taken over by the Chinese. And that the remaining companies in Europe that produce solar are either contract manufacturing in China for imports, or setting up shop in the U.S. He said that new solar innovation is promising, but questioned whether or not those innovators would be manufacturing domestically, or outsourcing to China. That would ultimately lead to China copying that technology and creating an instant, lower cost competitor to the European company that invented the product in the first place.
Europe’s low birth rate, coupled with a generally low skill imported labor force, has put Europe’s productivity rate below the U.S. In 1995, it was 95% equal to U.S. productivity. It’s now down to 80%. In an environment of historically high public debt-to-GDP ratios, potentially higher real interest rates than seen in the last decade and the increase in spending Europe wants in order to build a post-fossil fuels economy, plus the spending it will need to catch up to the U.S. and China in the digital economy and NATO defense spending, then stagnant GDP growth for Europe “could eventually lead to public debt levels becoming unsustainable and Europe being forced to give up one or more of these goals.”
On the digital economy, something Draghi worries about the most in his report, five of the top ten tech companies globally in terms of quantum computing investments are based in the U.S. and four in China. None are based in Europe. Europe’s native cloud computing companies have less than 5% market share at home.
Europe’s households have paid the price in foregone living standards. On a per capita basis, real disposable income has grown almost twice as much here in the U.S. as it has in Western Europe since 2000, long seen as the richest place in the world. Europe’s exporters have done okay and grown in emerging markets, mostly to China, which is both a blessing and a curse. It is why Europe is so skittish on doing anything to counter China’s industrials from taking over Europe’s market share on its own turf.
China is Already the EUs Solar OPEC. Draghi Presents No Solution.
The EU aims to achieve a minimum of 42.5% of its energy consumption from renewable sources by 2030, which will require it to nearly triple its installed capacity for solar.
China dominates global exports of most clean technologies. Last year, China’s Goldwind Science & Technology, a wind turbine player, tied for first with Vestas of The Netherlands as the world’s leading wind company. Goldwind will beat Vestas any day now.
Draghi knows it.
“Europe retains primacy in wind turbine assembly – serving 85% of domestic demand and acting as a net exporter – but it has lost significant market shares to China in the last few years, declining from 58% in 2017 to 30% in 2022,” he said.
On solar, Europe is completely AWOL. “On solar PV, the EU has already lost its manufacturing capacities, with production now dominated by China,” Draghi noted in Part A of his report.
China’s annual manufacturing capacity for solar photovoltaic cells and panel types is expected to be double the level of global demand, but judging by the report, Europe is ready to soak it all up. While Draghi says the U.S. is an exemplar here with the IRA, he fails to mention the Section 201 solar safeguard duties and tariff rate quotas. He doesn’t seem to like them at all, meaning Europe has already decided to be a solar importer.
We can tell where American policy makers and diplomats get their language from when it comes to solar deployment and climate change: it comes from Europe, at great benefit to China solar corporations. “Black-and-white solutions are unlikely to be successful in the European context. Emulating the U.S. approach would likely set back the energy transition and therefore impose higher costs on the EU economy,” Draghi said. “It would also be more costly for Europe to trigger reciprocal tariffs: more than a third of the EU’s manufacturing GDP is absorbed outside the EU, compared with only around a fifth for the U.S.”
China Cars: Let them All In
This July, the European Commission imposed tariffs on China EVs ranging from 17.4% to 37.6% on top of Europe’s universal 10% tariff on all cars. They based this tariff on the conclusion that EV production in China benefited from subsidies, a call the White House made in May when Biden imposed a whopping 100% tariff on China EVs.
Structurally higher energy costs and labor costs – up to 40% higher nominal unit labor cost in the EU compared to China – contribute to the serious competitive disadvantage for the EU. Higher energy costs are especially relevant for energy-intensive EV battery production. Labor is becoming an increasing bottleneck for the automotive transition to EVs, but again Draghi does not propose any solutions here. Even quotas seem to be off limits.
One can imagine that the likes of Volkswagen and Mercedes sell a lot of cars in China and so diplomats in Beijing and Berlin might be telling EU leaders that treating Chinese auto imports differently than American or Japanese ones might hurt their sales in China. Afterall, Beijing can simply say to its people ‘here is a $5,000 tax break if you buy a Chinese automotive brand.’
But China does not need to do those things, because Europe’s global automotive industry in Germany and Sweden, where Volvo is now majority owned by Geely from China, are against continuing these EV tariffs. The EU-wide tariff was only for four months. It will likely end in November. Draghi’s clarion call for reindustrialization will probably end right along with it.
MADE IN AMERICA.
CPA is the leading national, bipartisan organization exclusively representing domestic producers and workers across many industries and sectors of the U.S. economy.
TRENDING
CPA Congratulates Senator John Thune on Election as Senate Majority Leader
CPA Supports Senator Rick Scott for Senate Majority Leader
U.S. Manufacturing’s Shrinking Share of GDP and How to Catch Up
CPA Congratulates President-Elect Donald Trump on Victory
Trade Deficit Takes Huge 19.2% Leap In September; Automotive and Semiconductor Deficit Bigger Than Sept. 2023
The latest CPA news and updates, delivered every Friday.
WATCH: WE ARE CPA
Get the latest in CPA news, industry analysis, opinion, and updates from Team CPA.
CHECK OUT THE NEWSROOM ➔