Promover o crescimento empresarial em tempos de turbulência geopolítica | vídeo

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Thank you Welcome everybody um to our second panel on how can industrial policy promote growth in times of geopolitical turmoil my name is Laura Dubois I’m a reporter at FT in Brussels and I also edit our Europe Express newsletter and I would like to welcome our very distinguished guests I have two great speakers today

Who’s been staring competition policy at the European commission since before the covert crisis as director General Hayes who’s economics professor at the London School of economics and yeah has published extensive research on inflation Central Banking policy among other things um so welcome thank you for being here

And I suggest um to set the scene could you very briefly tell us where are we where is the European economy at the moment and what is in your view the main challenge we’re facing at the moment I think it’s useful as usual to distinguish between short runs mediums

And long runs if you want I think in the short run we are today compared to what was expected just a year or two ago growing much faster with an unemployment rate that is at record lows and with inflation well above Target in what seems like a persistent way so the

Data screaming we had too much aggregate demand or at least more Agate demand than what might expect and therefore looking backwards to the last two years I think we can assess now that likely our fiscal packages in response to the energy crisis and perhaps even as far

Back as a response to covid were a little bit too big and our monetary policies were not quite as aggressive as maybe they should have been so right now certainly looking at the tightness in the labor market and at the same time the level of inflation we are

We have a somewhat overheated economy resulting therefore in the very very high inflation that we’re seeing right now to be clear this is certainly what Americans often call Monday night Monday Court Monday quarterbacking it wasn’t clear that those packages would have were all that big back in 2021 or that

Monetary policy had to tighten much faster than what it did but still exposed I think it is the case that we have a somewhat overheated economy right now if we look instead of the medium and long run at the state of the European economy more general or the Euro air

More concretely or a little more narrowly I think what we have is that growth prospects continue to be somewhat moderate let’s say in that we do not see certainly the great Spurt of innovation or the great Spurt of potential growth than one might hope for but at the same

Time we are entering we are going through a very large set of structural changes in the economy involving both and as we’ll as we’ll speak more in this panel a large intervention by the government as well as a large spike in public investment a transformation towards a green economy

In which the European Union is in many ways ahead or even has some comparative advantages relative to some other regions in the world and a reconfiguration of trade as geopolitics leads to um Supply chains and production networks to adjust in different ways all of these lead me to think that at

Least now there are actually many opportunities opportunities come certainly opportunities to do very poorly but also opportunities to do very well and so while I take the forecasts of the next five to six years being similar to the last five or six years which by the way

Is more of a feature of almost all economic forecasting rather than a feature of reality reality tends to be much more volatile I think what I would what would I have what I would highlight over this near to medium Horizon is rather that we have a lot more dispersion of likely outcomes

And certain you might call it which some may look at with fear but I would look at with opportunities requiring therefore the flexibility to grab such opportunities yeah um does it work yeah so so let me take a bit of a different perspective I mean we we’re emerging of three crises

In 15 years each one of which can be happily described as kind of once in a century except there were three in fifty years so we started the financial crisis was Crisis probably worse than the the Great Depression uh uh certainly in Europe covered under the energy crisis so

We emerge from these three crises weakened and we emerge from these three crises with a level of private and public in debtness that is a multiple of what it was 15 years ago so just to to be a bit more gloomy on the on the outcome um so that that’s on the

On the not so bright side on the other hand the good thing I think is that these three crisis made or member states realize that if we don’t make the effort to Define collectively what our offensive and defensive interests and to stand for them nobody will do it for us

So in other words it is it is interesting to see and that is what gives me hope in the future that’s the mistakes we made during the financial crisis managing to transform a uh I mean the crisis an American Supreme crisis into a Euro crisis because we couldn’t

Appropriate the fact that or joint interest are more powerful that are individual narrow national interests you saw that the lessons had been drawn during the covet it’s not and I think it needs to be soluted by chance that a number of countries accepted that for the first time we borrowed together

Well these countries didn’t necessarily need it they borrowed together but the spendings are not not for them because they have understood that well when you’re the one you’re the biggest industrial power in Europe your interest is that to keep your demand alive so when you export 70 of your

Production in Eurozone the best for you is that the Eurozone works well and we see that again in the energy crisis now where the the degree of convergence and and common decisions and convergence and how we see the Futures and decision that needs to be taken

Is much better than it used to be because of course our diversity is an asset other diversity is a weakness as well we’re slower we’re more complicated we’re also much more transparent in the decision-making process I think that leads us to have decisions that are more robust but that in terms

Of a number of of weaknesses as well so for me the uh it’s true we have we’ve grown actually much more than any time in recent past uh but that was part of a catch-up so a big slightly longer perspective for me the defining period will be the next five to seven years

Um because we need to if we well your topic is industrial policy if we want to reconstitute our industrial base or industrial GDP has been dropping everywhere in Europe over the last 20 years because we were living in the 90s and beginning of the 2000s and this Paradigm

That we could strive by keeping at the at the top end of the value-added chain giving everything that is dirty and smells to other parts of the world and specialized in services and everything that is nice and shiny and of course we realized that such a world doesn’t exist

Because when prediction moves one day or the other Associated Services move as well and one day or the other research moves and then you left being at the low end of the value-addiction so it’s not too late but that crucially revolves on becoming a chip decarbonated energy

Continent and this is why our reports in that domain is so essential so were the efforts you said five to seven years what efforts is the European commission or the EU more widely planning to implement in that time span well I think I mean Ricardo I think alluded to it

Or comparative advantage is that we we realized the challenges earlier than many but we have a long tradition of being at the Forefront or seeing the next challenge coming and being incapable and translating into an industrial advantage so if you think about it invariably the U.S are slower in realizing the

Challenge but when they start moving they move much faster and in the end of the day we end up on the wrong end of this of the stick so this time it I mean we it is absolutely crucial I mean we can continue to subsidize the energy bill of

Large energy intensive users the truth is they will relocate here not because they have subsidies they will relocated in Europe or located in Europe if demands in the area is sufficiently strong because in the end of the day this is what drives the uh these decisions and if the energy price is Affordable

