 Good afternoon. My name is Alex White. I'm Director General here at the Institute of International European Affairs. We're very pleased to be joined this afternoon by a very distinguished speaker, Dr. Jeremy Zettelmar, who's Director of Brugel, which as you know is the Brussels-based economics think tank. I suppose the European Union has been placing much greater weight recently on economic security as a distinct policy objective. And at least I want to ask how does this differ from past attempts to increase resilience and prevent crises? There's a view that enhancing economic security should take the form of de-risking, which is a word we've heard a lot about, de-risking in a way that preserves trade integrations as much as possible. But how do we determine exactly what needs de-risking? These are some of the issues that our guests will seek to answer and through those answers make an assessment of the EU's policy agenda on economic security. What has been achieved? Are there any blind spots? How can the risk of unintended consequences be minimized? As one of the world's leading think tanks, Brugel makes an outstanding contribution to public debate and expertise through the production of timely and incisive research on a range of international economic issues. And we're very conscious of that here at the IIA, the work that Brugel does. So it's a great pleasure for us to have Jeremy here this afternoon to speak to us and to share some of his analysis. Jeremy will speak to us for about 20 minutes or so and then we'll have a Q&A. If you have a question, the usual drill applies. Feel free to submit the question when it occurs to you using the Zoom Q&A function at the bottom of your screen. And a reminder that the presentation and the Q&A today are both on the record. Jeremy Zettelmar has been Director of Brugel since September 2022. Born in Madrid in 1964, he was previously a Deputy Director of the Strategy and Policy Review Department of the International Monetary Fund. Prior to that he was Dennis Weatherstone's Senior Fellow and a Senior Fellow at the Peterson Institute for International Economics. He was Director General for Economic Policy at the German Federal Ministry for Economic Affairs and Energy. He was Director of Research and Deputy Chief Economist at the European Bank for Reconstruction and Development and the IMF staff member, where he worked in the research Western Hemisphere and European two departments. That's quite an impressive string. He didn't, you will appreciate, do all of those things at the same time, but he did them at different periods of his stellar career. So as I have said, we are delighted to have you with us this afternoon, Jeremy. And I'm going to hand the floor to you and invite you to address us for about 20 minutes or so, after which we will continue the conversation through the Q&A. Thank you very much. Great. Alex, thank you so much for this exceedingly generous introduction and for inviting me to speak at IIEA. So I will try to share my screen. All right, so this is based on work I've been doing with a group of people, which will be coming out in a report in early May. And so I'm sort of jumping the gun a little bit and I'm nervous that my co-authors will accuse me of having done that before the official launch. So I'm keeping things sort of quite general, but we can go into the details later. And so basically the background for this report, which we will launch on May 6th and 7th, is that as economists, we thought we should have a sort of clearer, more data-based view on where our economic security risks actually come from. And I mean, it worked to some extent, at least in the sense that the results of this project, which consists of five papers, I will show you in a second, made me change my mind a little bit on the topic. And so I will tell you why. So the plan for the next 20 minutes is it's very simple. I will give you our take on what economic security means. It's a term that we did not use very much until about a year ago, or maybe two years ago. But of course, there are many related terms, national security, crisis prevention and mitigation. And so the question is what is special about this term and about its context? I will give you sort of my main personal takeaways from this forthcoming body of work. And then I will draw some implications for the EU policy agenda. So on the first question, what does it mean, what is different about economic security relative to related concepts? So the way I would define it is security from external economic threats. And so the two neighboring concepts, national security and crisis prevention mitigation, how does it differ from national security? I would say in the sense that it excludes the military and other non-economic threats. But it does also include a category of problems, threats that are typically not included under national security, which I would say sort of non-willful threat. So what economists would refer to as shocks. So there is a little bit outside the concept that's inside national security. There's something inside this concept that is not covered usually by national security, but there is quite a big overlap. And the overlap, I would say, consists of willful economic harm inflicted by foreign actors. So that is common to both economic and national security. Now, how does it differ from what we as economists are more used to? So in a sense, when I first heard the term and something new, I thought, what do you mean? I mean, we've been worrying about how to prevent bad stuff in the economy forever. But typically, when we do