An Industrial Policy for Europe

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    After Europe’s long stagnation, a debate is emerging on how industrial capacity could be reconstructed. The article reviews current EU policies and provides the rationale for a new industrial policy at the European level. Such public action could help address current macroeconomic, industrial, innovation, cohesion and environmental problems and would be crucial for the recovery of countries of the “periphery” that have been hit hardest by the crisis. A range of proposals for organising, implementing and funding a new industrial policy ― focusing on selected economic activities ― are presented, combining action at the European, national and local levels.


    Industrial policy , Public policy , Europe

  • I. The Relevance of Industrial Policy in Europe’s Growth1

    Europe’s growth after the second world war was supported by an extensive industrial policy. Its objectives were the development of a large manufacturing base in the emerging industries of the 1950s and 1960s ― steel, auto, and chemicals, the typical sectors of “Fordist” production ― and, in the 1970s, the development of new activities in electronics, aircraft and biotechnology. At the same time, industrial policy has provided telecommunications and transport networks, a crucial infrastructure for modern economies, and a stable provision of energy which is essential in industrial countries with little energy resources. National policy tools that were adopted included an extensive role of state owned enterprises; support to private firms through financial and investment aid, R & D funds, public procurement, market protection; specific support for the development of new firms, new technologies, major new products. At the European level, an active coordination of such policies took place since the very first steps of European integration with the creation of the Carbon and Steel Economic Community (CECA) in 1951 and of a free trade area for most industrial goods in the six original member countries of the European Economic Community (EEC) in 1957, whose fast growing markets were offered a high trade protection from other producers. European industrial policy then evolved with various inter-governmental agreements; with a range of support initiatives and common regulations in specific sectors, aiming at the development of markets, industries and regions; with cooperation programmes in R&D and new technologies; with the creation of the Airbus consortium among four EU countries that has now become the largest world producer of civilian aircrafts.2

    The rationale for such policies was based on three major objectives and a wide range of policy tools. The aims included:

    The policy instruments that were adopted in Europe can be summarised as follows:

    The case of France is perhaps the most significant example of this strategy. In the post war period, state owned firms in France have been developed in electricity (EDF), telecommunications (France Telecom), steel, autos (Renault), aerospace (Aérospatiale, now merged in the European group EADS producing the Airbus) and several other industries. Protectionist attitudes, a strong public-private coordination, a major role of public procurement, strong support for higher education and technology diffusion have also been key elements of the French experience. French industrial policy has been highly successful in some fields; French high speed trains have been a model for all countries; French policies were at the source of Airbus’ success; in health sciences French research, drugs and services are highly advanced. Conversely, in information technologies France has shared the failure of all European countries in creating and sustaining firms able to confront the competition from the US and Asia. The main actors in French industrial policy have been the Ministries, sectoral agencies and state owned companies, often managed by graduates of the élite National Schools who play key roles in both public administration and private firms. Since the 1980s, France has strongly advocated the development of European level high technology programmes such as Eureka and the other EU initiatives in this field.

    Then, starting in the early 1980s, the economic policy debate in Europe and in the US has been dominated by neoliberal views that have argued that the above strategies ― that were still adopted by emerging countries catching up with Europe ― were inefficient and inappropriate (see, for example, Lerner 2009). The neoliberal argument was that government failures are serious and that markets are able to operate efficiently both in the short term ― allocating given resources ― and in the long term ― when the challenge is developing new activities, resources and markets. The large state owned firms were privatised in most countries (France, again, is a partial exception), leading to extensive closing down of capacity, foreign takeovers and greater market concentration. Governments largely left decisions on the evolution of the economy to markets ― that is, to large multinational firms. Europe’s policy focused on global liberalisation of trade and financial flows, a deep liberalisation of its domestic markets, including public procurement, and monetary integration with the creation of the euro. The space for industrial policy at the national level was drastically reduced and no integrated industrial policy emerged at the European level. What was left at the national level were policies that lost their selectivity and were limited to automatic “horizontal” mechanisms, such as across-the-board tax incentives for R & D or for the acquisition of new machinery, or incentives to producers and consumers of particular goods. The result has been a general loss of policy influence on the direction of industrial change and development in Europe; in most countries this has meant a major loss of industrial activities in Europe.

