Holding Back Europe’s Economic Nationalists

PARIS – The German and French governments have been scrambling to save their automobile and truck industries though big fiscal injections, making it clear that, within much of the European Union, industrial policy has returned with a vengeance. But, throughout last year, French, German, and other EU leaders worked against rather than with each other when putting their policies in place. As a result, some European industries got undue protection, while others were squeezed out of the market.

The lesson is clear: European governments must work together when implementing industrial policy. But they also need to do much more to promote innovation and competitiveness.

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The French and German governments intervened last year with capital injections to replace deserting shareholders. They buttressed weakening demand by subsidizing sales, stimulating research into cleaner technologies, and protecting jobs. These recovery schemes put national interests first, using the argument that taxpayers’ money must be used to defend the nation’s companies and workers.

The French authorities have now taken this approach a step further with the creation of a Fonds stratégique d’investissement (FSI), which aims to protect domestic capital from the predatory designs of foreign investors. This wholesale return to the industrial policies of yesteryear, and governments’ reluctance to let even uncompetitive companies fail, should be cause for widespread concern.

Judging by governments’ reactions to the crisis, one could be forgiven for thinking that market regulators and competition authorities should take the lead when an economy is stable, and that industrial policies should be implemented in times of emergency. Unfortunately, European governments did not respond to the crisis with common policies, nor did they seize the opportunity to strengthen the powers of eurozone authorities. Instead, each EU member state opted to fend for itself.

The member states’ common arsenal of interventionist tools – deposit guarantees, re-capitalization of banks, guarantees for inter-bank loans, and purchases of toxic assets – seemed to give credence to the notion of European unity. But the reality turned out to be very different; member states’ interventionist measures have in fact created distortions and irregularities up and down the Continent.

On bank re-capitalizations, some countries adopted the more punitive approach of quasi-nationalization, while others lent public bailout funds on very advantageous terms, linking re-capitalization to the development of credit or the restriction of dividends. The net result was a hodgepodge of fragmented and re-nationalized financial systems.

National competition authorities in countries like Britain were silenced. France and the Benelux countries had to bail out Fortis and Dexia, owing to the lack of any European mechanism for saving integrated financial companies.

To try and ease the harm that all this assistance was doing to EU competitiveness, the European Commission’s Directorate General for Competition warned that it had little option but to block state aids – but then quickly capitulated to vociferous national protests. Europe should have used its regulatory power and managed the conflict between systemic and competitive risk that all this emergency public funding was generating, but the competition watchdog’s contradictory request that companies receiving funding should reduce credit to their clients made this well nigh impossible.

The Commission’s handling of the GM Europe issue was an excellent example of industrial intervention. Initially, the Commission gave the German government free rein, but instead of assisting Opel, Berlin sought to protect German jobs by supporting Magna, the prospective Canadian-Russian buyer, even though this placed Opel’s Belgian and British workforces at risk of job losses.

The Commission’s competition lawyers announced that they would look into all national clauses, but GM’s recovery and the slow implementation of the German scheme ended up undermining the Magna solution. Then, after last October’s German elections, the incoming government withdrew support from Magna. Thus, the Commission was able – even before it was officially asked to intervene – to preempt measures that were contrary to single-market logic.

The difficulties that EU governments face in managing the financial crisis are raising serious questions about whether national industrial policy and the Union’s competition rules can co-exist. They probably can, but only if Europeans give up the political directives of yesteryear and instead promote innovation and more competitive environmental policies.

The global economic crisis, together with the growth of emerging markets, is putting Europe’s longstanding overcapacity problems firmly in the spotlight. To prevent the EU's single market from going bust, national policymakers must implement industrial restructuring policies in tandem.

This is particularly true of the automobile sector. The Davignon “manifest crisis” cartels, which once helped manage the European steel industry’s decline, urgently need to be revived. If the European authorities do not move to address overcapacity in the automotive sector, we will surely see a revival of protectionism.