End of Globalization Pushes Us Towards Green Reindustrialization of Europe

The fact that the apparent success of market-based globalization over the past 40 years has now been undermined became clear just weeks after the beginning of the invasion of Ukraine on February 24, 2022.

In short, the unilateral abrogation of the Bretton Woods approach on August 15, 1971 led to the creation of a global macroeconomic and financial chain, in which, roughly speaking, Germany, northern Italy, the still industrial part of France, Japan – which were soon challenged and partially replaced by China in the 1990s – produced primarily for the West, while the United States enjoyed the privilege of being their client of last resort. The entry of the Chinese economy into global trade in the 1990s and its rapid transformation into a “global producer” triggered wage repression in the West, leading to the decoupling of real wages from labor productivity. This happened because Western semi-qualified workers had to compete with Chinese workers, causing their real wages to stagnate or just rise slowly compared to productivity growth. Over the same period, shareholders’ returns as a percentage of GDP increased significantly, contributing to widening income inequality and stimulating savings that, in turn, had to be reinjected into the financial system by the banking sector.

In 2007, before the global financial crisis, Beijing accumulated a nearly $3-trillion trade surplus with the rest of the world. However, this money was essentially reinjected into the Western financial sphere through the purchase of US treasuries and Western assets (real estate, companies, French vineyards…). The money spent by Western families on cheap Chinese goods has not been matched by an increase in consumer purchasing power due to stagnant real wages. This was accompanied by an increase in the value of financial assets, the price of which depended significantly on the amount of dollars poured into the financial sphere due to the positive trade balance of countries trading with the United States. This led to a global circular flow of money that benefited the small minority of Western families who owned financial assets.

In the meantime, of course, massive consumption of fossil fuels has contributed to climate change, although the international community has paid no attention to this, despite repeated warnings from the scientific world. Moreover, the proliferation of electronics has dramatically increased our dependence on minerals, at least doubling the number of types of minerals needed by our society.

The global financial crisis of 2007-2009 abruptly interrupted this cycle, demonstrating the riskiness of deregulated Western financial markets. As a result, China began to diversify its portfolio and reorient industrial production towards the domestic market. Therefore, wages have increased on the east coast of China. Since the beginning of the second decade of the 21st century, the infusion of “fresh money” from the Chinese economy has begun to decline. Today, China’s surplus has virtually disappeared for the West, as the value of China’s imports from the West is roughly equal to its exports. And the dollar reserves of the People’s Bank of China amount to 1 trillion. This means that China’s dependence on Western customers, although still significant, has been fully exposed. Who will become the next factory of the West if Europe refuses to re-industrialize?

As a result, the only source of new money in Western finance from then on was the unconventional quantitative easing (QE) monetary policy pursued by most Western central banks since 2009. This bubble was largely disconnected from the real economy and has now manifested itself in a new inflationary context that has forced central banks to end quantitative-easing-oriented monetary policies in favor of traditional anti-inflation measures.

However, the policy of raising rates is a mistake for three reasons. Firstly, it misunderstands the underlying cause of inflation in the 2020s. Partly due to the shutdown of international production lines during the pandemic, partly due to the war in Ukraine, but also because some of these raw materials (for example, oil and copper) are becoming increasingly scarce.

The second reason it that the rising interest rates resulted in the appearance of the first signs of instability in the financial system, such as the collapse of Silicon Valley Bank, Credit Swiss, and a number of other banks in March 2023, while prices did not fall. Meanwhile, the planet has done very little to reduce greenhouse gas emissions. Even today, 80% of the energy dissipated by humanity still consists of fossil fuels.

The third reason is that rising costs of money can only make it more difficult to finance the green investments that the planet urgently needs. To have any chance of staying at +2 degrees by the end of the century, we will need to spend about 8% of global GDP on green investments every year. We are very far from this (less than 1%). Instead of taking scientific warnings seriously, we built a financial house of cards that only survives today thanks to the very loose monetary policies of central banks. Now inflation is making us pay for our dependence on fossil fuels and rare minerals. Instead of realizing that the only way to get rid of this is to accelerate green investment, we respond by fighting with traditional means, which will not relieve the long-term inflationary fever, but will bring down the financial house of cards. It’s time to come to your senses: regulate financial markets and the banking sector; fund a European Green New Deal worthy of its name; launch the green reindustrialization of Europe to reduce our dependence on fossil fuels. The war in Ukraine reminds us that this is the price of peace.