    In recent years, however, a widespread rethinking has emerged on the importance of industrial policy ― and of manufacturing industry itself. Restatements of the need for industrial policy have been provided by Chang (1994), Hausmann and Rodrik (2003), Rodrik (2008), Wade (2012), Greenwald and Stiglitz (2013); arguments have pointed out that the question is not whether industrial policy makes sense, but the way in which it can be carried out. This debate has been particularly important in new industrialised countries, where extensive public policies have been effective in combining public and private efforts to develop knowledge, acquire technologies, invest in new activities and expand foreign markets. Important studies on emerging countries are in Cimoli, Dosi and Stiglitz (2009) and in Stiglitz and Lin Yifu (2013). The cases of Asia and Korea are investigated in particular by Lee (2013a, 2013b) and Freire (2013).

    Investigating the experiences of the US and Europe, Mazzucato (2013) has emphasised the need for a broad role of ‘transformative’ public action in innovation and industrial change. Even mainstream perspectives have paid attention to the mechanisms for controlling and targeting industrial policies (Aghion et al. 2011, 2012). On Europe, assessments and arguments have been offered by Coriat (2004), Pianta (2010), Lucchese and Pianta (2012), WIIW (2013), Reinstaller et al. (2013) and Aiginger (2014).

    The effects of the 2008 crisis ― that have been particularly serious in Europe ― have led to an acceleration of this debate and to some changes in the policies of the European Union. This article argues for the need of a new major effort in industrial policy at the European level; the next section documents the twin problems of stagnation and polarisation in Europe; section 3 offers five important reasons for such action; section 4 summarises current policies by the European Union; the final section offers a proposal on how a new industrial policy could be developed, which activities could be its targets, how it could be organised, funded and implemented.

    1The ideas of this article were first presented at the EuroMemorandum conference in London in September 2013 and have inspired the section on industrial policy of the EuroMemorandum 2014 Report (EuroMemo Group 2013). Further presentations were at the EAEPE conference in Paris (November 2013), at the Industrial Policy workshop at Sapienza University of Rome (May 2014) and at a seminar at WIIW in Vienna (May 2014). I thank the participants to such events for lively discussions and criticisms; in particular I thank Trevor Evans, Michael Landesmann, Matteo Lucchese, Mariana Mazzucato, Frieder Otto Wolf and the referees of this article. Responsibility for the arguments and proposals, however, is mine.  2For an overview of Europe’s industrial growth and policies see Eichengreen (2008), Geroski (1989), Bianchi and Labory (2011), Grabas and Nützenadel (2014).  3On national innovation systems and their role in industrial policies see Nelson (1993). The policy implications from studies on the employment impact of innovation are examined in Vivarelli and Pianta (2000).

    II. Stagnation and Polarisation in Europe

    The crisis of 2008 has brought Europe to a stagnation. In the first quarter of 2014 real GDP in the 28 countries of the EU has grown by 0.3% only compared to the previous quarter. The continent has been divided between a slow-growing “centre” with financial and political power, and a “periphery” in depression, with no political influence, high public debt, high unemployment.4 This polarisation is evident in the data on real industrial production and youth unemployment shown in Table 1. With 2008 values for industrial production equal to 100, in 2013 only Germany, Austria and the Netherlands had an index that had suffered limited slumps during the recession and had returned to pre-crisis levels. Progress was made by Poland alone, reaching 118.

    Ireland has returned to a 2013 value of 99 after dramatic losses in the midst of the crisis. Most countries in Central and Northern Europe failed to recover; France, the UK, Sweden, and Denmark have 2013 values equal to 89, Finland is at 83 (in Finland and the Netherlands GDP has been falling in 2012 and 2013). Southern Europe has experienced a dramatic loss of industrial production; 2013 values are 88 for Portugal, 79 for Italy, 76 for Spain, 73 for Greece. As a result of the prolonged European crisis, a permanent loss of production capacity is taking place in most industries and most countries, with a major destruction of economic activities in the Southern “periphery.”

    A similar, extreme polarisation has emerged in the youth unemployment rate, whose change reflects the job opportunities for new entrants in the labour market, alongside structural characteristics of society and labour markets. The absolute change between 2008 and 2013 in the percentage of youth unemployed (15-29 years of age) has been a decline by 2.3 percentage points in Germany and limited raises in Austria and the Netherlands; in these countries only the 2013 level have remained below 10%. Poland and Ireland had significant increases of jobless youth, in spite of the recovery of production. Central and Northern European countries had modest increases, but in 2013 reached percentages ranging from 12 to 18%. The impact of the crisis on youth unemployment in Southern European countries has led to a very large increase ― ranging from 14 to 32 percentage points ― with 2013 shares reaching in Greece 48.7%, seven times the value for Germany.

