EU member states acting alone in tackling the crisis have created distortions in the single market, writes Elie Cohen, research director at France's Centre National de la Recherche Scientifique (CNRS).
The following contribution is authored by Elie Cohen, research director at France's Centre National de la Recherche Scientifique (CNRS).
"The German and French governments have been scrambling to save their automobile and truck industries through big fiscal injections, making it clear that, within much of the European Union, industrial policy has returned with a vengeance.
But, throughout last year, French, German and other EU leaders worked against rather than with each other when putting their policies in place. As a result, some European industries got undue protection, while others were squeezed out of the market.
The lesson is clear: European governments must work together when implementing industrial policy. But they also need to do much more to promote innovation and competitiveness.
The French and German governments intervened last year with capital injections to replace deserting shareholders. They buttressed weakening demand by subsidising sales, stimulating research into cleaner technologies and protecting jobs. These recovery schemes put national interests first, using the argument that taxpayers’ money must be used to defend the nation’s companies and workers.
The French authorities have now taken this approach a step further with the creation of a Fonds stratégique d'investissement (FSI), which aims to protect domestic capital from the predatory designs of foreign investors. This wholesale return to the industrial policies of yesteryear, and governments' reluctance to let even uncompetitive companies fail, should be cause for widespread concern.
Judging by governments' reactions to the crisis, one could be forgiven for thinking that market regulators and competition authorities should take the lead when an economy is stable, and that industrial policies should be implemented in times of emergency.
Unfortunately, European governments did not respond to the crisis with common policies, nor did they seize the opportunity to strengthen the powers of eurozone authorities. Instead, each EU member state opted to fend for itself.
The member states' common arsenal of interventionist tools – deposit guarantees, re-capitalisation of banks, guarantees for inter-bank loans and purchases of toxic assets – seemed to give credence to the notion of European unity. But the reality turned out to be very different; member states' interventionist measures have in fact created distortions and irregularities up and down the continent."
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(Published in partnership with Project Syndicate.)