that, we really focus on either crises that are generated in domestic economic systems in the sense that they are our fault. For example, a mortgage crisis. Or to the extent that we focus on external problems, these are external shocks that are not necessarily a reflection of willful actors. And so the little diagram here is supposed to kind of clarify these concepts. So you have national security risks that are defined, as I understand them, by deliberate action. And they are to the right of this box. And they could include any method of propagation. So through trade investment, financial disease, military or other, all kinds of channels through which you may suffer harm. And then we have the more traditional realm of economists, economic crises, which focus on just two channels of propagation, trade investment and financial channels. And they typically do encompass both domestic origins of crisis and external origins, but they tend not to focus on deliberate action, right? Deliberate action is the national security realm. And so what this concept of external security does is straddle these two concepts. Now, the way it's been applied in practice these days, focuses mostly on trade related threats. But I think that is not intrinsic to the definition. And in fact, I will argue that it's a problem that we are currently virtually only focusing on on trade related threats. So that brings me to the question of what threats we are talking about specifically. So if you, you know, this is simply an observation of what is on policymakers mind, particularly in the post COVID period. So the first category is was really defined by COVID. So this was this experience that something happening very far away in a major trading partner, in this case, China, it could really have enormous economic consequences for the rest of the world, not just through the direct effects. So that was, of course, the pandemic itself, but because of trade implications. And the reason for that where the port closures in China, the disruptions of supply chains, and because of our high level of integration and because supply chains magnify a shock that occurs upstream. So you can have a relatively small shock upstream that wouldn't be much damage if the supply chain ended. But if it's far upstream, and these chains are long, it can reach to the far corners of the world. So we are still concerned about that. And I think that is still part of the concept of economic security. Now that the second sort of class of threats that we have become aware of and concerned with increasingly. And so this had to do with Chinese coercion vis a vis Lithuania for political reasons, because of Taiwan and similarly, coercion vis a vis Australia. But prior to that similar coercion had happened vis a vis Japan. So in the case of Japan, China decided to stop exporting some critical raw materials to Japan. In the case of Australia, it banned imports of wine or de facto ban them. These things are sometimes done in sort of indirect ways and raw materials as well. You can also arguably count the Trump section 232 tariffs. So these were the aluminum and steel tariffs inflicted on several US allies as part of this coercive approach. And then of course the best known most traditional form of threats are just economic and financial sanctions, which are kind of an order of magnitude bigger than what is in class two, because it's not supposed to just be a limited publish punishment for a particular political action, but it's supposed to hurt your adversary in a more comprehensive way, such as a sanction that we imposed on Russia. Okay. Now, one important question is fine. We may be in a world that has to deal with such types of threats to a greater extent than in the past, but does this really require policy intervention? So firms have every incentive to protect themselves. So do we need to do anything beyond in a sense, making firms aware, having them read the newspaper, essentially. And so there's sort of broad agreement among economists that the answer is yes, and that has to do mostly with three effects. The first is this so-called network externalities. So firms, again, this relates to the role of supply chains. They're a part of a network. It's a broader effect, though. They're part of a network of relationships. And within this network, the relationships between the partners, between the firms that trade with each other and supply each other and their customers are not always market relations that are revised on an ongoing basis. And so if you have a problem, it's not just going to affect you. It's also going to affect the firms that depend on you. And this is not automatically reflected in market prices. And so there is an externality. And you may not sufficiently consider the fact that if there's a problem that you suffer, a whole slew of others will also suffer that problem. The second argument is that firms don't have full information about the risk exposure. So this is an issue, particularly with long or complex supply chains. And finally, there's a moral hazard argument, which is that firms might hope to get rescued by the state if things get really bad. And so as a result of these three effects, there's probably a generic case for policies focused on de-risking. Now, the big problem, of course, is what and how to de-risk. And the main reason why this is a problem is that we cannot just throw sort of the kitchen sink at the problem because de-risking may be costly. And first and foremost, it is costly because what we would call trade dependencies so that we are specialized in the world