    The weakening of industrial activities ― and, more broadly, of economic growth ― in the periphery has drastically reduced the job opportunities, resulting in major losses of employment and incomes, a return of poverty, problems of social and territorial cohesion, renewed mass migrations within Europe, and a dramatic loss of political legitimacy of the EU.5

    Since the crisis of 2008, a fundamental process driving such outcomes has been the concentration of economic activities and power in the “centre” ― Germany and few neighbouring countries integrated in its production system. The “centre” has preserved its industrial base and increased its exports to the “periphery” and emerging countries. Current accounts of “periphery” countries have avoided major unbalances only because of the severity of the depression, resulting in large import reductions. When a recovery arrives, the loss of domestic production capacity is likely to result in mounting trade imbalances for many EU countries; they could be addressed either by continuing austerity policies ― depressing again incomes and imports ― or by renewed capital inflows, further expanding private and public debt. In both cases, Europe’s “periphery” is unlikely to avoid a spiral of losses of income, jobs, production and exports.

    Such a reshaping of Europe’s economy is driven by the restructuring of the international systems of production controlled by large firms and is affected by national and EU policies. Operating in the pursuit of short term profits, market power and financial rents ― and with no attention to increasing environmental constraints ― firms’ responses to the crisis have included the following: drastic downsizing and plant closing; reduction of R & D, innovation and investment; emergence of hierarchical production systems with extensive outsourcing and offshoring both in Europe’s “periphery” and in emerging countries with cost advantages and a large potential for growth in domestic markets; consolidation and acquisitions, leading to more oligopolistic market structures. These negative consequences have been concentrated in the countries of the “periphery” where the recession has hit hardest.6

    In a context where European macroeconomic policies resist pressures to end austerity, stimulate new demand and redistribute income, a generalised return to growth is unlikely. Private investment continues to be negatively affected by expectations of low demand by firms; world export growth has not returned to pre-crisis levels and remains important for Germany and few other European countries only. This means that without a substantial increase in public demand an end of the current stagnation is unlikely.

    With a prolonged stagnation, Europe is likely to develop a more polarised industrial structure; “weak” countries, regions, industries and firms are becoming weaker; the “centre” may be negatively affected by lower demand; all countries will end up with a reduced ability to develop new technologies and economic activities. Without growth, change is more difficult; Europe as a whole could be stuck in its traditional economic trajectory ― with sluggish markets, a heavy environmental burden, cosmetic attention to climate change, and growing inequality ― while other advanced and emerging countries may move faster towards new knowledge, new products and processes, new sources of employment, supported by faster demand dynamics. The policy targets of Europe 2020 and the broader opportunity to develop in Europe a new trajectory of growth based on environmentally friendly activities and greater social justice would become more difficult to pursue.

    4Assessments of Europe’s economic crisis and possible alternative are in EuroMemo Group (2013) and Fazi (2014).  5The last Eurobarometer survey shows that citizens’ trust in the EU has fallen from 57% in spring 2007 to 31% in autumn 2013. The percentage of citizens for whom the EU conjures a negative image went from 15 to 28% and the proportion of those who are pessimistic about the future of the EU reached two thirds in Portugal and Greece. In the elections for the European Parliament of May 2014, one fourth of the seat were won by populist, nationalist and extreme right-wing parties with an explicit anti-European agenda.  6Analyses of the recent evolution of European industries and production networks include WIIW (2013); Simonazzi, Ginzburg and Nocella (2013); Reinstaller et al. (2013); Amadoret al. (2013), Aiginger (2014), Agostino et al. (2014). The evidence on the growing fragmentation of production in complex, cross-border value chains suggests that Germany has been a main beneficiary; some Eastern European countries have benefitted from extensive outsourcing; Southern European countries have experienced a weakening of their industrial capacity.

    III. Five Reasons for a New Industrial Policy

    There is no need, however, to accept such an outcome as inevitable. Europe is now facing multiple challenges ― ending the depression; upgrading its economic structure with new job creating activities; extending public action and public goods provision after decades of privatisations; reducing the polarisation between “centre” and “periphery” emerging from the crisis; moving towards an ecological transformation of the economy and society. An important, well known and effective tool that could contribute to address all these challenges is a newEurope-wide industrial policy.

