11 March 2020

The EU’s ‘industrial strategy’ will compound Europe’s economic woes


Monday was Ursula von der Leyen’s 100-day-anniversary as President of the European Commission. The new Commission started with ambitious plans, promising much that would need to be done right at the start of its five-year tenure. So far, it’s been a case of all mouth and no trousers.

The European Green Deal was presented by von der Leyen as Europe’s “man on the moon” moment in December, but it already looks to have been be watered down due to conflicting national interests, while climate heroine Greta Thunberg describes it as a complete “surrender”.

Meanwhile, European politics has been largely focused on the unforeseen return of the refugee crisis on the Greek-Turkish border and, of course, the coronavirus.

Yesterday, the Commission presented the second pillar of its grand plan – an industrial strategy that promises a “transformation which will touch every part of our society and of our economy”, to quote von der Leyen.

Far from a moment of unity, however, it’s quite possible the proposals will sow even more discontent among member states. And more worryingly, though the goal of the Commission’s industrial policy is too boost innovation and productivity, it’s possible it will do the exact opposite.

There is much disagreement already within EU institutions on the bloc’s future economic policy, particularly in regard to its competition policy. Margrethe Vestager, the current Vice President of the Commission in charge of digitalisation, was known throughout her time as Competition Commissioner from 2014 to 2019 as a hawk when it comes to penalising private companies (particularly from the US, a cynic might add), slapping the likes of Google, Amazon, Apple, and Oracle with multi-billion dollar fines for supposedly bad behavior.

Vestager was celebrated for her job and the attacks on foreign firms made her own of the most popular and powerful politicians in Brussels. Things changed, however, when she blocked a planned merger of German Siemens and French Alstom, arguing that it would lead to a monopolisation of the railway market that was unacceptable.

In recent months both the French and German governments had developed industrial strategies aimed at developing ‘national champions’. Vestager’s decision put the brakes on their ambitions to create giants to rival the big guns from America and China.

Ever since, France and Germany have been on the warpath. A few weeks ago, the ‘Franco-German engine’, supported by Italy and Poland, issued an unprecedented letter to the Commission asking for more assertiveness in creating ‘European champions’ and demanding more “collegiality” from Vestager. Before his appointment, the Commissioner for Internal Market and Services, Thierry Breton, has argued that “we need a digital policy and a true industrial policy at EU level.” He also added, pointedly, that “until now, it has especially been competition policy imposing its will, which sometimes caused industrial disasters”.

Breton’s industrial strategy echoes this sentiment that Brussels should not only allow the formation of industrial megaliths, but positively encourage them through government stimulus. There has also been plenty of talk about new ‘trade defence’ mechanisms, a euphemism for digital taxes that punish mainly US companies, and a carbon border tax. Just to round off the protectionist smorgasbord, there are also suggestions of relaxing state aid restrictions – leaving national governments free to boost their own companies through subsidies.

On the mergers front, the new strategy paper proposes a review of competition rules that would make it easier for a deal like Siemens-Alstom to go through (though the documents are rather vague on this point), and also suggests “making the most of its toolbox of trade defence mechanisms”, as well as supporting “sustainable and smart mobility industries” directly. The EU wants to start “Important Projects of Common European Interest,” where normal competition rules would not, well, rule anymore.

What’s more, as part of the EU’s digital strategy, corporations will have to share their data with governments, including a pooling patient data into European-wide “health data spaces”. There are also plans for new rules on social media content and the thorny question of what is deemed admissible online.

What all of this amounts to is precisely what it sounds like: further centralisation inside the EU, mercantilism outside – promoting European companies through economically illiterate subsidies, while discouraging imports from the outside world.

This is precisely what the EU tries to do: by relaxing competition rules, new mega-mergers would create new mega-companies  or ‘European champions’ in Brussels-speak. Bear in mind that these are not always fully private companies, but are often part-owned by the state or at least collaborating closely with governments. A case in point is an upcoming merger set to give Vestager headaches, between the Italian shipping company Fincantieri and France’s Chantiers de l’Atlantique, both of which are involved in military projects.

The EU’s mercantilism is also evident from what the Commission calls: “strategic autonomy”. While apparently geared towards making Europe “the best place to start a business and grow”, this sounds more like a way to vest ever more economic power in government – be it in Brussels, Berlin, Paris or Warsaw – with politicians picking winners and little room for real innovators to come up with new products an services. Let’s be clear, this is a path to economic isolation from the rest of the world – becoming ‘autonomous’ but poorer and less connected with fast-growing economies elsewhere.

That’s why Vestager was quite right when she said recently that “you don’t build strong champions by picking a favourite, and protecting them from competition in Europe. You do it by giving everyone a fair chance”. The EU’s digital tsar should follow her own logic, however, and give American companies like Google, Amazon, and Apple a fair chance too, instead of handing what look like highly politicised punishments.

And this is the key point: the reason Europe doesn’t have any ‘champions’ and those evil US companies are much more successful is not because of a lack of state intervention in the economy, but quite the opposite. Instead of providing space for entrepreneurs, politicians have meddled endlessly, creating obstacles and roadblocks that stymie innovation.

Far from a solution to Europe’s economic woes, an EU-wide ‘industrial strategy’ will simply compound them.

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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.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.