Europe’s geoeconomic competitiveness challenge

MILAN – Economists tend not to worry too much about a country’s international competitiveness. Cross-border trade and investment generally benefit both sides, and faster growth in one country benefits others, which can tap its expanding market. It is domestic productivity, not the ability to outcompete others, that determines national prosperity. That is why, 30 years ago, Paul Krugman called competitiveness a “dangerous obsession”.

From a strictly economic perspective, Krugman was right. But, with the war in Ukraine still raging and China becoming increasingly assertive and despotic, European leaders can no longer view competitiveness through an exclusively economic lens; geopolitical considerations are becoming just as – or even more – important. To paraphrase the American political scientist Edward Luttwak, the “logic of conflict” now supersedes the “grammar of commerce”.

Accounting for geopolitics implies a very different standard for assessing an economy. That is because geopolitics is about power, which is necessarily relative. When it comes to power, size matters – but how well people live does not. In other words, in “geoeconomics” – to use Luttwak’s term – the economy is a source of power, not necessarily a source of well-being for the population.