    As documented in the Introduction, a fast growing policy debate is now rediscovering the importance of industrial policy. Building on such a debate, I would argue that, in the context of the current stagnation, there are five major reasons for developing a new industrial policy in Europe.

    Industrial policy can be an important and flexible tool for addressing all these priorities. In order to implement it effectively, there is a need for new institutional arrangements and funding sources, new mechanisms of accountable governance, efficient and effective operation, systematic links between the EU, national and local levels, as well as forms of democratic control with participatory practices. But let us consider first the current policies carried out by the European Union in this field.

    7Bankrupting nature (Wijkman and Rockström 2013) is the most recent report to the Club of Rome documenting the extent of the global ecological crisis. The Europe 2020 strategy has taken on board some targets addressing environmental issues that, however, fall short of the action required.

    IV. Europe’s Missing Industrial Policy

    Since the 1980s, industrial policy has had a marginal role in Europe’s agenda. European Union policies on the evolution of economic activities are now framed in the Europe 2020 strategy, approved in June 2010 by the European Council. It provides the new framework for economic policy in Europe, replacing the Lisbon Strategy that was supposed to inspire Europe’s policies in the previous decade. In the Lisbon Strategy the EU set the goal “to become the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion.” A comprehensive economic strategy was expected to be developed “preparing the transition to a knowledge-based economy and society by better policies for the information society and research and development (R&D), as well as by stepping up the process of structural reform for competitiveness and innovation and by completing the internal market; modernizing the European social model, investing in people and combating social exclusion; sustaining the healthy economic outlook and favourable growth prospects by applying an appropriate macro-economic policy mix.” As pointed out by Lundvall and Lorenz (2011; see also Lorenz and Lundvall 2006), after the mid-term evaluation of 2004-05 ― and with right-wing governments replacing centre-left majorities in most European countries ― the EU strategy was scaled down and focused on neoliberal policies for employment and economic growth.8

    The Europe 2020 strategy follows this same trajectory identifying three priorities: ‘smart growth’: an economy based on knowledge and innovation; ‘sustainable growth’: a resource efficient, greener and more competitive economy; and ‘inclusive growth’ a high-employment economy with social and territorial cohesion. By 2020 the EU is expected to reach five “headlines targets” through a wide range of actions at the national and EU level, but the specific policy tools for achieving such goals appear limited. Eight “flagship” initiatives are associated to priority themes for re-launching Europe (European Commission 2010a).

    The specific targets identified by Europe 2020 follow the footsteps of the Lisbon Agenda. The target of devoting 3% of EU GDP to R & D expenditure is maintained. In 2008, R & D in EU-27 amounted to 2.1%, with a highly uneven distribution across countries and no sign of convergence. Since then, the recession has led to falling expenditures and greater disparities. Innovation capacity should be supported by the formation of human capital: the share of early school leavers should be under 10% in 2020 (it was 14,4% in 2009 in EU-27) and at least 40% of the younger generation should have a tertiary degree (32,2% in 2009 in EU-27). Again, progress towards such goals has been highly uneven and the recession has rolled back advances in “periphery” countries.

    The strategy includes a set of indicators from the 20/20/20 climate/ energy targets established in 2009 by the European Council. The first one is the 20% reduction of emissions by 2020 on the levels of 1990 (enlarged to 30% “if the conditions are right”); in 2009, the EU level has declined by 17%, largely due to the economic crisis that has deeply reduced output as well as emissions. The second target is the reduction of 20% in the use of renewable sources (in 2008, it was 10.3%); the third one is a rise of 20% in energy efficiency, with a move towards clean and efficient production systems the potential to create millions of jobs.

    The two “flagship” initiatives devoted by Europe 2020 to innovation and industrial policy include the “Innovation Union” (European Commission 2010b) and “An integrated industrial policy for the globalization era” (European Commission 2010c). The aim is to provide the best conditions for business to innovate and grow, as well as to support the transformation of the manufacturing system towards a low-carbon economy.

