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EU Must Adopt Systemic Approach to External Account Control

Good FT article on the role of Chinese investment in manufacturing in Europe. I worry however that EU policymakers may be framing the issue poorly. This should not be about managing incremental, country-by-country changes in production. Policymakers in the EU (and elsewhere) should instead think more systemically about how control of external accounts allows countries not only to shape the impact of their industrial policies on their own economies, but also on those of their trade partners. In other words, they should be doing what China and certain other surplus economies have done for many years, and what the US is increasingly attempting to do. These countries are reshaping their own economies to achieve strategic, economic, and technological objectives, and in the process they are also reshaping the economies of those trade partners that continue to accommodate these changes. This is because to the extent that countries relinquish control of their external accounts, the evolution of their economies reflects not just the decisions of their own firms and households, but also the industrial policies of their trade partners. If they do not want to play this role, they have little choice but to regain control over their external accounts. In such a world, very small economies may prosper by finding efficient ways to accommodate the global imbalances of larger economies. But large economies, I suspect, will have to be far more interventionist if they want to prosper. Many economists disagree, arguing that government intervention is undesirable and that we should instead rely on a system in which the “free market” determines how resources are allocated. But this argument is silly. The free market does not decide – at least not in the world we actually inhabit. It might do so in a world in which no country intervenes in its external accounts, or in which the global trade and capital regime prevents countries from externalizing domestic imbalances. But in our hyper-globalized world – one in which major economies do intervene, and can externalize their imbalances efficiently – the free market exists mainly in theoretical models. In practice, it is the domestic industrial policies of the most aggressive interveners that shape the global economy. Because control over external accounts allows countries to export the consequences of their policies, the real question for the EU is not whether to intervene, but whether intervention will be determined domestically or imposed from abroad. Put differently, if the EU does not decide what kind of economy it wants and how to get there, the risk is that China – and increasingly the US and India – will make that decision for it. The US has realized this, and is slowly (and so far not very efficiently) trying to fix the problem. The EU must do the same. https://t.co/VHreUCbyTS