Guest lecture

- GVC trade slowing down, after financial crisis

- Before the GFC:
o strong increase of trade openness for both advanced and emerging
economies
- After:
o Advanced economies and emerging Europe became more open to trade
o Asia (mainly China) strongly reverted its trend / changed strategy
- After Covid-19:
o Moderate rebound of trade openness

- Trade and the impact of Covid

o Reshaped global trade linkages
 China partly disappeared from the global picture
 Role of China has been covered by other Asian countries
 European linkages became less widespread

- Structural GVC participation

o Before GFC
 Upward trend of intra and extra-EU GVC participation
o With the GFC
 Temporary interruption of this development
o After GFC
 First, strong rebound
 Then, slow down

- EU export competitiveness vs backward integration

o Imports of intermediate goods appear to be fundamental for the smooth
functioning of the EU supply chain
 Positive and high correlation between imports of intermediates and
exports of final goods
 Correlation intensified over time `

- After Covid, intra-EU imports of intermediate goods grew faster than extra-EU
exports of final goods
o In order to fuel extra-EU export competitiveness, the EU had to strongly
increase its regional backward integration
o Deepening integration between EU countries

- Globalisation
o Inverted U-curve: parties on the extremes most wary of European integration
or globalisation
o Party competition in times if globalisation
 Structural – cleavage theory: formation of political parties is resp to
societal demands for representation of a particular set of interest
arising from large-scale societal change
  Strategic – Political entrepreneurs: formation of parties to mobilise of
societal demand sin order to meet strategic objectives of party elites
o Historical patterns in party competition
 Mainstream decline has been accompanied by reduced salience of
their issues:
 Left:
 More redistribution and state intervention ain the economy –
social democrats
 Right:
 Less spending, redistribution and state intervention in the
economy – Christian democrats/conservative
 Electorates becoming more picky, less attached to certain political
parties, increase in electoral volatility
 Strategic opportunity for political entrepreneurs
o Political entrepreneurs exploit weaknesses of mainstream parties
 Mainstream parties wish to centre party competition on the issues
they ‘own’ and hold incumbency advantage, but challengers wish to
mobilise issues on which they can drive wedge in mainstream
electoral coalition and capitlaise on their outside position
 Mainstream parties have incentive to:
o Increase importance of left-right
o Collapse all issues into left-right
 Challenger parties have incentive to:
o Increase importance of cosmopolitan-parochial
o Collapse all issues into cosmopolitan-parochial
o Brexit
 EU wasn’t a part political discourse before election,

- Political economy in action: How should the EU react to the Inflation Reduction Act
o Problem: GHG emission heating the planet
 Solution for economists:
 Tax emissions
 Political economy problem: nobody wants to pay
 Costs are private benefits accrue to society
 Democracies can overcome this obstacle
 E.g., EU emissions trading system
o Not so in US (coal producing swing states, etc), until
now
o Solution to political economy problem
 Carrots instead of sticks
 Instead of taxing emission, subsidise avoiding emissions
o The Inflation Reduction Act
 In principle should deliver same relative price as
taxing
 Hidden cost to society in overall public finances
 Use of tax credits helps to avoid impression of
fiscal cost