Bursting the Bubble

Growth via Trade is Plan A, also Plan B, C, D and E…

2 April 2013 | by

2008 will forever, in this generation’s eyes at least, be synonymous with the global financial crisis which continues to dominate the political and social spectrum across the European Union. Even now, 5 years later, the EU is still trying to claw its way out of economic stagnation. The recent Cyprus ordeal is just one further reminder of how inter-connected and fragile our economies are in this time of austerity and market upheaval; hindsight is often a wonderful thing but questions do need to be asked exactly how the previous financial stress tests were so positively signed off-on the Cyprus banking model in 2010 – however, this is neither here nor there. The EU has been desperately attempting to find a collective solution to the economic contractions and sluggish growth which have dominated the recent economic landscape across all member states, and if one thing can be specified as the EUs core plan-of-action to economic stability and growth, it’s trade.

Let’s just quickly review the separate paths to economic growth available to governments:

  • Fiscal stimulus? That requires governments to make large initial outlays, deepening GDP debt – no.
  • Investment? This requires loose capital from private entities and / or secure political and economic markets, not exactly the situation right now.
  • Reduced inflation? This can be done via QE (Quantitative Easing – the UK is currently on this medicine), hard to do in the Euro area, or by offering tax breaks, not very wise when taxes are your core form of raising funds.
  • Reduced taxes? Swings and round-a-bouts, decrease taxes to free capital, which increases investment – with banks on their knees, markets cautious, governments balancing the books and unemployment on the up, this doesn’t really work…

So what’s left? Trade. Increased trade will boost exports, create jobs, secure capital for business and hopefully kick-start manufacturing across the EU, a sector which has been systemically begging for a new lease of life after global competition, mainly from the BRIC quartet, has slowly eroded its European strength. Focusing EU institutions and political capital on trade as a way to economic growth allows regulatory convergence, business integration, collaborations on global supply lines and cheaper input costs across all members to occur quickly. Politically, it’s a win-win to both the markets and society. It’s progressive, simple to explain, and most importantly, refers back to a period of working class values which many of the electorate remember and have strong ties to.  Economically, with the EU being the most important and powerful trade bloc in the world, trade was responsible for reducing the impact of the recession within the EU by as much as 4x, is directly linked to over 30 million jobs (60 million indirectly) and is responsible for 15 000 new jobs for every 1bn EUR of exports.

This all sounds, and is, great news for EU citizens and governments – but what are the next steps? With unemployment and social scepticism rising across the Union, how long until austerity is no longer a viable option? The EU is first and foremost a single market for goods, secondly a political union, I’d argue that its third priority at this time should be its FTAs (Free Trade Agreements), thankfully, that’s exactly what it’s doing.

The recently announced FTA negotiations with the USA, Japan and Morocco is excellent news for the long term prosperity and growth prospects of the EU. Couple these negotiations with the soon-to-be finalised FTAs with Canada, Singapore and India and you have one of the most, if not the most, progressive trade agendas in modern politics. In 2012, FTAs contributed to 30% of total EU trade, this is expected to jump to 48% after these new FTAs have been finalised. If we use the South Korean FTA as an example, in its first year of operation, EU trade (liberalised goods – fully covered by the FTA) increased by 22%, whilst total EU trade to SK increased by 10%. These are tangible incentives to create further FTAs as soon as possible.

FTAs are the EUs core game-plan, and they look like a strong bet to help the EU regain its competitive edge on exporting luxury goods to the ever growing global middle class as well as strengthening the labour work forces across the member states. This should be celebrated, but this also must be viewed with caution. The Japanese and US FTAs, although potentially huge to all involved, will take years to negotiate and finalise. Agriculture will be off limits, a huge stumbling block for the USA’s large agriculture sector, as will the EUs health and safety standards across all goods, which is notionally high (and rightly so) for most competitors entering the market. It must also be noted that FTAs only go so far. They strengthen market leaders as these expand to new areas (under the specific FTA); but this works both ways – for both EU businesses wishing to export, and US/Japanese companies looking to compete in Europe. Competition should be welcomed, it enhances innovation, drives prices down and allows new players to drive society’s demands in the given sectors, but it also comes with a warning.

By creating FTAs with the world’s leading economies, we risk our own EU businesses being engulfed by competing, non-EU based businesses which can relocate jobs and drain expertise elsewhere. It also links us strongly with those countries who can be labelled as declining powers – where are the trade agreements with a resurgent Africa? Latin America? A booming Asia? I applaud the EU in making strides in one area and deplore it for not being progressive enough in the markets we know to be the next major players. It would be nice to know the EU has a Plan B – other than drawn out trade agreements – but the political reality should be recognised, there is no Plan B, C, D or E, only A, and right now, I don’t think A is working.

Get comfy, this economic flat lining isn’t going anywhere yet.

What do you think?