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European Interview n°5

A Growth Strategy for the European Union in the 21st Century, Interview with Jean-Paul Betbèze

A Growth Strategy for the European Union in the 21st Century, Interview with Jean-Paul Betbèze

As an introduction what do you think of the state of and perspectives for the French economy and that of Europe in the world?

The answer is very simple: at present we are witnessing an increasing polarisation of the world economy.

The overriding impression in France at the moment is that our economy is ailing. In reality the French economy cannot be separated from the European economy which is not doing so well whilst the world economy is in an excellent state of health. Average world growth has been close to 4% for several years now but this masks major disparity between various geographic zones: the USA have experienced an annual growth rate of around 4%, the major Asiatic powers (China and India) record growth levels higher or equal to this at 8% whilst the European average remains below 2%. We might make the observation that the paltry European growth rate would not even exist were it not for American and Asiatic growth since exports comprise the main driver of this. Without them European growth would be even lower.

This observation raises serious questions about the continuity of European industrial structures and as a result the economic viability of Europe over the next few decades. In effect within a world that is going global European companies are obliged to choose between the upkeep of a zone of low growth and their departure to, or at least their future investments in a zone of high growth. From this point of view company relocations towards the new Member States only represent the first stage before their final transfer out of Europe which is obviously inadequate due to the size of the market. However we must not forget that the relocation of major groups comprises a vital factor of development in itself. After all it is the location of the major groups which will define future growth.

What in your opinion are the reasons for this breakdown in European growth?

Should we blame the inadequacies of the Lisbon strategy?

Originally the concept of the Lisbon strategy was fundamentally just: the importance of technologies including that of knowledge. Unfortunately its application is the subject of purely governmental co-ordination whereby the real achievement of theoretical, planned objectives is left to the discretion and good will of the various Member States. Supporters of the Lisbon Strategy hope to achieve the respect of these objectives thanks to emulation and "peer pressure". But experience has shown that peer pressure is powerless in progressing objectives that are truly linked to the community. The European Union is therefore confronted by two weaknesses: the weakness of peer pressure to enable the achievement of the objectives set down in the Lisbon Strategy; and the weakness of this strategy itself in order for it alone to guarantee strong and continuous European growth.

European growth cannot just rely on a logic of agglomeration. However the logic of percentages and planned national objectives is a logic of separation. Europe must in effect be approached and evaluated as a whole and not State by State, emulation must be global and not individual. This is because true competition does not bring European States into conflict with each other but Europe as a whole against its American and Asiatic competitors. Europe must therefore move forwards united. To do this it must be given what the Lisbon Strategy did not plan for ie instruments for harmonisation and co-operation between States, possibly defined and applied by the European Union itself.

The Lisbon Strategy, which is vital but inadequate, must therefore be thought out again on a truly European basis. A healthy economy would notably not go hand in hand with an idiosyncratic approach and total autonomy on the part of national strategies. Europe's overall ability to master competition requires the creation of about ten major competitiveness axes Europe wide. This objective has no chance of becoming a reality if each European state tries to create its own axes and thereby exacerbates competition with its neighbours without anyone ever reaching critical size.

A European industrial policy will have to be even more voluntarist since the European workforce is and will remain for a long time to come less flexible than the American workforce. The creation of major European industrial zones will have to be undertaken by a series of unification measures "from the top". Linguistic unification appears inevitable in spite of the desire by some to protect their own particular linguistic features. The major European research institutes must be able to attract students from all European countries as well as students from other parts of the world. This is just one of the elements – but not the least important – of a true European strategy for growth.

Should we not admit the specific weaknesses of France in Europe?

As Schumpeter pointed out the overall economic growth of a country depends on its technological and organisational innovations, since both of these are often linked. In Europe, some States are more "Schumpeterian" than others. The UK's economic vigour is a result of a type of financial "Schumpeterianism"; Germany's is the result of a type of industrial "Schumpeterianism". In both cases the ability to innovate in a continuous manner and to offer new products of high technical value enables the embrace of new companies which in turn pull overall growth upwards. This technical innovative offer is part of a global production strategy. The major German groups have thus been able to combine their country's ability to innovate with the employment of a cheap labour force in the countries of Eastern and Central Europe. Many products labelled "made in Germany" are mostly manufactured in Hungary and Poland but the assembly and final finish are undertaken in Germany enabling them to be "certified" German. The accumulation of these advantages means that Germany and its products' added value tend to increase. This factor enables German exports to resist foreign competition, notably the Chinese, victoriously.

