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«Original citation: Owen, Geoffrey (2012) Industrial policy in Europe since the Second World War: what has been learnt? ECIPE Occasional paper, 1. ...»

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Part of the rationale for ESPRIT was the belief that collaborative research, bringing together companies, universities and research institutes across Europe, would improve the quantity and quality of European research and help European industry catch up with its Japanese and American competitors. “European policy makers had allowed themselves to become convinced that the Japanese had become so successful in microelectronics because the Ministry of International Trade and Industry (MITI) had engineered the coordination of government, industry and universities to be innovative in microelectronics. Indeed when ESPRIT was launched the Commission had grand ambitions to be the European MITI”.149 The immediate spur for ESPRIT, as it was for Alvey in the UK, was Japan’s Fifth Generation Computer programme, announced by MITI in 1981 and aimed at enabling Japanese computer manufacturers to overtake IBM in the next generation of computer technology.150 The contribution of collaborative research to Japanese competitiveness was almost certainly exaggerated151, but in the early 1980s Japan was riding high and Japanese electronics companies looked set to dominate the world market.

ESPRIT was followed by other collaborative programmes, including RACE (Research into Advanced Communications for Europe) and BRITE (Basic Research in Industrial Technologies for Europe152), and all these activities were brought together in what was called the Framework Programme. The first Framework Programme ran from 1984 to 1987, and it has continued to be the European Commission’s principal instrument for channelling funds into collaborative research.153 A further step towards cooperation came in 1985 when President Mitterrand of France proposed the creation of a European Research Coordinating Agency, later known as Eureka.

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The trigger was the announcement by President Reagan of the Strategic Defence Initiative, an ambitious plan to create a defensive shield against incoming missiles. While many in Europe doubted the technical feasibility of the so-called Star Wars programme, it was recognised that SDI would fund vast amounts of research in technologies that had commercial applications.154 Whatever the outcome of SDI in terms of defence, the programme was likely to strengthen America’s high-technology industries and make it even harder for European companies to catch up.

Eureka was a French initiative, and the initial reaction in the UK and Germany was sceptical. But industrialists in these countries recognised that Eureka, an inter-governmental programme outside the control of the European Commission, might have some advantages;

companies could decide whether or not to take part as they wished, and Eureka might usefully supplement national R & D programmes. Eureka projects would also be nearer the market than the pre-competitive research supported by the European Commission. By 1989 nearly 300 Eureka projects were under way, of which about a quarter related to information technology and another 20 per cent to biotechnology and medical technologies. Two of the biggest programmes were the HDTV scheme, designed to establish a European standard for high-definition broadcasting, and JESSI (Joint European Submicron Silicon Initiative) aimed at supporting the development of advanced semiconductors.

As these programmes were taking shape, another initiative, with greater importance for the future of Europe, was under way. Despite the lowering of tariffs that had followed the creation of the Common Market in 1958, there were still numerous non-tariff barriers that prevented companies from competing on a trans-European basis. The removal of these barriers, and the promotion of open competition in sectors which had previously been protected by governments, were seen as essential steps towards re-energising European industry. This was in line with the reforms that were being undertaken by the Thatcher government, and the UK provided much of the impetus that led to the Single European Act in 1986. That Act, the most important step towards European economic integration since the Treaty of Rome, has been described as “Mrs Thatcher’s baby”.155 It contained nearly 300 specific measures covering such areas as preferential public procurement and the provision of state aids, with the overriding objective of allowing markets to work more freely.

The architects of the Act believed that it would produce “a dramatically new environment” for consumers and producers alike.156 The gains would come in four main areas: reductions in costs thanks to economies of scale; improved efficiency within companies, with prices moving downward toward production costs under the pressure of more competition; the reallocation of resources among European countries in response to differences in comparative advantage; and more innovation, generated by the dynamics of the internal market.

These ambitions were only partially fulfilled. Competitive pressure certainly increased, and several companies sought to break out of what were no longer safe domestic havens by merging with or acquiring firms in other parts of Europe. Tighter rules on subsidies prevented governments from cosseting their national champions. In public utility industries such as telecommunications, the Commission forced governments to open up their markets to new entrants and to establish independent regulators charged with ensuring that the former incumbents did not abuse their market power; most European governments, following the lead set by the UK, privatised their telecommunications operators during the 1990s.





One of the biggest successes for the single market programme came in mobile telephony.

