Dear readers, despite our commitment, Eutopia Magazine is forced to suspend its publications due to a lack of funds. Our adventure comes to an end for the moment but we hope Eutopia’s journey will resume soon. All our articles will still be available for reading. Thank you for having supported Eutopia until now.

This website uses third-party analytics cookies to collect aggregate information on the number of users and how they visit this site. If you need more information please click here. By closing this banner or accessing any of the underlying content you are expressing your consent to the use of cookies.

EU (skewed) competitiveness
A different analysis
- Languages: it

When the global financial crisis hit in 2007, European countries were struck by it in different ways and to different degrees. Those that had failed to invest, for decades, in key areas that increase economic growth – such as human capital formation, adaptation to new technologies, and Research and Development (R&D) – experienced the hardest knock. And as the financial crisis has become a full-blown economic crisis, it is these countries that are experiencing the worst sovereign debt crisis. The hardest hit countries in the eurozone, those which Goldman Sachs has infamously called the PIIGS (Portugal, Italy, Ireland, Greece and Spain), stand out clearly as the lowest investors in R&D – widely recognised by both macro and micro-economists as being important to economic growth. 


Indeed, one of the biggest myths propagated during the ‘eurozone crisis’ has been that the ‘periphery’ countries such as Greece and Italy, have been too ‘profligate’, while the more responsible ‘core’ has known when and how to ‘tighten its belt’. Figures suggest the opposite: the periphery did not spend enough on key expensive areas, like R&D, that cause growth.


The emphasis on ‘profligacy’ ignores the fact that in many of the weakest countries deficits had indeed been low. Italy’s deficit, for example, had until 2007 been a modest 4%. Yet because its growth rate was so much lower than the interest it paid on its debt, Italy’s debt/GDP ratio climbed to rates as high as 105% in 2007, and then to 120% in 2011. And the great mission of today’s painful austerity programme in Italy is simply to bring this figure back to what it was in 2007, when things were hardly good. Worldwide austerity is in fact proving self-defeating in trying to get debt/GDP levels down, since austerity is hurting both consumer demand (due to falling wages and the crippling cost of public services), and eroding the confidence of businesses to invest.


This is deepening recessions, and thus hurting the denominator: GDP growth. Different governments are also embarking on ‘structural’ reforms, aimed at loosening rigidities in the labour market, battling corruption and nepotism, and increasing transparency, important to the ‘ease of doing business’ indicators. So the big question is: will the different types of ‘structural reforms’ and spending cuts induce growth in the periphery, the PIIGS? My answer is that, without investment in key areas, NO they won’t. Austerity will be pain with no gain, and structural reforms won’t be enough. Indeed, when Italy ‘liberalised’ Telecom Italia in the early 1990s, the first thing Telecom Italia did was cut its R&D.


This will very likely be the fate of Italy’s leading microelectronics company Finmeccanica, unless the upcoming liberalisation is accompanied by an investment strategy. This is currently absent. And since many of the structural reforms are also implying cuts to public services and public sector wages, hitting the weakest elements of society the most, it is likely that many such reforms will also hurt demand and the social fabric of countries – hurting their ability to get out of the current rut and at the same time making them less resilient to future crises, and with protests in the streets on the rise for the foreseeable future. 


Indeed, many attribute Germany’s ‘surplus’ status to the ‘Schroder’ reforms in Germany, which saw productivity increasing much faster than wages. And thus the immediate recipe for the ‘deficit’ countries has been to ask them to do the same. Cut wages, especially in the ‘profligate’ public sector, free up labour markets from ‘rigidities’, ‘liberalise’ markets in areas as different as pharmacies, taxis and energy supply, and this will cause growth. 


These recipes ignore the fact that there is no country that has ever grown without major investments in key areas, such as education, research and human capital formation. These investments, along with institutional ‘systems’ of innovation which promote horizontal linkages between areas like science and industry, are core to a country’s competitiveness. Indeed, Germany, one of the winners in Europe, with a high R&D spend, has recently been directing this spend on the ‘green growth’ challenge and has over decades build a variety of institutions which support patient finance, growth and innovation. This, not low wages, is the reason its companies, like Siemens, win procurement contracts all over Europe, such as the recent procurement to build ‘fast, green’ trains for the UK’s Thames Valley service.


Successful German firms are the product of a variety of factors such as A – the KfW State investment bank, which provides ‘patient ’ finance to innovative firms whose lead times in investments cannot perform over the short 3-5 year period which impatient banks and venture capital want, and B – the well-funded Fraunhofer institutes that support science-industry links in a systematic and coherent way. It is such investments and institutions that are lacking in Italy and Greece, not lower wages. Indeed, in Italy, a school teacher earns €1200 per month. If education is important for growth, is this figure too much or too little? 