    As in the Lisbon agenda, industrial policy is based on a “horizontal” approach, where the main policy tools are the provision of infrastructures, the reduction of transaction costs across the EU, a more appropriate regulatory framework favouring competition and access to finance. A significant role is ascribed to the ability of small and medium enterprises to promote growth and create employment. Key issues include the need to fight protectionism, increase the flows of goods, capital and people within and outside the EU, to exploit a more open single market for services, to benefit from globalization. This strategy confirms the rejection by EU policy ― first emerged in the 1980s ― of targeted industrial policies and state action for developing particular sectors, choosing a market driven approach. Selective industrial policies continue to be considered ineffective by the EU, due to the difficulty of fine-tuning actions and evaluating results (Lerner 2009).

    What is then left in EU policy tools (and budget) with a potential to reshape countries’ production capacity? First, Structural Funds are the most important EU programme addressing imbalances at the regional level and “compensating the losers” in market competition; they amount to 0.4% of EU GDP. They are provided from Brussels ― conditioned to the co-financing by national governments and local authorities ― to fund the “horizontal” activities described above: infrastructure construction; education and training programmes; other support for local development, excluding funding for specific firms or economic activities.

    Second, the idea of Smart Specialisations (Foray et al. 2009) has been recently adopted by EU policy, encouraging regions to focus their “horizontal” efforts in building a critical mass of R&D, innovative and investment capacity in highly specific activities, combining advanced technologies and local competences also in traditional industries. Policy makers are asked to develop plans for Smart Specialisations that may involve the use of EU Structural Funds, the EU R&D funds from the Horizon 2020 programme, national resources and private investment by firms, with no additional funds from the EU.

    Third, there is the project financing by the European Investment Bank ― 72 billion euros in 2013 ― that funds all sorts of private and public projects. The EIB, however, operates with a logic typical of financial markets; bond emissions by the EIB are required to obtained the triple A from rating agencies; profitability is required, and this necessarily excludes investments that are riskier or with longer time frame for obtaining returns, or where the public, non market benefits are more important than profits.

    Finally, the regulatory activity by the EU Commission has some influence in shaping the quality of economic activities in specific fields, in particular where food, environmental, safety and health or cultural issues are at stake. Regulations, however, cannot by themselves redirect or expand private production in desirable directions.

    With very modest resources, a focus on “indirect” measures and no questioning of the market logic, the “horizontal” approach of current EU policy has had a minimal impact on the development of production capacity and has failed to limit the polarising effect of business strategies on Europe’s economies.

    When the crisis started in 2008 and austerity policies were imposed on Euro-area countries, the emphasis on fiscal consolidation and macroeconomic coordination has further sidelined any serious discussion on industrial policy. The goals of Europe 2020 are now reinterpreted in line with the neoliberal view that economic growth can be supported by the operation of markets and that fiscal consolidation and debt reduction create appropriate conditions for long term growth. Europe 2020 only suggests that governments devote more resources for “growth-enhancing items” such as education, R&D and innovation, at the expense of social expenditure, that is considered to be unsustainable (European Commission 2010a, 2010c).

    Such view has become explicit in the policy directives imposed in 2011 on weaker countries of the “periphery” of Europe ― Greece, Portugal and Spain in particular ― as conditions for granting them financial help facing their debt crisis. Cuts in government expenditures, public sector jobs and wages, liberalisation of labour markets and reduced workers’ protection have been key elements of the austerity plans imposed on these countries, with the result of worsening the recession, industrial decline and unemployment.

    The major losses in industrial production since the start of the crisis ― documented in Table 1 ―, however, have led the European Commission to introduce in January 2014 a new policy initiative called “Industrial Compact”, establishing the “target” of returning industrial activities to 20% of GDP by 2020, against the present 16% (European Commission 2014a). German ― and, to a lesser extent, Italian ― industry and governments lobbied for such an action, which remains entirely within the Europe 2020 approach described above, building on the “Smart specialisations” approach. The only novelties include the call to support investment in fast growing, high value added industries such as energy efficiency, green industries and digital technologies. No additional funds, however, are offered; all actions have to rely on already existing EU initiatives, such as the Horizon 2020 R&D programme, the Competitiveness of Enterprises and Small and Medium-sized Enterprises (COSME), and the Structural Funds (including national co-financing). Greater attention is also emerging towards the need to act at the EU level on climate change and energy, but again little additional resources are available and no change in the approach to industrial policy is in view (European Commission 2014b).

