Local Heroes Generous to a Fault

Europe and the U.S. have different approaches to protecting their economies – or at least they used to. Recently Germany and France have stopped supporting their industries. Free-market believers might applaud, but the new hands-off strategy carries risks.
Domestic businesses are being left to slug it out on the free market, without government support.

Germany, France, most of continental Europe for that matter, have never shied from intervening in the free market in the name of “industrial policy.’’ Think of Sanofi’s takeover of Aventis in France or Germany’s rescue of Philipp Holzmann, a big construction company. All these are examples of the power of the European state.

And increasingly, these examples of muscular European state action are becoming a thing of the past. Europe is simply ditching its proclivity to get involved in the messy, creatively destructive world of capital markets. The new motto: Caveat emptor – buyer beware.

Germany seems to have abandoned any desire to manage its private sector, a reflex that had guided the “Rhine School’’ of capitalism for most of the country’s post-war history. Take a look at Germany’s struggling retail branch.

There are basically two big department store chains, Karstadt and Kaufhof. Most experts in Germany and beyond agree that with the e-commerce and online shopping boom, there is hardly any space left for Karstadt and Kaufhof, especially next to the Amazons of this world.

The new owner of Karstadt, an Austrian investor named René Benko, is pursuing a merger with Kaufhof. While preliminary talks have been held, they have not led anywhere, partly because there is no advocate for this deal – at least not at the top political level in Germany.

For decades, German politicians orchestrated and shaped large swathes of industry in a consensual way by bringing together different stakeholders -- entrepreneurs, shareholders, worker representatives and trade unions.

That used to be different. For decades, German politicians orchestrated and shaped large swathes of industry in a consensual way by bringing together different stakeholders – entrepreneurs, shareholders, worker representatives and trade unions.

Germany’s coal industry was reshaped twice in this manner, once in 1969 by Karl Schiller, then economic minister, and then again in 2005 by Werner Müller, a former economics minister under Chancellor Gerhard Schröder.

During the second coal industry intervention, Mr. Müller was chief executive of RAG, a company made up of all Germany’s black coal activities that resulted from the industry’s reshuffling under Mr. Schiller.

The government in the late 1960s took a lead role in assembling aircraft and arms producers under the Airbus brand, which later gave birth to EADS, the European airplane and aerospace company.

In 2008, the German government was willing to rescue carmaker Adam Opel, a German subsidiary of General Motors and a big employer, in the aftermath of the financial crisis. In the last decade, the German government – even under a “pro-business’’ chancellor, Angela Merkel – helped the renewable energy and automotive industries with hidden short- and long-term subsidies.

But initiatives like these seem to have come to a standstill.

Not for want of trying though. Consider the isolated and somewhat ineffective calls to create a European data cloud service in the wake of NSA spying. Or note the calls, so far unsuccessful, to create an alternative to GPS, the U.S.-dominated Global Positioning Satellite system.

In France, the same picture is the same.

The country has a long tradition of even more direct, naked government interference in the internal affairs of its major companies, either to create so-called national champions or to at least make sure that firms behave in what is perceived to be the national interest.

And now? The French elite in the Élysée Palace have recently let General Electric – a symbol of American capitalism –take over Alstom, an industrial pearl of the Grande Nation.

Such a move would have been unthinkable even a few years ago.

In the eyes of free-market adherents, this laissez faire approach is a very good thing. For them, industrial policy is just another word for protectionism and a clear breach of economic faith in the western world. Not only that: They conceive it as counterproductive or even downright harmful to the economic development of an economy.

Well, they might be right, at least in theory – even though some researchers led by Harvard Professor Philippe Aghion have come to the conclusion that industrial policy can be quite helpful.

While ostensibly taboo, U.S. industrial policy is often set through broad industry standards, which ensure that the fundamental development of new and growing industries produce payoffs for domestic companies.

Europe has picked a bad time to abandon its long tradition of setting industrial policy through state intervention. The United States has no qualms about tilting the playing field to its advantage.

While ostensibly taboo, U.S. industrial policy is often set through broad industry standards, which ensure that the fundamental development of new and growing industries produce payoffs for domestic companies.

The dollar has been the world’s reserve currency for more than 50 years. Credit ratings, a key factor determining the cost at which companies can borrow money, are almost entirely determined by U.S.-based companies.

The ratings agencies set the rules as to how the solvency and financial standing of debtors and borrowers are measured. And they play a great role in the regulatory framework of financial legislation in the United States and elsewhere.

In addition, nearly all industrial standards in the tech industry, such as the global data encryption standard, have been developed by U.S. companies and implemented by the U.S. government, which at the same time restricts the export of certain software.

Europe, by being passive about its own industrial policy, risks falling behind the United States. The worrying question is why is this happening? Sadly, business does not appear to have a voice in German politics any more, let alone an advocate willing to act in its interests in Berlin.

Since the financial crisis in 2008, German politicians have learned that it is much easier to win applause from the electorate when they demonize banks, companies and their managers, instead of trying to reform and support them.

That´s deeply disturbing– and not healthy for any economy.

 

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