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A Strategy for European Competitiveness
June 20, 2024
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IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER:
Phone: +1 202 623-7100Email: MEDIA@IMF.org
June 20, 2024
PRESS OFFICER:
Phone: +1 202 623-7100Email: MEDIA@IMF.org
As prepared for delivery
Thank you, Paschal, for your kind invitation to address ministers today on industrial policy, as part of your broader deliberations on competitiveness.
Last year, when I spoke here about the European capital market union, I started by saying it was a topic close to my heart, one we at the IMF deeply cared about. This year, a different tone: industrial policy is not something my colleagues and I cherish. And there are good reasons for it.
Let me note up-front that I plan to speak not just about industrial policy, but about how it fits in Europe’s strive for competitiveness. As I have argued many times, Europe’s core strength is the single market: fundamentally, Europe derives its prosperity, its competitiveness, and—yes—its market power from its cohesion.
With this basic truth in mind, today I will urge you to place discussions on the role and composition of industrial policy in the context an overarching, high-level strategy for productivity and competitiveness.
As I observed a short while ago as I presented the conclusions of the IMF’s annual consultation on euro area policies, the EU confronts a daunting list of challenges. Population aging; weak productivity growth; energy security; our common struggle against climate change; and, not least, the geoeconomic fragmentation that has, unfortunately, become our new global reality.
Preserving and sharpening Europe’s competitive edge in the face of such challenges requires not a reactive and piecemeal approach, but a well-thought out, multi-pronged strategy. Industrial policy may have a role to play as a small part of this strategy, but let me emphasize: in this case small—well-targeted and well-designed—is beautiful.
***
Of course, it’s a tough world out there—this much we know, I know. Last night I flew in from China, tomorrow I fly out to the United States. For me, this is a short stop at home—always very pleasant. Yes, Europe is geographically in the middle.
But is Europe caught in the middle too? To some extent, one can say Yes.
We see the major shifts underway. We know that many of the geopolitical concerns are real, that economic security actually matters. Across the globe, we see a resurgence in the use of industrial policy. In the US, the Inflation Reduction Act with its local-content requirements. In China, a history of support for various sectors.
Last year alone, we count over 2,600 industrial policy measures worldwide—with the US, China, and the EU making up roughly half of the total. These measures covered at least one-fifth of world trade. More than 70 percent were trade-distorting. Good economic rationale? Often not clear.
Still, some people like to say we live in a world of carnivores and that Europe behaves more like a herbivore. I am not so sure—at least not when I see last week’s tariff announcements on Chinese electric vehicles. You know that some form of retaliation will probably follow. My staff has given me a line on this matter, which I endorse. Let me quickly read it to you:
“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.”
So there you have it: our cautionary position on the destructive potential of tit-for-tat protectionist measures.
As a general point, industrial policy can be a powerful tool, one that can, on rare occasion, be put to good use. But remember, history is littered with examples of industrial policy interventions gone wrong — the support for British Leyland in the UK, the ailing shipbuilders in Germany, Groupe Bull for computers made in France, BioValley in Malaysia, Solyndra in the United States, and the list can go on an on. In my personal experience looms large the former Soviet bloc: an entire economic system built around party functionaries deciding how to allocate the people’s savings. We know how that ended.
It is clear to see: technocrats picking winners and interfering in markets is a risky business—costly and distortionary. Design with care, handle with care. Use only when no better tools are available.
Full disclosure: this is personal for me. Having grown up on the other side of the Iron Curtain—the colder side of the Cold War—I much prefer the invisible hand of the market to the heavy hand of big government.
And a side comment: we know that with the pandemic shock and the energy shock governments everywhere have become much bigger. Debt and deficits are high, and now is the time to dial it back, not forward—we need front-loaded fiscal consolidation and lower debt, including to prepare for future shocks.
Coming back to industrial policy, let me briefly unpack when it can be appropriate. Two conditions must be satisfied. First, we must see a clearly identified market failure—the market not properly pricing or delivering a necessary thing. Second, we must assess that a broad-spectrum, less-distortionary, first-best policy approach is either unavailable or unable to deliver the desired outcome on its own. Only when both conditions are satisfied can the use of an industrial policy intervention be appropriate—and then too, not always.
***
Three concrete examples of cases where industrial policy may have a role to play:
Let me offer a few words on industrial policy design when deployment is contemplated.
Three guiding principles:
Given the IMF’s role as guardian of the international monetary system, let me repeat the last point: a global escalation of tariffs can only make us collectively worse off while also undermining our existential struggle against climate change.
Finally, following on from the principles, a few specific recommendations for industrial policy interventions:
In a nutshell: minimize distortions to international trade, avoid protectionist measures, comply with WTO rules, and protect Europe’s most precious economic asset: the single market. Whenever and wherever possible, choose cooperation over conflict!
***
Before I end, let me go back to where I began: advocating for a high-level competitiveness strategy. Let me list some critical aspects of that strategy—not things you shouldn’t do, things you should do!
Fundamentally, as I noted, Europe’s competitiveness derives from its cohesion. Your strategy, therefore, must center on strengthening the single market.
Many parallel efforts will be needed—it brings me back to the concluding messages of our euro area policy consultation. You need to remove trade barriers within the EU. You need to strengthen the labor market by allowing workers to move more freely with skills that are continuously upgraded and recognized across the union. You need to invest in EU infrastructure, including cross-border electricity grids for energy security. And you need to mobilize unprecedented volumes of money for the green transition.
I have spoken separately about the need for a more-ambitious EU budget and the savings of centralizing some projects of common interest. Hugely important.
Finally, you need to build a single European financial system, comprising both a banking union and a capital market union. Ultimately, this is about improving the allocation of savings to enhance productivity and growth potential.
I have said this before: Europe is rich, but it suffers from what I call “lazy money”—across the Atlantic, savings work much harder. Total financial sector assets in the euro area amount to about 60 trillion euros, not far short of the US’s 80 trillion euros. But, whereas in the US only one-third of the total sits in banks, in the euro area the banking share is two-thirds. Two implications to highlight today as I close:
We are all familiar with the narrative of bright ideas being born in Europe but then migrating away to grow up elsewhere—Europe as someone else’s innovation supermarket. Europe needs a stronger venture capital industry, better able to support the best European startups so they can scale-up at home.
***
To sum it up: 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.
Thank you!
