Industrial and Investment Policy – What a Well-Structured Package Can Achieve

Written by | Tuesday, February 3rd, 2015

Matthias Kollatz-Ahnen and Udo Bullmann (Foundation for European Progressive Studies)

Recent years have shown that the policy of austerity cuts and belt-tightening measures is not as effective as was first envisaged. To lift the EU economy from the crisis, it is necessary to re-industrialise it through well-structured financial investments aimed at supporting the real economy rather than the financial sector. Some of the proposals for re-industrialisation want to shape it as a small improvement of continued austerity policy. This paper aims to demonstrate that, in the best scenario, this view, which is dominant in Brussels, may only slow down the process of de-industrialisation and effectively lead to more economic stagnation.

The previous Commission defined the objective as that 20 percent of GDP in 2020 would be created by industrial production. In reality, during the year 2013, the industrial share in GDP fell from 15 percent to 14 percent at the EU level. Continuing the trend would imply that the industrial sector would produce 12 percent of GDP and not 20 percent by 2020. The problem is that the existing EU policies have both explicitly and implicitly favoured the transition from the industrial sector to the service sector, so with policies remaining basically unchanged, we cannot expect that the process of de-industrialisation would even be slowed down. The post-Maastricht EU made a mistake in taking low indebtedness of the national budgets as an indicator of the overall soundness of the economy. However, budget cuts do not automatically create growth, and growth does not automatically create more industrial production. This problem can only be resolved through an increase in direct financial investment into the real economy, particularly in the areas of infrastructure, housing, and modernising industrial capacities.

In case we decide to follow the less ambitious plans to boost industrial production to 20 percent by 2020, it will be necessary to boost industrial production and capacities by 40 percent until then. To approach this target, additional spending for research, development and innovation from public and private sources needs to be increased by about 1 percent of GDP annually. The current practice of supporting mainly the financial sector will not lead to a revival of industrial production. Moreover, investment itself does not come without obstacles. Commission President Juncker has proposed an additional investment package totalling €300 billion into infrastructure in transport, energy and broadband, education, investment and R&D, and projects to reduce youth unemployment beyond the Youth Guarantee. However, for example the Minister of Finance of Poland Mateusz Szczurek calculates that €700 billion will be necessary to avoid a ‘lost decade’. Ultimately, the authors of this study argue that this investment can be achieved with a minimum of additional budget expenditure.

The study can be downloaded here

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