European Industrial Policy: Benefits and Challenges for Italy

1. Una Politica industriale Europea : benefici e sfide per’l’Italia EUROPEAN INDUSTRIAL POLICY: Benefits and challenges for Italia Jacques PELKMANS (CEPS & College of Europe) Bologna, Prometeia / GEI Conference : Ripensare la politica industriale oggi, XXIII Giornata Momigliano, 19 April 2013 Thinking ahead for Europe • Centre for European Policy Studies (CEPS) • www.ceps.eu

2. STRUCTURE • 1. Critical preliminaries of industrial policy • 2. Industrial policy: place & scope in the EU • 3. Europe is NOT a weak globaliser • 4. Recent I.P “vision” of the EU • 5. Telling Italians what Italians know better ? • 6. Conclusions

3. Critical preliminaries of I. P. • Loss of demand for industrial products dominates all other effects • Industrial policy debates often resemble a cosy Piazza in an Italian ‘paese’: chiacchiere and exchanging of small gifts • Healthy skepticism about industrial policy, useful when well-conceived

8. Demand loss in EU industry • Automotive (in crisis) some 20 % - plus of demand fall ; only Dacia grew since 2009 • and there was already overcapacity • Steel dropped dramatically : -34 % in 2007/9, a small upturn, and again – 5 % in 2012 • Chemicals, EU’s stronghold, also experienced some 25 % demand fall over the crisis • Overall, EU industry output -10% (2009/12) • NOTE : services barely suffered contraction

9. I. P. , barking up the wrong tree ? • huge demand loss cannot be compensated via public investments, exports • Still less, without a return of confidence / certainty • Aggravated by design failure of the SGP : SGP is basically sound, directed against a single eurozone country with a bubble or overspending publicly • But….SGP can become irrational and self-defeating, if collectively and simultaneously applied, and recession has already set in • No I.P. can ‘undo’ this ; I.P. should not sell illusions

10. Healthy skepticism vis a vis I. P. • IP is different things to different people • Demandeurs have [often, not always] problems originating elsewhere • Emphasis on existing firms – alas, the weak ones most – and not on new entrants, entrepreneurialism, ‘creative destruction’ • Most IP today no longer about distortive ‘interventionism’ ; still....always close

11. Interventionism never far away • Three examples • 1. Sarkozy (late Sept ‘08) made aggressive speech about French car industry, full of interventionism, protectionism and even an appeal on French investors to return to France from the Czech Republic ; EU shocked • But EU regime is effective: Memo of COM of 28 Febr 2009 leaves nothing of this speech, except minor items under EU programmes

12. Interventionism not far away (2) • 2. Current debates in “Brussels” on steel and aluminium ; proposal is “fitness checks” • widely read as attempt to relieve steel from EU REG with EU-wide benefits, despite cost burden on steel ; bitter fight inside COM; worse later in EP/Council • 3. undeniable, I.P. is very interventionist in China, to some extent in India and Brazil ; plus the rapid rise of export restrictions / taxes • Should the EU ‘countervail’ via trade policy ? Yes, and it is doing it (recent CSA case) + stepping up A.D. • Reciprocity public procurement with trade partners?

13. Industrial Policy : place & scope in EU • Industrial policy in EU severely constrained at both levels : EU and M.S. • For M.S., to pre-empt intra-EU barriers and distortions in the IM (incl. State aids) • For EU, because of ‘economic order’ provisions in Maastricht treaty (bad memories); later clauses on ‘competitiveness’; EU is ‘open economy’ (Maastricht) • Thus, EU I.P. shifted to horizontal & framework, and non-distortive sectoral; but… framework much improved and refined over time

14. Policies affecting EU industry Legend: EU EU powers Nat./ EU  shared powers, mainly national EU/Nat.  shared powers Nat (+EU)  national, & EU constraints or marg. inputs Nat. Member States' powers --EU little nat'l. leeway, strict EU constraints

15. (Wide concept of) industrial policy Legend: EU EU powers Nat./ EU  shared powers, mainly national EU/Nat.  shared powers Nat (+EU)  national, & EU constraints or marg. inputs Nat. Member States' powers --EU little nat'l. leeway, strict EU constraints

16. EU Public Corporate Environment

17. treaty objectives EMU Internal Market goods services capital persons agro + fisheries trade competition transport fiscal (e.g. VAT) risk regulation common policies customs union common policies free movement approximation free establishment mutual recognition INTERNAL MARKET REGIME

18. The Internal Market: interface with the EU Common policies competition policy (incl. state aids) agricultural & fisheries policy A Trade policy • econ freedoms • SHEC regulations • IPRs • Internal Market • investor protection • labour market reg. • public procurement A transport policy (6 modes) (incl. TENs) A A A-B environmental policy energy policy (incl. TENs) B C B Immigration policy (incl. asylum) regional policy & Cohesion C B Industrial policy EU Research area B = important for IM, yet, has other powerful drivers, too = critical for IM A = critical for IM, but partly not at EU level A-B C = (currently) of minor important for IM

19. EU is NOT a weak globaliser • It is correct to point at the rapid shift of economic power in the world • and that the EU ought to prepare • But wrong to say that the EU is under threat from ‘globalisation’, as if it ‘happens’ to us • The EU is the greatest globaliser, both East-West in the Union, and worldwide • in goods, services and FDI, less in technology

20. Source: UNCTAD (2013)

21. Source: UNCTAD (2013)

22. Source: UNCTAD (2013)

23. future EU prosperity at stake • EU share in world GDP falls rapidly (good sign) • Per capita income growth zero or weak ? • EU needs to remain attractive for FDI (BRICS) • EU firms need market access in services/infra • EU firms should lead global value chains ; yes, in specialty chemicals and automotive, not ICT • EU consistently underperforming in innovation • Young SMEs in EU fragile, “yollies” US >> EU

