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The European Commission’s Strange Plan for a Third Industrial Revolution

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At a panel talk in January on the fringe of this year’s World Economic Forum in Davos, Switzerland, Christophe de Margerie, CEO of Total, a French multinational oil and gas company, had raised an unusual idea. “Don’t take it as being provocative,” he said. “I think Europe should be reclassified as an emerging country.”

He might have denied it, but there’s no doubt the suggestion would raise eyebrows. Every schoolchild knows Europe is made up of “developed” countries that rely on postindustrial economies where services create more wealth than the industrial sector. Emerging countries, on the other hand, rely heavily on industry and manufacturing.

But de Margerie’s suggestion was more than a surprising opener for the panel discussion in Davos. Six months later, it’s a serious proposal from the European Commission on how the continent’s economic future should be shaped.

Antonio Tajani, the European Commission vice president responsible for industry and entrepreneurship, has developed a plan envisaging that by 2020 the European Union’s industrial sector will account for 20 percent of the EU’s gross domestic product. In other words, industry in the EU will grow by 5 percent in less than six years, after a steady decline of 1 percent a year for the past 10 years. What’s disturbing is that most economists think the plan is as far-fetched as it sounds. With prices of industrial goods falling across the continent and virtually all indicators not showing an industrial surge, the EU’s new policy proposal is a head-scratcher.

The plan developed by Tajani is set out in an ambitiously titled memorandum: “Mission Growth: Europe at the Lead of the New Industrial Revolution.” A European Commission communication, “For a European Industrial Renaissance,” published Jan. 22, urges member states to “recognise the central importance of industry for creating jobs and sustainable growth,” and puts just below $200 billion on the table for the cause

For those pushing the manufacturing plan, at stake is no less than the recovery of the EU, still much more fragile and lethargic than authorities would like it to be. “It’s true that the tail risks have disappeared, and that’s a value in itself,” said Axel W. Weber, former president of the Deutsche Bundesbank, at the World Economic Forum. “However, even if you take out the extreme negative tails, the distribution of risk in Europe is barely above zero, and it’s uncomfortably still screwed … skewed on the downside,” he added, quickly correcting himself.

According to Tajani’s memorandum, the economic crisis has underlined the importance of the “real economy” and a strong industry. It says that both are needed more than ever in the EU to “underpin the recovery of economic growth and jobs and it needs to reindustrialise for the 21st century.” Still faced with problems related to booming energy prices, draining investment, scarce resources, fading competitiveness, a weakening internal market and vertiginous unemployment, the EU has concluded that Europe must become an industrial powerhouse once again.

“We have to ensure we remain as competitive on the global scale as we once were,” European Commissioner Algirdas Šemeta said. “[And we cannot] make a living out of services only—industrial activity is crucial.” He acknowledged the plan is “ambitious.”

But the first reaction of top economists asked to rate Tajani’s idea was disbelief. Adam Posen, president of the Peterson Institute for International Economics and a former member of the Bank of England’s monetary policy committee, laughed at the idea that Europe could rely on a new industrial boom. “I am not aware of any evidence of that,” he said in Davos. And he was not the only one.

“Per se, industrial activity is not bad,” said Peter Lacy, Accenture’s managing director of strategy and sustainability services for the Asia-Pacific region, at Davos. “It is the nature of the activity we need to care about.” He added, “We would need to be extremely careful that our industrial base is properly geared up in the areas we are able to differentiate and create products with the highest rate of value-added [ratios].”

But, after five years of crisis, Europe’s industrial base is far from being properly geared up. Former major industrial sites, such as steelworks in Belgium and France, have been closed, with their production moved to lower-cost nonmember countries. These closures have seen the loss of not only many workers in the sector but also all their know-how, and it is not an easy thing to regain in the time frame given.

Behind the optimistic readings that have industrial production finally ascending from its current lows of 15 percent of GDP, we see that only the production of intermediate and nondurable consumer goods has floated slightly above zero in the past few months. Not only do these two categories have incredibly low value-added ratios, but they originate from EU countries characterized by weak innovation and low knowledge-transfer capacity, also known as the catching-up group. Hardly the best basis for a new industrial revolution.

Most serious, the prices of industrial goods have fallen in nearly all categories, and the services sector is set to contribute an increasingly larger share to the region’s gradual return to health, thanks to strengthening domestic demand.

Across the EU as a whole, countries are now less attractive for investment: Only six member states made it into the top 20 in the World Bank’s “Doing Business” rankingin 2013, down from eight in 2008, and only two now enjoy a spot in the top 10. In the light of such indicators, the re-industrialization plan looks at best unrealistic.

“There’s no reason why the manufacturing sector shouldn’t recover,” said Posen. “But no one should be fantasizing that we’ll be back to Sheffield and Newcastle being the engines of the world.”

There are reasons to worry that the plan is not just unrealistic but fundamentally wrongheaded. Throughout Tajani’s document, “competitiveness” is often used interchangeably with “productivity.” Historically, the competitiveness of a country has increased as a result of rising productivity (and intensified usage of capital goods), but it has also meant that industry’s share shrank. This relative decline, resulting from rates of productivity in manufacturing growing by more than the economy itself, thus reflected the real strength of industry.

“A strategy to reverse this trend and move to an industrial share of above 20 percent might therefore risk undermining the original strength of industry—higher productivity growth,” Guntram Wolff, director of the think tank Bruegel, said at the launch of Bruegel’s report “Manufacturing Europe’s Future.”

In other words, an increased share for industry may end up lowering the rates of productivity and competitiveness rather than the opposite, damaging growth rates in the EU as a whole and deepening the majority of structural problems instead of solving them.

It is possible $200 billion devoted to investments in innovation, research and development could make a difference and overcome these inauspicious conditions, assuming a targeted action plan exists. Providing that these developments were in high-end industry, the competitiveness of the entire EU might recover.

But the problem with the commission’s strategy is that there isn’t really one. The authors, having acknowledged the problems mentioned above and having “recognised the need” to concentrate on the areas with high value-added ratios (varying from high fashion to space infrastructure)—and after using the word “competitiveness” 74 times in the document’s 23 pages—do not provide tangible solutions for how to achieve their aspiration.

The EU is not the only world power dreaming of the third industrial revolution. Actually, it already lags behind. Several countries, including the United States, have already launched programs targeting manufacturing as an engine for growth. But the difference is that the U.S. government has actually taken strategically plausible steps (such as making gas and energy in the States three times as cheap as in the EU, driving investment decisions accordingly), while the EU doesn’t seem to have thought about it all.

In the wake of the financial crisis, the EU has created dozens of different (and even contradictory) strategies that will all end by 2020, and many of them (surprisingly) include target rates equal to 20 percent. There’s an unsettling impression that the numbers are being set arbitrarily, more by symmetry than economics. And without concrete proposals for how to achieve them, these numbers result in piles of communications picking one sector over another, instead of offering clear-cut, fine-tuned action plans.

Everything that grows changes structure. So does the world and the priorities of the EU, and few would dispute that the time to revise the new sick man’s treatment has come. But with many experts skeptical of the commission’s new industrial dream, we might rightly ask what the EU is exactly up to at the moment. As Enda Kenny, Ireland’s prime minister, said at Davos, “We can’t afford for the European Union to mess around for 20 years.”

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