Europe’s economic woes are largely self-inflicted

By
Pieter Cleppe
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For the first time in its 87-year history; Germany’s biggest employer, Volkswagen, is considering to shut down factories in the car manufacturer’s country of origin. Earlier this year, VW committed to invest 2.7 billion euro to expand its production capacity in China. At the same time, Chinese state company Changan has set up base in Germany, in order to start selling its EVs there.

Lower than expected demand for its electric vehicles (EVs) in Europe reportedly plays a big role in Volkswagen’s challenges. This is yet another indication of how damaging the EU’s climate and environmental policies have been for Europe. The EU’s decision to impose a de facto 2035 ban on a product where European manufacturers like Volkswagen are competitive – combustion engine cars – has effectively functioned as a subsidy for electric vehicles, a product where Chinese and American manufacturers are more competitive.

Irrespective of whether the EU should be protectionist or not, hopefully everyone can agree that it should not go out of its way to disadvantage its own industry. Yet, that is happening, all the while when it is less than clear that the environmental footprint of electric vehicles is superior.

Tariffs to correct failed policies?

The EU’s plan to increase tariffs on Chinese EV imports is really adding insult to injury. As former US President Ronald Reagan once described the government’s view of the economy: “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

European car manufacturers most certainly have had to endure years of high tax environments, certainly on labour, but it ultimately is EU regulation like the EU combustion engine ban that is now badly hurting them. Subsidies are on the way however. In January, the EU announced 4 billion euro of state aid investments in new factories producing electric batteries for cars, heat pumps and solar panels, hoping to accelerate production and the uptake of green technologies, while combatting cheap Chinese imports.

Yes, those Chinese imports are subsidized. Then, it should be the Chinese people’s problem if they pay for cheaper products to be exported to the West. Also, EU tariffs are making imports more expensive for European consumers and retaliation from Beijing is already on the way.

In the first place, before imposing tariffs on Chinese imports, the EU should stop eroding Europe’s competitiveness with its costly “green deal” regulation, which EU Commission President von der Leyen still refuses to reverse. On the contrary, her Commission is doubling down, for example with new regulations to calculate the CO2 footprint of electric car batteries, which would reportedly “massively disadvantage” the German industry, according to Wirtschaftswoche.

More fundamentally, EU-inspired experiments with stable energy supply have greatly damaged the competitiveness of the EU industry, in particular the chemical industry. In June, Jim Ratcliffe, the founder of chemicals giant Ineos, stated that Europe’s petrochemical industry was “finished”, as it fails to compete with the United States due to the high cost of energy and carbon in Europe. His warnings about EU carbon taxation driving away investment have unfortunately been ignored by policy makers.

CBAM

Ratcliffe thereby referred to the EU’s so-called “Carbon Border Adjustment Mechanism” (CBAM), a climate tariff imposed on certain imports, introduced because the EU believes it is unfair that other regions do not adopt Europe’s costly climate policies. This has sparked a major dispute with emerging trading power India, which is challenging CBAM at the World Trade Organisation (WTO). Additionally, African countries are also opposed to CBAM, as it is estimated to cost them US$25 billion annually.

It is regrettable to witness the EU’s punitive approach on climate policy has now also affected its trade policy. The reporting obligations for importers of emissions-intensive products is deeply frustrating European companies, who have complained about not being able to comply with the CBAM regulations, as they expect further tightening from Brussels. Sarah Brückner, Head of the Environment and Sustainability Department at the Mechanical Engineering Industry Association (VDMA) has stated: “The actual data is often simply unavailable, either because the suppliers do not collect the data or do not want to release it.”

This while an alternative approach is conceivable. It is being championed by members of the “Climate & Freedom International Coalition,” a group of academics and policymakers who have drafted an international treaty, based on leveraging free markets to achieve carbon-neutral solutions. Countries that sign this treaty, which serves as a free-market alternative to the collectivist “Paris Agreement,” would benefit from trade advantages if they implement climate-friendly free-market policies.

