Strategic Autonomy and Strengthening the Financial Architecture of the European Union

On May 29, 2023, INCIPE organized a virtual event titled Strategic Autonomy and Strengthening the Financial Architecture of the European Union. It featured the participation of Pablo Hernández de Cos, Governor of the Bank of Spain and also President of the Governing Board of CEMLA. The meeting was presented by the ambassador and Secretary General of INCIPE, Manuel Alabart. Following the presentation, a round of questions was moderated by Vicente Garrido, the General Director of INCIPE.

The Governor of the Bank of Spain began his intervention by highlighting the effects of globalization, a very important topic for highly open economies such as Spain and Europe. Starting in 2020, two extraordinary disturbances have occurred, the pandemic and Russia’s invasion of Ukraine, generating enormous uncertainty.

If we add to these factors the trade tensions between China and the United States, new questions arise about the future of globalization and the importance of geopolitical factors in shaping international economic relations. This not only conditions the actions of governments but also those of companies. This scenario is particularly important for Europe due to the level of commercial and financial openness of the EU, which is much greater than that of other geopolitical powers such as the US and China. The data from 2019 shows this: the share of foreign trade in the euro area reached 54% of our GDP, compared to 31% in 1999.

While we all agree that this increased openness of the European economy has been an advantage, it has also become a vulnerability in the current global geopolitical environment, as described at the beginning.

Hernández de Cos star with this question: “What are the vulnerabilities observed as a result of this high degree of integration?” He points out that there are at least four significant aspects of vulnerability when analyzing EU data. The first thing that appears is the dependence on Chinese industrial imports. Additionally, he notes that the EU also relies on third countries for semiconductor production. European companies involved in the manufacturing of these products are concentrated almost exclusively in the initial phase of the production chain, supplying high-purity equipment and materials. However, these companies represent an insignificant proportion in other critical phases of the production chain and also have a high dependence on external suppliers. Nearly 80% of the suppliers for European semiconductor companies are located outside the EU.

Hernández de Cos adds that a transition to a greener economy could significantly reduce these external dependencies. It is estimated that meeting the objectives established in this area could reduce dependencies from the current 60% to 10% by the year 2050. But, this transition requires critical raw materials such as rare earths, cobalt, and palladium.

Other aspects highlighted by the Governor are the concentration of exports and foreign direct investment since the main investment partners of the European Union are other advanced economies.

In the Q&A session, the Governor of the Bank of Spain extensively addresses the issues raised by the listeners, covering topics such as monetary policy, inflation and deflation in the country, and also anticipates that the Spanish GDP will return to pre-pandemic levels in the second quarter of 2023.

Danela Bordones

INCIPE