Taking into account the carbon the carbon price or cost Associated to it so that doesn’t mean to say we need to be on par on energy cost with other areas of the world we’ve never been we have ever had a positive difference it was more costly energy in Europe than

Say in the US on the other hand are the things that democracy in the U.S that in that in the EU and in the end of the day uh decision by industrialists to set their plans here or there I don’t really made on that but you cannot afford to be

Five times six times eight times uh more expensive when you’re exposed to International competition so the good news is it is possible uh what we’ve been doing in Europe we’ve been forcing competitive Thunders for a new production facilities in in wind and in cellular it was some years ago the effect was

Almost immediate that divided by two the costs and because the divided by two the cost that allowed for a number of economies of scope and scale and and that makes it that in particular in wind turbines we have a a a very good industry in

Europe so it’s not a a an Aryan which we’re dependent from from other continents unlike solar panels there is no fatality I mean what we know are the first generation solopreneurs the next Generations are gonna incorporate a lot more technology they can be manufactured in Europe if we take

The right the right decisions so and we’ve been also subsidizing through contracts for difference so you know you guarantee a minimum price and you take the uh the profit away above above a ceiling that works that worked extremely well uh because that guarantees the investors on Horizon

As you know that if the prices are bad it will never be worse than x and if they’re good your maximum profit is kept at Y and with this you can plan and that has led to a situation in which today you do not with the foreseen

Prices for electricity you do not really need any more to subsidize this type of production so probably it’s time now that we turn to what needs to happen quick and will not happen quick enough if we don’t help it which is the decarbonation of of industrial processes but continue to incentivize through

Other measures than subsidies like allowing faster permitting for example that we have more and bigger info because we will need we’ll need quite a a lot more if this is successful the chances that in 27 28 we will have enough electricity in Europe it will be very cheap because the

Investment cost will have been paid for through subsidies for a large part of it and the marginal cost is zero you don’t pay for the wind you don’t pay for the Sun and it will be decarbonated which will be a competitive Advantage worldwide so you’ve just mentioned a few measures

To bring down Energy prices meanwhile um the United States has implemented a massive subsidy package the IRA um Ricardo do you think the EU policies are enough to keep up with these big packages that the US is doing well that’s a difficult question because again even because the IRA itself is a

Very multifaceted type of intervention I think if you look at the IRA approve by President Biden it is a very clearly protectionist policy without any hesitation it is also a policy that relies on subsidizing private business as opposed to public investment per se and third it is a policy with a very

Large focus on manufacturing jobs in creating jobs and preserving jobs in particular manufacturing areas let’s look at all at these three in at these three in turn when you’re looking at preserving jobs and manufacturing jobs note that a focus on employment as opposed to competitiveness as opposed to productivity

Does not bode well usually when it comes to Industrial policy it does not bode well because it encourages potentially inefficient jobs to be created simply for the sake of preserving jobs second it usually does not bode well because it is always easier for any policy to be designed and any

Policymaker to be excited about protecting existing jobs as opposed to creating new jobs a usual flaw of industrial policies that it focus on the existing companies and lacks the imagination think about the new companies that will create new jobs and distortions get created across that margin and third with its enormous focus on

Manufacturing in Olivier also focused a little bit on manufacturing there we do have to realize that manufacturing nowadays employs 20 of Americans roughly 20 of Europeans as well and on a very large declining scale this very large focus on big factories that build things is something that is a little bit I

Might say of the past Century a lot of economic growth now comes in distribution and services in technology in the provision of services and that’s also where global trade in some ways is going so that side of the protecting jobs I think of the Bible Administration is debatable and criticizable I think if

Anything will work against the United States in so far as its future productivity and insofar as the design of its policy in a way that um hurts us in the same way that when a country does something that lowers I think its productivity and its potential for growth we all lose through the

Natural spillovers of growth second if we look at the fact that the United States and I’m going back in reverse order of my three points if you look at the fact that this policy is one that relies on private subsidies as opposed to public investment is something that

Certainly and when you compare even with the discussion the previous panel by the by the member of the parliament America Demarcus you see that that is a common difference between Europe and the US although even now here we are seeing more and more of interventions through subsidization of

Private sectors as opposed to public investment itself is one better rather than the other certainly large ideological battles have been fought over that question I tend to be more of a pragmatist when it comes to this and it depends a lot more on whether it’s done well versus not done well

When looks at the energy transition and when it looks even at the investment digitalization and others there’s clearly a need for public infrastructure as well as for private Innovation because there’s just so much uncertainty on precisely what the energy profile will be five to ten years from now it is

Really an illusion to think that we know exactly what will be the source of energy that will be the cheaper there is very large trends of different types with great uncertainty across different Technologies to both decarbonize as well as to provide energy efficiently which note in the past and let me clarify that

As often we use an excuse for inaction the fact that we don’t know exactly which technology will be the right one is an excuse for an action and it shouldn’t be one but it is instead I think a good argument for keeping us somewhat of an open perspective which does favor

Subsidies to private Innovation as opposed to public investment in so far as we think that private investment more quickly shifts following profit motives across different across different potential technologies that change or spoke investment traditionally it doesn’t have to be but tradition tends to be a little slower it’s harder for

For policy makers to admit that they bet in hydrogen it turns out that the future was in solar or whatnot whereas in the private sector even if only through the bankruptcy of those who bet one the wrong way or not that tends to be a little faster so in that sense I think

The US has taken a position that or a path that is natural in America um I think Europe has is still defining itself exactly how it wants to move in that direction you saw Olivia speaking very much about the private and the subsidies of privates but you saw Margarita before putting an almost

Entire focus when she was in the panel on public investment public investment public investment and I think we need to acknowledge and embrace that we don’t know what that we know that we need to do something we know that energy sources are changing we don’t know exactly what is the right technology there

Going now to the first point which is the fact that this is a protectionist policy it is a very unashamedly protectionist policy now it is protectionist because the eyes and certainly the interests in geopolitics if you want in America are very focused on China not so much on Europe but it

Does spill over to Europe in a very clear way now traditionally we tend to think of protectionist policies as not calling for a Tit for Tat then we see as protectionist policies going back to the old trade theorists as saying well if they’re being protections that’s going to lead to distortions on