Signatories would thereby agree to liberalize their markets, with one proposal suggesting that entrepreneurs and financiers in these treaty countries be incentivized to invest in “property, plant, and equipment (PP&E)”—assets crucial for long-term company growth—through tax-exempt “CoVictory bonds,” loans, and savings funds. The goal is to reduce borrowing costs by at least 30%, thereby promoting investment in newer, cleaner technologies.

Other recommendations include targeted tax cuts (Clean Tax Cuts, CTCs) in the four sectors responsible for 80% of greenhouse gas emissions—transport, energy and electricity, industry, and real estate—as well as tax cuts aimed at breaking up monopolies. This involves eliminating profit taxes for investors who acquire monopoly companies and state-owned enterprises, with the goal of encouraging energy market liberalization among treaty members.

Additionally, “Game Changer Tax Cuts” are proposed to reward firms that achieve significant breakthrough innovations that substantially reduce greenhouse gas emissions, offering a 15-year tax exemption on such profits.

Alternatives to China

EU trade tensions with China are not only about EV imports. Also anti-dumping probes into Chinese-made wind turbines and solar panels have been announced. According to China, these “seriously violate WTO rules”, so we really are entering a trade war with China.

That’s while EU firms are increasingly reliant on Chinese technology, despite calls for “derisking”. China is now the leading supplier of high-skill, technology-intensive goods to the EU, ahead of the United States.

While the United States has decreased its dependence on China for all types of imported manufactured goods since 2018, the EU and China have maintained or increased their reliance on each other for almost all types of imported goods. With the caveat that China is likely now exporting a lot more to the U.S. via Mexico.

In any case, trade with China is increasingly challenged, which should serve as prove of the importance of alternative economic powerhouses in Asia. Then, Southeast Asia comes to mind. It is a region with enormous growth prospects, something that could make up for any reduced trade with China.

Per-capita income in South Asia is estimated to only one fifth of the per-capita income in East Asia, a region with a much larger female labor force participation, smaller informal sectors, and an export-led growth strategy. Despite this, trade relations between Southeast Asia and the European Union are not good, and that is largely the EU’s responsibility. At the heart of it is a dispute over EU deforestation rules, which are badly hitting palm oil exploration, which is an important export for economies like Malaysia and Indonesia. Ever more stringent EU requirements have angered the Southeast Asian export powerhouses, even causing them to freeze trade negotiations with the EU.

A particular frustration in Malaysia and Indonesia is that the EU is completely ignoring the undeniable progress in reducing deforestation during palm oil production, something which has been also acknowledged by NGOs. Certification schemes like the Malaysian Sustainable Palm Oil (MSPO) have undoubtly contributed to this, as around 98% of the Malaysian palm oil industry is covered by it, including most of the country’s smallholder farmers. A lot of these companies will struggle to comply with the EU’s new bureaucratic requirements, according to the Stockholm Environment Institute, which has warned that “it is unclear how this policy to address a global challenge can meet local needs in Southeast Asia. Companies are required to comply within 24 months, incurring significant costs to align supply chains with EU standards. Implementation will notably affect smallholders, a group that accounts for 40% of global production in the oil palm sector. Many smallholders already struggle to obtain the necessary certifications.”

There is hope, however. Not only have the United States, the leading group in the European Parliament, the EPP, as well as a number of EU member states urged to postpone implementation of the regulation, Malaysia is now in favour of resuming trade talks with the EU. Also the restart of talks between the EU and Mercosur should bring some hope.

Conclusion

The rise of China and technological development would have in any scenario presented great challenges for the European economy. However, all kinds of EU-driven experiments with the energy supply and intrusive regulation bordering on central planning have made the challenge for Europe much bigger. The chief responsible for a lot of the newly rolled out policies that have made Europe less competitive is European Commission President Ursula von der Leyen. Unless EU member states force her to make a complete u-turn, so the European Commission starts to break down her legacy, things are unlikely to improve.

 

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