The transform! and Rosa Luxemburg Foundation's Workshop* gathered experts from all over Europe to discuss a progressive investment policy that would contribute to reindustrialisation, higher employment, as well as decreasing inequalities.
After welcoming speeches by Roland Kulke from the Rosa Luxemburg Foundation (Brussels office) and Maxime Benatouil of transform! europe, a possible alternative industrial policy and state intervention in the economy were discussed. The second day of the Workshop was devoted to the EU periphery and its need for a productive transformation (which is not covered by this Summary) and the EU's investment problem seen from the point of view of the financial sector.
Summary of the study by Pianta, M., M. Lucchese and L. Nascia (2016), “Industrial Policy in Europe: What room for manoeuvre does the current legal framework within the EU offer for a progressive industrial policy?“
The problem in the EU’s industrial structure is that the divergence in manufacturing production has lead to the emergence of a “German production core” as a key development in Europe. At the same time, international production systems are moving towards a more hierarchical and concentrated structure, while countries from the “periphery” now have very few leading firms in global markets, and experience a continuing loss of ownership of major firms to foreign investors. Current changes in Europe’s industrial structure open up a growing divide between a relatively strong “centre” and a “periphery” where a large share of industrial capacity is being lost. This leads to deepening imbalances within the EU (and within individual countries) in terms of knowledge base, investment, trade, employment and incomes. At this juncture, Europe is likely to develop a more polarized industrial structure; “weak” countries, regions, industries and firms are becoming weaker; the “center” may be negatively affected by lower economic activities (Pianta et al., 2016: 6-7, 15).
Furthermore, the current institutional setting of the EU is hardly adequate and effective action is prevented by a range of rules, including the rules on competition and state aid; the reliance on markets for the allocation of productive resources; the restrictions for the use of Structural funds activities (Pianta et al., 2016: 3). Structural Funds are the strictly “horizontal” policy tools devoted to create more favourable conditions for the growth of private firms in less favoured areas. However, direct support to firms and public investment in production is not allowed by the Structural Funds rules and the result is that since the crisis regional disparities have increased all over Europe (Pianta et al., 2016: 11). The overall impact of Structural Funds as a tool for supporting economic convergence among EU regions is disappointing. First, “horizontal” action on local framework conditions is incapable of setting in motion a process of development. Second, there is a continuing confusion between decisions powers at the EU, national and regional levels. Third, in many countries cohesion funds have either not been fully used, or have been characterized by excessive bureaucratic burden and sometimes corruption (Pianta et al., 2016: 25). EU policy has continued to disregard the seriousness of industrial decline and continues to rely on a policy frame wherein priority is given to market liberalization. As a consequence, there is a limited policy space for building industrial capacity. Even after the dramatic effects of the crisis, “horizontal” actions remain the main forms of “allowed” public intervention (Pianta et al., 2016: 40).
In this context, a more geographical distribution of economic activities is required by basic principles of social justice and solidarity, by the need to grant equal opportunities for employment and progress and, by definition, by the principle of environmental conditions within the EU (Pianta et al., 2016: 14). In addition, a Europe-wide industrial policy should be funded by Europe-wide funds, with a major role for the European Central Bank (ECB). Practical action could start within the role of the European Investment Bank (EIB). But public Investment would be needed in the medium term. European industrial policy should be implemented at the national and regional levels, with bottom-up efforts and systematic democratic processes. For industrial policy to be successful, reinventing the governance of public-interest economic activities and organizing a political and social consensus on rebuilding European economies is needed (Pianta et al., 2016: 4).
Finally, a fundamental objective of the industrial policy is the reduction of the divergence in economic activities among European countries and regions that brings with it the danger of a disintegration of Europe (Pianta et al., 2016: 42). A progressive European industrial policy would introduce a major change of direction in the process of European integration. In the last three decades, neoliberal views on the ability of markets to operate efficiently and regulate themselves have dominated the agenda. The crisis showed that finance and markets do fail. The goal is to develop new economic activities that are socially desirable, environmentally sustainable and economically efficient, by filling the investment gaps left by the operation of markets and these activities should be located in the poorer countries and regions, so that the current divergence within EU can be reversed. The industrial policy of the EU should provide funds for a variety of policy tools: public investment, public enterprises, procurement programmes, mission-orientated innovation programmes, etc. Investments plans that expand the quantity and quality of employment, raise wages, reduce inequality and make Europe’s development more sustainable could encourage a change of views among European citizens, workers, trade unions and civil society organizations (Pianta et al., 2016: 47-48).
