The European Commission recently requested the right to intervene in companies’ supply chains in the event of a major emergency. This follows the COVID pandemic, when many EU countries were hit by shortages of personal protective equipment and vaccines.
the said Single Market Emergency Instrument (SMEI) must obtain the approval of the 27 EU states. If approved, it could include export controls and prioritize production from some companies over others. Niclas Poitiers is a research fellow at the Brussels think tank Bruegel.
POITIERS: The idea behind the SMEI is perhaps comparable to the Defense Production Act in the United States. It will allow the Commission and EU Member States to intervene in markets in times of crisis, if they believe there is a risk of supply chains breaking or not being able to deliver essential goods for businesses, industries and citizens.
At the start of the pandemic, there were these photos of doctors in Italy having to tend to COVID patients in plastic bags and with really improvised personal protective equipment. And then there was the question of how we can get vaccines very quickly, and the EU decided to buy the vaccines for the whole of the EU instead of EU countries competing with each other to get them.
Triggered by supply chain crisis
The other driver for the creation of the SMEI was the supply chain crisis that we have seen triggered by the pandemic, where people are wondering if companies are adapting their deliveries to be just in time is actually sustainable and manageable. Those two things came together and led the commission to create this tool that would allow it to require companies to stockpile and prioritize specific industries over others in times of crisis, to s ensure that the things the commission deems strategic and important can still be delivered.
EDGE: And do you think it’s practical – would the commission be able to implement this in 27 countries?
POITIERS: So there are different parts in this tool. Some of them would be carried out by the Member States. A part would be carried out by the commission. There seems to be broad agreement on some aspects of the proposal: I think everyone agrees that joint procurement of vaccines was a good idea; I think everyone agrees on PPE. Some emergency measures for things like this are definitely a good idea.
But there’s also the underlying idea that more government intervention is needed to better manage supply chains, because companies have been unable to do so. The idea that governments can better manage supply chains might be SMEI’s intention, but I think it’s a very impractical idea.
If governments intervene at a time when supply chains are already crushed and force companies to repurpose their supply chains in a beggar-thy-neighbour way, they could make the situation worse.
EDGE: Does the EU offer to support a company’s supply chain or simply help a company manage its own supply chain?
POITIERS: These proposals must go through the legislative process, but it goes quite far, going so far as to prioritize specific companies over others. Some aspects of this tool were already included in the EU flea lawwhich says very clearly that the Commission has the right to impose export controls, ban the export of specific goods and give priority to European customers.
But whether the commission can actually handle all of this is highly questionable. It is unclear how this would work in most supply chains, as supply chains are really complex and managing them requires the specialized expertise of companies. If governments intervene at a time when supply chains are already crushed and force companies to repurpose their supply chains in a beggar-thy-neighbour way, they could make the situation worse. If the SMEI is to be applied in this way, it is a very problematic instrument.
EDGE: Do you think this is more of a political signal from the EU to businesses, to ensure they have strong supply chains to serve EU customers?
POITIERS: By the time the European Commission realizes that there could be a supply chain crisis in specific industries, I’m sure people in that industry itself will have already realized this themselves. So I don’t think it does much in that regard.
I think that the political signal is addressed more to the citizens. We have the supply chain crisis which led to inflation, which led to people waiting longer for cars and so on. And all of this has created some anxiety. The SMEI is the commission that says to European citizens: “We are thinking about it. We will do something about this to ensure that the same thing that has happened over the past two years in supply chains does not happen again. Of course, this is a bit of an illusion. But I think it’s really a political signal in that direction.
EDGE: As things stand, what impact will this have on companies operating in Europe?
POITIERS: I think in the short term, not much. It is something that is supposed to be applied in an emergency. And I think the bars for applying that are relatively high. But in the medium term, there is a risk that politicians will use this not only to solve real problems, but also to signal that they are doing something.
What role should governments play in markets?
It is really this question of what role does the government play in the markets? And we’ve seen a significant shift in the last few years where government has taken a bigger and bigger role in leading value chains, in leading industries. It starts with industrial subsidies and the prioritization of European interests and things like the CHIPS law, and the idea of stockpiling specific commodities, and all this talk about decoupling our value chains from China.
There is an element in the single market emergency instrument which says that the commission could ask you to stockpile if it sees an emergency arising. I think we’re at a point where the narrative of “we have to do something about supply chains with government interventions” is very strong.
But there are real costs to these things, and I think once people become aware of those costs, the strength of this narrative might wane. Therefore, I am not yet sure where we will end up in the end or what the new balance between governments and markets will be.