"Not all good things are compatible, still less all the ideals of mankind," wrote political theorist Isaiah Berlin. This used to be obvious to political economists: we have different ideals and different goals; there may be trade-offs between them, but not all can be pursued at the same time.
Someone in Brussels, however, seems to have solved this puzzle. Many have come to believe that European institutions can combine a leaner approach, a degree of simplification and deregulation, with a strong industrial policy and the ambition to steer private investment and activity toward Brussels. The Multiannual Financial Framework is the latest embodiment of this attitude.
The jewel in the crown is the new European Competitiveness Fund, conceived as a centrally managed European Union fund to channel investment into sectors deemed strategic for Europe's long-term competitiveness. However, this new instrument is unlikely to make a difference in narrowing the gap with the U.S. capacity to generate disruptive innovation.
This article is part of The Parliament's special policy report "Mapping the EU's long-term budget"
European insufficiency
That such a fund is needed, we are often told, is evident because the EU is lagging behind the U.S. and China in terms of innovation. Only four of the world's top 50 tech companies are European, while the overwhelming majority are American. And the EU's share of global tech revenues fell from about 22% to 18% over the past decade, while the U.S. share rose from roughly 30% to 38%.
As a result, between 2002 and 2023, the gap in gross domestic product between the U.S. and the EU widened from 17% to 30%. In purchasing power parity terms, U.S. GDP per capita rose from being 31% higher than that of the EU to 34% higher. Approximately 72% of this disparity can be explained by differences in productivity, while just 28% is because Americans work more.
Productivity gap
Hence, the EU has a productivity problem — as German Chancellor Friedrich Merz has acknowledged. But could the ECF be the solution?
The ECF will operate in a way similar to the Horizon Europe program: resources will be allocated mainly through centrally managed calls for proposals, run by the Commission or agencies of its choosing. Horizon procedures are considered competitive, even when compared with most large research funders worldwide. It can be regarded as one of the EU's most successful initiatives.
Still, advances in and for the market are a different matter. They are not targeted at research excellence as such, nor at some collective mission, but at people's demands — which businesses try to meet and anticipate.
It is hard to argue that U.S. tech giants emerged from government grants. They mostly started out in garages and were not assembled by top-notch scientists, but by fringe entrepreneurs. At its best, Silicon Valley was pure creative destruction.
Europe lacks that, especially the destructive part. To enable businesses to innovate, factors of production must be mobile and companies must be allowed to fail. This would require simplifying procedures and cutting red tape.
In many parts of Europe, the welfare state extends to companies as well, keeping factors of production tied to sectors long past their prime. State‑aid spending by member states has grown severalfold compared to the pre‑COVID period, with Germany and France particularly active.
Special aid to specific industries, including the Green Steel for Europe project or semiconductors, signals that governments want to direct and support certain ventures rather than set the market free.
It is difficult to see the ECF bringing about the emergence of new companies or a radical restructuring of old ones. That is something market forces, not public funding, can do.
While Brussels proclaims its commitment to lighter regulation, it is betting heavily on industrial policy. But if our productivity gap stems from having allowed less experimentation and entrepreneurship than the U.S., more EU money is unlikely to close it.
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