Their end no reason for us to be protectionists however I don’t think that that’s necessarily applicable this time around and certainly through much work and economic theory over the last 40 years we understand that there are circumstances in which we do enter trade Wars in which your right response

To someone else pursuing a industrial pulse production policy is for you to respond likewise so the old principle that if you throw rocks at your border why should I throw rocks at my border the usual argument against uh tit for tap protectionism is is not one that necessarily applies to

This particular instance and why because we are talking about a sector in which we have very large companies we have very large economies of scale and increasing returns moving forward and we do know that in those circumstances protectionist policies that allow you to create give a step ahead to your

Companies can indeed lead to a big loss to your competitors and that the right response may indeed be for you to respond so I think it is Justified for the European Union to think about how to respond and has already responded some regard but I do worry that the response is

Couched in incorrect terms and by correct terms I mean it is not that because you hurt me I need to find a way to hurt you that’s only going to lead to uh two black eyes if you want rather it is that if you are helping your companies get a

Step ahead in some way I must think of how can I now help my companies their competitors to get even further ahead and certainly if you see in terms of the Tariff policies and others I think EU has fallen a little bit more on the first and not enough on the second but

I’m again optimistic that we will change that perspective and react to the Biden plan by trying to Simply give our companies more of an edge in the construction of capacity in the conquest of these new markets that are opening up only did you worry that this response by

The EU which um I believe includes the critical raw materials act Net Zero industry act kind of what you said before old-fashioned industrial policy is one of your worries that this will just um benefit the big players in the EU and kind of leave behind small and medium Enterprises

Well this district is there a fear that this will distort the EU single market and the Level Playing Field well that that’s not the way I would put the debate but maybe coming back on what Ricardo just said first of all let’s put things in perspective Ira is not that gigantic

So what their U.S have budgeted for Ira is 400 billion Euro over 10 years any idea how much not we authorize but we spent in public subsidies in the same area in Europe over the last two years 400 billion so that’s not the issue and the issue is not quantity because

We do and I suspect we will continue to do a lot more in terms of subsidies it’s not that I like it but that’s a fact in Europe than in than in the US now the issue what is the the issue is IRA well when we subsidize in Europe

We have a very simple principle is that it has to address a market failure and it has to have what we call an incentive effect therefore so that means it has to make happen something that wouldn’t have happened with a bit of public money and that we find socially or economically desirable

To have so we try to use operation that’s all what leads stated control towards this concept of let’s put the money what is the public money when it makes a difference Ira is not at all this but first of all because there is no concept of State

Control in the U.S Ira in Ira there is no need test so whether you need the money to make your project happen or you don’t need at all the money to make a project happen it doesn’t make any difference if you’re in the right sector in the

Right State and you meet the conditions you tick the Box you get the money incentive effect zero so they subsidize it’s it’s inefficient in that way because they subsidize the number of things that would have happened anyway and that’s the reason why industrialist in Europe said oh that’s great of course

It’s great it’s Christmas every day of the year so I don’t deny it’s great but it’s not what we should do and we shouldn’t try to replicate that uh frankly because I agree with Ricardo this is inefficient and likely to be ineffective and it’s a waste of public money

And neither the U.S nor certainly us have too much public money to spend these days that we can decide to waste it on things that would have happened anyway so that’s that’s that’s the real issue for us so how do you respond to this because of course you have a number of

Demands from the whole of the industry said oh I’m gonna I’m gonna close my chemical site in Germany and open in Arizona these are fairy tales any idea how much it costs to close a chemical site in Germany that won’t happen but the real issue is Greenfield

Now when you have an you need to to build a new project the first thing you will look at is where is my my prospective demand because frankly you can give as much subsidy as you want if there is no demand in your area the plant will go elsewhere period

Secondly which are the structural basic conditions for competitiveness and this is where public investment matters in public goods infrastructures education social systems and when you compare us to the US in this we don’t rank too badly uh so that’s the second thing and then marginally you may need to subsidize so for us

Again up to the funding Gap but what if a subsidy policy that is not based on this concept of funding back on market failure is put in place elsewhere well the our answer to this is very targeted because we don’t want to jeopardize our equilibrium here in order

To match it there so we say well if you come with evidence that while you were willing to invest in Europe you will do it in the U.S and you show us what is it exactly you will get this is a reasonable degree of certainty then we can match

That’s the big innovation we included in our March evolution of the transition and crisis framework this is this possibility to match under certain conditions so that’s your answer is calibrated and targeted to where you have actually a problem and that I think is the right policy is

The right policy answer for the rest or policy is not either to reinsure everything we have delocalized but let’s face it we are living a movement which I think is not going to stop any sooner of relative deglobalization and part of this issue the issue we’re

Faced with is how do we manage this relatively globalization in other words something that is very rarely and I think it’s a Pity discussed and so through what is the external dimension of our industrial policy uh and and that matters that matters for a competitiveness that matters for the

Carbon footprint that matters for the management of our neighborhood it’s not the same whether you procure from China or from the southern banks of the Mediterranean for example uh in terms of what because we will not reinsure everything that is for sure even if we wanted we couldn’t and it’s

Certainly not our interest so that means for some very key Technologies where we have other reliances we may need to reinsure production and we may need to subsidize it but that will always be a minority of the production for the vast majority of the supply chains the issue of resilience is about diversification

And where is it that we choose to ensure these predictions and friendly and friendly close far away so all this external dimension of industrial policy is I’m afraid very rarely seriously researched and I think that’s a key weakness can you sorry let me follow can I follow

Up just on two points of long similar lines it’s not a direct response but a similar points I think if we’re talking about subsidizing Olivia mentioned mostly EU policy but let’s also move towards National policies because after all and as we spend a lot of time in the previous

Panel budgetary policies are for the most part still National and you use a small part of any spending or substance that exists I think there is if we were to embrace industrial policies the topic of this panel within the EU apparatus today they would be extremely difficult for one fundamental reason

Industrial policies love them or hate them always involve a sense of selecting some sectors and some companies to subsidize to support well company we we only have a handful of companies that are truly European in the sense of being in every region in Europe moreover the single Market is in many

