Disruptions to international supply chains are increasing the risk of inflation and call for European action

Global supply chain disruptions are no longer an exception. The COVID-19 pandemic, the war in Ukraine and, more recently, the blocking of the Strait of Hormuz have exposed how vulnerable our economies are to such shocks. One of the most noticeable effects is higher inflation. Although central banks may try to contain inflation, they cannot address its underlying cause. Their instrument for curbing inflation is to slow down the economy as a whole by raising interest rates. While this may be necessary to safeguard price stability, it is a broad and indiscriminate measure that entails substantial social costs.

Focusing policy at product level

Prevention may therefore be preferable to cure. In its report ‘Global supply chains and European economic vulnerabilities'. DNB examines how supply chain disruptions fuel inflation and how targeted government action can help prevent future disruptions. This would reduce the need for central banks to take difficult measures after the fact to bring inflation back under control.

DNB concludes that pursuing product-specific policies can be a viable alternative to taking sector-wide measures, because the risk of supply chain disruptions is concentrated in specific products across various sectors. Policies aimed at those products can reduce vulnerability to future disruptions. For example, governments can build up strategic stocks, boost the production of critical intermediate goods and diversify procurement of essential goods across different suppliers. Because such measures may reduce efficiency, their costs and benefits should be assessed on a case-by-case basis.

A European approach

European cooperation and coordination are essential in this regard. A European approach, which builds on the specific expertise and production infrastructure in the various Member States, will be far more efficient than isolated efforts by individual countries. The EU also has a key role to play in negotiating trade agreements, which can reduce both the likelihood and the impact of supply chain disruptions. The best defence against future dependencies – which can shift rapidly due to technological and geopolitical developments – is a resilient and innovative European economy with a strong single market free from barriers to trade and capital flows.