Europe ‘naive’ in clinging to old economic model, says central banker

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Europe is “naive” in believing that the liberal economic model can survive the global shift pushed by the US and China, according to the Belgian central bank governor.

Pierre Wunsch told the FT that EU policymakers are still pursuing goals such as open markets and limited state aid that no longer reflect a geopolitical reality shaped by Donald Trump’s America First and Beijing’s dirigiste policies.

“Openness to trade and strict state-aid rules work in a world that was rule-based,” Wunsch said. “This world is gone and if you stick too much to a world that is gone, you’re just naive.”

The European Commission sets trade and competition policy for the bloc and has recently sealed free trade deals with Latin American countries, Australia, India and Indonesia. But Wunsch questioned this approach: “How do you follow rules in a world where some people do not follow them?”

In the past, Wunsch said, policymakers could “apply the good free trade agenda and also restrict industrial policy very much”, an approach that was “largely successful except that we were lagging behind on the innovation front”.

That model is now under strain. Wunsch pointed in particular to energy-intensive industries, where Europe faces structurally higher costs but still aims to preserve domestic production. The EU, he argued, has a “tendency to not confront trade-offs . . . You’re just not competitive, that’s it”.

At the heart of his argument is the view that Europe has failed to internalise how far the global economy has moved away from a level playing field. Chinese subsidies and US protectionist policies have reshaped the landscape, he said.

“The world has changed, so we cannot keep doing the same thing and come up with the same answers again and again while they have to some extent failed in the past.”

In a recent Belgian central bank paper, Wunsch offers a blunt critique of the EU’s economic strategy, arguing that Brussels is avoiding difficult trade-offs between climate ambition, competitiveness and openness.

The Commission over the past decade has also promoted an ambitious green agenda, including a target to reach net zero carbon emissions by mid-century. Successive crises — including the Covid-19 pandemic, Russia’s war in Ukraine and the recent Iran war — have led to the watering down of green deal policies amid concerns over weak growth and declining competitiveness relative to the US and China.

Countries around the world are considering how to diversify away from oil and gas following the latest energy crisis from the conflict with Iran. Fatih Birol, the head of the International Energy Agency, has predicted it will boost nuclear power, noting that a large share of Europe’s existing atomic plants were built in response to the oil crises of the 1970s.

“We need a political discussion and not these kinds of grand narratives where you pretend you can have it all,” Wunsch said.

Wunsch and his co-author Geert Langenus argue that Europe has a penchant for economic redistribution and risk aversion due to “deep-seated societal preferences”, which are hampering Europe’s ability to compete on emerging technologies.

From artificial intelligence to robotics, Wunsch warned that the bloc risks falling further behind both on innovation and its ability to shape global standards.

“Wave after wave we’re lagging behind in a more obvious way,” he said. “We are trying to regulate something that we do not master.”

While being a technology “follower” — someone who adopts the technology rather than leading the way on innovation — may have been manageable in the past, today’s fast-paced development increases the risk for Europe to lose control over its economic future.

Underlying these challenges, Wunsch argued, is a deeper political constraint: “You basically have democracies that cannot make choices anymore.”