On September 9, Mario Draghi published a new report on European competitiveness. Andrew Wolf The report identifies many of the key challenges facing Europe, but argues that the nature of policy solutions is questionable.
Mario Draghi’s new report on the future of European competitiveness is undoubtedly an impressive piece of work in scope and detail. It does a great job of identifying the major internal and external challenges facing Europe’s growth model. However, the policy prescriptions it draws point in a direction that is difficult to reconcile with both the fundamentals of the single market and the needs of Europe’s SMEs.
This is evident in the structure of the report. Draghi proposes a renaissance of sectoral, bottom-up industrial policy by presenting tailored policy solutions for growth in 10 pre-selected sectors. This is an approach that advocates of new industrial policy have long shunned because of the lack of information available to policymakers and the high risk of policy being hijacked by vested interests.
Moreover, the proposed policy mix does not include many innovative measures. In addition to the need for rapid implementation of existing EU strategies and regulations, there is a continued focus on the need for Member States to join forces to support large-scale innovative investments. This is the basis for the report’s general call for a new European Competitiveness Fund.
The high risks and coordination issues associated with long-term investments in the modernization of the European capital stock may indeed justify a collective contribution. However, the report lacks a fundamental economic justification for the role of the state as an active investor, especially in relation to the transfer of high business risks to the taxpayer community. The mere mention of the lack of competitiveness of European companies in the supposed growth sectors is not a sufficient argument for the ambiguity of such a role.
Competition in the internal market
In the area of competition policy, the report argues for relaxing merger rules in areas with strong global competition and external dependencies, suggesting that additional criteria should be taken into account when evaluating mergers. The idea behind this is to encourage the creation of new European champions through cost-saving synergies.
Given that economies of scale are certainly present in many emerging sectors, such as clean technologies, overcoming barriers to growth at the firm level will have to play a key role in the EU’s competitiveness strategy. However, to avoid hampering long-term productivity growth, it is important that the pursuit of international competitiveness does not come at the expense of competition in internal markets.
Draghi emphasizes that the single market must be completed by removing border barriers through infrastructure investment and regulatory harmonization in many areas. However, for the single market to function properly, it must be competitive in the sense that incumbents must challenge new entrants. Large-scale mergers may bring cost advantages in the short term, but they risk creating dominant positions that increase the entry costs for domestic innovative companies. This could undermine, rather than strengthen, the global competitiveness of European industry in the long term.
External risks
The measures proposed by Draghi to deal with external risks move in the same direction. According to Draghi, the EU’s traditional reliance on trade openness should be replaced by a case-by-case trade policy, where trade measures should be seen as another part of the toolbox to promote the competitiveness of specific sectors. For high-potential sectors where European companies still have a low market share, the classic infant industry argument is used. Protectionist measures such as local content requirements should encourage European companies to grow by protecting them from foreign cost advantages.
These case-by-case trade policies impose high decision-making costs on policymakers and therefore carry a significant risk of abuse. They are also likely to conflict with other objectives. This applies in particular to proposals for a deeper strategic partnership on the one hand and an increased strategic use of unilateral trade policy instruments on the other.
Given the industrial policy practices of major competitors and the continued weakening of trade institutions, it is right not to rely solely on global solutions to trade conflicts within the World Trade Organization. However, this means that it is even more important not to harm potential strategic partners through uncoordinated measures.
For example, even targeting individual countries such as China, raising import tariffs or imposing additional non-tariff barriers could divert trade flows and undermine growth in friendly third countries. Finally, this would undermine the EU’s credibility as a defender of the rules-based trade order, thus preventing the EU from regaining its global influence through stable partnerships.
Innovation Support
In contrast, a report focusing on capital markets in innovation policy is long overdue. Overcoming the “valley of death” in the innovation process between creating a prototype and turning it into a marketable product has been a weak link in European innovation support. Access to private venture capital is a key driver of successful commercialization. This key role of venture capitalists as a growth driver for innovative industries has not been seriously exploited in Europe.
However, building a venture capital culture in Europe takes time and requires coordinated policy strategies from Member States, including tax incentives and a willingness to engage in innovative forms of financing. Moreover, the focus on risk capital should not lead policymakers to ignore other equally important barriers to turning ideas into successful businesses. These include widespread dissatisfaction with the administrative burden on startups and the high complexity of environmental regulations. Reducing these barriers will require many small, incremental changes over time.
Note: This article presents the views of the author and does not necessarily reflect the position of EUROPP (European Politics and Policy) or the London School of Economics. Source of featured image: Alexander Michailidis / Shutterstock.com
