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Europe's Fragile Competition Quest, From QE To Bangladeshi Pay

Economics / Euro-Zone May 13, 2013 - 03:36 PM GMT

By: Andrew_McKillop


Any leading politician in Europe, today, has a "competitivity" speech ready at the touch of the Talk button. Europe's CNN-lookalike business TV channels have almost daily "great debates" on how to make Europe competitive. Against what and who? More than 65% of trade for most countries in Europe is with other European countries - the EU is a free trade area and customs union. Many observers say that is the only good thing European union ever brought about.

Currency wars are difficult for Europe. Its euro money started overvalued and remains so - but that brings low inflation, and even deflation! QE eternity in Europe, as in the US and Japan, and plenty of other countries is a part of the furniture since 2008, almost "traditional". It is now a "global response to crisis". Europe's own trade version of globalization - its free trade customs union - is however now attacked by Indian multi-billionaire Lakshmi Mittal, owner of the world's biggest steelmaker ArcelorMittal, in a Financial Times interview today.

Mittal says Europe is not going far enough and not being aggressive enough - with China.

Rather surely linked with Mittal's new call for Europe to run a full-blown trade war with China, ArcelorMittal on Friday posted a net loss of $345 million (down from a $92 million profit a year earlier) on Q1 2013 sales which plunged 13%, and whose share price is scraping along at 52-week lows despite stock exchange euphoria running at epic highs in Europe, as in the US. Mittal, who recently shut down major steel plants in Belgium and France, has said he may also close plants in Eastern Europe if the “economy continues to slump”, providing him plenty of motivation for telling Europe it urgently needs a trade war with China.

Mittal says China uses unfair competition, whether with tariffs, subsidies, or by outright dumping. Indian industry was not mentioned by Mittal, but it does exactly the same - especially using the same wage rates in industry that neighboring Bangladesh operates, as low as $35 a month for a 192-hour work month. The slave wage "competitive advantage" that China no longer needs, and if Europe used them to "improve its competitivity" they would bring street riots and revolution.

Mr Mittal went a lot further than talking only about how to save Europe's steel industry. He suggested that Europe should use protectionist measures to stop Chinese products flooding the market with cheap goods of any kind, abandon austerity, spend more, set special tariffs against "environmental dumping", invest in infrastructures - and other good things. He said: “If Europe continues only with the austerity programme without spending money on growth for infrastructure, things will never improve”.

Building bridges as well as cars, food cans and bicycles needs steel.

Mittal cited with approval the US and EU action to penalize Chinese dumping of solar panels (and windmill towers), from its vastly scaled-up rrenewable and alternate energy industries - but Europe itself is choking from overcapacity in solar and windpower. Mittal's answer to the problem was a classic play to the emerging North-South divide in Europe.

This is the complex subterranean political struggle between "Germany and everybody else", now Europe's favourite explanation of why everything is wrong - Germany's unwillingness to pursue debt-reduction policies through building the debt bubble even higher and layering the debt cake, by adding new tricks to "monetize debt". The anti-German lobby wants the ECB to have carte blanche and follow the US Fed's footsteps, and engage in "debt monetization". Europe has to wait until after Germany's September elections to know if Angela Merkel will scrape through, and keep this party going.

 Mr Mittal told the Financial Times. “We can clearly see that austerity is not helping economies to come out of recession.”  He added: "[policy makers] have to save European manufacturing, whatever you may call it. What I want is action to save the domestic manufacturing, including steel".

To be sure, Mittal only put the record back to the groove of slamming evil, efficient Chinese steel plants which have "very low environmental standards", but in his FT outburst he was forced to explain why Europe's steel demand shows no signs at all of recovering pre-2008 levels, unlike the USA where Mittal said that "in some sectors", especially the car industry, demand is almost back to 2008.

Mittal is obliged by facts to say the slump in demand in Europe, ‘‘is not a cyclical but a structural change’’, prompting ArcelorMittal to ride roughshod over trade union and government protests, and cut capacity while investing in high-end, high profit margin special steel production. Mittal's struggle with governments in Europe already includes the French government, which threatened last year to nationalize Mittal's lossmaking Florange site in northeast France, but Mr. Mittal held firm on his closure plans.

France's "anti-austerity" government, which practices no austerity for bailing out banks and the financial sector - but lets unemployment ride ever upwards to a 20-year record high - made a media fest out of its "anti-Mittal struggle". This ended with a certain level of understanding between Mittal, French president Hollande, and his Industrial redevelopment minister, Arnaud Montebourg, who had publicly led the threats to nationalize Mittal's asset in France.

Mittal's new advice to French and European deciders is that instead of taking potshots at him, they should use the heavy artillery to shoot down China with a full-blown trade war. They should also move up the global currency war at least one notch by tricks like "monetizing deficits", possibly including trade deficits, and play the environmental card as a way to protect Europe's declining industries. The sector of special interest to Mittal - steel - would of course attract an especially big slice of the new and fragile "competitive-oriented" financial and political layer-cake brewing in Europe.

Adding trade war with China to the cake, we can be sure, will rather soon create major political blowback and potential major new economic collateral damage

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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