The future of Europe: what role for industrial policy?

The record since 1945 casts doubt on the notion that governments can identify winning technologies or create competitive advantage through direct intervention in industry

While governments have been preoccupied by the problems of the euro and the fragility of the banking system, another issue - the future of European industry – has also been moving up the policy agenda. There is a broad consensus that, with the accelerating shift of manufacturing to China and other emerging countries, Europe needs to strengthen its position in the high-technology, knowledge-intensive sectors that are less vulnerable to competition from low-wage suppliers. The big question is how the necessary changes in the continent's industrial structure can be brought about. Can the outcome be left to the market, or should governments intervene directly to modernise old industries and to create new ones? Some influential voices are arguing that an active industrial policy is essential, if Europe is to resist 'de-industrialisation'.

What sort of industrial policy would make sense in present circumstances? To answer this question, it is helpful to review past experience in this field and to see what lessons can be learnt. Since the Second World War, industrial policy in Europe has passed through two phases. The first, starting in the 1960s, saw a series of attempts by governments to create national champions in industries deemed essential to the health of the national economy. Among the favoured sectors were high-technology industries such as aerospace and computers; part of the motivation was to narrow the 'technology gap' between Europe and the United States. There was also a widely-held belief in scale as the key to international competitiveness.

With some exceptions, these interventions were unsuccessful. One example was the Plan Calcul, France's attempt to create a computer company capable of competing against IBM. A more egregious case was the United Kingdom government's decision to merge virtually all the British-owned car makers into a single company, British Leyland Motor Corporation. Within a few years, British Leyland was close to collapse and had to be rescued by the government. Policy-makers at that time tended to over-rate the costs of what they saw as market failures and to under-estimate those associated with government failure. This was especially true of the UK and France. West Germany largely eschewed interventionist policies during the 1950s and 1960s; the industries which were responsible for the German 'economic miracle', such as chemicals and machinery, did not depend on government support.

From the 1980s, with the UK under Margaret Thatcher setting the pace, there was a shift away from targeted intervention towards horizontal, non-selective policies aimed at improving the environment for all firms. The Thatcher government rejected the concept of national champions. Subsidised firms such as British Leyland were broken up and sold to foreign companies. Both at the national and at the European level - through the single market programme - more emphasis was placed on competition. The ability of governments to support their industries was curtailed and previously protected sectors such as telecommunications, and electricity, were partially liberalised.

The concept of industrial policy was not entirely abandoned during this period. Some people in Europe were impressed by the apparent success of the Japanese government in promoting industries such as computers and semiconductors. But the attractions of the Japanese model faded during the 1990s, as that country entered a period of economic stagnation. Attention switched to America, which from the mid-1990s experienced a surge in productivity growth - linked to the rapid development of the Internet and other advances in information technology. The reaction among European governments was to try to reshape their economies along US lines. The priority was to encourage the growth of entrepreneurial high-technology firms on the American pattern, to develop the venture capital industry and to make stock markets more accessible to younger companies.

Although the dot-com crash in 2000 and 2001 dispelled much of the hype associated with the 'new economy', Europe did move some way in an American direction during those years. But there was still a wide productivity gap with the US and in several high-technology sectors European firms were lagging behind their American counterparts. There was also growing concern about de-industrialisation, attributed in part to the shift of manufacturing to China and other emerging economies. The financial crisis of 2008-09 heightened these anxieties, causing governments not only to provide short-term help to hard-hit sectors such as the car manufacturers, but also to consider how best to enhance the competitiveness of their industries – especially high-technology industries – in the longer term. Some influential voices have been calling for a return to sector-specific industrial policy.

But how would the sectors be chosen and how would governments avoid the mistakes of the past? The record since 1945 casts doubt on the notion that governments can identify winning technologies or create competitive advantage through direct intervention in industry. The most promising way forward is not to return to the era of national or European champions, but to persist with horizontal policies that promote competition, encourage innovation and facilitate industrial change.

Geoffrey Owen is senior fellow at the London School of Economics, in the United Kingdom. This article is based on his paper Industrial policy in Europe since the second world war: what has been learnt? for the European Centre for International Political Economy think-tank