Ways the great unifying principle that started our Union and that still continues to play a very large role in it it is going to be extremely hard dare I say impossible to say I want to support to have the French government to pick on the French government well let’s say the

Belgium government since we’re in Belgium to say we want to support a local champion in sector X someone who’s very competitive provides some large subsidies so that they can compete with the American company that’s being subsidized without realizing wait but what about the French company and the Luxembourg East company and the Germany

Company that’s not getting the same subsidies within the European Union creates an almost unsurmountable problem because the competition authorities and many others will say hold on how can Belgium support a company that is competing with a French company this is clearly legal state aid one that it’s unleveling the play field within Europe

So for me to level or unlevel it relative to the Chinese the Americans whomever else you want how can you achieve this while keeping it leveled in Europe given that we have National budgetary policies and many in this reports will be National is a little bit of a

Conundrum whatever you can come up with a better image than I can in terms of a difficult Square to Circle so that’s an immediate difficult that we’re going to have if we were to start in this Tit for Tat of supporting a very aggressive industrial policy I think it will bind

Very quickly second small companies versus large companies it is the fact that every country that I know of certainly well certainly in advance in the oecd but even in others has a great Fascination for small and medium Enterprises for many reasons some cultural some economic some Justified some not in Portugal today

You are a large company if you sell more than 50 million euros I believe that’s not a lot in an economy especially where you really want to export if you’re a small country and you have to have a view of a company that exports there’s a lot of large companies

In Portugal that are really very very small companies there is an enormous uh penalty to being a large company to having more than 50 million penalty because you lose a tremendous amount of support that we have to small and medium Enterprises this is supported by you policy it’s

Certainly very much part of national policies but this penalty to growth of companies is something that if we are to embrace on the one hand the idea that we need industrial policies because we need to get scale that’s the only way to compete maybe we’ve been too competitive

Whereas those Americans they could build large companies over the last 10 years and to what extent are we not getting scale after all the arguments we hear from industrial policy that classes with at the same time saying let’s keep on subsidizing small and medium Enterprises which the laws of Economics are clear a

Subsidy to a small Amino company is nothing but a penalty in large companies and so that is again something that a conundrum that you need to square somehow you cannot keep on penalizing companies that sell more than 50 million and at the same time dream for companies

They will export and compete with their American counterparties in a vactive way in energy or whatever the field you want to have so there are two conundrums here there are quite I think a little bit of the root of contradictions in European in the European Union not a European

Policy that lead me to at least um have a little pause as as there’s this new fascination of industrial policy and absolutely that was actually going to be my question how do you pick who to subsidize you said earlier the EU policy is different because it’s very

Targeted but which sectors do you target which players how do you make that decision what is targeted is our answer to Ira unfortunately or subsidy policy is not so targeted one point on on what the trigger that just said of course there is a tension between the external and the internal Dimensions I

Mean externally you would like to throw as much money out of the window as you can in order to merge the challenges of China the U.S God knows who and of course the more you do this I mean the the chances that that doesn’t feel a subsidiary race internally and

Fragments the single Market as Europe so I disagree this is insurmountable I think it is surmountable by not rushing to try to match whatever the we think the U.S is going to do that’s what I try to explain previously and the second thing is to have a serious steady

Control let’s say control is based basically on this is is to try to maximize uh the impact of the subsidy and minimize the fragmenting effect on the impact on competition in particular onto companies from other member states and this is what we’re trying to do and

This is all these calls that I hear in particular in the biggest member states to unplug standard control because it’s all so complicated and slow on your and it’s a pain you know for the uh the end during the energy crisis we have taken this extraordinary measure that we are load member states

To have set part of the bill of larger intensive energy users of course only works if it’s limited in time the time for you to build your generation and deploy windmills solar panels Etc so you know the the gamble here is that’s why we need to have succeeded by

27 28 because there’s no way we can continue with this policy for long we got lucky because for the biggest part of the high impact on the gas of price and the price of gas and electricity this large energy intensive users they were covered either by long-term contracts or by their aging policy

And when they stop to be covered which is around November December last year because we’re lucky prices went down to what they were before the crisis so the truth is they’ve been marginally impact and if you look at the Outlook of the German industry last year

They got the best year for a very long time at the same time we had requests from the German government well you’re really painful with your stated control you have in particular this concept that in order to be able to have set the the energy bill of a company it needs to

Have a loss in ebitda let’s get rid of this stupid bureaucratic thing so in other words let’s subsidize a company without knowing whether it is impacted that’s a pure windfall profit we have not accepted it if we had accepted it I don’t care too much about the waste of German public money but

The impact on the single Market could have potentially be gigantic so back to to your point together I don’t think this tension this tension exists I don’t think it’s insurmountable but that’s basically the reason why the control of State subsidies is in Brussels because right or wrong and we make

Probably many mistakes but you need somebody that does not does not have vested interest to be the referee in that game and and that’s that’s pretty much all our job this said we are authorizing masses of of subsidies on your right in particular in in smes

I’m not so sure it’s a loss for for large companies to be frank uh I’m not so sure either it’s a terribly effective way of to spend public money but that’s that’s another story from my point of view as a bureaucrat the charm it is it very mildly impacts the single Market

So to the extent it is not so smart it is limited within the countries that are actually implementing these policies so this is largely the problem going back to the word that you said before de-globalization um to put this all in a bit of a larger

Context are we just kind of seeing a new age of protectionism mercantilism is this the kind of industrial policy that the EU the Us and other countries will now go for I hope not but that’s clearly a risk it seems to me um that’s why I mean people like me are resisting

Having a kind of Tit for Tat as you described it bring other answers to uh to the U.S policy because I mean we know what this type of spiral leads to and if you look at the story of the Great Depression it’s it’s not it’s not rocket science it’s bad for everybody

At the same time at some point you probably cannot afford to to react so you need to calibrate your reaction sectorally and that’s back to your question how do you select the sectors well some are not very obvious I mean and people like me are not the best place to

Pick the winners normally it will fail but for example that you need to promote the as fast as possible deployments of massive capacity of the carbonated production of electricity is pretty consensual and for the rest what to do with electricity that we should live to the market