As I argue in the book The Entrepreneurial State, the Silicon Valley miracle that so many European countries aspire to, is a result of heavy, yet decentralised, state-led investments. Without them, the most innovative US companies like Apple and Google would not be what they are. Indeed, most revolutionary elements behind the iPhone (Siri, GPS, internet, touchscreen display) owe their funding to public investments. If Europe is to get off the ground again, it needs to create a common vision around innovation-led growth, understand the role of both public and private sector actors and investments, and set up the institutional frameworks which allow dynamic links between the two. 


The irony of the ‘fiscal compact’ is that it has very little ‘fiscal’ in it in terms of actual (fiscal) spending. It is in the end about cuts and some reforms. We need a similar change to that which occurred with the Maastricht Treaty, which was initially only about ‘stability’, and later (in 1997), with pressure from the French Prime Minister Jospin, re-named to a treaty for stability and growth. But even there the growth component remained idiosyncratic, with the growth vision not embodied in the details of the treaties. We need to rename the fiscal compact a growth compact and make sure that it is well represented in the remedies (and conditions for bailouts and loans) that are being given to countries. If not, when the next crisis comes (and these do inescapably occur every 10-15 years), EU countries will again be hit in very different ways and degrees, causing a new round of scepticism, lack of solidarity, austerity, and lack of confidence in the European project. 


So if structural reforms without investment do not lead to growth (and vice versa), the question facing Europe is where the funds will come from in a period in which the economic crisis has drained government budgets dry. The answer must of course be partly from private EU firms themselves. Many firms in Europe spend too little on innovation (BERD, business level R&D): Fiat is one of Italy’s problems and must become one of its solutions. It must invest more in innovation, whether this is in the search for new engines (part of China’s new industrial policy) or other types of energy saving innovations.


The answer must also be at the national level, with investment in areas that cause growth not burdening debt figures: European wide agreements should cause spending on areas like R&D to be counted as capital expenditures not spending. Education, research and human capital formation must be priorities for national budgets: without these, European countries will be forced to compete with low wage nations, which the EU cannot and should not do. And we must also consider how to steer investments productively at the European level, using specific European instruments. 


A key player at the European level must of course be the European Investment Bank (EIB). When the financial crisis hit, the European Investment Bank (EIB) played a critical role in sustaining counter-cyclical investments to promote growth and employment in Europe. EIB loans were expanded from €47.8 billion in 2007 to €57.6 billion in 2008 to €79.1 billion in 2009 – a 65% increase from the pre-crisis level. However, later, mainly due to worries about the bank's AAA credit rating, as well as a lack of consensus between EU countries on how active the EIB should be, the investments fell to €72 billion in 2010, €61billion in 2011, and €52 billion in 2012. This reduction was a mistake because the crisis was far from over. Indeed, after the bank was recapitalized in 2012, investments in 2013 rose to €75 billion in 2013. If the EIB is to play an active role today, it must be further recapitalized, using unused structural funds, as well as co-financing of EIB bonds with European Central Bank (ECB) bonds. And most crucially, total annual investments should, until the crisis is really over, rise above what they were in 2009.  But this requires the EIB to be viewed as an important instrument to get productive investment happening in the periphery countries.


Of course such investments must also be managed properly on the ground. National ministries and national firms receiving the loans must be governed in ways that meet common European standards. It is these types of standards and ‘conditions’ that should govern both the bailouts and loans, not fiscal compact conditions based on austerity, which cause only a vicious cycle of no growth->bailout->austerity conditions->no growth->bailout. And perhaps the biggest danger: the loss of solidarity across Europe, fuelling conservative forces, and more fear.


In this sense, the fear in Germany is that that allowing the ECB to be a lender of last resort will create a permanent siphon from Germany’s Treasury to the PIIGS and become a self-fulfilling prophecy: by not getting the institutional set-up right, by not allowing productive investments to happen (e.g. creating more synergy between the ECB and EIB), growth will not occur, so bailouts will indeed need to occur continuously. A waste for all. Especially for the EU citizens involved – lost investment, lost growth, lost opportunities, especially but not only for the young and the most vulnerable. 


Furthermore, we must have a new vision for what national governments can do. We currently have a vicious circle  whereby the more we attack the governments of the weakest EU nations for their corruption, bureaucracy and inertia, the harder it is to reform them. Who would want to go work for a public organisation that is depicted in this way? We must develop a new vision for the public sector, make it not only support innovation but also be innovative from within. This also means not outsourcing all areas that require expertise but developing it internally. It is this that makes it exciting to work in an organisation, and which will allow it to attract talented minds.  


