India-EU Trade Deal Deadline: ‘Unwise’ – Bruegel’s Zettlemeyer

India’s Growth Hinges on Open Trade, Navigating US Protectionism & climate Finance challenges

A leading economist argues that India risks hindering its economic progress by adopting a protectionist stance, while also highlighting the complexities of navigating a shifting global order and securing crucial climate financing. Jeronim Zettlemeyer, director of the Brussels-based think tank Bruegel, believes increased trade is vital for India’s faster growth and dismisses the likelihood of secondary sanctions from the European Union.

A Crumbling international Order & the Future of Trade

The international system is facing unprecedented strain under the weight of shifting geopolitical dynamics. According to Zettlemeyer, the most probable outcome is a fragmented multilateralism, where institutions like the World Trade Organization (WTO) continue to function, but with a reduced scope. “The standard of success of this sort of diminished WTO would be that it basically prevents trade wars among the group of countries excluding the US,” he explained. This scenario envisions continued trade disputes with the united States, while the rest of the world maintains a relatively peaceful trading environment.

Reforming Multilateral Development Banks & Addressing global Imbalances

Notable reforms are needed within international financial institutions, especially regarding the governance of multilateral development banks (MDBs) and the International Monetary Fund (IMF). Zettlemeyer pointed to the inequity of India’s smaller shareholding compared to smaller European nations as a key issue. “It is embarrassing that India has a smaller share than small European countries,” he stated. However, he cautioned that addressing this imbalance is complicated by the escalating rivalry between the United states and China, as any reform would necessitate granting China a larger stake.

Europe’s Dependence & US Influence

The European Union’s recent acquiescence to US pressure on tariff negotiations underscores a critical dynamic: Europe’s reliance on US military strength. “It’s as we depend on the US military,” Zettlemeyer noted. “The EU is effectively in a hybrid war with Russia because of Ukraine. If we were militarily stronger, we would have taken a tougher position on these negotiations.” This dependence limits the EU’s ability to assert its economic interests independently.

Sanctions & India’s Position

Despite pressure from the US governance, the prospect of secondary sanctions targeting India appears unlikely.”Putting secondary sanctions on India doesn’t strike me as being politically or economically plausible,” Zettlemeyer asserted.This assessment suggests a recognition of India’s strategic importance and the potential repercussions of such a move.

Climate Financing: A Critical Impasse

Addressing climate change requires significant financial commitments, but securing these funds remains a significant challenge. Zettlemeyer emphasized the need for innovative financing mechanisms and a greater willingness from developed nations to meet their pledges.He also highlighted the importance of easing restrictions on manufacturing to accelerate growth.”It will have to become much easier,” Zettlemeyer stated. He also highlighted the need to address the skills gap hindering manufacturing growth,noting that india,despite its expertise in development economics,continues to struggle with this fundamental challenge.

Private Investment & Debt Sustainability

India’s reliance on state-led demand growth has reached its limits, necessitating a shift towards private sector-led investment.With 20% of its receipts allocated to interest payments, the cost of financing remains a significant obstacle. “It is indeed clear that this cannot be state-led demand growth. You have maxed out on that. It has to be private sector-led,” zettlemeyer explained. Engineering a larger current account deficit, while carefully managing financial vulnerabilities, could be a key strategy.

Chinese Investment: A Conditional Approach

Regarding Chinese investment, Zettlemeyer advocated for a pragmatic approach. “You should be open to Chinese investment with conditions,” he advised, suggesting that India could learn from China itself in setting those conditions. He acknowledged Europe’s growing recognition of its technological lag in certain areas and the need to embrace foreign direct investment from China, with a focus on technology transfer.