I would say on that point on your question that um there are two sides here I think there’s certainly changes in Supply chains following uh what happened during covet partly because we understood the resilience of some Supply chains and learned things that we didn’t know before I think many companies learned

How some suppliers were more reliable than others they became more aware of some risks that we had ignored so far or that simply weren’t present so far and so and that seems to have led to and this is what the data of the last two years on international trade shows so

What I’m going to say now is factual is that International Trade has increased in the last two years globalization has increased we trade are trading more across borders but the distance have shortened that is we have seen Mark locally in Europe more offshoring to Poland or to Portugal than

All the way to China but more offshoring and more transaction and more trade so we have not seen a declining trade at all the data speaks when in 2020 of course it fell but it’s beyond recovered so the age of globalization that stood as International Trade continues to be

With us continues on the trend it may even have accelerated a little although again with the big disturbance of covert it’s hard to draw inferences that are too secure however there’s been a bringing forward some of it as I said is simply firms and the market workers as it should firms

Learning trying to get some advantages trying to understand the importance of resilience and so be it um also to be clear China is also not as competitive as it used to be it’s growing wages are rising its wage Advantage is not what it was 20 years ago in spite of localization to Vietnam

And Laos and others who are emerging but we are also and at the same time the investments in education that we’ve had in Europe and others have also led to a more productive Workforce that can compete in other terms and finally again industry is falling services are rising and simply shipping

Things very far away to be produced is not as advantageous and an overall national income as it was so that all of it is the wonders of the market economy shocks happen and every two years a little different and that’s why CEOs are always paying attention and trying to

Change in that regard it’s not it’s still globalization a slight change I wouldn’t I find it fascinating to study but I wouldn’t say it’s a concern per se it’s simply the world working on top of that though we do have as you mentioned the idea that we are starting

To see more geopolitical tensions and there are people here who are better certainly much better transfer relations than I am and a certain fear that one one of these shocks one of these risks that a company now takes has to take into account is that we have some

Aggressive sanctions or God forbid even a conf an armed conflict between different large regions which therefore again is a responsible manager a company you have to realize it’s not major risk and I had to make sure that I’m also resilient to the use of sanctions or the

Or the eruption of conflict here and there um on that regard we get to the usual conclusion an important one to State even if not original one that it is we would hope the job of our policy makers and politicians to reduce that uncertainty

So that we do not have to live in that fear and have to plan for that occurrence but at the same time if it exists one does have to plan for it but it’s clearly a negative as being afraid of sanctions or conflict is a negative that hurts everyone

Um together and then finally we get to the third point which is well to what extent are we seeing more mercantilist protectionist policies not here the data does not speak actually clearly on that we have to remember that it is the case that many countries especially in Southeast Asia

Had very aggressive export-led growth strategies with very protectionist in some ways strategies some of which worked and everyone remembers success cases and many failed miserably and people tend to tend to forget those certainly Out Among the emerging markets in different ways so what you were seeing and in some ways those countries

Are don’t have a trend or if anything are reducing the amount of protectionism if you want that you do what you are seeing though is in the United States starting with the Trump presidency you may even date it to a little before but certainly in a very clear with a trump

Presidency and continued in a very strong way with the Biden presidency is now a movement away from the WTO and from International organizations that tended to ensure a leveling playing field and a more aggressive National policy that includes explicit protectionism just like the IRA its size notwithstanding

And so that is the large change and the extent to which the EU is responding or not or will respond to something that we already talked about five ten minutes ago so that is really the change it’s more let’s be clear it’s not that the world has become our protectionist is

That the US in a great part Europe somewhat are becoming less um are are becoming more active in that sense um and less Reliance certainly on the WTO and moving very much away from the international organizations that used to ensure a Level Playing Field to be clear

This is much bigger in speeches now than in actual policies um as of now so it takes more space in newspapers than it takes in actual laws if you want in terms of the paper that gets used in it but it is something to be concerned about because it does very quickly

Indeed lead to these tit-for-tat policies of different types note that when it and now I’ll stop there note that when it comes to sanctions we are certainly becoming graining a great appetite for economic sanctions as a form of diplomacy now um and that speaks directly to this

Um I think the Russia experience has both shown us that sanctions can um be a a way to intervene without entering militarily in very dangerous situations in a world of course with global nuclear superpowers it’s also shown as the limitations of those sanctions we have learned a lot about our Implement

Sanctions over the last 12 months so the next time we do it we’ll do a much much better and actually if we I I worry sometimes I speak to my callers and word there will be a new field of Economics calling aggressive economics if you want how to actually design things that

Really hurt people but believe me the Russian ones are much more effective than the ones we had done five years ago and ten years ago in other context and they may get more and that certainly worries me I think economic aggression Beyond simply Towers but in sanctions

That is a worrying phenomenon but again experts here in international relations and World politics can tell me why we’re going that way and maybe that’s better than bombing each other probably so maybe that is a positive element even if I see it as a negative unaggressive economics and I mean sanctions are maybe

A very extreme example we have the sanctions against Russia against Belarus et cetera but in discussion are also um instruments against economic like economic coercion instruments targeting China Chinese companies limiting foreign investment in Europe but do you think I would be interested do you think that will have an impact on the European

Economy and its competitiveness on the businesses or is that something that’s needed now to preserve our competitiveness well no first let’s be clear I mean Derek for an investment are welcome in Europe that was the case is the case will be the case that and that’s not what is at stake

Coercing Chinese companies well if you really look for coercion maybe you should have a look in China you would be more likely to to find more active and probably effective coercion than than here you know there is a saying uh Mrs vestayer that I like I mean we shouldn’t try to emulate

The Chinese policy first because we don’t think it’s the right policy in a market economy but even if you thought because in the end of the day that is that is a question of belief values opinion so say for a second it’s a great policy but it’s a policy that rests on the

Premise of a very strong central power so when something is centrally decided in Beijing it happens in the most remote parts of the empire and that is exactly Us in Europe you’re not in that so see she always concludes this saying well if we were to be Chinese we would

