Reality check for EU: China is eating your lunch, find growth at home, ECB chief economist argues

By Carmel Crimmins

DUBLIN (Reuters) -The world economy is undergoing transformative changes beyond U.S. tariffs and Europe needs to start finding growth at home because its traditional sources of income are drying up, European Central Bank chief economist Philip Lane said.

Europe has barely grown since the pandemic as China is crowding it out on key export markets, industry is losing competitiveness, domestic consumers would rather save than spend, and now U.S. tariffs on imports are adding to the pressure on overseas sales.

China, long a top consumer of European goods, has also built up rival industries with top know-how, shifting from being a buyer to a competitor, narrowing the window for European exports, Lane told the Reuters Econ World podcast.

"The comparative advantage pattern in the world has turned," Lane said. "China's now very strong in lots of sectors."

"Regardless of the geopolitics, there's also a basic economic reality: the kind of relative attractiveness of exporting versus domestic sales has changed."

US NOT SUCH A BIG WORRY?

U.S. tariffs may exacerbate Europe's export problem but Lane was sanguine on the issue, arguing that the AI boom and high government spending were keeping U.S. demand high, limiting the trade hit.

"Under those circumstances, the ability of firms to pass through tariff hikes to the American importer and also the American consumer is reasonably robust," Lane said. "The U.S. is important, but it's not the predominant driver of the European economy."

However, tariffs did reroute global trade flows, particularly in Asia, and Europe now faces more Chinese competition even at home, Lane argued.

"China is now exporting more to Southeast Asia, Southeast Asia is exporting more to the U.S., and China is also exporting more to Europe and to other parts of the world economy," Lane said. "That is a very big reconfiguration for the world."

FOCUS ON THE DOMESTIC MARKET

Europe should never voluntarily retreat from export markets since trade is a positive-sum exercise, but a domestic market of 350 million people provides ample opportunity for growth, if the bloc only managed to remove more of its internal barriers, he said.

"The lesson from the U.S. is really having a genuine single market," Lane said. "We need the scale ... if we're going to really have a return on the kind of investments that are most germane in a basically digital economy."

"To get to scale, it's pretty difficult when you break up the European Union into 27 member countries," Lane said.

That will of course take a lot of country-specific, detailed, difficult, time-consuming reforms.

Still, many EU nations on the bloc's periphery, particularly Spain, have already started on this process and now enjoy the benefits of quicker growth, Lane argued.

"It makes sense for Europe to think about how to deliver a stronger rate of domestic demand. That's partly fiscal policy, it's partly reform."

"So that the incentives to invest in Europe and to innovate in Europe go up," Lane said. "Autonomy is a lot easier to deliver if domestic demand is strong enough."

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(Writing by Balazs KoranyiEditing by Frances Kerry)