The case for a Microeconomic European Policy

September 6, 2012 , London Stock Exchange

Policy Network meeting

Miguel Sebastián, Universidad Complutense de Madrid

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The case for a Microeconomic European Policy

• It is indubitable that a Macroeconomic European Policy is needed, at least for the euro area

• It should include:

• A Monetary Policy, with a real lender of last resort, a new governance and new goals for the ECB

• A real Fiscal Policy coordination, including eurobonds

• Financial Stability issues, including a banking union and an European regulator, to avoid asymmetric bubbles.

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The case for a Microeconomic European Policy

• But a Microeconomic Policy at the European level is also needed, not only because of the current global and euro crises, but for “structural reasons” as well.

• Such a Policy should include:

• An Energy and Raw materials European policy

• A Tourism European Policy

• An Industrial European Policy, including not only the Manufacturing sector, but the ICT sector as well.

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The case for a Microeconomic European Policy

The “structural reasons” for such an European Policy are:

1. The EU is steadily loosing weight in the world economy

2. The European energy dependence is worsening. And the raw materials dependence is dramatic

3. The EU share of world exports is shrinking, and so is the relative European manufacturing sector.

4. Tourism is a stronghold, but action is needed.

EU USA BRICS Rest of the World

1980 32% 25% 12% 31%

1990 29% 25% 15% 31%

2000 25% 23% 18% 34%

2010 20% 19% 25% 36%

2040 (E) ?? ?? 50% ??

Europe is shrinking at a faster pace than the US

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The BRICS (Brazil, Russia, China, India and South Africa) have more than doubled their share in world GDP in the last 30 years and, according to several forecasts, by 2040 they will become almost half the World's GDP.

Share of World GDP

1. The EU is steadily loosing weight in the world economy

In the last ten years the EU’s energy dependence has increased almost 10 points.

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European Union Energy Dependence

40

42

44

46

48

50

52

54

56

58

60

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Perc

enta

ge

EU Net imports of primary energy

96.175

187.247137.125

199.646

311.930

378.258

486.178

208.999

376.941

168.947

0

100.000

200.000

300.000

400.000

500.000

600.000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Mill

ion

€

Energy dependence, together with rising oil prices, have multiplied the EU’s energy import bill by 5 in the last 10 years

An increase of 30 € in oil prices (what the IEA expects for the next 10 years) will mean an additional annual transfer of 132.000 M€ to oil producing countries.

The EU annual budget sums up to 140.000 M€.

2. The European energy dependence is worsening

Critical raw materials

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Antimony Display panels, micro capacitorsChina 91% Bolivia 2% Russia 2% South Africa 2%

Indium Displays, Thin layer photovoltaicChina 58% Japan 11% South Korea 9% Canada 9%

Beryllium Military applicationsEEUU 85% China 14% Mozambique 1%

Magnesium Space, manufacturingChina 56% Turkey 12% Russia 7%

Cobalt Lithium-ion batteries, synthetic fuelsD.R. Congo 41% Canada 11% Zambia 4%

Niobium Micro capacitors, ferroalloysBrazil 92% Canada 7%

Fluorspar LensesChina 59% Mexico 18% Mongolia 6% Platinum

Group Metals

Fuel cells, catalysts, seawater desalinationSouth Africa 79% Russia 11% Zimbabwe 3%

Gallium Thin layer photovoltaic, LedN.A. Rare Earths

Permanent magnets, laser technologyChina 97% India 2% Brazil 1%

Germanium Fiber optic cable, IR optical technologyChina 72% Russia 4% EEUU 3%

Tantalum Micro capacitors, medical technologyAustralia 48% Brazil 16% Ruanda 9% D.R. Congo 9%

Graphite SteelmakingChina 72% India 13% Brazil 7%

Tungsten Drills, steelmakingChina 78% Russia 5% Canada 4%

The study considers 14 of 41 raw materials as critical. This is due to their high relative economic importance and to high relative supply risk.

According to a recent study, developed by a group of experts in the framework of the EU Raw Materials Initiative, Europe is on a critical position to ensure the supply of some raw materials.

2… and the raw materials dependence is dramatic

Global Trade of Goods

The EU’s share in goods trade, as an approximation of industrial production, has decreased in the last years, mainly because of emerging economies growth

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3.The EU share of world exports is shrinking

EU excluding internal trade

15%

16%

17%

18%

19%

2003 2004 2005 2006 2007 2008 2009

Perc

enta

ge

Share in world trade of Goods

Example 1: Shipbuilding

The global market for new ships has increased one and a half times in the last 10 years but the production in European shipyards has remained almost constant, reducing notably the EU share in the shipbuilding global market.

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3. ….and so is the relative European manufacturing sector.