Probably be the worst Chinese in the world and that is true so even if you think this is this is the right way to run a modern economy in in a in a market economy it’s simply not us it’s not a DNA it’s our organization we are we are not even

A confederation so let let alone a very centralized and Military organized unitary state so it simply wouldn’t work here so we need to we need to to revert another means in order to to be to be competitive what are we doing we have well the council department have adopted a

Regulation that is dealing with foreign subsidies is it about preventing foreign companies from investing in Europe no that’s not the point the point is extremely simple ever since the 60s we have tools and active policies to control the way a member states subsidize their companies when it impacts a single Market on

Competition in a single Market and that is necessary that is not really was necessarily not on titrist we’re the only ones in the world to have this because we’re the only ones in the world that share a genuine single Market not a free trade area but have 27 sovereign and the way to

To reconcile this is to have stated control and that’s the reason why we have this idiosyncrasy right but for 70 years on something we didn’t think it was important to control foreign powers when they do exactly the same thing that is at best inconsistent so what the the foreign subsidy

Regulation does is simply this is mimicking the control we have on our own member states when foreign jurisdictions are just acting in the same way so it’s not trying to enter into competition with anti-subsidies instrument under trade policies because that is about subsidizing something in the front jurisdiction and the goods are then

Imported onto Europe that’s Ira if you wish probably indeed contrary to WTO uh this is about subsidizing production in Europe the same way France Germany Portugal could do it and we will control it just in the same way as well so it’s not at all something that is anti

Foreign investment this is something that is designed to prevent that competition is distorted in a single Market buy for instance it is the same way they could be distorted by member states subsidy and that we control the two on unequal footing that’s why by the way we believe that

This is the WTO compliant and this is not protectionist thank you maybe one thing that so much else is inflation and the following policy of high interest rates um Ricardo you’re an expert on this topic could you maybe tell us a little bit about how does this interact with

Industrial policy does it make things easier more difficult than why um I think the current burst of inflation is quite worrying and to me the most direct interaction that it would have with discussion we’ve had so far is through the impact it has on fiscal capacity if you want

Um a sudden burst of inflation much like we had in 2021 and 22 is in many ways a good thing from a physical perspective why because is it a way to inflate away some of the debt it is a way to have bondholders join taxpayers in paying for the effort of

The large spending that came during the pandemic so the burst of inflation in 2021 of 21 and 22 in some ways is actually once you look at the amount of spending we did in 2020 is actually not all that out of line it’s a little bit higher depending on exactly how you

Compare those amounts with what we saw after World War II World War One or others once again you scale by the expenditure we spent a lot we fought a war against a pandemic in this case and we said let’s also have the bondholders pay through some high inflation in some ways however

An inflation that persists in 2023 in 2024 and let me remind you that according to the last projection of ECB inflation will only be back at two percent on the third quarter of 2025. is the persistent inflation and that person of inflation does not expropriate or Oxford does not devalue

The value of bondholders is it inflation translates itself instead into higher interest rates as lenders or creditors now require a higher interest rate in order to offset the effect of the inflation on the new debts and in order to also include a premium for the risk that they’re facing if inflation turns

Out to be even higher than what say the ECB projects we know this very well for many countries this was the reason to join the Euro and leave their treasure National Banks or at least take away some of their autonomy because inflation was used not just after Wars to finance

Expenditures those was used a little more regularly than that including at pretty much every election and as a result you ended up not with um a way to pay for your spending but rather with a much tighter fiscal capacity and an inability to uh fund itself or even public investment because

Of persistently High interest rates and a limited capacity so we know this very well this is something that should not be hopefully a lesson from textbooks but a lesson from aside from the youngest people here in the audience that should know very well um that is the danger is this fact that

Inflation is still persisting and is dangerously persistent that way in that it will shrink our physical capacity um the interest rates on government debt um so far uh markets creditors had interpreted them as this was a one to two year event and so what we saw was that short-term interest rates went up

But long-term interest rates had gone up quite modestly what we’re seeing in the last three weeks is indeed an a drift up of interest rates as credits are realizing this is becoming more persistent than we thought um and as they do so again fiscal capacity will be constrained and we may

Indeed have and also in the context of the previous panel uh maybe some physical crisis in the Horizon so to me and this has always been um it’s a lesson that sadly sometimes is forgotten the reason for having a very aggressive ECB in 2021 and 2022

Was not to punish the economy or to drive us into a recession or to make the job harder for the for for government was exactly the opposite was precisely to bring inflation down faster since the impact of short-term interest rates that PCB under capacity is limited but the

Impact of the long-term wins is high and by having persistent inflation that is the big danger of what we’re having and this is why I have been times critical of central banks including DCB for because we should know this and that is the responsibility of preservative capacity in the weight

Preservance capacity is actually to raise interest rates not to keep them low but I think that was that sometimes in the public debate gets a little lost I mean I am scarred by the fact that the last time I was in Brussels I was testifying at

I forget the name I think it was the economic Committee of the European Parliament interest rates back then were zero the CB had raised them from -50 to zero and I sat through a panel with distinguished members of the European Parliament where the other two economic experts there were arguing that raising

Interest rates to 20 from 0 to 25 or 50 basis points would be Dreadful populists would return it would be the end of the European Union we could not tolerate it there was some election I forget which election up maybe the Italian one I don’t know there’s always some election

That meant that raising an interest rate would be Dreadful and I was and I said I think Industries have to rise to at least four percent three and a half maybe four here we are 12 months and sure I was right in a forecasting sense

But that’s not the point here but if you saw the faces of horror in the members of different parliament of the idea of raising interest rates then and I think that so this is just that since we’re here in Brussels and not to blame just ECB but this unawareness that the real

Key thing to keep the fiscal fiscal capacity was to be aggressive before so as to be loose later is one that cannot be forgotten as a lesson as of now we are seeing DCB being aggressive we are getting to a point of um should it be more or less I think

They’re going to be very important decisions in the next three to four meetings um but we are really at a turning point I think I think the projection of inflation coming down only by the third quarter 2005 may be a little pessimistic at DCB

By the way should be met with a sense of that’s just not good enough we cannot have four years of inflation above two percent by such a large extent you have to deliver stable inflation so that we can preserve this capacity and have discussions about what industrial

