European countries massively subsidize ‘glamour products’. All that to solve an imaginary problem

Paul De Grauwe is a professor at the London School of Economics. His column appears biweekly.

The new buzzword in the European Union is competitiveness. In her State of the Union speech in the European Parliament, Commission President Ursula von der Leyen announced that she had commissioned Mario Draghi, the former president of the European Central Bank, to write a report on European competitiveness and how it can be improved. jacked up.

The fear runs deep: the European Union is losing in the competitiveness rankings. China and the United States are leading the way in developing new technologies. The big technological companies are in America and China, not in Europe. This continent is in danger of falling more and more behind technologically and economically.

Two questions arise here. First of all, what’s the point of that? And if there is a problem, how do we tackle it?

Since I started studying economics, I have heard nothing else: Europe is lagging behind. It started in the 1960s with Jean-Jacques Servan-Schreiber’s bestseller Le défi americain. He argued that America would wipe Europe off the map economically with its superior management techniques. In the 80s it sounded like Japan that would dominate us. Later it became America again, which would blow away rigid Europe through its flexibility. Until China came on the scene and took over our entire industry. There is no end to the complaints that Europe is falling behind, technologically and economically. So some skepticism is in order.

The big tech companies – the Amazons, Metas, Googles, Apples – are indeed non-European. But there is more than IT in the economy. When the pandemic broke out, it became apparent that important new scientific and technological developments involving new vaccines had taken place in Europe. These developments were not as glamorous compared to IT, but they are no less important.

To find out for sure whether Europe is really lagging behind the US by that much, I compared statistics on the European Union’s export market shares since 2005 with those of the US – I’m taking 2005 because this is the year after the EU’s enlargement to the Central -European countries. What appears to be is that both the European Union and the US have seen their shares of world industrial goods exports fall at more or less the same pace. In 2005, the EU’s market share was 16.4 percent, that of the US 9.2 percent. In 2022, the respective market shares were 14.0 percent and 7.8 percent. Comparable developments, which are the downside of the rising market shares of China and other Asian countries.

Isn’t there a competitiveness problem in Europe? Hardly. The declining market shares of the EU and the US reflect the new growth dynamics of Asian countries. And it will stop at some point.

The competitiveness problem mainly has to do with perception. The Americans have specialized in domains that, in the perception of many, have more appeal. IT products are more fascinating than pharmaceutical products. Politicians are particularly sensitive to this and want to develop a plan ‘to catch up’.

The European Union will now follow the example of the US in pursuing an industrial policy. To make this possible, the ban on subsidizing companies, a key provision of the internal market, has been lifted.

And now the dam is closed. Since 2020, state subsidies in the European Union have tripled. National governments of the European Union have started massively subsidizing the new ‘glamor products’: chips, batteries (which should ensure that even more cars (electric ones) race on our roads), AI applications and so on.

We know the experience of industrial policy from the past. The large countries with the deepest pockets will cough up the bulk of the subsidies, and those subsidies will mainly go to the major national champions. We also know from experience that these are not always the most dynamic companies. They do have the most political power, which allows them to drain the subsidy pot.

This industrial policy will undermine the internal market and pit Member States against each other. The small countries will get the short end of the stick. And all to solve an imaginary problem.