By Andreas Charalambous and Omiros Pissarides
The world economy is currently performing better than expected. The recession, which many analysts had predicted as an inevitable result of the pandemic and the geopolitical upheavals, seems to have been avoided.
The focus of interest has been shifting towards long-term considerations, including the economic and financial dimensions of security issues. The increase in geopolitical tensions, notably between Russia-Ukraine and Israel-Hamas, the possible victory of Donald Trump in the forthcoming US elections and the intensification of the rivalry between the US and China are particularly troubling.
The aspect of security has three main dimensions, with related budgetary implications: (a) the strengthening of defence capabilities, due to the escalation of geopolitical tensions, (b) the creation of preventive mechanisms, to deal with a possible new pandemic or widespread health crisis, and (c) dealing with climate change and the extreme phenomena that characterise it, such as a higher number of fires, prolonged droughts and intense storms.
The discussion regarding the appropriate strategy for dealing with geopolitical tensions is of particular interest.
In the US, trade protectionist tendencies have strengthened, mainly vis-a-vis China. Similar approaches are observed in the EU and are reflected in the new industrial policy, promoted by the European Commission, and the imposition of trade tariffs against China, on the basis that China also adopts a similar policy on imports from the EU.
Such policies rest on a rational basis and aim to reduce, or avoid, over-reliance on imports in strategic sectors. A typical example is Germany’s overdependence on cheap natural gas from Russia, which created severe adjustment problems after the start of the war in Ukraine. Today, the EU exhibits similar overdependence on imports of raw materials for the technological sector.
This strategy, which bears the description “de-risking”, is associated with negative side effects that should not be ignored. Specifically, it tends to limit competition and lead to higher prices and also fewer choices for the consumer. Further, it provokes reactions from the affected country and creates a vicious cycle of restrictions on international trade. It must, therefore, be promoted with caution, and within the framework of an integrated strategy, which takes into account the long-term repercussions.
Such an integrated strategy is necessary for the EU, which is characterised by an increased degree of dependence on the export sector. Key elements of this strategy should be: (a) the selective identification of a small number of strategic sectors, characterised by a risk of overconcentration and in need of targeted support, (b) the encouragement of markets’ diversification, rather than the imposition of general trade restrictions, and (c) the avoidance of a piecemeal approach and partial measures, under the pretext of protecting strategic sectors.
The above also applies to Cyprus. The adoption of the relevant EU directive should not circumvent the open nature of the economy and its attractiveness as a destination for foreign investments. On the contrary, productive foreign investments in our country, including those in critical sectors, should be encouraged.
Andreas Charalambous and Omiros Pissarides are economists