    A major policy development in Europe, however, has emerged in 2013 with the negotiations for the Transatlantic Trade and Investment Partnership (TTIP) with the United States. The Treaty would move Europe further ahead along the road of trade liberalisation ― the very process that has led to a more unbalanced and hierarchical industrial structure. More importantly, it would offer a very strong protection for private foreign investment and scale back the scope for public policy and regulation in major fields, including environmental rules, GMOs, utilities and other public services. In fact, TTIP is bringing back the agenda of the Multilateral Agreement on Investment that was discussed at the OECD in the late 1990s and was stopped by the opposition of France and by mounting global mobilisations.9 TTIP has come under increasing criticism, and its future is uncertain. If it were approved, the possibility for a European industrial policy would be closed, and the space for public action in the economy reduced to a minimum.

    Figure 1 summarises the main current policy actions by the European Union so far described, documenting the very limited policy space for building industrial capacity. EU policy has continued to disregard the seriousness of industrial decline and to rely on a policy frame where the priority is given to market liberalisation. Even after the dramatic effects of the crisis, ‘horizontal’ actions remain the main forms of ‘allowed’ public intervention, and no significant EU-wide resources have been made available to members states. Moreover, even the very mild tools of present EU industrial policies have lacked an adequate governance mechanism; industry lobbies exert a major influence and there is a lack of democratic processes and broad participation in decision making ― a weakness that, unfortunately, is found in all fields of the present model of European integration.

    8A simple indication of the extent of the reduction of government intervention in the economy is offered by its transfers to firms; total state aid to firms in the EU as a whole has fallen from more than 0.8% of GDP in 1992-93 to about 0.4% of GDP in 2010-2011, excluding crisis-related actions (see, 2013).  9On TTIP and the expected economic benefits see CEPR (2013); a critical review is in EuroMemo Group (2014, ch. 7). On global activism against liberalisation of trade and investment see Utting, Ellersiek and Pianta (2012) and Pianta (2014).

    V. A Proposal for a New European Industrial Policy

      >  A. How can we change what is produced?

    A different policy perspective is needed, addressing at the European level the joint needs to end the depression and rebuild sustainable economic activities in a less polarised continent. Decisions on the future of the industrial structure in Europe have to be brought back into the public domain. A new generation of Europe-wide industrial policy has to overcome the limitations and failures of past experiences ― such as collusive practices between political and economic power, heavy bureaucracy, and lack of accountability and entrepreneurship. They should be creative and selective, with mechanisms of decision making based on the priorities for using public resources that are more democratic, inclusive of different social interests, and open to civil society and trade union voices. They have to introduce new institutions and economic agents, and new rules and business practices that may ensure an effective and efficient implementation of such policies.

    The general principles of industrial policy ― discussed in section 1 above ― are simple enough. It should favour the evolution of knowledge, technologies and economic activities towards directions that improve economic performances, social conditions and environmental sustainability. It should favour activities and industries characterised by learning processes ― by individuals and in organisations ―, rapid technological change, scale and scope economies, and a strong growth of demand and productivity. An obvious list would include activities centred on the environment and energy; knowledge and information and communica tion technologies (ICTs); health and welfare.

    All these fields are characterised by labour intensive production processes and by a requirement of medium and high skills, with the potential to provide “good” jobs. But how could Europe change its economic activities in such directions?

    Industrial policy has long relied on different mechanisms ― funding the development of new activities on the supply side, using the demandpull effect of public programmes, organising new markets and coordinating public-private cooperation in R&D, innovation and investment. Building on previous experiences, the new European industrial policy could rely on three main tools. On the one hand actions could be directly carried out by public organisations or public funding could provided to private ones; on the other hand, actions could either focus on the “upstream” R&D and innovation phase, or on the “downstream” investment and production phase.

    Additional policy tools could be developed, including the organisation and regulation of markets; support for new non-market activities of social and environmental relevance by the public and nonprofit sectors; measures “empowering the users,” letting them define specific applications of existing technologies that may lead to new goods and services with large markets. Finally, policies need to build closer relationships among all actors of national and European systems of innovation ― firms, financial institutions, universities and policy makers ― helping coordinate decisions of public and private actors.

    So far, the funding for such industrial policies has come from national public expenditures in forms that included subsidies and tax reductions, transfers and procurement contracts, the granting of public capital to state banks and enterprises, and public guarantee on bank loans to innovating firms. Since the start of the 2008 crisis, austerity policies, EU constraints and pressure for fiscal consolidation on national public budgets have dried out much of these resources; a different type of funding has now to be developed, with a focus on European-level initiatives.

