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How to stop anti-crisis policies from becoming protectionist, by Elie Cohen (europesworld.org)
“Industrial policy” has long been a euphemism in most parts of Europe for economic nationalism, and the problem is getting
worse. Elie Cohen looks at the policy aftermath of the financial crisis and sets out a framework for EU-level industrial policymaking.
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 EU industrial policy has become a central plank of national governments’ decisionmaking. In this inhospitable climate there is a pressing need
for EU co-ordination, but national interests will still decide which industries get support.
During the course of last year, French, German and other EU leaders worked against rather than with each other when putting
their industrial policies in place. The results were disappointing; certain European industries got undue protection while others were squeezed out of the market. The lesson is clear. EU
governments must work together when implementing industrial policy, but they also need to do much more to promote innovation and competitiveness.
The French and German governments intervened last year with capital injections to replace deserting shareholders. They
buttressed slack demand by subsidising sales, stimulating research into cleaner technologies and protecting jobs. These recovery schemes put national interests first, using the argument that
taxpayers’ money must be put to work in defence of the nation’s companies and the nation’s 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’ concomitant
reluctance to let even uncompetitive companies go to the wall because of the crisis, should be cause for widespread concern. It is still not clear whether this economic nationalism is only
temporary, or whether it’s a long-term response to a new post-crisis economic order. But already a major lesson of the crisis is that development models that rely on external growth, exports and
foreign indebtedness are not only unsustainable but are also at the root of “global imbalances”. Trade balances that are systematically either in surplus or in deficit are also problematic. For
countries with trade balances in surplus, domestic consumption is insufficient so there is a danger that the investment of excess reserves will be risky, as has happened in Germany. For countries
with trade balances in deficit, excess consumption and debt coupled with fragile exchange rates have a tendency to jeopardise economic stability, as the UK has found.
Industrial policies have therefore taken on a new significance. Judging by governments’ reactions to the crisis, one could be
forgiven for thinking that market regulators and the competition authorities should take the lead when an economy is stable and that industrial policies should be implemented in times of crisis.
But unfortunately European governments didn’t respond to the crisis with common policies, nor did they seize the opportunity to strengthen the powers of authorities in the eurozone. Instead, each
EU member state opted to fend for itself.
The mainstream European media paid scant attention to these protectionist manoeuvres, because for the most part journalists were
more interested in covering the co-ordinated Sarkozy-Brown plan for overcoming the crisis, meetings of the G20 and the co-ordinated economic stimulus plan, which together gave the impression that
Europe was uniting to tackle the crisis. The common arsenal of interventionist tools employed by EU member states – deposit guarantees, re-capitalisation of banks, guarantees for inter-bank loans
and the purchasing of toxic assets – all seemed to give credence to the notion of European unity.
But the reality turned out to be very different, and the interventionist measures taken by member states have in fact created
distortions and irregularities right across Europe. On bank re-capitalisations, some countries adopted the more punitive approach of quasi-nationalisation, while others lent public bail-out funds
on very advantageous terms, linking re-capitalisation to the development of credit or the restriction of dividends. The net result was a hotchpotch of fragmented and re-nationalised financial
systems.
National competition authorities in countries like Britain were silenced. France and the Benelux countries had to bail out
Fortis and Dexia because of the lack of any European mechanism for saving integrated financial companies. And to try and ease the harm that all this assistance was doing to EU competitiveness,
the European Commission’s DG-Competition warned that it had little option but to block state aids, before quickly capitulating in the face of vociferous national protests. Europe should have
acted as a regulatory power and managed the conflict between systemic and competitive risk that all this emergency public funding was generating but the competition watchdogs’ contradictory
request that companies receiving funding should reduce credit to their clients made this well nigh impossible.
Luckily, the relative weakness of the EU’s competition watchdogs was short-lived. Once the storm passed the Commission found
itself back in the driving seat. Banks like Royal Bank of Scotland (RBS), Dexia or ING that had been saved by public funding had to present their dis-investment proposals to the Commission. The
aim was to lessen the harm that their emergency funding might cause to free and fair competition. This is why ING decided to divest itself of its insurance business and why RBS reduced the scope
of its investment banking arm while also selling off 17% of its retail side. Before the Commission had time to assess Dexia, the bank had sold its holdings in Crédit du Nord and in pension asset
management. But the longer term result of all this is that the mergers created as a result of the crisis will allow dominant parties to abuse their position in certain markets, especially in the
property market. So what is authorised today could well be undone tomorrow.
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 owner, even though this risked
having detrimental effects on Opel’s Belgian and British workforces. The Commission’s competition lawyers announced that they would look into all national clauses and give preference in relation
to employment, 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, so even before it was officially asked to intervene, the Commission was able to put an end to measures that were contrary to intra-community logic.
A number of recent studies, particularly those by the World Trade Organisation (WTO), show that governments have generally
avoided trade protectionism, so that only 1% of international trade has been affected by such measures. But this takes no account of financial protectionism. Investments by sovereign wealth funds
could limit the mobility of capital and give undue protection to national capital. A study of the investment policy of France’s FSI investment fund shows that with only one exception, the fund’s
investment strategy has been perfectly orthodox. That is probably because investment capital specialists – usually private equity funds, and sometimes even foreign investors – are responsible for
implementing it.
The difficulties being faced by EU governments in managing the financial crisis are raising serious questions about whether
national industrial policy in the EU and the Union’s competition rules can co-exist side by side. They probably can, but only if Europeans give up the political directives of yester-year and
instead promote innovation and more competitive environmental policies. It isn’t possible to plan for innovation, of course, but it is possible to get the conditions right. Innovation clusters,
independent universities and well-funded innovative companies all create the right environments for innovation. It is also possible to promote innovation and technical change in biotech
industries and the renewable energies sector, while at the same time avoiding national monopolies. In a global and regionally integrated economy, competitive environmental policies that create
research infrastructure or provide tax and regulatory incentives for innovation can have significant knock on effects.
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 with one another. This is particularly
true of the automobile sector. The Davignon “manifest crisis” cartels that helped manage the European steel industry’s decline in years past urgently need to be resorted to once again. If the
various European authorities do not move to address overcapacity in the automotive sector, we will surely see a revival of protectionism.
Competition policies that allow global players to emerge may well re-shape the structures of European industry, especially in
the public utility networks sector. The EU also needs policies that will promote standardisation, normalisation and innovation, and member governments must learn to avoid micro-managing and
instead work as part of a horizontal EU-wide approach. Industrial policies and competition rules can thus be made compatible, and horizontal policies can affect industrial re-structuring just as
significantly as vertical policies.
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