Illusions about trade with China still run deep in Europe.

At a chatham house event yesterday, one economist claimed it was “baseless” to suggest China would dominate most industries. Europe, they argued, would simply retain and develop new comparative advantages.

1/ But that theory, or hope, only holds if demand adjusts.

China suppresses consumption, shields its market, runs persistent trade surpluses, and funnels credit and subsidies into industrial capacity, exporting (over)capacities to the world.

2/

We’ve just published a new report, based on our annual economics conference. It distils the big policy debates on the European economy post-Draghi, drawing on the brainpower around the table.

Some journalist friends convinced me it’s worth sharing — so here’s a thread.

1/x The problems are clear. European economies grew 2-3% py throughout the 90s, early 00's. But growth never recovered from the 2008 financial crisis. While Europe continues to rank highly on broader measures of wellbeing, its meagre growth has fallen well behind that of the US

2/

Alan Beattie outlines the dark clouds headed for the global economy.

“The trading system needs buyers not sellers”.

Yup. Neither tariff-fest USA, hurling towards stagflation/recession, nor demand black-hole China will provide it. There won’t be enough demand to go around.

1/ The US has long been the consumer-of-last-resort. China's consumption is depressed.

I sympathise with US policy-makers who fret about the perpetual dance of Chinese debt-fuelled capacity expansion meeting US debt-fuelled consumption expansion.

But blowing it all up...

2/

Germany now has the right fiscal policy to stoke domestic demand and offset lost export markets to the second China shock - as @Brad_Setser and I argued.

But to stop China deindustrialising Germany this will need to be flanked by industrial and trade policy.

1/ A dovish CDU/SPD China policy would be bad.

Scholz opposed the EUs China EV tariffs. He seemed willing to sacrifice industrial cities like Ingolstadt and Wolfsburg on the altar of CEO payouts from a few more more quarters of profits from a dying china business.

2/

I wrote a new piece in foreign policy.

The US's postwar role as guarantor of Europe’s security is over – and may even turn adversarial.

But Europe has an overlooked trump card: when it comes to manufacturing Europe blows the US out of the water.

1/x

foreignpolicy.com/2025/03/07/eur… For European leaders, meeting this historical moment means preparing to defend their national interests on their own. Merz, Macron (+Starmer) seem on the ball

Their trump card: Europe collectively outproduces the United States in steel, vehicles, ships, and civil aircraft.

2/x

The German fiscal package is massive (10-20% GDP).

- 500 billion 10Y fund for public investment
- All defence spending above 1% of GDP not counted for debt brake.
- Federal states can borrow 0.35% p.y. for investment.

Germany is back - economically +militarily.

1/x CDU (Merz) and SPD (Klingbeil) CSU (Söder) just gave the presser. Big question is whether greens will sign up - my guess is yes.

Focus of the package is on defence and infrastructure.

But money is fungible: tax cuts can be paid by reshuffling stuff into special fund.

2/x

Italy's @Corriere with key observations and data, picking up on @Brad_Setser and my work.

The newspaper highlights how China's aggressive export-led growth model hammering Germany is having serious knock-on effects for Italy.

The German crisis is a European crisis.

1/x The paper isn't mincing words: "China's domestic consumption, always been weak, is now completely depressed. The Communist Party is reacting by subsidising exports of increasingly sophisticated product ranges in every way possible."

Auto's are ofc at the heart of it.

2/x

In a new study, @Brad_Setser and I unpack how badly Germany’s trading relationship with China has backfired. And how a new government might help its industry weather the 2nd China shock.

With terrific accompanying reporting in Handelsblatt and FT.

1/

cer.eu/publications/a… I could sparsely have thought of a more fitting week.

Germany just confirmed its two-year economic downturn, held back by the malaise in manufacturing, good for ~20% of GDP and 5.5M jobs. And China just clocked a $1tn annual trade surplus

The two trends are interrelated.

2/

“Only net ~150k manufacturing jobs were created during Biden’s tenure” - despite billions spent on greentech(IRA)/Chips production.

So the policy failed? Let’s give Biden a fair shake on his way out. Hammering that data point overlooks goals, counterfactuals, and time lags. 1/ First, the goal of the IRA/CHIPS acts was not only to create jobs - perhaps not even primarily so, despite obvious political rhetoric.

But also to have - a reserve of- manufacturing capacity at home to ensure supply chain resilience vis-a-vis authoritarian regimes. 2/

Letta/Draghi's plea to save the fading EU economy in one truly staggering IMF stat:

„Existing barriers in Europe's single market are equivalent to an ad-valorem tariff of 44% for manufacturing, between U.S. states it is 15%, and 110% for services between EU countries.”

1/7 The EU needs a more coherent trade & industrial policy to counter China.

But there can be no doubt: the most potent way to unlock growth is to reduce the barriers in our internal market.

Thát piece of homework EU leaders can do without looking at DC or Beijing.

2/7

Some reflections on Germany’s no-vote on European duties on Chinese EVs.

Scholz is trying to signal détente to China and protect the interests of car multinationals.