Policies to have as opposed to we can’t really have any because we have to go through a sharp run of austerity because of shrinkers of fiscal capacity is there anything you would like to add yeah well I’ve been spent 10 years between 2010 and 2020 to try to

Redo the financial framework uh I I would agree completely with you if we will not sit on a mountain of debt so that that complexifies a bit the equation the fact that private and public in-depthness has been rising so much in the last 15 years is not helping because my view is we

Don’t have much fiscal capacity anyway of course it’s even worse with is higher rates but uh and and yet we have an industrial policy that is centered on public subsidies and it doesn’t have to be well I mean I don’t deny you need to have some specific subsidy but probably not in

That in that amount I mean there is a a part of uh member states losing their their nerves uh in a way and uh and the fair amount of blackmailing by by big Industries to be to be frank um and the and the result is that I I’m

Afraid that we have a collectively I’m not saying the EU because the EU distributes comparatively a small part of the total public subsidies but the rest of it I’m in charge of controlling normally and uh we we simply have a policy I don’t think we can afford

Anymore and if you think about it subsidizing companies to establish in Europe or to locate their plants in Europe is a very costly way to cover for the efficiency to set the right framework conditions that’s the discussion we had a moment ago there are a number of reasons why

We’re not optimal in setting the right framework conditions namely because we have 27 different national interests uh and that makes a very sub-optimal in making these type of decisions either we fail to agree and we have stuff like banking Union left in the middle or Capital Market

Union in my view even more important probably for the financing of the economy not even started or barely started or the price to make a decision is an incredible amount of complexity because you need to accommodate the idiosyncrasies of X Y and Z and for the industry complexity means an attractiveness

The more complex it is actually the less it will happen let me give you a small example some years ago when I was doing Financial regulation we were told by the whole of the industry in Europe well we should try to mobilize better the 500 billion of excess saving that we have

There are many things you could do but we could do a pan-european portable investment product that would be at the same time a kind of Third Field or insurance and and the saving product to be invested in industry we made a proposal to that effect 18

Months later it ended up being a product with 27 compartments with 27 tax regimes not a single fund was ever created because of course the cost of management outweighed by a distance any possible profit that’s just one story there may be so the the the either we cannot decide

Or we decide for as long as we we are scared enough to make the decision as soon as it seems looks a bit better it’s frozen again or we finally decide but it has a high cost in complexity and I fear that is in the end of the day our biggest problem

For as long as member states will not be able to build together what is the general interest of the area and accept that it will never match their individual interest but that’s the most efficient way to deal with economic issues collectively we will be very very sub-optimal we will

Be slow uh we will spend too much money we will not be targeted enough Etc thank you very much I think we have time for some questions if there are any yes please thank you now it’s easier uh to pick up on the the issue of inflation and fiscal policy we’re going through

Something that seems like a little we’re going to get back to more tight fiscal policy uh but then we can have more subsidies so at least we have a not so tight competition policy that’s my reading of what we’ve been having how can we cope with that uh with plus

Inflation that’s one point second tool Evie the example you were giving about the 400 million that we’re given I would guess that a large part of those 400 million were from two member states probably Germany and France more than most of the other countries so my

Concern is that if we simplify very much or so if we make a competition policy to light let’s put it that way we risk actually having a problem with the Level Playing Field because at the end of the day some member states do have more fiscal capacity than others and third

Question for your example of the solar panels one would be doing better to if if the issue is as you were saying not the current solar panels but the future ones which will have more technology and so on instead of subsidizing buying uh solar panels made in Europe shouldn’t we

Be subsidizing through Horizon Europe through Innovation Europe research and Innovation on those future solar panels instead of being of subsidizing buying the current ones from Europe instead of China which will only make the green transition cost you costlier we just do that no no we just do that I mean uh

But the problem is is different I just mentioned Capital Market Union so we just do this we got quite good at this it’s one of the area in which spending are relatively effective research and relatively coordinated relatively the problem though is as soon as you have a good project and

You need to finance it you don’t need the banking financing you need a capital financing if you need a capital financing that is anywhere around 150 million and above it will be very difficult to find it in Europe and not only in Portugal in Germany as

Well in France so what do you do you take your project across the Atlantic moderna was a bunch of perfectly respectable Marseille doctors and that’s a great American company because when they needed to raise serious money to scale up they couldn’t find it in Europe

So we have a real issue we have the issue of the let’s call it the uh the the finance elevators we have an issue in both having the amount but also being able to help companies to find the right financing mix as they develop because you don’t need the same financing mix

When you’re a small startup in your country and when you start to export abroad and and move up closer to Industrial scale and then when you become big we’re very bad at that in Europe so and I I really don’t think research is the issue because a lot of European research ends

Up in two American Innovations and it’s not by subsidizing more your your research in Europe that we will fix that problem so that that I think is very important it’s it we we are not yet here far from and because we need both the depth and the and the the

Width in financial Market to do that and we also lack the competencies in managing the transitions because even if we were able to assemble the right financing mix at the different stages in the ladder the area of fragility for a company is when you transition from One financing mix to the other

And that we’re not terribly good at this the Americans are Stella for that because they do it a lot also because the Capital Market is five times bigger than ours but I don’t mean to say that we should try to emulate because there are reasons why the American Capital Market is five times

Bigger than ours and that have to do largely to the way they are financing their social model and I don’t think it would sell terribly well to European voters if we tell them we have a great idea for you we will become American in terms of social model

So but but there is a large margin for improvement and if we would only double or triple which is possible the size of a capital market for example by using more white more wisely or public money in the risking the use of private money rather than inputting straight amounts of public money

Largely in form of Grants which means bye bye you never get the upside that there are there is a number of things we could do to to perform better in that respect so on that let me um continue on the same on the same uh on

The same line and then go to the question address to me I mean it is really quite striking when you look at uh one of these little pictures of all the Unicorn companies all these tech companies of the last 10 15 years and you look at where do they

Incorporate where are they based and it’s just overwhelming how they’re in China or in the US 90 plus percent then you look at where were they started and all of a sudden Europe is a third of them or 40 of them so it’s really not that we seem to be failing at research

