ifo President Fuest: “EU Should Provide for Geopolitical Risks without Sacrificing the Benefits of International Trade”

President of the ifo Institute Clemens Fuest advocates greater strategic independence for the EU. “Since Germany’s and Europe’s prosperity is based firmly on international trade, it is particularly important here to develop the right geoeconomic strategy for potential crises,” he said at the Munich Security Conference. “To reduce risks, it makes sense to diversify raw material and energy supplies, secure critical physical and digital infrastructure, and increase warehousing or maintain in-house production capacity for highly critical goods such as certain medical products.”

However, Fuest is critical of a blanket termination of trade relations with China or other authoritarian states or a decoupling of the EU from global trade: “Shifting production back to Europe would involve high costs. But although it is important to limit critical dependencies, it is equally imperative to continue to make full use of the immense advantages of the international division of labor.”

Studies by EconPol Europe show that a unilateral withdrawal by the EU from international supply chains would be accompanied by a decline in industrial value added of more than 10%. In addition, if the global economy were to split into a western bloc (with the EU and the US) and an eastern bloc (with China and Russia), this would permanently reduce Europe’s level of prosperity tangibly and cause losses in value added worth billions.

“At the same time, it is also strategically important for Europe to avoid unilateral dependencies in its critical and digital infrastructure,” says Florian Dorn, Director of EconPol Europe. Military dependence on the US’s promise of protection is also problematic due to the uncertain outcome of US presidential elections. “Europe must be able to defend itself and ensure the safety of its people,” Dorn says. However, this would require a more decisive rethinking of priorities in government spending and European cooperation.