economy. And as a result, we purchase specific goods from places like China. This is reflection of specialization. So this is, in a sense, a phenomenon that we have embraced as societies since the early 19th century, at the very least. And the reason for that is that we can jointly produce more if we specialize on things that we are good at. And so this is what people talk about when they refer to the gains from trade. So in some sense, dependency is very intimately, very directly related with the gains from trade. If we want to cut down on dependencies, we might cut down on gains from trade and it might hurt us more than it helps. The other reason why de-risking could be costly has to do with the fact that I have focused on external risks. But there is, of course, still domestic risks and reducing trade integration. While it may make us safer with respect to imported problems, it makes us less safe with respect to our ability to deal with domestic problems. A third and extremely important point is that aggressive trade re-risking, of course, has political consequences. So we are taking an hostile approach towards a trading partner that could damage international cooperation, particularly in areas like climate change where we really need it. And fourth and finally, it's the perennial problem if we are talking about the EU that we are broadly aligned, but not exactly aligned in our interests within the EU. And so aggressive de-risking might hurt some countries in the EU more than others. So for example, aggressively reducing export exposures is going to hurt Germany more than Spain vis-à-vis China. And so it could threaten cohesion within the EU, which in turn makes threats harder to deter because divisions can be exploited. So how do you sort of deal with these trade-offs? And so there is a conventional view that the right way of dealing with these trade-offs is this, to quote Jake Sullivan, the US National Security Advisor in a speech, I think last year at the Brookings Institution, is the small yard high fence approach, which is trying to identify a few critical trade dependencies, ideally at the product level, and then reduce these trade dependencies, mainly by diversification. So not by necessarily trading less, but by trading less with the specific partner that you are in this good, in this good category dependent on and trading more with others. And then otherwise you maintain maximum integration, including with that trading partner that might potentially harm you because the channels through which you can be harmed have been reduced. And so basically, I have changed my mind a little bit on this prescription. So I'm still an economic liberal. I'm still in favor of trade, but I think putting it like this is just a bit too simple. And so I have three more slides. And then I will tell you why it's too simple. So it has to do with the sort of two main insights of this research report, which includes five papers by a bunch of economists and applied economists, including I'm very proud to say three Irish people, Morgan Kelly, Kevin O'Rourke, and Conan McCaffrey, who is actually at Bruegel. And he was at some stage in his life, at least an intern or something like that at IIEA. So he was all happy when you heard that I was going to present there. Okay, so the two insights are the following. The first one is that, you know, this idea that let's just focus on these pressure points, let's identify the product level trade dependencies and reduce them. It's really, really hard to implement. And the reason is that while it is possible to identify goods where we import a lot relative to what we produce domestically in the EU, and among these goods, it's easy to pick goods that have a very concentrated import structure, say goods where we are importing 90% from India or 98% from China. So that stuff is easy to do. What is much harder to do is to capture indirect dependencies, which implies that the first two steps may understate the problem, because we might depend, we might be exposed to China, not just directly, but because we are exposed to a country that imports a lot from China. But more importantly, even more importantly, what it completely misses this approach is what might actually happen if there's a disruption in imports. So how easy would it be to substitute away from a specific importer? And this can have a very big effect. So in the end, we got through the energy crisis of 2022 better than we thought, particularly Germany got through it better than it thought, because it was possible to substitute away from Russian gas somewhat more easily than people had thought. And then the really important thing that this approach misses is that it doesn't really give you a sense of the economic costs of disruption in the event that all things go bad and we really cannot substitute away from an import source. So we might not be able to substitute away from a specific importer, but we could still substitute away, say from the goods that we are importing on the consumption side. And so one of the chapters in this report, there's a list of our top 20 or so trade dependencies. And it turns out that about half of them are consumer goods, something like camping equipment, electric blankets, artificial flowers. So those are our big trade dependencies that are not the only ones, of course. So they are some more serious ones. But these type of selecting dependencies doesn't really give you a sense of that. And it's extremely difficult to actually establish a sense of that. And so the consequences is that if you're going down this road, you will