Fearing Populism, France and Germany Flee Into the Past

After promising to embrace free-market economics, the two biggest nations in the European Union, France and Germany, are both seeking to flee into their pasts. Together they are touting an industrial policy intended to create continental champions to compete with China and the United States, and, they hope, assuage the angry populists who have come to define the political debate in Europe.

But a major battle is brewing, because the bureaucrats in Brussels are pushing back. They want to double down on the deregulation agenda they’ve pursued for nearly three decades, seeing more, not less, competition as the key to innovation and being able to compete in the new economy.

The fight could take on a new complexion next month, when European Parliament elections are expected to bring a surge of support for Euroskeptic parties. That will determine the composition of the next European Commission, which is ultimately tasked with drafting an industrial strategy. And one of the EU’s biggest free-market advocates, the United Kingdom, may or may not be around; either way, northwestern and Nordic European countries will have to find new help pushing back against the Franco-German proposal. At the least, the next European Commission will find itself in the middle of an even more heated battle between the Franco-German push, populist calls for a less interventionist EU, and China’s efforts to peel away eastern countries that are needier when it comes to investment and infrastructure.

What is happening in France and Germany—the governmental re-embrace of scaled-back competition rules, more state aid and state-directed investments, and, above all, champions like Airbus that can compete globally—reflects the spreading doubts about capitalism in many Western economies, including the United States.

And for French President Emmanuel Macron—one of the last liberal voices for more European integration—the move may be evidence of a kind of desperation. Macron, who is well down in the polls, is seeking nothing less than a new raison d’être for Europe, as well as his own political future.

The European Union began as a peace project in the decades after World War II, then became a single market and growth project by the end of the century, before getting bushwhacked by the global financial crisis a decade ago. It’s still off balance.

“After the crisis, the driver of growth has been damaged. So, looking around for a new reason for the EU, Macron hit upon a ‘Europe that protects,’” said Oscar Guinea, a senior economist at the European Centre for International Political Economy.

Europe, like the United States and China, is struggling for the best way to come to grips with the realities of a new economic landscape. Rapid technological change is redrawing the corporate world, creating entirely new industries and rendering old ones obsolete. Meanwhile, the rules that regulated international trade during decades of growth are under increasing strain as countries such as China distort competition with hefty state subsidies while taking advantage of other countries’ open markets.

China, after a brief nod toward more market-friendly economic policies, has under President Xi Jinping redoubled the role of massive state firms and a state-driven economic blueprint to dominate crucial sectors such as artificial intelligence, robotics, and communications. The United States has taken a surprising turn toward statist economic policies, embraced protectionism, and is flirting with a national industrial policy of its own for some key sectors like electric cars or fifth-generation telecommunications.

As a result, two of Europe’s biggest economies—and the political axis at the heart of European integration—are essentially saying: If you can’t beat them, join them. Earlier this year, the two countries unveiled a joint manifesto promising an “European industrial policy fit for the 21st century.”

“The world economy is more brutal, and the unexpected is happening at a stunning pace,” said French Economy and Finance Minister Bruno Le Maire in a speech earlier this month. “If Europe wants to remain in the technological and industrial race—in other words, if Europe wants to remain economically and politically significant in the world of tomorrow—we must have a new industrial policy.”

Peter Altmaier, the German minister for the economy and energy, told other European ministers last month point-blank that “it is time to develop a new industrial policy in the EU. This includes a revision of European competition law.”

The Franco-German plan boils down to a three-part program: Massively increased state and private investment in targeted sectors, as China does; an easing of restrictive European competition rules to make it easier to form giant companies with more access to state aid; and an uptick in economic protection against countries that don’t play by the rules. In speeches, French and German officials highlight both Chinese and U.S. state subsidies that drive innovation and give their firms a competitive edge over European concerns.

“When some countries heavily subsidize their own companies, how can companies operating mainly in Europe compete fairly?” argues the joint manifesto. Like St. Augustine’s “chastity—but not yet,” the Franco-German proposal eventually aims at a free and unfettered world of economic competition, just not right now.

“Of course, we must continue to argue for a fairer and more effective global level playing field, but in the meantime, we need to ensure our companies can actually grow and compete.”

The immediate impetus for the proposal, which has provoked a rebuke from top European Union officials, especially Competition Commissioner Margrethe Vestager, was her decision in February to block the proposed merger of France’s Alstom and Germany’s Siemens, which would have created a global giant in the railroad industry that Paris and Berlin thought would be better positioned to compete with huge Chinese firms.

Le Maire zeroed in on the railroad sector and the blocked merger in his April speech calling for a reform in Europe’s economic policies.

“Fifteen years ago, the major companies were North American and European. In less than two decades, a Chinese public company that did not even exist has become the world No. 1 and won most major public procurement tenders throughout the world in the past few months,” he said. “Meanwhile, Europe has blocked the merger between Alstom and Siemens and prevented the creation of a leading European rail champion.”

At heart, though, in yearning for a strong industrial policy, both France and Germany are essentially restoring their factory settings. Centuries ago, decades of top-down economic intervention by Jean-Baptiste Colbert, the finance minister to Louis XIV, created the modern French economy. More recently, Charles de Gaulle’s drive to create national industrial champions defined much of postwar French development. Prussia and later Germany used the state to shape industrial policy in everything from railroads to steel to the country’s current sweeping energy transformation.

For France, the push for a new European industrial policy is about more than jobs or growth—it’s about finding a lasting antidote to the extremist political challenge that threatens the whole European project.

Macron’s ally, Le Maire, certainly got the memo about “protecting” Europe.

“So, yes, we must protect, protect our fellow citizens, protect our borders, protect our technologies, protect our investments, because it’s what China does, it’s what the United States does, and if we do not understand that protection is the first request of our fellow countrymen,” the finance minister said in a recent speech, “we will see rising, cresting like an irresistible wave, extremists and populists in Europe.”

Many economists, like the European Union, are less than thrilled with the Franco-German push. State-led industrial policy has been tried for years in Europe, with mixed results, including lower growth and higher unemployment than in the United States. The European Union since the 1990s has gradually sought to tweak the continent’s DNA and make it a more open, competitive, and innovative market. That has involved deregulation and an aggressive competition policy meant to forestall the creation of market-dominating giants.

“The norm before was that competition was good,” said Guinea, who wrote a recent paper arguing just that. “And now there’s paradigm shift toward, competition is not so good, and we can be more interventionist and have an active state policy to achieve our goals. It’s not the right example to copy.”

The EU competition head, Vestager, has taken the Franco-German proposal head on in speeches and debates, in addition to blocking the high-profile rail merger and explaining why.

“A company is not going to be competitive abroad if it does not have any competition at home,” Vestager said while blocking the merger. “Unchallenged companies are not likely to be innovative, flexible, or efficient also in the global marketplace.” At other times she has stressed the role that competition-driven innovation—not sheer size—plays in promoting strong global companies, especially for technology and digital firms.

On one thing, Vestager and the Franco-German pair do seem to see eye to eye: the benefits of relaxing state aid rules for more European government investment in key technology sectors such as microelectronics. France, Germany, Italy, and the U.K. launched a four-country, five-year project last year. France and Germany want to do the same thing right now for electric car batteries, and they later hope to expand more state investment to sectors including low-carbon energy and health care.

If that sounds a little bit like Beijing’s Made in China 2025 strategy to stake out the dominant position in emerging technologies, or the newly floated American idea to build a national supply chain for electric car components, that’s because it is.

“China and the U.S. have no qualms about state aid to finance disruptive innovation,” Le Maire said. “Europe must also be able to provide such public financial support.”