Harry Geels: Inefficient European industrial policy looms large again

June 18, 2024

_{This column was originally written in Dutch. This is an English translation.}

By Harry Geels

Following Emmanuel Macron, Mario Draghi recently called for higher import tariffs, more subsidies, and the formation of larger companies. In other words, a new call for Homeland Economics. However, Draghi's plans are counterproductive for three reasons.

Mario Draghi's speech upon receiving the Carlos V Award at the Monastery of Yuste in Spain last week focused on the importance of unity and solidarity in Europe. He emphasized the need for European countries to work together to tackle common challenges, as well as the need to impose import tariffs and engage in industrial policy. Draghi sounded a lot like Macron, who previously called for Make Europe Great Again in the Financial Times.

Draghi's words fit into a broader social trend that has mainly emerged since Donald Trump took office with his 'Make America Great Again' and that was reinforced by the corona crisis, which was characterized by supply problems. The Economist compiled an extensive dossier on this in October last year, entitled 'Homeland Economics' and with the main question: 'Are free markets a thing of the past?' Conclusion of the English business magazine: Homeland Economics – economic retreat to one's own region – is not a good one case.

Let's take three key elements from the speeches of Macron and Draghi (and many other EU officials) by the horns.

1) Higher import tariffs? These put upward pressure on inflation.

Recently, Chinese electric car manufacturers were confronted with significantly higher import tariffs due to concerns about unfair competition. That raised the question what exactly is meant by unfair competition. In addition, higher import tariffs (to protect their own industry) cost European consumers money, and therefore reduce welfare and make reducing CO₂ emissions more difficult. Milton Friedman explains this here in one minute.

2) More subsidies? These lead to less efficient markets and unwanted wealth transfers.

The call for subsidies to companies to make them stronger than large companies elsewhere, or to develop industries that are still underrepresented, raises two concerns. Firstly, those industries apparently cannot become big on their own. Is that due to a lack of good people? Or because of too much regulation? Secondly, that we use taxpayers' money. Friedman breaks down the argument for subsidies in four minutes. Subsidies can also become a 'subsidy rat race' to the bottom for the providing countries.

3) Larger companies? These undermine the benefits of the free market.

The call to form large, strong companies as forces against other large, strong companies is also problematic, especially if this is done with government help. This often results in a mixing of interests between the government and the business community. In addition, the political-philosophical dilemma of oligopolies (and monopolies) arises, one of the most important complications being the decrease in the power of the consumer and the ordinary employee. Here Friedman explains the essential difference between free enterprises, big business, and big government.

Look at the failed policy against Russia

The underlying idea behind the calls for a more centralist European industrial policy is the great danger from outside: the US, China, Russia. That policy is counterproductive. Look, for example, at the sanctions against Russia. First of all, these have led to much higher energy prices. Russia and Western entrepreneurs circumvent the trade ban (via third countries). And Russia has even become more resilient by seeking other paths. The euro has also become an increasingly weak reserve currency.

Solutions: keep talking and combat 'unfair' practices

To reach a solution, we must continue to negotiate, with two principles in mind: peace and prosperity, without power games that serve the interests of influential companies. If clearly measurable unfair trading practices are still identified, import sanctions may be resorted to, such as the European import levy on CO₂ (CBAM), or the banning of products and services from companies from outside the EU that are improperly supported by local governments.

Finally, the best answer: a dynamic economy, consisting of 'free enterprises' that are active in efficiently functioning financial and real markets and European companies that bring prosperity to all citizens in the world.

This article contains a personal opinion from Harry Geels

More columns by Harry Geels