Summary of Matteo Gaddi's presentation “Public Tools of Intervention in the Economy: Public Ownership, Concept of “In HouseProviding”, Sectorial Public Investments“
Matteo Gaddi of Punto Rosso took the example of the Services of General Interest (SGI), i.e. their subset Services of General Economic Interest (SGEI) to explain how the member states of the EU can influence them. “SGI are services that public authorities of the Member States classify as being of general interest and, therefore, subject to specific public service obligations (PSO). The term covers both economic activities (...) and non-economic services. The latter are not subject to specific EU legislation and are not covered by the internal market and competition rules of the Treaty” (EC, 2011: 3). “SGEI are economic activities which deliver outcomes in the overall public good that would not be supplied (or would be supplied under different conditions in terms of quality, safety, affordability, equal treatment or universal access) by the market without public intervention” (EC, 2011: 3). Hence, he asserted that the member states themselves are in charge of them. Furthermore, the Treaty on the Functioning of the European Union (TFEU) gives significant leeway to the member states when it comes to rules guiding the operation of SGEIs. It namely prescribes that “[u]ndertakings entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly shall be subject to the rules contained in the Treaties, in particular to the rules on competition, in so far as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them“ (EU, 2012, Article 106).
In this framework, Gaddi insists, public financing is possible. It could be done via either the state aid approach or the compensation approach. He presented the case of Italy’s Cassa Depositi e Prestiti as an institution unbounded by Maastricht criteria since it acts on the market. It is de facto a National Development Bank that can, either directly or indirectly, finance industry and therefore be an important tool of industrial policy. If Italy invested into water distribution, local public transportation, waste disposal, gas distribution, electricity distribution and telecommunications over the next maximum 30 years it could create over 180 thousand jobs per year in the following sectors: water collection, tretment and supply (E36), manufacture of motor vehicles (C29), waste collection, treatment and disposal (E37-39), electricity, gas, steam supply (D) and telecommunications (J61).
Summary of John Grahl’s presentation “The real existing EU and the challenge of a left investment policy”
John Grahl from EuroMemo Group notices worrying tendencies in the eurozone concerning concentrations of fixed investments and gross expenditures on research and development in “core” countries, whereas “peripheral” countries lose competitive edge.
In terms of financial sector there are constraints, while bank lending to firms stagnates and biggest companies hoard money. However, the EU’s financial policy has focused on capital markets union that tries to emulate the US model while disregarding the importance of macroeconomic and innovation policy. In John Grahl’s opinion the European Commission has two important financing mechanisms – Horizon 2020 and European Structural and Investment Funds. Nevertheless, they are not big enough to stimulate investment in a significant way, and they concetrate too much on raising competitiveness alone.
Summary of Dominique Plihon’s presentation “The investment problem in the EU - what alternative to oppose to the Capital Market Union?”
Dominique Plihon from University Paris XIII and Attac asks how the investment problem in the EU is (not) being solved, since investment level currently is well below the level reached before the Great Recession that began in 2008.
Not only in economic theory, but also in the EU policy making, one could notice differing views on the financial system favouring either bank-based or market-based finance. What we have in Europe today is a hybrid financial system, with universal banks that have to a great extent relied on market-based banking, partially via shadow banking.
For the past 4 years, European Commission has proposed different and partially conflicting ideas. The EU has come up with the Capital Markets Union (CMU) for the purpose of advancing non-bank lending, with several priorities: promote securitisation, give greater role to institutional investors, develop alternative financing techniques and deregulate financial markets. However, as Plihon claims, the plan to further CMU involves some serious flaws. Contrary to intentions of boosting SMEs and infrastructure financing, the CMU, as it is conceived currently, cannot do the job. Instead, he claims, for SMEs and other firms, banking that creates long-term relationship is more imporant than market-based financing. Not even the time frame of the CMU is consistent with anti-crisis policies currently needed.
