A Strategy for European Competitiveness

IMF News, June 20, 2024

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Speech by Kristalina Georgieva, IMF Managing Director, to the Eurogroup on a Strategy for European Competitiveness, Luxembourg.
Date: June 20, 2024.
Central thesis: Europe’s competitiveness rests on its cohesion and the single market; industrial policy can play a limited, well-targeted role within a broader, high-level strategy for productivity and competitiveness.

Major challenges confronting the EU:
- Population aging.
- Weak productivity growth.
- Energy security.
- Climate change.
- Geoeconomic fragmentation.
Global context on industrial policy:
- Last year: over 2,600 industrial policy measures worldwide.
- The US, China, and the EU made up roughly half of the total.
- These measures covered at least one-fifth of world trade.
- More than 70 percent were trade-distorting.
Caution on protectionism:
- “The EU and China both benefit from an open trade system; we encourage them to cooperate to address the underlying concerns. Trade restrictions can distort the allocation of investment from where it is optimal, raising the cost of goods and services for final users. They can also slow the green transition and trigger retaliatory actions. We encourage all parties to work within the multilateral framework to resolve their differences.”
- Recent history: when one country introduces protectionist measures, there is about 75 percent probability of retaliation within a year.

Two necessary conditions for considering industrial policy:
- A clearly identified market failure.
- A broad-spectrum, less-distortionary, first-best policy approach is unavailable or unable to deliver the desired outcome on its own.
Three concrete cases where industrial policy may have a role:
- Climate change: bolstering mitigation and support for development and adoption of early-stage clean technologies; no case for protecting mature clean tech.
- Supply-chain resilience: e.g., diversification of semiconductor production may sometimes justify intervention after careful analysis.
- Strategic public goods: defense-related sectors where national security concerns justify promoting domestic production.

Three guiding principles:
- Use industrial policy judiciously; picking winners and losers is inherently difficult.
- Do not undermine the single market; account for externalities of state aid and intra-EU spillovers.
- IMF staff analysis: while state aid may encourage recipient firms to hire more workers or invest more, it reduces, by a larger margin, jobs and investment in other firms in the same sector and in other EU countries that do not receive the aid.
- Avoid erecting trade barriers that do more harm than good; favor cooperation over conflict and comply with WTO rules.

(A) Keep interventions temporary and preserve competition:
- Embrace public–private co-investment where possible.
- Define clear exit strategies.
(B) Keep interventions limited in scope and coordinate at the EU level:
- Contain fiscal costs and distortions.
- Avoid national subsidies for national champions, complex and varied tax incentives, and divergent regulatory standards.
(C) Design state-aid to limit adverse spillovers and fiscal strains on other member states:
- Recognize differing fiscal space across neighbors.

Center strategy on strengthening the single market.
Parallel priorities:
- Remove trade barriers within the EU.
- Strengthen the labor market: allow workers to move more freely with skills continuously upgraded and recognized across the union.
- Invest in EU infrastructure, including cross-border electricity grids for energy security.
- Mobilize unprecedented volumes of money for the green transition.
- Consider a more-ambitious EU budget and centralizing some projects of common interest.
- Build a single European financial system: both a banking union and a capital market union.
Financial sector observations:
- Total financial sector assets in the euro area amount to about 60 trillion euros, not far short of the US’s 80 trillion euros.
- In the US only one-third of the total sits in banks; in the euro area the banking share is two-thirds.
- Implications:
- Do not neglect banking union while pressing forward on capital market union.
- Resolve home–host issues to allow cross-border bank liquidity and capital.
- Banks are less well-suited to financing innovation; targeted capital-market interventions may be necessary to support startups and early-stage clean-tech.
Venture capital and innovation:
- Europe needs a stronger venture capital industry to prevent the best European startups from scaling up abroad.
- The European Investment Bank and European Investment Fund play a constructive role supporting financing for innovative European startups.

Minimize distortions to international trade.
Avoid protectionist measures.
Comply with WTO rules.
Protect and strengthen the single market as Europe’s most precious economic asset.
Be generous in protecting and building the single market; be stingy in using industrial policy.
Promote the ideas of the future, not the industries of the past; have a comprehensive strategy for competitiveness.

Source: Remarks by Kristalina Georgieva, IMF Managing Director, to the Eurogroup, June 20, 2024.