6 September 2019

As Britain prepares to leave, the EU slides further towards protectionism

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While the UK has been engaged in a full-throttle political struggle over Brexit, the EU has had to face up to the fact that one of its biggest member states had decided to leave the bloc.

Would the EU realise that endless integration is not the future and revert back to a smaller EU of sovereign states cooperating loosely? Or would it use the opportunity, with the market-orientated naysayers across the channel gone, to speed up the drive towards “ever closer union?”

With the new Commission incoming on November 1, the question of the future of the Britain-less EU has resurfaced again. What does Ursula von der Leyen, the next Commission President, have in store along with her colleagues Frans Timmermans and Margrethe Vestager?

Anyone hoping the EU would become more realistic or modest in its goals will have been disappointed with the appointments of von der Leyen and co. Appointed in what could at best be described as a semi-democratic process, the former German defence minister is a well-known advocate of European federalism. Her speech in the European Parliament to secure MEPs’ support was widely seen as sounding more like a centre-left or Green politician than a conservative, the political tradition she is theoretically part of.

A recent Politico report indicates, however, that things could get even worse than thought. It revealed a new document written by Commission officials who argue that the EU should get ready to adopt a more defensive posture to survive in a new “power-based world order”.

According to the Commission’s report, the EU should set up a 100 billion euro fund, financed by member states, to foster “industrial champions” and outcompete foreign companies such as Google, Apple, Facebook, Amazon, and Alibaba. Through the fund, the EU would actively buy equity in private companies which do business in “strategically important sectors”, attempting to prop them up and make them globally more competitive.

Further help for European corporations would come through a loosening of state aid rules, i.e. more possibilities for member states to subsidise their domestic companies, as well as “defence mechanisms” through which the EU could unilaterally slap tariffs on other nations, primarily the US and China again.

And no worries, if you thought the Commission had forgotten about topics such as climate change or hate speech, those are also included: some money from the fund should be used to arrange beehives on public buildings and social media companies should have a “duty of care” over what is posted on their platforms.

While Commission officials immediately attempted to make clear that those ideas are mere brainstorming, and while von der Leyen’s team argued that “nobody in the transition team has heard of” these plans, the document is hardly an outlier in the way top officials are now thinking about trade.

For instance, von der Leyen has herself announced that competition rules should be loosened in the future and that the EU would need to “reconsider the definition of the market” and look to create champions which can perform well on the global level. It was considered a clear sign from her that something like the Siemens-Alstom debacle, in which her predecessor Jean-Claude Juncker blocked the merger of the two major German and French companies, would not happen under her watch.

It is here where we see who is leading the charge in the attempt to create those “European champions” through a state-dominated industrial policy: it is a classic feature of the Franco-German economic model. Liberated from the free-market, laissez-faire approach of the recalcitrant Brits, it seems as though both countries think the time is ripe for some good, old-fashioned dirigisme.

This is not all that surprising – after all, Emmanuel Macron has been arguing for these policies ever since becoming French President. He has attacked free trade agreements such as the one with Latin America, he wanted to implement a mechanism which would make it possible for Brussels to prevent Chinese acquisitions in “strategic” industries. Combined with his successful efforts to complicate freedom of movement for workers inside the single market, the supposed “liberal” darling has long shown that he has protectionist tendencies both at home and on the European level.

The same has increasingly been true in Germany. Peter Altmaier, the Economy Minister, announced his National Industry Strategy earlier this year and it sounds dangerously close to the Commission’s plans, just with the goal of creating “national champions” rather than European ones.

What this kind of policy boils down to is not merely protectionism: it is classic mercantilism mixed with a strong corporatist tinge.

Gone are the arguments in favour of free trade, which the EU is supposed to ardently defend. In comes the Trumpian idea that global trade is a zero-sum game for nations in which only Europe or the US or China can win. Gone are the arguments that a successful economy needs to be as free as possible. In comes the idea that an economy needs to planned top-down from Brussels. Gone is the notion that within the market, those that are successful are those that offer others the best product and that everyone, even the small entrepreneur or start-up should have the same chance to break out from the crowd. Instead, these ideas amount to governments picking winners and losers, with big corporations propped up by public money and unfair trade policies.

Not that all of this would be a complete change of direction. The EU has long been much more protectionist, interventionist, and corporatist than it portrays itself to be. Nonetheless, this policy would be another significant jump in that direction.

The Commission is looking at these wrongheaded policies because they feel Europe is losing out economically on the world stage. Where the US has Apple, Microsoft and Facebook, “Europe has no such companies”, the Commission officials write rather despondently in the document. The diagnosis is not the problem – the EU has clearly been out-innovated by other economies for many years. But the way out of this is to free the economy, deregulate, pull down barriers, and give space for entrepreneurs – exactly what the UK always wanted out of the institution. It would certainly not help if the EU were to become a failed venture capitalist state itself.

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Kai Weiss is a Research and Outreach Officer at the Austrian Economics Center and a board member at the Hayek Institute.