In sum, I believe Europe would be well served by reforming its post-crisis agenda in the following ways: 


TAXATION DOES NOT DRIVE GROWTH. It is often assumed that firms are ready and willing to invest, and all that needs doing is to take away ‘impediments’ whether these be tax or red tape. This assumption is held both on the right and the left, as is clearly seen today in Italy with even the PD (Democratic Party) focusing on so much tax policy. The reality is that investments that lead to long-run growth (‘smart’ investments) are not driven by the ‘bottom line’ but by the perception of future technological and market opportunities. And as these are highly correlated with direct (often public) investments in difficult new areas, it is naïve to think that reducing tax will spur investment, unless these are also accompanied by strategic mission-oriented investments in such new high risk areas. When corporate taxation falls (whether directly or through tax incentives), without such investments, all that is affected are government tax revenues, which then have to be ‘balanced’ by cutting exactly those investment that are needed to create those opportunities. 


INVEST: We must find ways to allow the weakest countries in Europe to make the necessary productive investments in those factors that cause growth. Public spending on such investments should not increase debt figures. These investments, especially those on innovation, should be recognised in terms of capital expenditure, distinguished from simple ‘spending’. EIB loans should go to ‘viable’ projects and be managed locally by people with technological and financial expertise in the relevant sector. The EIB should be recapitalised with unused structural funds as well as through contributions from member states, which do not have to be very large since private sector co-financing can lead to a very large multiplier effect. 


FINANCE QUALITY NOT QUANTITY: It is often assumed that there is a finance gap, a credit crunch. Actually, there is plenty of finance, just not enough long-term committed finance. Indeed, across the world the countries that today are leading in terms of smart innovation-led growth are those that have public financial institutions tha are providing such long-term finance: Germany’s KfW, and China’s Development Bank (CDB). Bloomberg New Energy Finance data shows that such development banks are the key investors in the global clean tech landscape. Italy’s Cassa Depositi e Prestiti (CDP) should step up to the game and fund long-term ‘smart’ innovation investments in capital intensive high risk areas, where the private sector is too fearful to tread. This will of course entail some failures, but precisely because it is a bank, it can retain equity and fund the downside with the upside. Italy must not fear failure, as trial and error is a natural attribute of innovation. But a key requirement is the ability to attract the kind of expertise in such a public bank which has made KfW, BNDES  and CDB investments both strategic and often profitable. Yet the constant State bashing that is now fashionable makes it difficult to attract top minds into public agencies. 

GOVERNANCE AND CONDITIONALITY: Instead of only complaining about governance problems in the periphery (e.g. Italy’s corruption and ‘red tape’), Europe must think of concrete ways to develop strategic, well funded, and well governed public institutions, within countries, that can guide an EU-wide growth strategy.  The development of talent, meritocracy, and viable strategies should be the focus of EU monitoring. Many continue to think that this is impossible, as though it were in the DNA of public administrations in some counties not to work. This is false. Indeed, it should be easier to structure (in some cases impose) technocratic expertise within these  core agencies to steer productive investments than to impose them at the presidential level (which is more controversial and has indeed been done overnight). In the end it is these agencies and institutions that will make the difference. Throwing money at them without reforming them will not work. And starving them will also not work. While the bailouts have been associated with austerity driven ‘conditions’, we should begin to consider ‘conditions’ linked to the investments and governance of these investment agencies, institutions, and structures.  


Growth in Italy and in the rest of Europe will only occur once we have a new way to consider the public dimension of the public-private partnerships that today are more necessary than ever to guide growth that will be ‘smart’ (innovation led), inclusive and sustainable. I hope this book will help lead the way. 



Questa è l'introduzione al libro di Mariana Mazzucato: Lo stato innovatore (2014, Laterza). Edizione inglese: The Entrepreneurial State. (2013, Anthem Press)



Further readings:


Mazzucato, M. and Shipman, A. (2014), “Accounting for productive investment and value creationIndustrial and Corporate Change. (January 14, 2014) 23:1: 1-27


Lazonick, W. and Mazzucato, M. (2013) “Apple's Changing Business Model: What Should the World's Richest Company Do with All Those Profits?Accounting Forum. 37 (2013): 249-267.


Mazzucato, M. (2013), “Finance, innovation and growth: finance for creative destruction vs. destructive creation” in special issue of Industrial and Corporate Change, M. Mazzucato (ed.), 22:4: 869-901