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| 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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