get both lots of missed dependencies because you sort of fail to count some of these indirect dependencies. But you may also get lots of false positives. So you may get some goods that you look, it looks like you're very dependent. And in fact, you are currently are in the sense that you import a lot from just one trading partner, but then it will be very easy either to find another trading partner once prices go up or to substitute away from this good entirely. Okay, the second big insight from this paper is that the costs of a hard stop to trade with a highly integrated partner or to put it more bluntly, the cost of a decoupling, a complete decoupling from China are an order of magnitude higher than the cost of a gradual reduction in integration, even if it leads to complete decoupling. So essentially the timeframe of decoupling matters almost as much as the extent. And this is a point that is being often overlooked. So just to give you the orders of magnitude, the output cost of a hard stop in trade between the G7 and the EU on the one hand, and China and Russia on the other as a result of a geopolitical shock like an invasion of Taiwan. So imagine a sanction scenario, right, where we really stop trading in most categories. The output costs of this event for a place like Germany, which is quite dependent on China is large. It's not, it wouldn't kill Germany. So according to this paper, it's somewhere in the order of magnitude of the COVID recession. So four, five percent of GDP. But if you decouple gradually over time and have a time to substitute a way to other trading partners, that cost, according to these authors, is going to drop to something like one percent of GDP for the US 0.5 percent of GDP. And so why, why is this? So what, I mean, this is, was a bit surprising to me because I, for a very long time, believed that, you know, the option of simply going back to a Cold War type situation, where we stopped trading with a large hostile block, wasn't really there because China is so much more important to the world economy than the Soviet Union was. Well, according to this trade model, that's, you know, it may be true, it is costly, but it's not really unbearably costly. And the result, what's generating this result is that even it is assumed here that the depraving happens between, if you like, China and the West, but both blocks continue trading with the rest of the world and of course with each other. And so it turns out that there's sufficient gains from trade to realize most, or there's sufficient diversity in what these blocks produce, right? Diversity and comparative advantage in the rest of the world to mean that in the end, in the long run, the gains from trade in trading with China or rather the losses from a decoupling are not so big as we thought. Okay, so what does one take away from this? This is my second to last slide. So first of all, I think it's still a good idea to worry of or de-risking of products, but I think what should focus sort of on products where the cost of interruptions are just unquestionably large, right? So we are very unlikely to get false positives, if you like. So these are things like natural gas, computer chips, or critical medical supplies. In many cases, we don't know how big the costs are, but when we do know that the costs are very big, then by all means we should diversify. Now, in my view, this excludes product category like solar panels, which sort of are often mentioned as somehow strategic and important for the Green Deal and so forth, but they're not in the category where the cost of interruption are unquestionably large because all that would happen if the Chinese stopped sending us solar panels is that we couldn't, we would have to continue the green transition at a somewhat higher cost, right? But the energy supply doesn't go down just because they're not sending us new solar panels. The second point that follows from this literature is that maybe this overwhelming focus on import dependency, which has to do with our Russia and COVID traumas, is really a bit misplaced in the sense that export dependency is just as important. So what is driving sort of the economic cost of the decoupling with China is to a very large extent the fact that we export a lot to China, not just our import dependency. And by the same logic, we should also not forget that there are other forms of dependency, financial, and so forth. They may not be relevant with respect to China, but in some scenarios of the world, they could be relevant with respect to other countries. You know, God forbid, this may include the United States. The third and for me, the most important insight is that raising resilience is at least as important as the risking. And that has to do with this, you know, basic humility that we are not going to be sure whether we really can get the risking right. We don't know and we will likely never know enough to protect ourselves against the most relevant threats. And so we have to protect ourselves against what Donald Rumsfeld used to call the unknown unknowns. And that's another reason to strengthen the single market, so to be able to react flexibly within the EU. For the same reason, because we're not really sure that we will be able to mount sort of the right defense, having identified or de-risk the right products. Before, we need to worry about deterrence, not just de-risking. So deterrence is, in a sense, the economic security or the national security version of crisis prevention. So if you're able to deter coercion, that's as good a defense as de-risking. And then finally, there's