What's needed is a much more visionary EU industrial policy

Europe's World

Picture of Markus Kerber
Markus Kerber

State Secretary at the German Federal Ministry of the Interior, Building and Community

The start of the EU’s 2014-2019 legislative term offers a unique opportunity to rethink Europe’s future political priorities. We urgently need more growth to reduce unacceptably high unemployment rates in the EU’s southern member states, to consolidate public finances and overcome growing divergences within the eurozone. But over the next five years, economic growth will mainly be generated outside Europe, so the key challenge will be to fashion and implement an industrial policy that strengthens Europeans’ global competitiveness and preserves our high living standards.

The European Commission aims to increase industry’s share of GDP from 15% to 20% by 2020. But different strategies exist around Europe for achieving this. National industrial policies based on intervention and state aid are seen as key instruments for reindustrialising an economy. In France, recent state interventions in the cases of Peugeot and Alstom have shown that promoting national champions is still a top priority, whereas in Germany the traditional focus has been on creating the right framework conditions for the hidden champions of the “Mittelstand”.

A far more determined effort to complete the internal energy market, including strong incentives for private investment in cross-border energy infrastructure, is required

An EU industrial policy should complement national approaches by focusing much more on providing European public goods for globally-competitive value chains. The EU and its member states must provide a truly integrated and open single market that will promote joint production and innovation within Europe and beyond.

Europe needs a more pragmatic approach in its industrial policy to the roles of states and markets. Whether or not more state intervention is needed to boost competitiveness and growth should become less of an ideological question. In many cases, the urgent need is for less state intervention. Italy, for instance, could make its strong industrial base more competitive by liberalising the labour market and reducing the labour tax wedge. The need in Germany is to ensure more competition in services, and Europe as a whole should set a new quantitative target for reducing the EU’s regulatory burden.

But in some cases, what’s required is a stronger or better state. In many European countries, corruption remains an important brake on economic development. The European Commission says that corruption costs the European economy €120bn a year, which happens to be exactly the amount that Germany should invest in infrastructure over the next ten years.

What Europe needs are common rules to promote a fast and reliable internet in Europe and enable companies to better run complex European value chains

What Europe really needs, therefore, is a political debate about how to achieve convergence between industrial competitiveness and energy and climate targets during the next legislative term. A strong industrial base is vital if we are to integrate Europe into international value chains. But in practice, ambitious Europe has been giving its highest priority to energy and climate targets. Too often, this has been however, at the expense of industry. Between 2000 and 2012, the EU’s share of world manufacturing value added declined by 5%, while Asian emerging market economies increased their share by 18%. During that time, six million industrial jobs were lost in Europe.

The aim of the European Commission to reindustrialise Europe is very welcome. But it will demand a fundamental change in EU governance affecting industrial competitiveness. The Competitiveness Council will have to be significantly scaled-up to become a monitoring and control body with real decision-making powers. The incoming European Commission should carry out the announced structural changes to strengthen industrial value chains and ensure a more consistent and transparent application of competitiveness-proofing. The EU has to avoid imposing unnecessary regulatory burdens.

Once its new forward-looking industrial policy aims are agreed, the EU and the member governments should agree on the most efficient balance between states and markets needed to achieve them. For greater competitiveness, public intervention should be focused much more at a European level. More European-level decisions on public goods are needed to boost competitiveness and growth.

An integrated European single market with well-functioning infrastructure is crucial if the EU’s full potential in innovation and cross-sector as well as cross-country production is to be realised. Europe is the world champion in industry service integration and joint production of industry and services together contributes 8.5% to total value added in Europe, whereas the worldwide average is only 3.7%. Europe’s success is notable in producing innovative, tailor-made products that are difficult for our international competitors to copy.

Another important factor is the way countries are specialising within value chains that stretch far beyond their own borders. Today, 21% of intermediates are imports from other European countries, but only 14% of patents are joint patents registered by at least two member states. This shows that there is still a lot of potential for cooperation within European innovation networks. Improved European value chain management is needed if we are to use Europe’s historically-rooted diversity in economic structures as a comparative advantage in global competition.

What this boils down to is the urgent need for a 2014 – 2019 EU industrial policy agenda that provides the right infrastructure for a well-functioning single market that’s open to the world:

 

    • Europe needs a much more integrated internal energy market. A European Parliament estimate suggests a more integrated energy market could yield efficiency gains of €50bn a year. At present, each member state decides its own national targets and policy measures, leading to differences in energy prices and distortions of competition. Industrial electricity prices have increased by 37% in the OECD’s European members between 2005 and 2012, yet decreased by 4% in the U.S. This is weakening Europe’s competitiveness and has led to “investment leakage” with major projects being off-shored. A far more determined effort to complete the internal energy market, including strong incentives for private investment in cross-border energy infrastructure, is required.

 

    • Much more could be done to create Europe’s digital single market. Another European Parliament study says a truly integrated digital market could result in efficiency gains of as much as €260bn per year. The telecoms market in Europe, for instance, remains highly fragmented along national lines. The U.S., unlike the EU, has a unified telecommunications market of 315m customers, served by only four operators who compete within a single framework. What Europe needs are common rules to promote a fast and reliable internet in Europe and enable companies to better run complex European value chains.

 

    • The EU institutions should be making the single market more open to the rest of the world. European leaders and their U.S. counterparts should make sure that work on a Transatlantic Trade and Investment Partnership (TTIP) is strengthened substantially. With 16.6% of European exports going to the U.S. in 2013, it is by far Europe’s most important export market. And beyond market access for goods, services, investments and public procurement, industry would like to see bold and rapid progress in transatlantic regulatory cooperation, thereby increasing the EU’s growth and jobs prospects.

 

Europe is at a turning point. For the next five years, we need to go far beyond merely preserving the status quo. The EU’s institutions and member states must agree on much greater convergence between industrial competitiveness and other headline targets. The key will be fashioning an EU industrial policy that complements national policies and so provides Europe with a truly integrated and open market.

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