In France, the added value of exports has tended to decrease. The fiscal environment can explain this phenomenon to a great degree. The creation of the ISF (tax on wealth) has had catastrophic effects on SME's. Together with the growth differentials seen worldwide this factor certainly influenced and continues to influence companies' development strategy negatively.

In comparison with the UK and Germany in reality France suffers from a lack of strategic analysis. The Germans theorised for a long time on the Standort Deutschland principle, "the German site" enhancing know-how "made in Germany". The English have deliberately opted for a strategy of offering financial services. Everyone in Europe must discover its poles or pole of specialisation and make them grow together with their partners. However this growth strategy has to be accepted by the political decision makers in spite of changes in government.

How should we really plan for the creation of these specialist axes in Europe?

The driving force of the large companies

The large companies represent the only critical mass around which research and innovation centres and know-how concentrate, and these alone can guarantee long term growth in the economy of knowledge. The big companies also know how to attract the SME's and are able to give them support and help them prosper.

Today two thirds of national wealth is produced by services and our progress comes from the combination of industrial production and services of high added value. These businesses – and the large groups – that Europe must preserve and what is more – attract since they are the condition for future growth and wealth. The work undertaken by the large companies and the "grandes écoles" and universities together could comprise one of their major advantages.

Since the SME's are unable to grow alone they need managers able to attract research and technological innovation who remain sensitive to the developments in demand on the various world markets. The large companies are the condition for the development of SME's who will take over from them at a later date.

If we do not go in this direction then Europe is in danger of falling into a vicious circle in which mediocre growth increasingly undermines the conditions for future development. Therefore Europe must absolutely jump-start its growth as soon as possible. To do this a common policy is necessary to attract research and leading-edge know-how to safeguard the major groups and enable SME's to grow. Only the will to pool European resources will enable us to achieve this result. In the present context of the world economy nothing could be worse for the European countries than playing against one another.

Does Europe have the financial means to apply this strategy?

The European assets market is especially wealthy. The wealth in the London market is a good example of this. In fact as soon as the market is attractive it prospers, assets and investments flood in. Europe's poor growth is not due to a lack of assets.

Hence shareholding and resources do meet requirements in Europe and even in France. The problem is not one of money but of a lack of major groups both from the point of view of number and size.

France is experiencing quite specific problems. Due to its taxation system, savings barely benefit the most productive sectors. A redirection of taxation would enable a solution to this phenomenon to a great degree. In effect savings respond especially well to tax incentives. We see this in real estate where taxation stimulates and also "defines" housing and as we saw in the creation of PEA's it even plays a positive role in structuring savings in shares.

In France the main financial product is life-insurance, that finds resources in bonds that are issued to cover the deficit. The deficit is hence covered easily because it is exempt of tax discouraging both budgetary responsibility and productive investment.

The need to reorient assets towards productive sectors of the economy enhances the inevitable nature of a strategy for supply within the present context.

What would the role of the competitiveness axes be in this strategy?

The specific feature of the new economic landscape is its extraordinary fluidity. Knowledge and know-how migrate easily from one region to another and respond greatly to all types of incentive. In addition to this the various economic sectors tend to interfold and fall in line with the services economy. Agriculture has been operating like an industrial sector for a long time now. But industry itself under the influence of technological revolutions is also tending to mutate into a service provider, with a permanent ear lent to the slightest developments in demand. The economy of knowledge and innovation marks the ultimate triumph of the economy of services. The world is no longer technical, it is systematic, it is becoming organic full of interdependent network. We must think accordingly.

Only the creation of major, structuring axes will enable the accomplishment of this reorganisation. Unification, concentration, certification and simplification all depend on the abolition of economic idiosyncrasies. In this smooth landscape a unified economic strategy would enable Europe to resist its main competitors, to maintain and attract large companies on its own territory and thereby play to its best advantage.

However, only considerations of interest will determine the large companies' final decision to remain in Europe or to leave it. The existence of dynamic technological research centres might be a powerful factor in the decision of these companies to stay in Europe. This type of polarisation is in effect one of the most remarkable features of modern capitalism.