Moreover, he offers five alternative proposals that would help the real economy: 1) policy makers should value fiscal policy more than they do the current financial reforms and quantitative easing; 2) securitisation should be limited in scope and scale; 3) structural reform of the banking sector is needed; 4) relationship banking (“boring banks”) should be promoted; 5) public investment banks should be developed.
Summary of Peter Wahl’s presentation “The casino in limbo – the EU financial sector under conditions of QE and zero interest rates”
Peter Wahl of Weltwirtschaft Ökologie & Entwicklung e.V. argues that the conditions in financial markets have fundamentally changed, as we have reached limits to current monetary policies of quantitative easing.
Financial system has demonstrated unorthodox tendencies for several decades now (with ever rising share of private financial assets in GDP) which have only been exacerbated since the onset of the financial crisis in 2007/2008. We have witnessed higher capital market volatility than it was the case before, with inflation rates in the euro zone only closely above zero or even negative (deflation). With banks of some eurozone countries having a significant burden of non-performing loans and with macroeconomic and other risks facing these countries outlook for financial stability has worsened.
In such financial environment, monetary policy of quantitative easing has reached its limits. It has had some positive effects (to creditworthiness, lowering of capital costs and of non-performing loans, servicing of debts) and negative ones (e.g. to decreasing profitability and increasing propensity to take risks). However, whereas the European Central Bank has pursued quantitative easing, the European Commission has not done enough to counter these trends, and has even pushed for the interests of the financial industry. Potential for a new crisis has risen, while the macroeconomic situation is worse than in 2008.
Summary of Stefanie Schulte’s presentation “SME financing in the EU - the Potentials of Cooperative Banks”
In Stefanie Schulte’s opinion, expectations of the capital markets’ union for SME financing have been exaggerated. SMEs namely prefer bank financing even in the market-based system such as that of the US, and securitisation on the basis of SMEs’ loans is far from being crucial for the capital market, in particular after the financial crisis struck in 2008.
Stefanie Schulte makes a case for small banks, since they are especially important for SMEs, as opposed to big banks. Out of those, cooperative banks (in Germany) and community banks (in the US) have market shares in lending in their respective markets far greater than percentage of total assets they have. Cooperative banks have many advantages as they promote economic democracy and are focused on regional clients. However, they are under pressure from big banks and an unfriendly regulatory environment that would need to change if we are to see greater role of cooperative banks in the near future.
Paris, 6-7 June 2016
*This Report is based on a draft version of a Report on “Industrial Policy in Europe: What room for manoeuvre does the current legal framework within the EUoffer for a progressive industrial policy?“ by Pianta, M., M. Lucchese and L. Nascia (2016) (summarised by Aimilia Koukouma), notes from the Workshop, each author’s presentation as well as on other documents, where indicated, respectively.
European Commission (EC) (2011), Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: A Quality Framework for Services of General Interest in Europe”, available at http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52011DC0900&from=EN.
European Union (EU) (2012), Consolidated Version of the Treaty on the Functioning of the European Union, Official Journal of the European Union, available at http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:12012E/TXT&from=EN.
Gaddi, M. (2016), “Public Tools of Intervention in the Economy: Public Ownership, Concept of 'In House Providing', Sectorial Public Investments“, presentation at the Workshop (mimeo).
Grahl, J. (2016), “The real existing EU and the challenge of a left investment policy”, presentation at the Workshop (mimeo).
Pianta, M., M. Lucchese, and L. Nascia (2016), “Industrial Policy in Europe: What room for manoeuvre does the current legal framework within the EU offer for a progressive industrial policy?”, Brussels: Rosa Luxemburg Stiftung (mimeo).
Plihon, D.(2016), “The investment problem in the EU - what alternative to oppose to the Capital Market Union?”, presentation at the Workshop (mimeo).
Schulte, S. (2016), “SME financing in the EU - the Potentials of Cooperative Banks”, presentation at the Workshop (mimeo).
Wahl, P. (2016), “The casino in limbo – the EU financial sector under conditions of QE and zero interest rates”, presentation at the Workshop (mimeo).