Lagarde: China now competes with the eurozone for 40 per cent of its leading sectors

Brussels – China is increasingly a problem. For the eurozone and the EU economy, it is the biggest challenge requiring a decisive and swift response, because the country’s expanding reach raises issues of economic and industrial competitiveness and of influence on the international stage. The President of the European Central Bank (ECB), Christine Lagarde, has sounded the alarm: Europe’s advantage over Beijing is shrinking. 

“Europe’s strength in mid-tech manufacturing, supported in part by access to relatively cheap energy…is also being eroded,” she said during her address to the International Business Council, the advisory body comprising around 120 of the world’s leading chief executives, representing various sectors and regions, established within the World Economic Forum. Specifically, Lagarde emphasised, “China has been steadily moving up the value chain,” and the result is that “the country now competes directly with the euro area in close to 40 per cent of the sectors in which we have a comparative advantage, compared with around 25 per cent in the early 2000s.”

Europe faces two problems: Chinese industrial and manufacturing growth outpacing Europe’s, and higher energy costs for the twelve-star economy, leading to a loss of competitiveness. “The cheap energy on which European industry once relied – including that from Russian gas – has faded,” the ECB President noted. The extent of the damage to the European economy is such that “last year, EU electricity prices for energy-intensive industries were on average more than twice US levels and around 50 per cent above those in China.”

Lagarde is therefore calling for swift progress on reforms to complete the sustainable and technological transitions that can  enable the EU and its eurozone to emerge from their current difficulties and to attempt to keep China at a distance, whose presence in the European Single Market is already too strong. To make headway, she urges the EU to overcome fragmentation within the single market: “Firms still compete too much within national borders, which weakens the competitive pressure to adopt new technologies,” Lagarde warns. Then there is a second barrier: “fragmentation of capital markets.”

In this regard, the European Commission’s EU Inc. initiative, launched to remove barriers for businesses, is a step in the right direction but, as the ECB President warns, “EU Inc. only addresses one part of the problem.” To curb China’s advance, “the wider task is to remove the barriers that fragment the Single Market, so that competitive pressure and new technologies can spread more widely across existing firms too.”