this really hard question, which I'm not sure I know the answer to is, should we, given how China has evolved, reduce overall integration with China? And so this is essentially a question of probability. So to give you the orders of magnitude, you know, from a German perspective, the cost of a hard decoupling from China is 4% of GDP. And the cost of, you know, a partial preemptive decoupling might be 0.4% of GDP. And so are these 0.4% of GDP justifiable as a sort of insurance premium to prepare yourself for the fact that trade might just stop? Well, it probably depends on the probability that trade would just stop, right? And so that is a calculus that is beyond what I can do. Okay, final slide. How has the EU actually done on these fronts? So there is a plethora of legislation that the EU has done mostly in the fund-aligned presidency a little before that too. And so I'm happy to talk about some of these things later, but roughly what it boils down to is the following. And I'm ordering this now in the same categories as the previous slide. So I'm going through these main insights from our report. So on import de-risking, I think the commission has done fine in the sense that they have put a lot of weight on this subject, but with some caveats. And so there are essentially two caveats. The right thing is, the thing that's good about it is that they have focused on some of these critical things, when they make critical raw materials and computer chips. They've also focused on clean tech, which I think should not be subsumed in as much in the economic security umbrella. There may be sort of competitiveness reasons where we may want to push clean tech, but basically the, you know, the EU has tried to push what at the beginning sounded a little bit of a protectionist agenda on clean tech under this umbrella of economic security. And I don't think it belongs there. And then the other thing you can complain about is that the policy instruments are often weak. Now that's not necessarily the commission's fault, right? They mostly weak because we don't have much money at the EU level. What has been almost entirely ignored is export dependency and financial dependency. So the focus is completely driven by this, you know, the COVID Russia trauma. It's all about what if certain imports stop. So the idea that we might hurt ourselves because we just export too much to China hasn't had nearly as much of a debate, a discussion as the import dependency question. Similarly, the point that, you know, the resilience agenda should have received another kick after Russia and in light of a more authoritarian China and it really hasn't. So remember the term resilience, it was all on vogue after COVID. It's been forgotten a little bit and replaced by economic security. But once you think it through, you sort of discover that at the end, the best you can do is probably to raise resilience after all. And fortunately, this idea is brought out in Enrico Letta's report on the single market, which was published yesterday. Now, the one area where the commission gets the highest marks, I think where they really have done very well is on deterrence. So there's a thing called an anti-coercion instrument, which is basically a legal instrument that allows the commission with the agreement of the council. So the council has to has to be in favor and maybe what you can, what you could argue is that it would be nice to have a qualified majority voting against this to give the commission more leeway. But the commission can, if it detects coercion, essentially retaliate in any way once against the entities, you know, firms of the country that is cursing us to the point of prohibiting them to sell inside the EU. And then there's the really difficult question on whether we should reduce integration with China. And I think that should at least have a discussion in the EU. This is something that would be comparatively easy to do with respect to policy instruments. So unlike import protection, which requires you to do things in general that are WTO illegal, which we do not want to do because we still want to defend open rule space trade, you can very, very easily reduce export dependence to exports tariffs that is completely legal under the WTO or diversification charges or stuff like that. I don't think anyone is talking about that. And indeed, it could have unintended side effects. It could make our relationship with China much more difficult. And of course, the reason, the main reason why no one is talking about that is that the political economy is really deadly, right? So you have German exporters, which are already in trouble because of high energy costs. And you tell them on top of that, you can't export as much to the one country that's still profitable, you're going to get a lot of pushback. So I don't think this is a very realistic option, maybe not a desirable option, but one has to think through it and then possibly consider an alternative, which is to take a prudential approach to a company or sector exposure, especially attending companies look, you know, feel free to export as much as you want, but be aware, have a contingency plan in case there is a problem. And finally, I will just end with this, I don't have time to get into it, but we could do it in the discussion. The elephant in the room, of course, is Trump. So, you know, if Trump gets reelected, not see things that could happen to the EU. And that opens yet another dimension of economic security that we can talk about. So let me stop here and sorry for going a little over that allocated time.