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An EU Sovereignty Fund to avoid the damages of protectionism

“Beware of protectionism. History teaches that it’s never a good idea.” Raghuram Rajan is one of the most distinguished economists in the world (former Governor of the Bank of India, he held a prominent role at the International Monetary Fund for a long time). And, from Davos, during the work undertaken at the World Economic Forum, he observed with concern the political decisions taken by major global economic players (the measures implemented by the Biden administration to safeguard American enterprises, China’s activities to prioritise its internal market, the shadows cast by the many ongoing trading wars) and insisted on the need of open and competitive markets: “Excessive dependency on any country (in terms of energy, raw material, component manufacturing) is wrong. The issue is to avoid this while also maintaining a balance that won’t poison international relationships. We need to cooperate in certain areas, such as ‘green’ investments. And with regard to microchips, having every single country manufacturing their own is really not that wise. Thinking about the American Inflation Reduction Act, we should rather focus on strategic questions, not merely give the impression of wanting to contain China, even at the risk of hurting ourselves, of harnessing growth” (la Repubblica, 17 January).

Rajan is absolutely right. Protectionism is harmful, slows down economic development, warps the optimal allocation of resources through open and competitive markets. Behind the smokescreen of safeguarding the people’s interests, it increases economic and social inequalities within those same countries whose businesses it claims to protect. And it feeds negative political delusions (populism and sovreignism – the great evils of our struggling modern times – which, in the medium term, actually damage the more vulnerable and precarious social classes whose approval it instrumentally seeks). Reading some of his books, especially those highlighting the role of global trade – such as Fault Lines. How Hidden Fractures Still Threaten the World Economy, published in 2010 by Princeton University Press (and recipient of the Financial Times & Goldman Sachs Business Book of the Year Award) or Saving capitalism from the capitalists, written with Luigi Zingales and published in Italy by Einaudi in 2004 – is a good way to get solid evidence of this.

It’s precisely in a period in which globalisation needs rethinking, knowing however that “we can’t go back” and that we need “common regulations” (Giorgio Barba Navaretti, la Repubblica, 9 January), that acknowledging the crisis arising from closure policies and protectionist fences is worthwhile (indeed, The Economist’s cover of 13 January read “The end of magical thinking. How Britain can build a better relationship with Europe” referring to the failure of Brexit). Thus, the challenge that political and economic players must be able to overcome concerns the implementation of more balanced and socially acceptable sustainable development conditions, which would also have a positive impact on the attempts to untangle the knots of growing geopolitical tensions (the war in Ukraine is the most tragic instance of these), armed with the knowledge gained by a timely rereading of Frederic Bastiat, forward-looking French economist from the 19th century – “When goods don’t cross borders, armies will.”

Basically, we need to enhance the interconnections that still mark global economies, shifting from a free trade ideology (global trade at the mercy of the most powerful, privileging raw material and high-tech components oligopolies) to a much better fair trade system, seeking some balance between different needs and interests, and reassessing and relaunching international bodies such as the World Trade Organization, with its regulations and sanctions.

Precisely the opposite of those buzz words so cherished during the Trump era – “America First” – and the pressure to “Buy American”, which still affect the Biden administration, too (with its rather alarming Inflation Reduction Act, with its $369 billion budget to support and subsidise American enterprises and investments).

Under these circumstances, Europe could play a key role. Not only to avoid ending up powerless and vulnerable amongst giant countries like America and China, with negative consequences on the entire world economy, but also to assert itself as a positive, conciliatory model between economic growth and widespread wealth (by reforming the welfare state infrastructure of the various countries), economic freedom, liberal and market democracy, current competitive businesses and future sustainable development. And, further, promoting another important principle: the need to coordinate national interests at the urging of European bodies, thus consolidating the economy and enhancing the quality of life and employment. The EU, with its history of Treaties, the European and Steel Community, the ECM and then the “Currency Snake”, the Euro and the ECB, is indeed a prime example of it.

