CBC highlights need for stronger European economic cooperation

The Central Bank of Cyprus (CBC) on Thursday published a piece of analysis by economist Marios Louca arguing that deeper European integration was becoming increasingly important as geopolitical tensions reshaped global trade, investment and economic policy. The article, titled “More Europe in a Fragmented World: Geoeconomic Fragmentation, China’s Rise and Europe’s Strategic Response”, examined the changing global economic landscape and the implications for Europe’s competitiveness and resilience. “The global economy is entering a new phase in which geopolitical considerations increasingly shape economic relationships,” he said. It argued that while this shift presented challenges for Europe’s openness-based growth model, it also increased the importance of scale, resilience and collective action. The analysis said the world was not necessarily entering an era of deglobalisation, but rather a period in which international economic integration was being reshaped by strategic and geopolitical considerations. For much of the period following the end of the Cold War, globalisation appeared to be an irreversible process, with falling trade barriers, expanding capital flows and increasingly international production networks. This openness brought productivity gains, lower production costs, greater consumer choice and higher living standards, with Europe among the major beneficiaries. The European Union built much of its prosperity on international trade, cross-border investment and global value chains, leaving its economy particularly exposed to changes in the international trading environment. However, a succession of shocks, including the global financial crisis, the Covid-19 pandemic, Russia’s invasion of Ukraine and growing strategic rivalry between the United States and China, had highlighted vulnerabilities arising from deep economic interdependence. “Resilience and security are increasingly being considered alongside efficiency in economic decision-making,” he explained. The analysis pointed to growing attention among policymakers and businesses to external dependence on suppliers, critical technologies, energy imports and strategic raw materials. It said trade restrictions had increased sharply in recent years, with International Monetary Fund estimates suggesting that the number imposed globally had nearly tripled since 2019, reaching close to 3,000 measures annually. Investment flows and supply chains were also increasingly being reorganised along geopolitical lines, while concepts such as “friend-shoring”, “near-shoring”, “de-risking” and “economic security” had become increasingly prominent in policy discussions. China’s expanding role in the global economy was identified as one of the major forces reshaping international economic relations. The economist pointed out that China had become the world’s largest exporter of goods since joining the World Trade Organisation in 2001 and then accounted for roughly 28 per cent of global manufacturing output. It described the emergence of what had increasingly been termed “China Shock 2.0”, saying this differed from the export expansion that followed China’s entry into the World Trade Organisation. China’s economic development was increasingly extending into high-technology sectors, alongside efforts to strengthen strategic self-reliance and improve price competitiveness. He further mentioned that these developments were reinforcing China’s position in global trade and manufacturing networks while creating new competitive dynamics for advanced economies. At the same time, increased imports from China could have benefits for European consumers and businesses by putting downward pressure on prices and supporting economic activity in the short term. “While increased imports from China may support economic activity in the short term through lower production costs and higher purchasing power, the broader effects are likely to vary across sectors and over time,” he said. For Europe, the analysis said the changing global environment created both challenges and opportunities. IMF analysis cited by the CBC blog estimated that severe geoeconomic fragmentation could reduce global output by as much as 7 per cent in the long term, equivalent to approximately $7.4 trillion in today’s prices. Highly open economies would likely be among the most exposed, while Europe’s reliance on external markets and global value chains could mean greater adjustment costs. The analysis also pointed to Europe’s competitiveness challenges, including weaker productivity growth compared with other major economies, rising investment needs, demographic pressures and intensifying competition in emerging technologies. The Draghi report on EU competitiveness was cited as arguing that Europe could no longer rely on the conditions that had supported its economic success in previous decades and that substantial investment, innovation and deeper coordination would be needed to sustain long-term prosperity. The analysis nevertheless saw opportunities in the changing environment. “Europe has an opportunity to strengthen its industrial base, accelerate innovation and attract strategic investment,” it said. The green and digital transitions, together with greater attention to strategic industries, could create new sources of growth while helping reduce excessive external dependence, according to Louca. For businesses, the changing environment could encourage greater diversification of production and supply chains as companies sought to improve resilience while maintaining access to international markets. The economist further argued that the appropriate European response should focus on greater cooperation rather than economic isolation. “Many of the challenges arising from fragmentation extend beyond national borders and cannot be addressed effectively by individual member states acting alone,” it said. Energy security, defence capabilities, industrial policy, research and innovation, capital markets and critical infrastructure all had significant cross-border dimensions, making collective European action increasingly important. Louca pointed to the growing European policy concept of “open strategic autonomy”, which sought to strengthen resilience and security while preserving the benefits of openness and international engagement. It argued that efforts to strengthen European industrial competitiveness, improve energy resilience, deepen capital markets and enhance strategic autonomy reflected a growing recognition of the value of collective action. “‘More Europe’ should not be interpreted as a call for protectionism or economic isolation,” Louca stated. Europe’s prosperity, it added, remained fundamentally linked to openness, international trade and global cooperation. “The objective is not decoupling from the global economy, but building resilience within it,” the analysis said. The emerging global environment was therefore described as a new form of economic interdependence, rather than the end of interdependence altogether. Supply chains were becoming more diversified, although potentially less efficient, while investment decisions were increasingly influenced by security considerations and trade patterns were gradually shifting along geopolitical lines. The CBC economist further mentioned that economic scale was becoming a strategic asset, resilience was increasingly a source of competitiveness and policy coordination was acquiring greater value. “Economic scale is increasingly becoming a strategic asset, resilience is becoming a source of competitiveness, and policy coordination is acquiring greater value,” it said. For Europe, the central challenge was not simply to adapt to the changing global environment but to position itself to help shape it. “If globalisation was the defining economic force of the previous three decades, geoeconomic fragmentation may become one of the defining forces of the next,” the article said. It concluded that the question for Europe was increasingly whether greater coordination was becoming necessary as the international economic landscape changes.