24. EU firms more in value-chains : foreign content of goods exports (%)

25. EU firms in value-chains: foreign content of services exports (%)

26. EU27 Innovation performance compared to main competitors Source: Innovation Union Scoreboard, 2013

27. Recent I.P. vision of the EU • EU’s new IP risks to be oversold • “Mission Growth, Europe at the lead of the New Industrial Revolution” is a curious combination of Jeremy Rifkin & Tajani wishes • whereas details on energy efficiency, KETs, clean vehicles, fitness tests, defence sectors make sense, • the overall ‘framing’ is not credible : GDP manufacturing share back from 16 % to 20 % ; pulling EU out of the crisis ; Single Market issues solely on goods, whereas services are THE issue ; few hard and convincing instruments outside the specific areas

28. I.P. as jack-of-all-trades ? • Classic framework and technology / standards support (for advanced manuf. technologies for ‘clean production’, bio-based goods, clean vehicles & vessels, smart grids) • Still, requires combined climate policy, energy strategy and industrial & R&D policy • ‘access to markets’ intra-EU = the I.M. (goods) • ‘access to markets’ extra-EU = EU trade policy • access to finance is partly EU budget + EIB, partly a consequence of the new I.M. for financial services • Single market for Venture Capital Funds = I.M. + tax

29. Telling Italians what Italians know better ? • In 2011, IMF paid special attention to Italy, if only because • (a) Italy had the worst 10-yrs growth performance in the EU (1999 – 2009) • (b) real per cap. income in 2009 was lower than in 1999 • Yet, some basic indicators are not so bad at all • Industrial policy not the first answer, is more complementary

30. Tellings Italians what … (2) • Did Italy have a lousy investment rate ? NO • between 1999 and 2010, Italy’s investment ( non-construction gross fixed capital formation) was (i) consistently higher than that of Germany, (ii) barely decreased between 1999 (9.6 %) to 2010 (8.8 %) ; overall investment remained at nearly 20 % for a decade (higher than Germany as well) • Economy-wide net capital stock increased by 19 % but real GDP (2009) only by 5 % ; inefficient ! • Interestingly, also human capital (tertiary educ.) improved markedly, and more so than.. in Germany

31. Telling Italians what … (3) • Italy needs deep reforms, in services and labour markets, a standard wisdom • But what do we observe? (see next slide) • OECD PMR indicators (on restrictiveness of market REG) have fallen, so has the EPL indicator • in 2008, same level as Germany

32. OECD Structural Reforms Indicators

33. Telling Italians what… (4) • Italians know (for a long time) that the country can (must) improve on governance • But indicators went clearly in the wrong direction • Governance indicators are a little ‘soft’ • Not easy to make them fully reliable, still… • Combined indicators (WGI, from World Bank, with thanks to my colleague Daniel Gros) show >>>> a significant decline between 1996 and 2010 >>>> now 2 standard deviations below euro average

34. Governance indicators: performance gap Italy versus core Euro area

35. Telling Italians what … (5) • always found it striking that Italy has remained unattractive for FDI for decades • If France has a reputation of being overregulated, lazy workers for only 35 hrs, etc., FDI was always flowing in ; not in Italy • Fortunately, this has improved somewhat recently ; but… via industrial policy? [doubt it] • I regard it as a critical test of making markets work better and fostering productivity in Italy

36. Source: Eurostat (2013)

37. Why is inward FDI key for Italy? • The influence of foreign affiliates on domestic competition, on the performance of local firms and on (productivity increasing) ‘market selection’ is usually beneficial everywhere, and would be even more effective in Italy (in the first decade or so) • High productivity of EU industry in other EU countries, is due, to a large extent, to inward FDI • productivity differentials between foreign affiliates and local comp[anies are striking

38. Main determinants of the magnitude of FDI Impact on local firms Source: European Competitiveness report, 2012

39. Share of value added of foreign affiliates in EU Industry (2011)

40. Labour productivity of foreign controlled and nationally controlled firms (‘000 EUR)

41. Telling Italians what… (6) • Research and innovation has always been a weak spot ; for future comparative advantage, it is indispensable to focus on this area • although in design and creativity, Italy is still a world leader • Italy’s innovation performance (24 indicators) is relatively low, with Spain and Portugal • requires a broad spectrum of improvements for catching up with EU average

42. EU Member States’ innovation Performance Source: Innovation Union Scorebaord (2013)

43. Country groups: Innovation performance per dimension Source: Innovation Union Scoreboard, 2013

45. Conclusions • EU Industrial Policy can have value-added where common action between M.S. is critical for new markets (e.g. standards, rules, subsidies) • for a productive interface between EU level and EU industrial sector (e.g. EU Automotive Plan 2020 ; H. L. G. on Business Services; chemicals in the past) • For pre-empting inconsistencies or neglect of industrial issues in other EU policies • And for EU innovation and technology promotion

46. Conclusions (2) • industrial policy cannot usefully be a jack-of-all-trades, get us out of the crisis, or raise industry share • The same would seem to apply to Italy • If ‘first-best’ appears so far way (in Italy ?), recourse to I. P. Is understandable but risks to ‘sell illusions’ • In today’s EU (and eurozone), market pressures count ; help them by making Italy attractive for FDI, by catching up in innovation efforts, by reforming services markets more than under the S.D. • Otherwise, Italy would be better off getting rescue funds, with an intrusive reform programme !