The ongoing discussions in Brussels and in the chambers of the main European governments (including Rome) on “state support”, the EU’s industrial policies and a “European Sovereignty Fund” investing in strategic security – that is, the provision of energy, raw material and cutting-edge technologies – seem to point in this direction. A Fund that the issue of Eurobonds could also plump out: the beloved brainchild of another supporter for a united Europe, Jacques Delors, which is back on the table for public debate. And, Carlo Bonomi, president of territorial entrepreneurial institution Confindustria, is strategically insisting on it, too (la Repubblica, 18 January).

It is than hoped that the open negotiations with the US and Brussels’ political steadfastness in demanding a relaunch of transatlantic relationships will lead to a good outcome.

Ursula von der Leyen, president of the EU Commission, is well-aware of this, and from the Forum in Davos asserted that the European Union “needs to make this net-zero transition creating new dependencies” and announced, “a Green Deal industrial plan”. A plan to be financed by the EU and the market, as “state aid would only be a limited solution.” Rather, a better solution to avoid a fragmentation in the single market would be to increase EU funding and thus “in the medium term, we will prepare a European sovereignty Fun as part of the mid-term review of the 2023 EU budget”. This is a position that Italy supports – as the Italian Minister of Economy and Finance Giancarlo Giorgetti well explains: in response to the American Inflation Reduction Act “a mere easing of state aid regulations is not a solution because disproportionate, as it would only benefit those member states with a larger budgetary margin while exacerbating the economic inequalities within the EU and subsequently fragment the internal market.” Hence, what’s needed are some common European tools and after the Recovery Plan, the EU Sovereignty Fund is a key strategic decision. A Fund, it should be maintained, supporting all the production supply chains in a Europe that’s strongly oriented towards industry and quality manufacturing.

Thus, crisis makes for wiser decisions, and those who are familiar with European history will remember, right at this moment, the far-sighted words that one of its fathers, Jean Monnet, voiced in 1954: “Europe will be forged in crisis, and will be the sum of the solutions adopted for those crises.” – an extremely up-to-date lesson in good politics.

(photo: Getty Images)

“Beware of protectionism. History teaches that it’s never a good idea.” Raghuram Rajan is one of the most distinguished economists in the world (former Governor of the Bank of India, he held a prominent role at the International Monetary Fund for a long time). And, from Davos, during the work undertaken at the World Economic Forum, he observed with concern the political decisions taken by major global economic players (the measures implemented by the Biden administration to safeguard American enterprises, China’s activities to prioritise its internal market, the shadows cast by the many ongoing trading wars) and insisted on the need of open and competitive markets: “Excessive dependency on any country (in terms of energy, raw material, component manufacturing) is wrong. The issue is to avoid this while also maintaining a balance that won’t poison international relationships. We need to cooperate in certain areas, such as ‘green’ investments. And with regard to microchips, having every single country manufacturing their own is really not that wise. Thinking about the American Inflation Reduction Act, we should rather focus on strategic questions, not merely give the impression of wanting to contain China, even at the risk of hurting ourselves, of harnessing growth” (la Repubblica, 17 January).

Rajan is absolutely right. Protectionism is harmful, slows down economic development, warps the optimal allocation of resources through open and competitive markets. Behind the smokescreen of safeguarding the people’s interests, it increases economic and social inequalities within those same countries whose businesses it claims to protect. And it feeds negative political delusions (populism and sovreignism – the great evils of our struggling modern times – which, in the medium term, actually damage the more vulnerable and precarious social classes whose approval it instrumentally seeks). Reading some of his books, especially those highlighting the role of global trade – such as Fault Lines. How Hidden Fractures Still Threaten the World Economy, published in 2010 by Princeton University Press (and recipient of the Financial Times & Goldman Sachs Business Book of the Year Award) or Saving capitalism from the capitalists, written with Luigi Zingales and published in Italy by Einaudi in 2004 – is a good way to get solid evidence of this.

