Mario Draghi’s new report on the future of European competitiveness is undoubtedly a work of impressive scope and detail. It does an excellent job of identifying the key internal and external challenges facing Europe’s growth model. However, the policy prescriptions derived from it point in a direction that is difficult to reconcile with both the fundamentals of the single market and the needs of Europe’s small businesses.
This is evident from the structure of the report. By presenting tailor-made policy solutions for the growth of ten pre-selected sectors, Draghi is proposing a renaissance of sectoral, top-down industrial policy. This is an approach that has long been buried by advocates of a new industrial policy, due to 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 call for a rapid implementation of existing EU strategies and regulations, there is a persistent focus on the need for member states to join forces to support large-scale transformative investments. This is the basis for the report’s general call for a new European Competitiveness Fund.
The high risks and coordination problems associated with long-term investments in the modernisation of Europe’s 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 with regard to the transfer of high business risks to the taxpayer community. The mere reference to a lack of competitiveness of European companies in supposed growth sectors is an insufficient argument for such a blurring of roles.
Competition in the internal market
In the area of competition policy, the report’s suggestion that additional criteria should be taken into account when assessing mergers entails a softening of merger rules in areas of strong global competition and external dependence. The idea behind this is to encourage the creation of new European champions through cost-reducing synergies.
Given the undeniable presence of strong economies of scale in many emerging areas such as clean technologies, overcoming barriers to growth at the firm level will have to play a crucial 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 the internal market.
Draghi stresses the need to complete the single market by removing cross-border barriers through infrastructure investment and regulatory harmonisation in many areas. But for the single market to work properly, it must also remain contestable in the sense that incumbents must be challenged by new entrants. While large mergers may bring short-term cost benefits, they risk creating dominant positions that raise entry costs for domestic innovators. This in turn could undermine rather than enhance the global competitiveness of European industries in the long run.
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 are seen as another part of a toolbox to promote the competitiveness of specific sectors. For supposedly high-potential sectors with still low market shares of European firms, the classic infant industry argument is used. Protectionist measures, such as local content requirements, are supposed to induce European firms to grow by shielding them from foreign cost advantages.
Such case-by-case trade policies impose high decision costs on policymakers and thus carry a significant risk of abuse. They are also likely to conflict with other objectives. This applies in particular to the proposed deepening of strategic partnerships on the one hand and the increased strategic use of unilateral trade policy instruments on the other.
Given the industrial policy practices of major competitors and the continuing weakness of trade institutions, it is right not to rely solely on a global solution to trade conflicts within the World Trade Organization. However, this makes it all the more important not to harm potential strategic partners through uncoordinated measures.
For example, higher import tariffs or additional non-tariff barriers, even if targeted at individual countries such as China, could undermine the growth of friendly third countries by diverting trade flows. Last but not least, this would damage the EU’s credibility as a guardian of a rules-based trading order and thus prevent the EU from regaining global weight through stable partnerships.
Supporting innovation
By contrast, the report’s suggested focus on capital markets in innovation policy is long overdue. Overcoming the “valley of death” in innovation processes between the creation of prototypes and their transfer into marketable products has been something of a blind spot in European innovation support. Access to private venture capital is a key driver for successful commercialisation. This key role of venture capitalists as growth drivers for innovative industries is severely under-utilised in Europe.
However, building a venture capital culture in Europe will take time and, above all, a coordinated policy strategy by member states, including tax incentives and a willingness to engage in innovative forms of financing. Moreover, a focus on risk capital should not lead policymakers to neglect other, equally important barriers to turning ideas into successful businesses. These include, in particular, widespread complaints about the administrative burden on start-ups and the high complexity of environmental regulations. Reducing these barriers will require many small, incremental changes over time.
About the author:
André Wolf is an economist and head of the division “Technology, Infrastructure and Industrial Development” at the Centre for European Policy in Berlin. He studied economics in Göttingen and Prague and obtained his PhD from the University of Kiel with a thesis on human capital and emigration incentives. His current research interests centre on policy instruments for the green transformation of European industry and measures to improve supply chain resilience in the face of geopolitical disruptions.