John FitzGerald: Unpicking global connections will be damaging for all

The fall of the Berlin Wall in 1989 freed eastern Europe from repressive communist regimes that not only limited individual freedoms but also resulted in much lower standards of living than in their EU counterparts.

The fall of the wall also initiated a major transformation in the wider European economy whose effects played out over the subsequent 25 years. These changes involved a large relocation of manufacturing activity eastward, and an opening up of intra-European trade.

When the wall fell new markets opened up in eastern Europe for western businesses as borders tumbled. Likewise, trade opportunities in the EU opened up for the old eastern bloc, and many new firms emerged there to exploit these possibilities. In addition, global markets were simultaneously becoming freer.

French and Italian car manufacturers were slower to shift production abroad, and suffered a loss of competitiveness as a result

These trade developments ushered in a long period of growth in the EU, which only came to a halt with the advent of the financial crisis in 2008.

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The lowering of borders within Europe also gave an opportunity for many western firms to relocate manufacturing activity from the EU15 to the new member states. In particular, the German car-manufacturing industry moved segments of its production process east to avail of an ample supply of skilled labour and a much lower cost base.

This simultaneously improved the competitiveness and expanded the capacity of German firms. The movement of Dell from Limerick to Poland in 2009 was part of this process.

At the same time rapid technical progress was transforming manufacturing, making it more efficient and requiring less labour to produce its existing output.

French and Italian car manufacturers were slower to shift production abroad, and suffered a loss of competitiveness as a result. Ultimately, to survive, they have followed suit.

Technical change

Today employment in German-owned manufacturing firms in the new member states is equivalent to roughly 10 per cent of manufacturing employment within Germany. France, which was much slower to go this route, has about half this share of manufacturing based abroad.

The combined effects of technical change and moving production eastward could have hit domestic employment in the EU15 hard. However, when the major burst of relocation to the east was happening in the 1990s, the EU economy was growing rapidly, so that displaced blue-collar workers found alternative employment.

Since 2000, manufacturing employment in the EU15 has fallen by 15 per cent, while it rose by 3 per cent in the new member states. With the 2008 recession many blue-collar workers in the EU15 found themselves suddenly unemployed, while employment continued to grow in the east of the EU.

The integrated EU economy we see today has very complex but efficient supply chains

Likewise, in the US the process of technical change combined with relocation of manufacturing to lower-cost regions saw substantial sections of the automotive industry move from states like Michigan to southern US states and also to Mexico.

In both Europe and the US there has been major political fallout, manifested in particular by disenchantment with existing political parties in France and Italy.

The rise of populist, nationalist and far-right movements has drawn on support from alienated areas of industrial decline, and from manufacturing workers who have seen their earnings decline or experienced unemployment.

The heart of the economic problems experienced in areas of declining industry has been a failure of policy to anticipate and adapt these regions and communities to industrial change. However, a scapegoat nearly everywhere is immigration. In addition, the UK has blamed membership of the EU, while Trump sees a trade war with China as the answer.

Adjustment

There are signs that the adjustment of the European production sector to the opportunities offered by EU enlargement is substantially complete. While the new member states still have some way to go to narrow the gap in living standards with the EU15, the large movement of jobs from west to east is over.

While this will reduce pressure on blue-collar employment it will not eliminate it. Technical change continues to place a big premium on workers with good skills and education, and those who lack skills are vulnerable to being left behind. Nevertheless, populist politicians are likely to continue to blame globalisation and foreigners for society’s ills – technical change and innovation don’t offer such an appealing target.

The integrated EU economy we see today has very complex but efficient supply chains, developed because they achieved major cost savings within a single EU market. Any process that unpicks those interconnections, be that through Brexit or, in the case of the US, through a trade war with China or Mexico, is likely to prove complex, painful, and economically damaging for all involved.