The now confirmed Brexit process is the first serious political challenge to the EU’s project of an “ever closer union” in decades. In the short term, both actors must agree to a fair trade deal that benefits both, considering the intense trading, social, cultural and diplomatic relations between them. However, in the long term, European Union governance bodies must start addressing some of the challenges that led to Brexit in the first place. Now, the coronavirus crisis is also presenting a challenge to the continent’s economic foundations. For instance Italy, where the pandemic has spread very rapidly, is also the most exposed country in terms of public and private debt.
Industrial policy is a very suitable area where efforts can be redirected. For starters, it would address the economic inequalities and grievances fuelling support for Eurosceptic and other extremist political forces. Austerity, and lack of investment more generally, have been connected in the literature to support for Brexit. Furthermore, by focusing on innovation, industrial policies could respond to growing geopolitical anxiety about Europe’s relative disadvantage with regard to North American and Chinese innovations. The latest UNCTAD Digital Economy report (2019) showed how this sector is increasingly becoming a duopoly dominated by firms from these two nations. Finally, industrial policy can help address longstanding structural risks for Europe, particularly the climate crisis and its consequences. It can steer investment away from fossil-fuel dependent activities towards green economy solutions.
Industrial Policy: Managing the Guest Who Was Unable to Leave
There are two key misconceptions about industrial policy.
First, that industrial policy is a thing of the past. On Buñuel’s film The Exterminating Angel, a group of high society guests at a dinner party suddenly realise they cannot leave their host’s home. After some days trapped and without leadership, these well-educated individuals turn into savages that wreck the house. Contrary to news of its early demise, industrial policy is like these guests. Left unattended, industrial policy will provoke chaos and undermine everyone’s stability. However, if one is able to rein in its worst impulses and promote its positive attributes, it can become a long-term asset. In fact, as Chang (2002), Wade (2004) and others have covered, state economic intervention has been successful in times and places as different as post-war Western Europe or East Asia after the 1970s.
Second, is industrial policy not mainly a priority for emerging economies? After the failure of state-averse policies under the Washington Consensus, agenda-setting organisations like the World Bank have accepted the need for limited interventions to protect industries and generate new industrial comparative advantages. Premature deindustrialisation and the middle-income trap described by Rodrik or Lin are powerful arguments to reverse the aversion to intervention. However, what about European Union countries? Even in the face of overt state intervention by the US and China, EU authorities defend the continent’s longstanding opposition to state protection and procurement policies favouring selected firms. However, the recent case of Huawei’s success at catching up with Ericsson should send a clear message to domestic and continental leaders: without pooling resources together though inter-firm and cross-country coordination, the EU will keep falling behind rising economies.
This does not mean returning to old-style, “picking winners” top-down approaches. Instead, decisions should be guided by existing innovation and development dynamics. Recent work by Keun Lee on the “art of catching-up” suggests that advanced economies are better at pursuing activities that rely on tacit knowledge, strong intellectual property regimes and long-term innovation cycles. This is because middle-income competitors like India or China will have to spend more time acquiring the know-how and intangible assets needed for successful market entry. Following this framework, both the digital transformation and the climate crisis offer fitting opportunities across the continent. European firms have advantages in activities like origin-protected food and drink or urban-oriented digital services, because of the continent’s relatively high population density and growing demand for smart city services globally. While small-scale initiatives are being launched in these areas, a higher degree of coordination is needed for large-scale projects, like the extension of novel communication infrastructures to rural areas. The European Union’s involvement in these productive initiatives can also boost its legitimacy much more than through the more “welfare-oriented” cohesion policies that were found patronising by some Brexit voters.
In conclusion, industrial policy is no longer an optional but a necessary tool for European policymakers. But how does it look in practice? The Europe 2020 framework pursues smart, sustainable and inclusive growth; however, Mazzucato’s mission-oriented approach is a better and more focused starting point to anchor these policies. As Pianta and others have argued, several actions are fundamental to unleash the full power of industrial policy. First, a real coordination of macroeconomic policies; but particularly the legitimation of domestic and supranational public intervention currently side-lined by competition policy. Next, the creation of a true European Public Investment Bank by linking current funding initiatives under an umbrella institution. The quantities committed by bodies like the European Investment Bank or the European Fund for Strategic Investments are comparatively low when compared to leading advanced and middle-income economies. Third, the promotion of these plans with EU-owned funds, under the principle of Member State solidarity. Moreover, a focus on disadvantaged countries and regions. Finally, as with any other EU project, it should have sufficient funding, respect the perspectives of bigger and smaller countries alike and be conducted in a transparent and accountable manner. All of these could support, in combination with private firms, applied research in suitable sectors; greener public procurement; risky start-ups in cutting-edge areas; cross-country innovation networks; public-private partnerships; coordinated business groups; and already existing horizontal industrial policy. This can help build a more economically resilient continent with less political instability and more solidarity across borders.