{"id":39239,"date":"2025-12-16T06:23:41","date_gmt":"2025-12-16T06:23:41","guid":{"rendered":"https:\/\/financialrush.com\/?p=39239"},"modified":"2025-12-16T06:23:41","modified_gmt":"2025-12-16T06:23:41","slug":"the-key-distinction-europe-must-make-on-trade-policies","status":"publish","type":"post","link":"https:\/\/financialrush.com\/?p=39239","title":{"rendered":"The key distinction Europe must make on trade policies"},"content":{"rendered":"<p> \n<\/p>\n<div>\n<p>Unlock the Editor\u2019s Digest for free<\/p>\n<p class=\"article__content-sign-up-topic-description o3-type-body-base\"><span>Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.<\/span><\/p>\n<p><iframe class=\"article__content-sign-up-iframe close\" scrolling=\"no\" id=\"signUpIframe\" data-prev-url=\"\/register\/in-article-sign-up?ft-content-uuid=da6d44de-c4c4-42f5-8ee9-6ca6a78cf478\"><\/iframe><\/div>\n<div id=\"article-body\">\n<p><em>The writer is a senior fellow of the Carnegie Endowment for International Peace<\/em><\/p>\n<p>Europe is often portrayed as the great underperformer of the global economy, undermined by economic rigidity, high wages and an expansive social welfare system. For years critics have argued that these features must be reversed because they erode Europe\u2019s competitiveness, pushing manufacturing activity towards more \u201cnimble\u201d economies that suppress wages, weaken labour protections, subsidise manufacturing and maintain tight control over their external accounts.<\/p>\n<p>But it is important to distinguish between conditions and policies that make European businesses less efficient and those that make them less competitive globally. These are not the same.<\/p>\n<p>European manufacturing efficiency, for example, has clearly been undermined by red tape, divided national economies, limited labour mobility, poor technology adoption, weak infrastructure investment and slow regulatory approval. These conditions should all be addressed by domestic policy reform. <\/p>\n<p>But high wages and strong social safety nets are a completely different matter. While they may make Europe less competitive in today\u2019s hyperglobalised environment, they are, in fact, beneficial for global growth. Not only do higher wages and strong social safety nets support the household demand that creates the incentives businesses need to expand investment, but they especially encourage the backing of productivity-enhancing technology.\u00a0<\/p>\n<p>This is particularly relevant in light of a European Central Bank <a href=\"https:\/\/www.ecb.europa.eu\/press\/economic-bulletin\/focus\/2025\/html\/ecb.ebbox202504_03~82e0d4b61c.en.html#:~:text=Net%2520responses%2520indicate%2520expectations%2520of,advanced%2520economies%2520and%2520emerging%2520markets.\" title=\"\" data-trackable=\"link\">survey<\/a> this year that shows that it is \u201ca weak demand outlook\u201d, followed closely by \u201clow profitability\u201d, that constrains business investment in the euro area. If weak demand is the problem, policies that boost wages or that reduce precautionary savings should be positive for the economy.<\/p>\n<p>Unfortunately, in an international trading system dominated by economies that intervene to manage their external balances, these same policies put Europe at a competitive disadvantage. We live in a world in which manufacturing competitiveness is a product not so much of greater efficiency but of lower labour costs (relative to productivity). So policies that boost demand by increasing the household income share of total production also undermine manufacturing competitiveness.<\/p>\n<p>The result is an example of what the Polish economist Micha\u0142 Kalecki described decades ago: a paradox in which a player becomes more competitive and grows faster by suppressing wages even as the overall system suffers from such a strategy. It \u201cwins\u201d by retaining the benefits while exporting the costs to its trade partners.<\/p>\n<p>When a country raises wages and welfare spending, it contributes to global growth by raising total demand. But when its major trade partners boost manufacturing exports through wage suppression and subsidies, including currency devaluations, the country soon finds its manufactures are crowded out by cheaper foreign production. Its trade partners get most of the benefits of its higher wages while retaining none of the costs.<\/p>\n<p>Europe suffers in this setting because of its open external accounts. In a world in which some major economies, like China, have long exerted substantial control over their external accounts, while others, like the US, are regaining control over theirs, those that don\u2019t must inevitably bear the brunt of adjustment. The fact that Europe lacks the political unity needed to act unilaterally leaves it especially vulnerable. Many of its most criticised \u201cweaknesses\u201d are in fact strengths from the perspective of global welfare. But because these policies are not matched by equivalent commitments among the EU\u2019s trading partners, their net effect is to ensure that even when European manufacturing is efficient, it is nonetheless globally uncompetitive.<\/p>\n<p>That is why unless Europe is willing to dismantle its welfare system and force down wages relative to productivity \u2014 which would be bad for global growth \u2014 it has no choice but to intervene in its external accounts. The purpose of such intervention is not protectionism, but rather to reverse the consequences of trade intervention abroad. Policymakers in the EU must distinguish between domestic conditions that hamper productivity and efficiency and those that undermine global competitiveness. The former can be addressed by the right set of domestic reforms. The latter can only be resolved by policies designed to control external accounts and reverse the consequences of beggar-thy-neighbour policies abroad.<\/p>\n<\/div>\n\n<br \/><a href=\"https:\/\/www.ft.com\/content\/da6d44de-c4c4-42f5-8ee9-6ca6a78cf478\">Source link <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"Unlock the Editor\u2019s Digest for free Roula Khalaf, Editor of the FT, selects her favourite stories in this&hellip;\n","protected":false},"author":6,"featured_media":39240,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[23],"tags":[],"class_list":["post-39239","post","type-post","status-publish","format-standard","has-post-thumbnail","category-us","cs-entry","cs-video-wrap"],"_links":{"self":[{"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/posts\/39239","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=39239"}],"version-history":[{"count":0,"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/posts\/39239\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=\/wp\/v2\/media\/39240"}],"wp:attachment":[{"href":"https:\/\/financialrush.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=39239"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=39239"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/financialrush.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=39239"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}