When mobile telephones were first introduced, using analogue technology, the European

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market was fragmented by incompatible national standards. For the next generation of telephones, based on digital technology, the European Commission secured the agreement of member states to establish a Europe-wide standard, known as GSM, which allowed network providers and manufacturers of equipment to compete on a European basis. “The GSM standard put in place a standard for a market – a market that was large enough for leading continental players to achieve the scale necessary to compete globally. Thus, public policy was not protectionism in disguise but rather ‘market-creating’ in the sense that it established a large enough single market to enable European (as it turned out the winners were Scandinavian, but this was not pre-ordained) to reach scale and be competitive in global markets”.157 The success of GSM showed that the creation of a barrier-free internal market could boost the competitiveness of European industry and provide consumers with better products and services.158 Yet the impact of the 1992 programme was not as extensive as its proponents had hoped.159 Although the number of cross-border mergers and acquisitions increased, the structure of European industry in the mid-1990s was not very different from what it had been ten years earlier. As a later study by the European Commission remarked, “in the wake of the Single European Market the extent of structural change appears to have been somewhat disappointingly slow”.160 There was disappointment, too, over the results of technological collaboration. Although the ESPRIT programmes continued to be supported by governments and companies, they were not translated into greater commercial success. This was also true of Eureka. The biggest of the Eureka programmes, which was also supported by the Commission, was the HDTV project. Pushed by TV set manufacturers such as Philips and Thomson, the plan was to establish a European standard (known as MAC) for satellite broadcasting and thus to prevent the imposition of a Japanese standard that would make existing TV sets obsolete. But the project was dogged by disagreements between broadcasters and TV set manufacturers. By the early 1990s the MAC standard was effectively made redundant by technological advances in the US, leading to the adoption of a fully digital broadcasting system.161 The JESSI semiconductor project, which ran from 1989 to 1996, was more successful, although two of the three principal participants, Siemens and Philips, later pulled out of the semiconductor business.162 Inter-company collaboration on the Japanese model, it seemed, whether in pre-competitive research or closer to the market, could not do much to upgrade Europe’s position in hightechnology industries. By the early 1990s targeted industrial policy of the sort that had been practised in Japan was out of fashion. In a paper published in 1992 the Commission set out an approach that was almost Thatcherite in tone. “In the 1970s industrial policy was characterised by a dirigiste and sectoral approach. Today it is recognised that public interventions in this area must take the form of horizontal activities to achieve the right climate and balance for maximising the productivity and competitiveness of European industry”.163 In this context the appropriate model was no longer Japan but the US. As noted in earlier sections, American leadership in the “new economy” prompted European governments to look for ways of reshaping their institutions along American lines. The aim of the Lisbon agenda, adopted by member states in 2000, was to make the European Union “the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion”. This was to be achieved by action on several fronts: boosting innovation and investment in R & D; faster structural reform by completing the internal market, especially in services; making the labour market more flexible, with the goal of achieving a 70 per cent employment rate (compared to the

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current figure of 63 per cent); and sound macroeconomic policies.

The success of the Lisbon programme hinged on the response from national governments, but the commitment of member states turned out to be less than wholehearted. In 2002 a high-level group of economists set up by the Commission and led by André Sapir reported that “substantive outcomes (from the Lisbon process) are so far meagre”. The main recommendation of the Sapir report was that that the European Union needed to go faster and further in liberalising the economy. “What is needed now is less vertically integrated firms, greater mobility within and across firms, more retraining, greater flexibility of labour markets, greater availability of external finance, especially equity finance, and higher investment in both R & D and higher education. In other words, what is required is a massive change in economic institutions and organisations, which has not yet occurred on a large scale in Europe.”164 A later review for the Commission, chaired by Wim Kok, concluded that the failure of Lisbon was due to an overloaded agenda, poor coordination, conflicting priorities and, above all, the lack of determined political action.165 Europe’s problem, according to the Kok report, was partly due to a slowdown in the rate of technological progress, especially in information and communications technologies; there was insufficient investment in R & D and “an indifferent capacity to transform research into marketable products and processes”. The Kok report was followed by a relaunch of the Lisbon strategy. The number of priority areas was reduced and the division of responsibilities between the Commission and national governments was made clearer.

Despite these changes there was little evidence in the years leading up to the financial crisis that the reforms set out in the Sapir and Kok reports were being carried through. In particular, the failure to implement the Commission’s services directive, which had been seen as a cornerstone of the Lisbon strategy, reflected the lukewarm attitude on the part of some member states towards genuine Europe-wide competition.

3.5. EUROPEAN INDUSTRY BEFORE THE FINANCIAL CRISIS

The shift away from government intervention in the 1980s and 1990s, together with the increase in competitive pressure arising from more open markets and more demanding investors, improved the efficiency of European industry and to some extent corrected the errors caused by ill-judged industrial policies in the 1960s and 1970s. But there were two grounds for concern. The first was the widening productivity gap between the US and Europe which had first become evident in the mid-1990s; after rising to 94 per cent of the US level in 1995, GDP per hour worked in Europe fell back to 85 per cent in 2003.166 The second was the accelerating transfer of manufacturing capacity, not just in labour-intensive sectors but also in electronics and other high-technology industries, to China and other emerging markets.

In Europe, as in other advanced countries, the decline of manufacturing as a proportion of GDP had been under way for some years, but the assumption had been that these countries would retain a sizeable manufacturing sector, concentrating on high-value-added, knowledge-intensive goods which China would be unable to match. With China investing heavily in research and moving up the value chain, that assumption was looking more questionable.

The two issues were related since Europe’s lag in productivity was partly due to its failure to keep pace with the US in the production and use of information technology, and that in turn was linked to Europe’s over-dependence on older industries. Europe’s industrial strucNo. 1/2012

ECIPE OCCASIONAL PAPER



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