At a crossroads: where next for Europe?
By Laurie Macfarlane | Twitter: @L__Macfarlane
When Ursula von der Leyen replaces Jean-Claude Juncker as the President of the European Commission later this year, she will face no shortage of challenges.
Donald Trump’s trade war, Brexit, economic stagnation, environmental breakdown, inequality and an ageing population will all loom large in the in-tray of Europe’s new leader.
Overcoming such challenges will require an ambitious policy agenda, and a bold willingness to depart from the status quo.
With politics becoming increasingly fraught across Europe, what might such an agenda look like?
Owning the future: a new ‘European Future Fund’
Last week the Financial Times reported that the EU is considering plans to launch a €100bn sovereign wealth fund to nurture European industrial champions and “compete with US corporate giants such as Apple and Google and China’s Alibaba”.
According to the plans, a new ‘European Future Fund’ would be financed by member states and tasked with “buying up long-term shareholdings in EU-based corporates in strategically important sectors” and “building and strengthening the innovation leaders of the future”.
IIPP has long advocated the need for new public sources of patient strategic finance in Europe and beyond. Work in this area has included advising the Scottish Government on the establishment of the new Scottish National Investment Bank, and addressing leaders of Europe’s six largest public investment banks at the headquarters of the European Investment Bank.
Together Europe’s public investment banks represent a combined balance sheet of over €2 trillion — a significant amount of financial firepower if deployed strategically. It has also been reported that von der Leyen wants to turn a part of the European Investment Bank into “Europe’s climate bank”. So what additional value might a sovereign wealth fund provide?
The idea of sovereign wealth funds, which are also sometimes referred to “social wealth funds” or “citizen’s wealth funds”, is not new. In 1964 the Nobel prize winning economist James Meade argued that the state should own a significant share of a society’s productive assets, using the return on the assets to promote a more equal distribution of income.
Many countries around the world — including Singapore, Norway, Australia, China and many Gulf states — have established such funds, building up significant investment portfolios over time. However, typically these funds have relatively conservative investment strategies aimed at maximising financial returns for the state, rather than supporting a strategic industrial policy. They also often lack transparency.
But there are a number of reasons why a new European fund, structured and governed effectively, could be a valuable addition to Europe’s institutional landscape.
Firstly, the fund could provide a valuable source of patient, strategic capital that is all too scarce in Europe. Private venture capital, where it exists, is often too short-termist and exit-driven. In contrast, a public fund can invest with a view to the long-term, taking account of wider strategic priorities.
Purchasing long-term equity stakes is also an effective way of ensuring that the public sector is rewarded for its contribution to wealth creation. Many of the products and services we enjoy today were supported by some form of public funding, and have also benefitted from the commons of knowledge built up over centuries. But under the guise of shareholder primary, the rewards of wealth creation have been increasingly captured by private owners. Wealth creation is a collective process, therefore shouldn’t society also be able to share in the financial rewards?
In this way, the fund could also help to tackle inequality. In the last three decades inequality in Europe has been driven by two key trends: a growing share of national income accruing to capital and land at the expense of labour, and an increasing concentration of ownership. By increasing the level of social ownership of the productive base of the economy, and reducing the concentration of wealth and capital, a sovereign wealth fund would provide a powerful means to rebalance wealth and power — providing a powerful accompaniment to Europe’s welfare states.
Finally, the fund could provide an effective lever for promoting structural change in the economy. By taking long-term equity stakes in strategic firms and sectors, the fund could use its influence to promote desirable practice, such as reducing carbon footprints, implementing better employment conditions and investing heavily in research and development. Conditions could also be attached to investments regarding the price, design or property rights over products that emanate from the fund’s support — which could be particularly powerful in areas like the pharmaceutical sector.
While debates about the ownership of enterprise are not new, the challenges of the twenty-first century also provide an opportunity for fresh thinking about what assets should be included in such a fund, and how rewards should be distributed. For example: if we are to come close to averting environmental breakdown, it is clear that we must urgently transform the stewardship of our natural resources. And if data is the ‘new oil’, then who owns our data has huge implications for the future of the distribution of wealth and power.
