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Its lure should be resisted
IF YOU CAN’T beat them, adopt their worst economic policies. Worried about the “aggressive strategies” of America and China, France’s president, Emmanuel Macron, issued a Europe-wide proclamation on March 4th that, among other things, proposed a new revolutionary era of government intervention in European Union businesses (see article). “We cannot suffer in silence,” he declared, while other global powers flout the principles of “fair competition”.
Mr Macron is not alone. Across the continent, politicians are seeking to influence business using a range of tactics including regulation, nudging managers to do deals and boosting state ownership. At Renault-Nissan, the downfall of Carlos Ghosn has become intertwined with a struggle for control between the French and Japanese governments (see Banyan). Last month Peter Altmaier, Germany’s economy minister, called for champions such as Siemens and Deutsche Bank to be protected. Last week it emerged that the Dutch government has built up a 14% stake in Air France-KLM to help its former flag-carrier “perform better”. And Italy is poised to increase to 10% its stake in Telecom Italia, which it began privatising 21 years ago.
This resurgence of state intervention is intended to make European industries stronger. Instead it is more likely to hurt consumers and dim the prospects of business.
Granted, Europe has never been a haven of unfettered free markets. The European Coal and Steel Community, the precursor to the EU, was created in 1951 to co-ordinate industrial activity. France has long adopted a dirigiste policy of strategic planning by enlightened technocrats. Nonetheless, by the 1990s, the state was in retreat. The launch of the single market in 1993 promised a continent-sized playing field for European firms, which could at last exploit economies of scale and compete unfettered by national subsidies and politics.
The lurch back towards intervention partly reflects the desire of Mr Macron and other politicians to show grumpy voters that they are making capitalism fairer. But it also reflects the fear that Europe is falling behind America and China. Bosses worry that European firms are too puny. If you take the top 500 firms in both Europe and America, the median European one is 52% smaller by market value. Europe has no giants to rival Amazon or Alphabet and hosts few of the world’s dynamic startups. China’s plan to dominate various strategic technologies, such as new materials and AI, and its pursuit of state-backed takeovers in Europe, seem threatening and unfair. And the White House’s me-first habit of telling firms where to build factories has legitimised the kind of overt meddling that had become taboo in the West.
Yet Mr Macron’s solution is self-defeating. Germany and France have urged on the merger of the rail divisions of Siemens and Alstom, which would have resulted in a firm with a 50% market share in Europe. But that would have pushed up the price of rail travel (the European Commission has sensibly blocked the deal). Intervention often incites national rivalries, too. The Dutch bought into Air France-KLM in order to offset French influence. It can be a recipe for cronyism. Does Deutsche Bank, which paid 1,098 staff more than €1m a year in 2017, despite paltry profits, really warrant special treatment? And intervention is unlikely to achieve its aim of creating champions. Of Europe’s five most valuable firms, three (Nestlé, Novartis and Roche) are based in Switzerland, which spends heavily on education and research and development but does not engage in central planning. One (Royal Dutch Shell) is transnational and the other is a French luxury-goods firm, LVMH, that has thrived because it answers to China’s consumers, not the strategic plans of French bureaucrats. Europe’s one corporate success with dirigiste roots, Airbus, has soared since 2012, when its shareholding pact was revised to reduce political influence.
Instead of pursuing an activist industrial policy, Europe should put consumers first. That means enforcing competition. German and French attempts to stymie EU antitrust rules are misguided. Allowing oligopolies to form, as America has, creates big companies that overcharge their customers and, sooner or later, exert more effort controlling markets than innovating. In tech, Europe ought to satisfy itself with rules, such as its GDPR regulation, that protect consumers’ rights over their data and privacy. Europe can also continue to deepen the single market. The main reason some industries, such as banking and telecoms, are struggling and fragmented is because they still operate in national silos that hinder firms from achieving economies of scale. And Europe should be proportionate in the way it screens foreign investment, for example from state firms based in authoritarian countries, notably China. The aim would be to block investment in only the most sensitive industries, such as defence, police it rigorously in important ones, such as technology, and otherwise step back.
Mr Macron is right that trade and markets are being distorted by the actions of China and, increasingly, America. That does not mean Europe should copy their mistakes.