Emmanuel Macron is playing the emperor again. Last week he proudly announced a grand new strategy, but without any indication of how to pay for it. The French President said that ‘“Made in Europe” should be our motto,’ and urged Europeans to ‘take back control of our supply chains, energy and innovation’.
Macron’s call for Europe’s reindustrialisation reflects a new transatlantic consensus. The age of ‘globalisation’ and ‘neoliberalism’ is over. We were too naive about our trading partners during the 1990s and the 2000s, and we now need to build up national resilience. Heavy-handed industrial policy and protectionism are making a comeback in the United States and Europe alike.
But the western world rejected those policies in the 1980s and the 1990s for a good reason: they kept down economic growth. In the developing world too, a strategy of industrialisation of ‘import substitution’ – i.e. building national champions to manufacture at home what could otherwise be imported – proved uniformly disastrous.
There may be reasonable arguments for various industrial policies, based on national security or on the imperative to accelerate the green transition. However, western leaders should be honest about their economic costs. They must think hard about where the growth, needed to sustain these new costly economic policies, is going to come from.
Macron’s own track record on the economy shouldn’t give citizens much confidence. He says he wants to improve Europe’s ‘competitiveness, greater integration and the deepening of the EU single market’. Yet, he has little to show for his six years in office, either at home or at the European level, where the single market in services remains non-existent, in part due to France’s long-held suspicion of genuine market competition. National governments often take matters into their own hands with little regard for the finer points of EU law.
In France itself, real incomes have barely gone up under Macron’s watch, and total factor productivity has been essentially flat. The problem is shared by Europe’s other major economy: Germany. Following the complacency and stasis of the Merkel era, the German economy does not exactly offer a picture of breath-taking dynamism. With its reliance on cheap energy and ties to China, it might be hit especially hard by measures aiming at European ‘economic sovereignty’.
In key EU countries, public debt is at historic highs – close to 100 per cent of GDP in France and over 130 per cent in Italy. Who exactly is going to pay for the new subsidies? Leaders such as Macron would like to see the EU’s budget expand, financed by a common European debt instrument and new European taxes. But in a world of high interest rates, piling European debt on top of unprecedented national burdens is hardly sound policy.
Those who want to bring manufacturing home, accelerate decarbonisation, or ‘de-risk’ Europe’s economic relations with China must articulate what supply-side reforms at home can make these new ambitions possible. Lower taxes on income and investment? More housing? More immigration and freer labour markets? Cheap and abundant energy? Deeper market integration within the EU? Ambitious trade deals with like-minded partners? There is a dearth of such proposals.
There is no question that the world has changed from the optimism of the early 2000s. However, that is no excuse for blindly accepting the new ambitious policies of reindustrialisation. They may or may not be justified on their merits but they are certainly not costless. Unless they are accompanied by serious reforms to raise the long-term growth rates of western economies, they are bound to fail.
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