Lhe Draghi report offers a harsh, but realistic, diagnosis of the position of the European Union (EU) in relation to the United States and China. One of the reasons for the relative loss of competitiveness of the EU in recent decades is the increase in the cost of energy for European households and firms, the result of two energy shocks: the shale revolution in America North, which led to a sharp drop in energy prices in the United States, and the fallout from the war in Ukraine, which caused a rise in energy prices in Europe. These two shocks have seriously undermined the EU's ability to compete with other economic blocs.
Added to these two shocks is a growing gap between the climate and energy policies of the EU and those of the other two blocs. If the EU Green Deal, adopted in 2020, is ambitious on the climate front, it contrasts with the industrial policies of China and the United States, which have proactively sought to strengthen their competitiveness in sectors to high energy intensity.
The American shale revolution has had indirect negative effects on the competitiveness of the EU. Indeed, the combination of innovations in hydraulic fracturing and horizontal drilling allowed a significant increase in oil and natural gas production in the United States after 2008, which should be further accentuated by the election of Donald Trump. This revolution did not spread to Europe because of environmental rules, differences in population density and land ownership rights.
The American shale gas revolution, because it lowered domestic energy prices, stimulated the reindustrialization of the American economy. It has sparked investment in energy-intensive businesses and created good jobs; it also considerably reduced the United States' current account deficit due to the drop in energy imports. This comparative advantage has mitigated the consequences of China's comparative advantage in cheap labor, but has also deteriorated the EU's relative competitiveness.
Proactive agenda
The second shock, the global energy shocks caused by the war in Ukraine, hit the EU disproportionately. Sanctions and bans on Russian oil and gas imports have led to a rush by Europeans towards alternative sources to Russia in order to limit rising energy prices. Indirect costs have also been considerable, including subsidies linked to energy prices and lower taxes on energy products, which have widened deficits and increased debt levels. Decisions to relocate energy-intensive companies outside the EU are perhaps even more economically damaging. In Germany, the overall cost was estimated at 3% of GDP.
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Source: Lemonde