The fundamental problem for Europe is still the differential in growth with North American and Asia. A differential such as this cannot remain so for long without becoming irreversible. If there are no large, successful, innovative groups in Europe it will miss out on the next stage in economic and technological development.

The difference between Europe and China is particularly enlightening. China has both a qualified and abundant workforce as well as an expanding market. Europe only has the first of these elements: its internal consumption is powerless to encourage growth and its workforce, although qualified, is not cheap. The consequences of such a difference are potentially catastrophic. It will be difficult for private companies to maintain their establishments and axes of growth in an economic zone typified by low growth and decreasing profitability.

The territorial distribution of growth at present as well as taxation will determine the future establishment of large companies and in turn they will determine the territorial distribution of growth over the next twenty years. The differences in growth between territories maintain themselves and unless there is strong action to correct this they will continue and become increasingly pronounced. And once the large companies have modified the places where they are established long term these differences will be irreversible.

The example of the large groups' ability to aggregate is very well illustrated by Airbus. The establishment of Airbus in Toulouse is the direct origin of the aeronautical technological axis there. The development of this axis has in turn enabled the development of large and medium sized groups attracted by the workforce and know-how. Around this pole small and potentially high growth companies can grow. This voluntarist act was therefore the source of a virtuous circle. This is the strategy to reproduce across Europe.

Large groups are established in European countries such as France or Germany. A European strategy for growth might provide itself with the objective of creating ten world standard axes of leading edge technology in Europe. A technological base such as this would be decisive for the long term growth of the Continent.

Is this strategy for growth still possible just for single States?

At this point in time a European economic strategy cannot be avoided.

The competitiveness axes able to attract and retain large groups could not be just a national affair. Due to the size required for the concentration of material and intellectual resources these competitiveness axes must be European. The level required to achieve adequate critical size is European. It is this agreement that must comprise the heart of a truly European economic policy. The stakes are really the survival of the European economy as a whole in the face of the North American and Asiatic economies and not the survival of the various European economies on an individual basis.

To convince the large groups to maintain their establishments in a zone where the average growth rate is slightly lower than 2% rather than to go and set up in areas where the rate lies closer to 4 and even 8% European States must absolutely come to agreement. These are the strategic stakes of the years to come.

The national governments of Europe must therefore tackle this question, define and apply a common strategy to attract large groups. National strategies have no future. Long term growth on the European continent depends on the European Union's Member States' ability to agree and pool their resources. The danger lies in the fact that European States which enjoy a certain growth rate will not see the interest in a European strategy such as this and that the States suffering from low growth rates will opt for a short term self centred approach that is designed to preserve employment and fiscal structures just for the time being. Therefore there is a real danger of witnessing the rise of a fiscal, political and regulation war between the States of Europe.

To prevent this type of disaster a joint European strategy is absolutely vital. It is in effect indispensable to establish the conditions sine qua non for the development and success of capitalism. Support in the form of the SME can only come in the wake of the large groups. We might call this the ecology of the new economy.

The first stage of such a strategy would be to strengthen the European market's potential. To do this a first priority would comprise completion of the economic reunification of the continent. The temporary relocations in Central and Eastern Europe would be the price to pay in achieving a European market of a comparable size to that of the American market. Only a true strategy for supply will enable Europe to support the impact of its competitors.

An effective European economic strategy should bring together three elements: enlargement in the East, the completion of the grand market, the Lisbon Strategy. The Lisbon Strategy is a strategy to catch up on our know-how. It comprises investing massively in knowledge and leading-edge technology. The aim is to enable the greatest number of companies to cross the frontiers of technological innovation.

Can we really define the inspiration, principles and objectives of a European strategy for growth?

European must bear in mind that economic reality always ends up by winning through. And the most inevitable reality is the growth differential between Europe, North America and Asia. If this differential sets in long term, the vital forces will leave our Continent resulting in a process of technological regression that at first would be slow and progressive and then become irreversible.

It is in order to face up to this challenge that growth must be boosted. This can only be achieved by renovating European economic fabric. First we must prepare support for the large groups emerged in the post-war years and the 1960's some of which take the form of SME's in the landscape of world capitalism. Then we must encourage the development of an SME structure – the vital Mittelstand – that falls into the sphere of influence of these new groups.

The European nature of these future large groups is essential. Traditional European groups remain anchored to their national territories. They have no successors. Some groups that have been created over the last twenty years do in fact have a European strategy but they do not have the required size to take over from the large traditional companies. To do this they have to continue their strategy of expansion and they must be encouraged to do so over the next twenty years.

