Europe’s green relocation dream

Europe’s green relocation dream

Christopher Dembik
Head of Macro Analysis

Summary:  It is essential to adopt a coordinated European approach to reduce the inherent costs associated with relocation. The least we can say is that Europe is not heading in this direction.

The coronavirus pandemic has highlighted Europe’s overdependence on Asia, particularly China and India, for the production of medical equipment and devices (e.g. hydroalcoholic gel, masks and resuscitation respirators) as well as the active ingredients that are key components of commonly used drugs. While in the 1980s and 1990s, around 60% of all active ingredients were of European origin, the situation was completely reversed from 2010 with China and India now jointly accounting for up to 60% of total production.  

The crisis served as a wake-up call to European governments and society on the urgent need to diminish economic and health dependence on the rest of the world. Emmanuel Macron called for “European and national sovereignty” and “full independence” for parts of the medical markets. Others, certainly inspired by Japan’s financial incentives to move Japanese companies’ production out of China, went further with this idea and asked for an European industrial policy that would aim to relocate as many economic activities as possible in Europe. 

Reshoring of value chains is not a new idea; it is as old as globalisation itself. But it has swung back into fashion in recent years on the back of rising protectionism – and it has gained more ground over the past few months due to the outbreak. From Trump’s 2016 campaign to UK manufacturing’s campaign today in favor of “aggressive” reshoring of supply chains in the UK, there is an underlying belief that if more products and goods are produced at home, the economy will turn better.  

In theory, relocation is a very attractive idea. It should bring many advantages: reindustrialisation, creation of new jobs, limiting supply chain disruption in the event of a new external shock similar to the virus and, above all, environmental sustainability. But the question is whether Europe has the means to realise its ambitions and become more self-reliant. 

The euro-area balance of trade provides us with initial answers. It shows the difference between sales and purchases made abroad and is used to assess relative import/export dependence to the rest of the world.  

Euro-area trade is characterised by a massive surplus, mostly due to Germany reaching a EUR 338-billion surplus in the twelve-month period to March 2020, which represents roughly 2.8% of euro-area GDP. This is the second biggest trade surplus in the world, behind China. Europeans, then, are selling more abroad (outside the Union) than they buy. The EU open trade regime is therefore marked by a strong reliance on exports and lesser import dependence – which means that the EU is broadly self-sufficient, notably in most primary agricultural commodities. 

That being said, can it regain autonomy in goods and products where it is not self-sufficient yet, such as medical equipment or printed circuit boards that are essential to smartphones and computer production? It is highly uncertain.  

Even if it can regain autonomy, relocation is far from the miracle solution that many claim it to be. At the very least, it requires resources, skills, leadership and a tolerance for higher costs – and that’s not even considering potential retaliation from China. It assumes that host countries have the requisite workforce and know-how, which is not always the case for manufacturing many products and goods.  

Creating a vibrant industrial base requires long-term vision, political leadership and the capacity to work hand-in-hand with the private sector. Relocation cannot be decreed, it is built over time. It involves long and risky processes – including reorganising value chains, which can take years.  

Plus, as we all know, there is no free lunch in economics. Reshoring usually leads to higher costs for businesses that are almost systematically passed to consumers. Thus, it is essential to adopt a coordinated European approach to create economies of scale and reduce, as much as possible, the inherent costs associated with relocation. The least we can say is that Europe is not heading in this direction.  

In the context of the seven-year MFF negotiations and “Next Generation EU” instrument, the European Commission has proposed to boost Horizon Europe – an already existing programme that is aimed at strengthening autonomy in strategic value chains, among other things.  

If validated by the European Council, the total envelope could reach EUR 94.4 billion over the period 2021-2027, versus EUR 80.9 billion initially. So the package allocated to reduce EU reliance on outside trade would represent, at best, 0.08% of EU GDP per year. Even considering other programmes, such as those targeting climate change impact and aiming to develop new industrial clusters, this is a mere drop in the ocean. The EU’s ambition to become more self-sufficient is nothing but empty promises.  

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.