      >  B. How can the new industrial policy be implemented?

    The need for rebuilding and restructuring economic activities in Europe has recently led to a series of policy proposals. The German trade union confederation DGB has proposed “A Marshall Plan for Europe” (DGB 2012), envisaging a public investment plan of the magnitude of 2% of Europe’s GDP per year over 10 years. Along the same lines the European Trade Union Confederation has developed the proposal of “A new path for Europe” (ETUC 2013). Previous proposals were developed in Pianta (2010), Lucchese and Pianta (2012), Dellheim and Wolf (2013), EuroMemo Group (2013).

    Building on such a debate ― and on previous experiences in Europe ― we can argue that an ambitious but realistic proposal for a new industrial policy in Europe could be developed on the basis of the following institutions, funding arrangements and governance mechanisms.

    The institutional arrangements. The new industrial policy has to be firmly set within the European Union and ― if required ― within the institutions of the Euro-zone. This is needed in order to coordinate industrial policy with macroeconomic, monetary, fiscal, trade, competition, regulatory and other EU-wide policies, providing full legitimation to public action at the European level for influencing what is being produced (and how). Major changes are required in current EU regulations, in particular the ones that prevent public action from “distorting” the operation of markets. The expansion of economic activities that markets are unable to develop should become an explicit objective of EU policy. The EU level is crucial also for funding such policy (see below). As this policy is likely to meet opposition by some EU countries, a “variable geometry” EU policy could be envisaged, excluding the countries that do not wish to participate.

    A close integration has to be developed between the European dimension ― providing policy coherence, overall priorities and funding ―, the national dimension ― where public agencies have to operate and an implementation strategy has to be defined ― and the local dimension ― where specific public and private actors have to be involved in the complex tasks associated to the development of new economic activities. Existing institutions could be renewed and integrated in such a new industrial policy, including ― at the EU level ― Structural Funds and the European Investment Bank (EIB). However, their mode of operation should be adapted to the different requirements of the role here proposed. While in the short term adapting existing institutions is the most effective way to proceed, in the longer term there is a need for a dedicated institution ― either a European Public Investment Bank, or a European Industrial Agency ― coherent with the mandate of reshaping economic activities in Europe.

    A system could be envisaged where EU governments and the European Parliament agree on the guidelines and funding of industrial policy, calling the EU Commission to implement appropriate policy tools and spending mechanisms. In each country a specific institution ― either an existing or a new one, either a National Public Investment Bank, or a National Industrial Agency ― could assume the role of coordinating the implementation of industrial policies at the national level, interacting with the existing national innovation system, policy actors, the financial sector, etc. More specific agencies, consortia or enterprises, with a flexible status but a strong public orientation, could be created (or adapted, if already in place) for action at the local and regional level and for initiatives in particular fields. The institutions at the national and local level would take responsibility for spending decisions, identifying the private firms to be supported ― either with public procurement, or with low interest loans of with a share of ownership ―, the projects to be developed, the new public activites that are required. They would be subject to the strict monitoring described below.

    The funding of industrial policy. Funds for a Europe-wide industrial policy should come from Europe-wide resources. It is essential that troubled national public budgets are not burdened with the need to provide additional resources and that national public debt is not increased. The order of magnitude of the funding for an industrial policy programme that could address the challenges discussed above is the one suggested by the DGB plan and by the ETUC proposal ― 2% of EU GDP over a period of 10 years, about €260 billion per year. As a term of reference, we can note that the European Central Bank provided in the period December 2011-March 2012 alone €1,000 billion of special funds to private banks at 1% interest rate, with no success in turning them into real investment; EU Structural Funds in the period 2007- 2013 reached €347 billion; lending by the European Investment Bank was €72 billion in 2013. An investment effort of about 2% of EU GDP appears to be feasible ― considering the size and power of European institutions ― and would be big enough to compensate ― at the macroeconomic level ― for the lack of private investment and low exports, effectively ending Europe’s stagnation.

    Different funding arrangements could be envisaged. As suggested by the DGB proposal “A Marshall Plan for Europe” (DGB 2012) ― funds could be raised on financial markets by a new European Public Agency; funds could come from the Europe-wide receipts of a once-for-all wealth tax and from the newly introduced Financial Transactions Tax. Such tax income could help cover interest payments for the necessary projects that are not profitable in market terms. This arrangement would not burden domestic public finances and could visibly make the connection between policies for downsizing finance, taxing the rich, reducing inequality, and the industrial policy that could lead to new economic activities and jobs.