In the long-run, Berlin may end up thanking the Commission and EU partners for avoiding a strategic blunder. 1/

https://twitter.com/vonderburchard/status/1841899516267487283

The stakes are hard to overstate.

If Scholz would have succeeded in overturning the tariffs at the 11th hour, it would have vindicated China’s efforts to lean on individual member-states.

And been the final nail in the coffin of EU efforts to have a foreign economic policy. 2/

Last year, Draghi was given a task: figure out why Europe’s economy is struggling. The results of his investigation: stagnant productivity, little innovation, high energy prices, brutal competition in global markets.

Sound familiar to German ears?🧵
1/8

https://x.com/lucasguttenberg/status/1835965649027269025

Unlike during the Eurozone crisis, Germany is now at the center of the storm. Since 2019, the German economy has practically flatlined.

And no other EU country suffers as much as Germany from China’s aggressive state-backed push into key sectors of its economic model.

2/8

Draghi’s strategic economic growth agenda for the EU does not disappoint.

It channels aspects of the thinking of Jean Monnet (EU defense integration), Jacques Delors (EU single market) and Bidenomics (cleantech / economic security).

But above all, Draghi’s own vision.

🧵 The diagnosis is hard to argue with. The EU economy grew at around 2 to 3 per cent a year throughout the 1990s and early 2000s.

But growth has never fully recovered from the 2008 financial crisis, and has fallen well behind that of the US.

2/

"When Germany sneezes, the Netherlands catches a cold".

So goes an old saying in Dutch economistland. But we may have to junk the expression.

The Dutch economy is not only dramatically outperforming its bigger brother Germany, it's also slowly diversifying away from it.

1/5 In terms of GDP per capita the lowlands are far ahead, and the gulf has grown as Germany remains stuck in multi-year stagnation.

The post-pandemic growth gap is around 5% of GDP.

(Of course the difference in GDP level is smaller if you compare only former West-Germany).

2/5

“Europe has a China problem.”

Don't take it from me. But from the EU's budding new trade Commissioner @WBHoekstra.

In a new speech in Eindhoven, he raises alarm about restoring a level playing field w. China.

And points to another specific area of concern: electrolysers. 1/ Punchy wording, for example:

"In the past decade, Chinese players came in, undercut (...) our market with ultra-low prices thanks to massive government support, and almost wiped out our solar industry. We see the same thing happening in other sectors (...) unacceptable".

2/

This @TheEconomist chart should really keep European and German policymakers awake at night.

China’s state-directed investment in ‘high-quality, productive’ forces is leading to massive overproduction that will reverberate in global markets for manufactured goods. 1/ As China's manufacturing exports exploded in the 2000s (to 19% of world total by 2013), aided by protectionism/subsidies, the US lost one million manufacturing jobs.

A second China shock is rapidly unfolding, this time in the EU's key sectors. And the shock is much larger. 2/

Sticking my neck out on an issue I care about.

In an oped in @politico, I argue Europeans dismiss Biden's strong response to China's mounting trade imbalances at their own peril.

China's export surge threaten's Europe’s economy more than America’s. 1/

politico.eu/article/chines… The conventional wisdom (@TheEconomist or @FT) is that the EU should embrace the glut of subsidised Chinese greentech goods. And rejoice at how cheap they are because of Beijing's subsidies and repressed consumption at home. But this is risky not only for 'security' reasons. 2/

Some observations on the new Dutch government’s EU policies based on the draft coalition agreement ('hoofdlijnenakkoord'). The Netherlands will become a more difficult partner for the EU, but in a more British than, say, Hungarian way. On Ukraine: “[We] will continue to support Ukraine military, financially and morally against Russian aggression”. Doing so in the EU-context seems acceptable, even preferred. The gov also commits to a minimal 2% of GDP defense spending and EU defense-industrial coordination.

"Subsidy race with US and China would harm Europe’s ailing economy" IMF warns

Broadly agree with the Fund. But the choice for Europe shouldn't be misrepresented as a blanket free-trade v industrial policy binary. There are sectoral shades of grey. (1/5)
ft.com/content/0ee289… In greentech, the EU is in a better position than assumed, with almost twice the US share in global export markets. The combination of (early) policy levers like carbon taxes, regulation and CBAM have nudged private sector innovation in Europe - so we need less subsidies (2/5)

Tonight, over dinner, European finance ministers hope to hammer out a compromise on EU fiscal rule reform. So where do things stand, what are the remaining bones of contention, and what would a deal mean? Open issues relate for example to ‘safeguards’ put in by Germany and the frugals (as guardrails on the spending path rooted in a debt sustainability analysis), especially the debt sustainability safeguard and the deficit resilience safeguard.

Mark Rutte's VVD makes it moves. It says it won't do a coalition deal with Geert Wilders, but it "will make a center-right cabinet possible," according to party leader Dilan Yeşilgöz. It’s a halfway house. On purpose. Quick thread.
nrc.nl/nieuws/2023/11… Broad strokes there were three options after the election result.
A) A government with Wilders PVV, VVD and Omtzigt’s NSC.
B) A ‘cordon sanitaire’ of all the other parties
C) A minority government with ‘tactic’ support from others.