It’s precisely in a period in which globalisation needs rethinking, knowing however that “we can’t go back” and that we need “common regulations” (Giorgio Barba Navaretti, la Repubblica, 9 January), that acknowledging the crisis arising from closure policies and protectionist fences is worthwhile (indeed, The Economist’s cover of 13 January read “The end of magical thinking. How Britain can build a better relationship with Europe” referring to the failure of Brexit). Thus, the challenge that political and economic players must be able to overcome concerns the implementation of more balanced and socially acceptable sustainable development conditions, which would also have a positive impact on the attempts to untangle the knots of growing geopolitical tensions (the war in Ukraine is the most tragic instance of these), armed with the knowledge gained by a timely rereading of Frederic Bastiat, forward-looking French economist from the 19th century – “When goods don’t cross borders, armies will.”

Basically, we need to enhance the interconnections that still mark global economies, shifting from a free trade ideology (global trade at the mercy of the most powerful, privileging raw material and high-tech components oligopolies) to a much better fair trade system, seeking some balance between different needs and interests, and reassessing and relaunching international bodies such as the World Trade Organization, with its regulations and sanctions.

Precisely the opposite of those buzz words so cherished during the Trump era – “America First” – and the pressure to “Buy American”, which still affect the Biden administration, too (with its rather alarming Inflation Reduction Act, with its $369 billion budget to support and subsidise American enterprises and investments).

Under these circumstances, Europe could play a key role. Not only to avoid ending up powerless and vulnerable amongst giant countries like America and China, with negative consequences on the entire world economy, but also to assert itself as a positive, conciliatory model between economic growth and widespread wealth (by reforming the welfare state infrastructure of the various countries), economic freedom, liberal and market democracy, current competitive businesses and future sustainable development. And, further, promoting another important principle: the need to coordinate national interests at the urging of European bodies, thus consolidating the economy and enhancing the quality of life and employment. The EU, with its history of Treaties, the European and Steel Community, the ECM and then the “Currency Snake”, the Euro and the ECB, is indeed a prime example of it.

The ongoing discussions in Brussels and in the chambers of the main European governments (including Rome) on “state support”, the EU’s industrial policies and a “European Sovereignty Fund” investing in strategic security – that is, the provision of energy, raw material and cutting-edge technologies – seem to point in this direction. A Fund that the issue of Eurobonds could also plump out: the beloved brainchild of another supporter for a united Europe, Jacques Delors, which is back on the table for public debate. And, Carlo Bonomi, president of territorial entrepreneurial institution Confindustria, is strategically insisting on it, too (la Repubblica, 18 January).

It is than hoped that the open negotiations with the US and Brussels’ political steadfastness in demanding a relaunch of transatlantic relationships will lead to a good outcome.

Ursula von der Leyen, president of the EU Commission, is well-aware of this, and from the Forum in Davos asserted that the European Union “needs to make this net-zero transition creating new dependencies” and announced, “a Green Deal industrial plan”. A plan to be financed by the EU and the market, as “state aid would only be a limited solution.” Rather, a better solution to avoid a fragmentation in the single market would be to increase EU funding and thus “in the medium term, we will prepare a European sovereignty Fun as part of the mid-term review of the 2023 EU budget”. This is a position that Italy supports – as the Italian Minister of Economy and Finance Giancarlo Giorgetti well explains: in response to the American Inflation Reduction Act “a mere easing of state aid regulations is not a solution because disproportionate, as it would only benefit those member states with a larger budgetary margin while exacerbating the economic inequalities within the EU and subsequently fragment the internal market.” Hence, what’s needed are some common European tools and after the Recovery Plan, the EU Sovereignty Fund is a key strategic decision. A Fund, it should be maintained, supporting all the production supply chains in a Europe that’s strongly oriented towards industry and quality manufacturing.

Thus, crisis makes for wiser decisions, and those who are familiar with European history will remember, right at this moment, the far-sighted words that one of its fathers, Jean Monnet, voiced in 1954: “Europe will be forged in crisis, and will be the sum of the solutions adopted for those crises.” – an extremely up-to-date lesson in good politics.

(photo: Getty Images)