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Europe’s old-fashioned new industrial policy

Published in Newsroom Pro (Wellington), 19 February 2019

If success is the ability to go from failure to failure without losing enthusiasm, then German economics minister Peter Altmaier is on a winning streak.

Just as Airbus was about to announce the end of its A380 production, Altmaier presented his vision for Germany’s future industrial policy. It is, believe it or not, modelled on Airbus.

Germany’s new ‘National Industry Strategy 2030’ shows where Germany and the rest of Europe are heading. They are not quite on the road to serfdom, but certainly on a path towards a planned economy – and no past planning failure is likely to stop them.

Altmaier is not your run-of-the-mill minister. Regarded as Chancellor Angela Merkel’s closest ally and advisor, he is a heavyweight in German politics. When Altmaier offers a radical redefinition of strategic economic policy, it is worth paying attention.

In his foreword to the strategy document, Altmaier reveals his ambition “to develop for the first time a comprehensive and fundamental national and European industrial strategy.” After a few lines of lip-service to the market economy, he explains that his national strategy was about defining in which cases government should act “to avert damage to the economy and the country as a whole.”

The short document is essentially a 20-page manual for an active, winner-picking government. Or, as Altmaier puts it:

“In some cases, we see that the sum of our companies’ management decisions is not sufficient to counteract global power and wealth shifts. Each company only considers its own success, not that of the country. In these cases, and only in these cases, an activating, supporting and protective industrial policy is justified. If market forces within a country cannot maintain the country’s ability to innovate and compete, then this is the responsibility of the state.”

If this already sounds like a passage from the rulebooks of communist regimes, wait, there is more. The document sets targets for the share of industry in gross valued-added for Germany (25 percent) and the EU (20 percent). The old Soviet bloc only worked on five-year plans. Altmaier apparently has an 11-year equivalent.

But hang on, it is not just enough for the German economics minister to issue general targets. He also deems it necessary to name companies that are too important to fail.

“Champions like Siemens, Thyssen-Krupp, our car manufacturers or Deutsche Bank have existed for 100 years and longer,” he writes. “The long-term success and survival of such companies is in the national political and economic interest because they contribute substantially to value creation and are in many cases responsible for the excellent worldwide reputation of German business and industry.”

Managers at Siemens, Thyssen-Krupp, BMW and Deutsche Bank can thus relax. Their companies now carry the label “too important to fail”. As if the global financial crisis had not demonstrated how foolhardy it is to give guarantees to private companies, Altmaier is doing just that. Except this time, he also includes companies from beyond the finance sector.

Which brings us to Airbus. It is the company most singled out for praise in Altmaier’s document. The trans-European, taxpayer-subsidised aircraft manufacturer is designated a “success story” that fulfilled a strategic function.

More than that, Altmaier wants to repeat the Airbus model for the industries he deems strategic for Europe’s future: “In questions of utmost importance such as the platform economy, artificial intelligence and autonomous driving, a direct engagement of the state – just as it happened with Airbus – appears necessary and justified (AI Airbus).”

There we have it: Where other countries have private companies developing new technologies, the German government sees the need for a state-run entity.

So let’s look at how well that worked out for Airbus.

There is no doubt Airbus produces highly sophisticated planes. Its range of aircraft are state-of-the-art, modern and competitive. However, Airbus would not have got where it is without European taxpayer support. This support is a source of constant dispute with the World Trade Organization.

European governments have subsidised Airbus’ research and development activities for decades. The same governments have also determined which aircraft got designed.

The prime example of this unfortunate link between Airbus and governments is the A380. When it was developed, it was supposed to be the pinnacle of the Airbus story. For politicians, it meant prestige and jobs. Except, from a business perspective, it went horribly wrong.

The A380 was a project to show that Europe’s aircraft manufacturer could beat its US arch rival Boeing at building large aircraft. Unfortunately, it came at a time when the airline industry was demanding smaller and more flexible long-haul jets. Boeing’s 747 was already coming to the end of its life-cycle when the A380 entered the scene.

The result is the just announced discontinuation of the A380 project. It leaves European taxpayers with billions of losses since Airbus will no longer repay the subsidies it received to develop the A380 model. By all accounts, it is a debacle for both Airbus and European industrial policy (never mind that the A380 is a wonder of modern engineering).

From this wreckage of the A380 rises another opportunity to question whether politicians are qualified to make decisions on industrial structures. Instead, an undeterred German economics minister has declared Airbus to be his model for future industrial policy.

It all recalls a quote from another famous German, 19th century philosopher Georg Wilhelm Friedrich Hegel: “We learn from history that we do not learn from history.”

If only Mr Altmaier knew what to learn.

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