FIW-PB 62 Improving Supply Security - Guidelines and Policy Proposals

Supply security is threatened by technical, business, natural and policy shocks. Geopolitical tensions and climate change are likely to exacerbate the risks. Is there a rationale for policy intervention? If yes, what are efficient and effective measures that achieve derisking at the lowest possible costs? This policy brief uses welfare theoretic arguments that explain why private incentives do not generally lead to an optimal diversification of supply sources or technologies. First, measures to improve the general quality of the business location strengthen protection against and resilience in the face of shocks. A key measure must be to deepen and complete the EU single-market. Second, governments should refrain from policies that further disincentivize diversification such as the ex-post skimming of excess-profits or the granting of short-time wage compensation without a deductible when adverse shocks force a stop of production. Third, they should work on framework conditions that facilitate diversification, e.g., by concluding trade or investment agreements. Finally, in the case of non-diversifiable risks, it makes sense to invest in common strategic reserves. Importantly, most measures are best taken at the EU-level.