TLDR:
– Europe is facing a “competitiveness crisis” due to factors like insufficient investment and a decline in FDI.
– FDI is crucial for productivity growth and knowledge transfer.
Over the past two decades, Europe has seen a widening productivity gap with the US. This “competitiveness crisis” can be attributed to factors such as insufficient public and private investment, a shortage of tech firms and venture-capital funds, and demographic decline. One key factor that is often overlooked is the decline in foreign direct investment (FDI), which is essential for productivity growth and introducing new technologies and knowledge. Germany and the UK have experienced drops in FDI inflows, impacting their economies post-pandemic recovery. The EU is now grappling with challenges related to de-risking supply chains and preventing a China shock similar to what the US experienced in 2001. To address these challenges, the EU is considering measures to attract more FDI and diversify supply chains through investments in key sectors like green industries.
The vulnerability of global supply chains, especially for green industries, has become evident in recent years. The EU has started subsidizing foreign investments in battery cells and semiconductors to foster diversification and reduce dependency on Asian suppliers. However, Europe is also experiencing its own “China shock” with China surpassing Germany in key export sectors. Policymakers are concerned about the threat this poses to Europe’s economic model and the rise of far-right parties. European countries are now considering imposing import tariffs on Chinese EVs to protect their markets and boost Chinese FDI flows to the EU.
It is suggested that forming partnerships with technologically advanced economies like China, Taiwan, South Korea, and Israel could help bridge the knowledge gap and increase FDI flows to the EU. By asking Chinese EV manufacturers to establish joint ventures with European companies, the EU could boost competitiveness and address the challenges related to the “China shock.”