We don’t seem to be failing at the smaller medium Enterprises I’ll go back to my uh point but once the small medium starts wanting to be big it relocates to the US like in the modern example now I still think that some of it is because we punish big companies so much

Um but let’s let we’ve already discussed that but a large part is certainly like Olivia’s noting the Capital Market so when you ask why is it well it’s modern as an example but uh far-fetched the Portuguese one or uh or many others and why is it that they all go to the US

Once they reach a certain scale what you learn is they say look there’s a set of services in terms of scaling up that are accessed that are in their supply in the U.S market there is financing in the Capital Market but it’s not only financing and Olivia’s already mentioned

About not that it’s not important but since he’s already mentioned it I’ll spend less but there’s a certain ability to scale up things that requires moving to the US market to in order to reach a global scale note all of these are not about industry manufacturing building things but about Services

Provision Capital markets is a service Financial Industries Consulting companies that tell you how to scale up which is not an easy thing as anyone a small company of transitions to a large company is not easy the marketing and others that you see even Silicon Valley by the way which is always we always

Hear the stories of Silicon Valley that come from the 1990s where a lot of companies got started there in the last 20 years a lot of silicon valleys again companies starting somewhere else and moving there to take advantage of the economies of scale in the infrastructure in order to be able

To scale up and so what you see again is that when you look about this competition when you look about productivity a lot of it is coming not from setting some big factories somewhere in putting lots of workers building solar panels that has to do with the new economy with the fact that

There’s all of these other services that are very valuable that are very value-added and at which point Americans seem to be doing it better and this one particular one as opposed to the Europeans and so that is where I think I really fear when we talk a lot about

Industrial policy is that we do industrial policy of the 19th century about building big factories and we worry about big factories or of the late 20th century which is oh it’s all about r d well in some ways it’s really neither of the two it’s really on the

Scaling up its services all of this is services and those end up being the ones we don’t pay attention and on top of it we punish scaling up by having such an obsession with small medium Enterprises and so these are exactly I think you put a nail

On what I think is some source of concern as again we get overly excited about industrial policy which we may be you mentioned on fiscal pulse in the fire and inflation look we have a lot of debt as Olivia put it an enormous amount of that which points to we should be we

Should be tightening spending if you want or raising taxes either way but cutting deficits on that transition assets we have a lot of inflation in our star of intervention saying on how we have an overheated Market that would also call for tightening fiscal policy note by the

Way that the U.S after an enormous fiscal stimulus in 2021 over the last years is actually tightened it’s typically adjusted primary balance is actually close to zero not in Europe because with the energy crisis we’ve continued spending quite a lot and so as a result we are we’re still having some

But now that the energy crisis in some ways in the past is in short-term impact both inflation control or the debt would all point to tightening the belt over the next couple of years do you hear any discussion of tightening the belt if anything the a word austerity is a

Forbidden word in Europe after what happened in the last decade and so yes I share with you that the puzzlement that sees that on the one hand there’s very little political or popular appetite for um for the um if you want again let’s not use the a word for uh going for

Moving towards if anything primary balances that are in Surplus even if all will point that direction and so when it comes to effective control all that says again is and this is another reason why um I am um pessimistic that even the current rate of plans of DCB will not be enough

To bring down inflation is precisely because I think it’s going to be facing fiscal uh headwinds that are Tailwinds actually that are going to make the job even harder requiring even higher interest rates but it is hard to see why the fiscal boat will be turning in a

Direction it’s not impossible but there are many reasons why it’s hard to to to do that and even the Lucio there was here on the previous panel telling you about all the difficulties in getting an adjustment plan of creating capacity at the European level but it does seem to

Be a difficult problem but one that will bite thank you very much I think we’re almost out of time can I just ask you very briefly very briefly is the EU on the right track when it comes to Industrial policy maybe you could each just give me your final thoughts

I mean we’ve speak we’ve spoken at length and I think more than on the right or wrong track I think we’ve pointed to places where it is on the right track places where probably it is on the wrong track places where there’s opportunities to do better places where

There’s risks of doing much worse and so again more I am happy that we’re having discussion on this or policy that are not just about it being black and white about it being a bad idea or a good idea as opposed to thinking of which types of policies are more effective and less

Effective which is very much I think a summary of the last 16 minutes where we’re speaking um I think that’s certainly positive element as I say in the current changing world I worry and I think I’ve used this expression at least five times now I worry about the appetite for industrial

Policy because it’s also not a good in itself and it can be very poorly done in some ways which is not to say that I don’t welcome some industrial policy which I think could be certainly very useful you know in public debates it’s very unfortunately you never

Managed to get the pendulum where it should be so it’s it’s here and then it swings all the way the other way so I agree with Ricardo for so many years industrial policy was the work you know the words you shouldn’t speak in Brussels it was really when you were saying it it

Was shameful industrial policy so but in the end of the day what is it about it is about setting the parameters for long-term competitiveness and then that way when I arrived in Brussels a very very long time ago in the 90s the big discussion was the opposition between industrial policy and compassion policy

Well nearly 30 years later you have the same discussion it’s not any more sophisticated or actually uh having any truth in it than 30 years ago because the truth is they are both meant to be long-term competitiveness policy except one Corporation policy is more focused on structural parameters for competition

And the other one Ricardo mentioned it is more involved necessarily a certain amount of picking up the winners which is always what people like me tends to have to be defiant from this type of policy I think it’s it’s a mixed so this opposition doesn’t exist until a large extent what

We’ve been doing in in competition policy for the last three years is a kind of complement to Industrial policy now for me what what we will make a Quantum Leap in terms of being more effective in setting or or policies in general industrial policy in particular as I said is the

Day we will have a better Collective understanding of what are or joint offensive and defensive interest we will not shy away from making strong decisions in order to pursue them and therefore that means member states will accept to go for a second order Optimum rather than systematically try

To pursue the first other nationalistic Optimum and the more you big and the more true it is so it should start with the bigger one because that’s not an issue for small member states more smaller mistakes no for a long time that the coordinated outcome is better

Thank you very much on that note thank you everyone thank you Foreign