Shipbuilding Sector Evolution

World Total

Europe0

5.00010.00015.00020.00025.00030.00035.00040.00045.00050.000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Prod

ucti

on T

hous

ands

CG

T

Rest of the World

Europe

Example 2 : Automotive Sector

In 1999 European factories produced 3 in 10 of all the cars and trucks built in the world.

Ten years later they produce 2 in 10 and the tendency is a further decrease.

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1999 Automotive Production

EU (15)30,1%

China3,3%

Rest of the world66,7%

2009 Automotive Production

EU (15)20,2%China

22,6%

Rest of the world57,2%

3. ….and so is the relative European manufacturing sector.

Example 3: the ITC Sector

The EU shows a big gap between imports and exports in the ITC Sector. Its coverage ratio is just above 0,5.

This difference is mainly due to hardware and semiconductors. Only 9,2% of the sales of the top 25 companies in this area come from Europe.

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3. ….and other technological sectors

159

309

174

287

114

84

115

58

EU USA Japan Korea

ITC Imports and Exports (2008) Million US$

ITC Exports

ITC Imports

Hardware & Semiconductors Top 25 Enterprises. Sales

USA; 31,8%

Europe; 9,2%

Asia; 59,0%

But action is needed to keep such a position

The EU is currently the main destination for World Tourism

This year the number of tourists will reach 1 billion, for the first time ever

By 2020 this number will climb to 1,5 billion (an additional half a trillion € ).

The EU must act to preserve its leadership.

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4. Tourism is a stronghold in the EU

Share in world tourism

Source: UNWTO

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What should a Microeconomic European Policy consist of?

• The EU micro policy should be complementary, not a substitute for domestic micro policies.

• It is not a matter of spending more at the EU level, but spending better, shifting public investment and financing support towards EU exporting sectors

• A higher coordination of policies is needed

• We must improve EU regulation.

• We should change the role of EU surveillance institutions: from chasing member states (and European companies) to building an EU productive industry.

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In particular, specific targets for EC authorities and EU institutions should be established regarding 3 measurable and accountable goals:

1. The EU share of world output (its decline should be stabilized).

2. The EU share of global exports (it should be held constant).

3. The EU current account (it should improve)

What should a Microeconomic European Policy consist of?

United, Europe may better manage its uncertainties, thanks to a stronger negotiating position through:

• An EU single voice

• More interconnections

• A common regulatory framework

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The solution of the Russian-Ukraine gas crisis of 2009 is an example of our strength if we negotiate as one.

The same strategy is needed when discussing with Northern African countries.

Some examples

Energy Dependence

key regional electric connections capacity in Europe

11 TWh

8 TWh

18TWh

1 TWh

9 TWh

41 TWh

8 TWh

12 TWh

15 TWh 2 TWh

35 TWh

1TWh

1 TWh

3%

8,6%

15,2%

20,9%

7,2%

13%

9,7%

X% % Cross-border electricity between regions

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Tourism

In order keep the EU leadership in World Tourism, we need to compete for the new markets: the Russian, Indian and Chinese outbound travel markets

• Joint packages

• Multiple visas, exchange of information

• Joint promotion abroad

Some examples

In 1980 there were only 270M tourists world wide. This year, 2012, we will reach 1000M. By the year 2030 there will be 1800M tourists.

Each visitor spends 1000$ on average. So, we are talking about a 800b $ cake.

Number of tourists worldwide (M)

Source: UNWTO

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Single Digital Market

In order to reach a real Single Digital Market we must accomplish:

•Remove technical and legal barriers

•Accessibility: 100% population covered with basic broad band

•Infrastructure: Deploy of New Generation Networks

•Promote intra EU e-commerceSingle Digital Market

20%

55%

24%

7%0%

10%

20%

30%

40%

50%

60%

70%

80%

Enterprises that sellthrough internet

Citizens that boughtthrough internet

Only in their country

In other EuropeanCountries

Europe has a great potential in this area. In 2010 only 20% of European enterprises sold through internet to other European countries and only 7% of European citizens had bought something through internet from another European country.

Some examples

Following the (unfortunate) years in which “the best industrial policy is no industrial policy”, the need for an active European industrial policy should be widely recognized.

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Some examples

Industrial Policy

Why an European Industrial Policy?

Although Industry only represents 18% of the EU GDP, it accounts for:

• Internationalization: Industry produces almost 75% of all exports of goods and services from the EU.• Innovation: Industry is responsible from almost 80% of the R+D executed by the EU private sector. • Productivity: Industry productivity is 9% higher than the productivity of the whole economy.

INDUSTRY = JOBS + EXPORTS

We want a strong and dynamic industrial sector and we also want to be leaders in:

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A final question for debate

Climate change

prevention

Welfare system

Fiscal discipline

Monetary orthodoxy

¿?

Can we make all these 5 goals compatible?

¿?

The case for a Microeconomic European Policy

September, 2012 . London Stock Exchange

Policy Network meeting

Miguel Sebastián, Universidad Complutense de Madrid