In this price war, competitiveness will not be decided only in our factories or in the corridors of the European Commission; it will also be decided at the ECB. To survive, like Japan and South Korea, Europe must pursue a defensive competitive devaluation. Here's why.
The mirage of productivity gains alone
Led by Germany, advocates of austerity and free trade argue that simplification, optimization of value chains with a narrow circle of partners, innovation and productivity gains will, on their own, erase this price differential. That ignores the reality of the new globalization. We are shifting from a world of optimized flows (the "happy” globalization that applied David Ricardo's principles on a planetary scale) which produced one outcome: "The winner takes it all” (in this case, China, which has managed to concentrate 30% of global manufacturing value added, even 40% when expressed in purchasing power parity) to an era of regionalization, where resilience and sovereignty (indispensable in a world of empires and power politics) carry an intrinsic cost.
Relocating, reindustrializing, rearming, securing supplies, decarbonizing: all of this is expensive
If our cost structures are structurally higher than China's, how can we hope to preserve our market share? South Korea and Japan understood this long ago. Facing the same Chinese competition, they did not wait for a productivity miracle. They do invest more in R&D (Europe should follow them on that path, and the solution proposed below would help), but they have also used their currency as a shield. Since 2020, the won has lost 30% of its value against the euro, and the yen 45%. It is no coincidence that these levels correspond precisely to the price differential between European products and Chinese products; those exchange rates are simply the consequence. This is not an offensive strategy of monetary dumping; it is a defensive survival strategy: in direct contact with the Chinese ogre, the aim was to keep the industrial base afloat by absorbing cost shocks through monetary adjustment. In the automotive sector, this approach worked remarkably well in Korea which, unlike Europe, managed to preserve its share of global export markets; it also worked remarkably well in response to US tariffs.
Meanwhile, Europe, under Germany's sway, clings to a 2% inflation target and to a strong currency-a "safe haven” for an economy running out of steam. By acting this way, we turn the euro into a structural handicap that condemns us to slow deindustrialization. We are the only ones imposing this iron discipline on ourselves in a world that has freed itself from monetarist dogmas.
The escape route proposed by the austerity camp-always moving further upmarket to maintain our share of manufacturing value added-is reaching its limit. The report presented by High Commissioner Clément Beaune demonstrates this clearly. China is rapidly moving up the value chain and, at the end of the road, there will be no industry left in Europe if nothing is done to protect it.
Part of the answer lies in targeted protectionism. That is the purpose of the Industrial Accelerator Act (IAA) presented by Stéphane Séjourné, whose scope must be expanded (the sectors covered, the perimeters concerned) and whose openness must be limited ("Made in EU” and not "Made with EU” in strategic sectors, which would otherwise lead to offshoring to low-cost countries other than China). Another part of the answer, indispensable, lies in a monetary response similar to those used by Japan and Korea.
The new monetary contract: moving from 2% to 3% or 4% inflation
This is where the thesis must change. The ECB's mandate, focused on a 2% inflation target, is a relic of a bygone era: that of happy globalization.
We are entering an era of "regionalisation” and forced transitions (ecological, security-related). This new reality is intrinsically inflationary. Wanting to maintain 2% inflation in a world of resource scarcity and reshoring is an economic absurdity that leads to only one thing: adding a ball and chain to the European economy. Not what Europe needs as it is attacked on all sides.
The proposal: set a structural inflation target range of between 3% and 4%. Why?
- Safety cushion in crises: This would restore room for manoeuvre for the ECB to act in crises and avoid any deflationary scenario (the worst-case outcome).
- Natural devaluation: Higher inflation in Europe would mechanically lead to a depreciation of the euro. It is the most elegant way to restore price competitiveness without having to decree abrupt devaluations.
- Debt management: Following the French model of the "thirty glorious years”, controlled but higher inflation helps erode the real value of public debt, providing the fiscal breathing space needed to finance investment in the industrial transition.
Inflation is not the enemy
The most frequent objection to raising the inflation target is social: inflation would "eat” employees' purchasing power and make the poorest households more precarious. It is a seductive argument, but it rests on a static and incomplete view of the economy.
The mirage of purchasing power in a dying economy
What is the value of purchasing power "protected” by 2% inflation if the job that generates it disappears? Protecting the value of the currency at the expense of the competitiveness of the productive base is short-sighted. By refusing defensive competitive devaluation, we condemn workers to a double shock:
- Pressure on wages: to offset an overly strong euro, companies have no choice but to squeeze payroll costs to stay alive.
- The risk of deindustrialization: ultimately, it means the outright disappearance of skilled jobs in favour of countries that have integrated the monetary tool into their conquest strategy.
Inflation as a driver of wage adjustment
Contrary to common belief, moderate inflation (3%-to-4%) makes it easier for real wages to adjust without the traumatising step of redundancies or nominal wage cuts (impossible in Europe). In a dynamic economy, wages always end up adjusting to inflation, supported by robust activity. During the "thirty glorious years”, inflation averaged close to 5%, which did not prevent the wage share of value added from rising. Proof that inflation can be good for purchasing power.
The real cost of inaction: downgrading
The real enemy of Europeans' living standards is not a 3% or 4% rise in prices; it is technological and industrial downgrading. If Europe lets China, Korea and Japan seize the automotive and electronics segments thanks to their monetary advantage, then the continent will become a low value-added services economy. Living standards are not decreed by an arbitrary inflation target in Frankfurt; they are built by a continent's ability to produce, export and innovate. By regaining monetary oxygen, we restore companies' ability to invest and maintain high value-added jobs-the only true guarantors of living standards over the long term.
The saver's challenge: the illusion of stability
The second argument against this monetary policy is that it would expropriate savings. That is a profound analytical mistake. Proponents of a strong currency fear inflation as a thief of wealth. But what is the value of savings in an economy that is getting poorer?
Having a "stable” currency in a Europe that is losing market share, closing factories and falling behind technologically is not protection. It is a guarantee that the real value of one's capital will erode-not through inflation, but through the decline in the continent's productive value.
Savers have everything to gain from holding corporate capital in a dynamic, strong and competitive economy. An economy that gains market share, invests in the future and protects its industrial fabric offers better returns and far greater security than a sluggish economy, even one with a strong currency. The real expropriation is atrophy. We must convince society (and especially the hawkish countries) that prosperity does not depend on nominal currency stability, but on the strength of the productive base that supports it.
Conclusion: the boldness of pragmatism
The report presented by Clément Beaune and the IAA project proposed by Stéphane Séjourné deserve credit for stating the obvious: we are in an economic war. But the final pillar is missing. We cannot ask our companies to run a 100-meter sprint with their feet chained by an overvalued currency and monetary constraints from another age.
The shift to a 3%-4% inflation target is the missing lever. It is a defensive competitive devaluation, an instrument of sovereignty. It is necessary to correct the 30% to 40% cost differential that separates us from the rest of the world.
Europe must therefore stop seeing itself as the guardian of a monetary museum and become an industrial power again - and why not abandon the (in)famous 2% target inflation obsession, aimed at - perhaps incorrectly - for so long. Sovereignty has a price, and that price is a currency that reflects the reality of our economy, not our past dreams. For our industries, for our jobs and, ultimately, for the real value of Europeans' savings, this turn is inevitable.
An opinion by Stéphane Faure, president of the wealth management firm Astyrian Patrimoine