This gives rise to a series of interesting questions: could the new fund be a repository for data, natural resources and other non-financial assets? And could the dividends be used to fund a pan-European basic income?
Rewriting the rules of the single market
In recent decades, policymaking has been dominated by the idea that goods and services are most efficiently produced by private firms operating in a competitive market, and that the state should only intervene in markets to ‘level the playing field’ or to correct certain identifiable ‘market failures’. These principles underpin modern competition policy, including in the European Union.
But at a time when governments around the world are facing major social and environmental challenges, simply trying to ‘level the playing field’ will only lock us into our current trajectories. If we are to overcome the key challenges of the twenty-first century, we need to abandon the myth of the level playing field and instead ‘tilt’ the playing field towards an ambitious set of collective goals: transitioning to an environmentally sustainable economy, eradicating poverty, reducing inequality, improving health and education outcomes, etc.
IIPP’s ‘mission-oriented’ approach to industrial policy involves strategic thinking about the desired direction of travel, the kind of technologies and industrial landscapes needed to get there, and the policy frameworks required to make it happen. The Institute’s missions framework has been adopted by European Commission to steer its forthcoming programme of funding for research and innovation. What is needed now is alignment across different areas of EU policy to support a bold, mission-oriented approach.
While the criticisms levelled by some critics about the constraints of the EU single market are often overblown, it is true that the present approaches to competition policy and state aid may limit the scope for effective industrial polices. It is not a coincidence that most of Europe’s remaining industrial giants were established before the formation of the single market — and few have been created since. As Tom Enders, the former chief executive of Airbus, recently acknowledged: European industrial giants like Airbus could never have come into being under the EU’s modern competition rules.
But there are signs that European leaders are starting to shift on this too. In February, the economy ministers of France and Germany published a joint policy manifesto for a European industrial policy that is “fit for the 21st century”. The paper states that the EU’s competition rules “need to be revised to be able to adequately take into account industrial policy considerations in order to enable European companies to successfully compete on the world stage.” It also calls for reforms to EU state aid rules, including “potential involvement of public actors in specific sectors at particular points in time to ensure their long term successful development.”
France and Germany are not alone in questioning the economic orthodoxies of the past few decades. In a remarkable editorial, the Financial Times recently declared that “markets do not allocate capital to the most productive places”, and called on countries to “drop concerns around state planning” to enable a “transition to a worker-led economy”.
The times, as they say, are a changin’.
Public budgeting for public purpose
Perhaps the most challenging area of reform relates to the EU’s fiscal rules. Under the Stability and Growth Pact, each member state’s budget deficit is not supposed exceed 3% of GDP, and the national debt is not allowed to surpass 60% of GDP.
It is clear that these rules are not fit for purpose. By undermining public investment and promoting counterproductive austerity, they have held back economic growth and caused unnecessary human suffering.
If Europe is to flourish in the twenty-first century, a new approach to fiscal policy is needed. As my colleague Josh Ryan-Collins has noted: “government spending should be seen as a strategic policy tool to support a healthy society and economy rather than a finite resource that may one day run dry.” Public spending should be guided by public purpose, not arbitrary fiscal targets.
This week the Financial Times reported that EU officials are discussing “substantial simplification” of the rules, noting that the present rules have led to “imprudent fiscal positions” and “procyclical fiscal policies” that impose overly restrictive limits on struggling governments.
This is a positive sign. But as well as relaxing fiscal rules, EU leaders should also consider how fiscal policy (government taxation and spending) can be more strategically aligned industrial policy (where the money will be spent) and monetary policy (how the money is created). This could include a repurposing of the European Central Bank’s quantitative easing programme to support social and environmental priorities.
***
None of the above ideas are official policy, and at this stage many of them are little more than hearsay. But Europe is at a crossroads: with reactionary populism on the rise across the continent, our new leaders must be willing to abandon failed economic orthodoxies, and embrace bold new thinking. The future of the continent is at stake.
Laurie Macfarlane is a Research Fellow at IIPP, and leads IIPP’s work on new forms of public finance, focusing on the role of state investment banks.
Sign up to the UCL Institute for Innovation and Public Purpose’s mailing list to hear about our latest research, news and events. You can also follow us on Twitter: @IIPP_UCL.