Capitalism implies constant renewal; it is the ability to continue work and to produce. The problem confronting Europe at present is knowing how to encourage the creation of SME's that will become large groups later. In the context of the economy of knowledge the solution comprises in grouping companies together around major centres of higher education and technological innovation. Economic growth and the renewal of European capitalism will develop from these axes of innovation.

A renewal process such as this will not start up of its own accord: political will must provide the initial impetus. Indeed the paradox of modern capitalism is that although the only credible growth strategies are those of supply and innovation to satisfy constantly changing demand, these have to be launched and applied by governments. On this point as on others true liberalism is the opposite of anarchic "laisser-faire" that is gladly mocked by its opponents. Risk taking is a vital component of capitalism, but it is up to governments to create the liberal zones where risk taking is not only allowed but actively encouraged. In an economy of services public players must encourage private players to innovate and take hold of their independence.

To be exact what concrete measures can we expect from governments?

The creation and attraction of large groups to Europe calls for a certain of number of incentives:

Fiscal measures: this means creating the most favourable types of fiscal incentives to convince the large groups and their leaders to establish themselves here and not elsewhere. Groups must be taxed on the basis of their consolidated world profit. Tax revenues such as these will both enable the abolition of negative mechanisms that discourage companies from investing and making profits in Europe and the reduction in the size of groups subject to tax profit: more groups would therefore be taxed enabling an increase in States' revenues.

Judicial measures: financial legislation must be adapted to make economic and trading activities as simple and as profitable as possible. The legislative and regulation framework must also be adapted in several ways to companies' requirements, notably with regard to the creation of companies and labour law.

Measures in the area of education: large companies are looking for a qualified, competent workforce. The establishment of major training institutes and higher education centres comprises therefore the vital element in the establishment of large groups and their head offices. Inversely the presence of large groups enables and encourages the establishment of centres for higher education. This is therefore a potential virtuous circle if the two links in the chain are in the same place.

These European research institutes would at first be multinational cyber-poles associating two or several countries. We can imagine Franco-Italian or Franco-German or even Franco-Italian-German alliances. Two or three experimental groups of this type might be founded initially thanks to European funds. Then European universities could be developed along with a true status of European professor. A specialised base such as this in the form of research institutes or groups does in fact already exist in Europe. They must be extended and used in a systematic manner however.

In order to attract large groups a trained competent workforce is a vital advantage. Moreover this workforce tends to resemble the potential clientele of these large companies particularly the large service groups. In effect it is this population thanks to the diversity of its interests and the influence of its buying power which is in a position to define new trends and impose its tastes on the manufacturers of products of high added-value. And one of the vital roles of the large groups is to discern as quickly as possible any developments in demand and adapt to these thanks to its innovative ability. A large group is both a pioneer and a "manager of variety"; a receptacle for new trends and a base for innovation. SME's can gather around these large groups thereby disseminating growth by guaranteeing work for everyone.

Large companies can be encouraged to contribute to the creation of the European axes of competitiveness. Incentives might be mainly but not exclusively fiscal. The most direct manner in which to encourage the creation of these axes is a simple procedure of call for tender. Again it is up to governments to launch or at least create the basic foundations of these axes. On a European level the structures that might participate in setting up this grand political project are not lacking. Our thoughts turn notably to the European Investment Bank (EIB).

In your opinion what ultimately is the decisive challenge which we are facing?

Europe, which scatters and wastes its strength, must define a common, unified strategy. The watchword for this strategy might be "drawing level together". Whilst the Asian and American powers threaten to increase their advance on Europe to an even greater degree the latter must be aware of its real weakness. It is no longer the leader in a good number of domains and soon it might no longer be part of the leading group. Europeans must stop playing against themselves and provide themselves with a joint economic strategy undoubtedly set up by a joint economic government and finally make the necessary effort to remain in the lead. This imperative will force France to review some of its habits. It is by identifying its strong points and by using them to the full within a joint European strategy that France thanks to Europe and Europe thanks to France might be able to make up for lost time and avoid exclusion from the world economic race.
Publishing Director: Pascale JOANNIN
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The Guest
Jean-Paul Betbeze
Economist, member of the Robert Schuman Foundation's Scientific Committee
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