    An alternative may come from a deeper European fiscal reform, introducing a EU-wide tax on corporations, thus effectively eliminating fiscal competition between EU countries. Perhaps 15% of proceedings could go to fund industrial policy, public investment, knowledge generation and diffusion at the EU level; the rest could be transferred to the countries’ Treasuries.

    For the group of Euro-zone countries, financing through EMU mechanisms could be considered. Eurobonds could be created to fund industrial policy; a new European Public Investment Bank could borrow funds directly from the ECB; the ECB could directly provide funds for industrial policy to the spending agencies concerned.

    Moreover, funding arrangements could be different according the relevance of the “public” dimension:

    In all cases, the rationale for financing industrial policy cannot be reduced to the financial logic of the “return on investment.” The benefits in terms of environmental quality, social welfare, greater territorial cohesion, more diffused growth at the European level have to be considered, and the costs have to be shared accordingly.

    Figure 2 summarises the new framework for European institutions, funding and policy-making that could be associated to the new industrial policy proposed in this article.

    The governance system. The different options outlined above are associated to different governance arrangements of EU-wide industrial policy. As an example, we can assume that a European Public Investment Bank or Agency ― let us call it European Public Investment (EPI) ― is created and similar organisations ― National Public Investment (NPI) ― operate in each country. The European institution should be accountable to the European Parliament, who appoints its board where representatives from business, research organisations, trade unions, environmental civil society organisations should be included. No “revolving door” between industrial policy institutions and private firms and banks would be allowed. The European institution should engage in consultation with EU political, economic and social actors for developing its proposed industrial policy, that should be approved by the European Parliament. Funds would then become available, and could be assigned to national institutions and specific targets and activities. Funds could be used for a variety of activities, possibly in combination with private investment that could be attracted to the creation of new economic activities and markets. In particular, in each country the National Public Investment organisation could use the EU funds for the economic activities in the targeted sectors and regions outlined above: Public R&D and innovation; Public investment for developing production; Mission-oriented innovation and procurement programmes. In addition, public action could fund and organise networks of innovators, producers and users in new activities, in order to consolidate economic relationships and create markets. It may also continue to provide some ‘horizontal’ support to firms with the existing policy instruments.

    The lessons from successful experiences outside Europe, such as ARPA-E in the US, the Brazilian Development Bank BNDES ― discussed at length by Mazzucato (2013) ― could lead to a more specific and effective forms of public action. Transparency in decisions would be required; monitoring and evaluation procedures ― similar to those required by EU Structural Funds ― would be arranged.

    The same governance system could be introduced in the implementation of activities at the country level. The National Public Investment organisation could identify partners ― both private, nonprofit and public ― operating at the local level and in specific policy fields, who could become key players in the implementation of specific investment programmes. The specific fields that could be eligible for such industrial policy programmes can be identified within the broad areas outlined at the start of this section.

    In order to reduce the scope for ‘pork barrel politics’, the countries and regions where such investments could be carried out have to be defined in advance, with the explicit aim to reduce the polarisation that is weakening the industrial base of Europe’s “periphery”. For instance, 75% of funds could go to activities located in “periphery” countries (Eastern and Southern Europe, plus Ireland); at least 50% of them should be devoted to the poorer regions of such countries; 25% could go to the poorer regions of the countries of the “centre”.

    These criteria for operation, transparency in decision making, accountability to the EU Parliament and citizens may contribute to overcome the collusion between industrial policy and economic and political power that has characterised past European and national experiences. Extensive public consultations and a democratic debate about what and how we produce could support these policy initiatives, building consensus and credibility for a EU-wide industrial policy.

    Opening up a debate on industrial policy in Europe is an urgent task. A wide range of ideas and proposals have to be shared and discussed. The political obstacles for such a new industrial policy are indeed huge, and major changes would be required in order to implement it. But the results of such efforts could be very important ― ending stagnation, creating new high wage jobs where they are most needed, greater EU cohesion and public action, progress towards an ecological transformation of Europe, greater democracy in economic decision making.

    10Mazzucato (2013) provides a comprehensive review of such policies and emphasises the potential of “mission oriented” public funds and actions as effective ways for directing private firms to carry out R&D, innovation and production in targeted fields.

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