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Lord Mandelson Highlights Different Europe For A New Economic Era

Source: UK Dept for Business, Innovation and Skills (BIS)
Posted on: 8th November 2009

Speaking at the Bruegel think-tank in Brussels today, Business Secretary and former EU Trade Commissioner Lord Mandelson set out what he sees as the challenges facing Europe.

Lord Mandelson spoke about Europe’s role in the world; how we need to get our economic, political and institutional act together, whilst outlining some new ideas on how the work of the European Commission could be reorganised, particularly in the wake of the economic crisis.

Lord Mandelson said:

“We are approaching a decisive break with the economic past – a totally reordered global economy. The idea that this doesn’t require serious new thinking in Europe is just not credible – it must be based based on new strengths and capabilities to enable us to compete in a much tougher global economy.

“We will either step into a meaningful role in a multipolar world, or make do with a walk-on role. Will we drive the agenda, or become a subsidiary of a process driven and shaped elsewhere, above all by the G2, meaning the US and China. We need policies and structures for this changed world.  So it is time that Europe got real.”

Lord Mandelson offered a wide range of suggestions for refocusing EU policy around innovation and investment in growth, including:

  • Refocusing the EU’s structural and research funds to support innovation.
  • Potentially amending EU State Aid rules to boost growth in high-tech industries including low-carbon.
  • Driving forward the benefits of a single market, especially by making open trade in services a reality.
  • Rethinking some of the organisation of the European  Commission to reflect the importance of innovation, the digital economy and climate change.

Lord Mandelson said that it was important that open markets and fair competition was defended during the downturn and this remains the case. He argued that it is right for the temporary State Aid framework to end in 2010, but that new guidelines are needed on risk capital so as to support the growth of high-tech industries, including digital and low-carbon.

He said:

“The EU’s budget priorities are misaligned, and that needs to change. We need to start seeing that the EU budget of “just 1%” of EU GDP as a critical 1% of added value for the EU – but that should be better used, notably at the cutting edge of our investment in European innovation, especially in the skills that help people get good jobs and in low carbon job creation.

“EU rules risk suppressing investment in innovation. Change is needed. EU rules need to encourage private capital to invest and innovate, and state aid rules need to provide the right kind of space for governments to encourage and facilitate such investment. That’s a departure, but it is necessary”.

View images of Lord Mandelson’s speech in our Flickr set

Full text of Lord Mandelson’s speech:

Speech by: Lord Mandelson

Brussels

Obviously at the start of new Commission there’s always a crowded market for advice. So I offer this analysis advisedly. But I do feel that perhaps more than any time in its previous history the EU faces a ‘what kind of Europe do we want?’ moment.

That choice is of course hundreds of individual choices about economic and foreign policy. But they boil down to a future picture for Europe’s weight in the world anchored in two things: the growth and strength of its single market; and second, the coherence with which it projects its policies externally.

We are approaching a decisive break with the economic past – a totally re-ordered global economy. And the idea that this doesn’t require serious new thinking in Europe is just not credible.

We will either step into a meaningful economic and political role in a multipolar world; or we will have merely walk on role, forced to follow other’s lead. In other words will we drive the agenda, or become a subsidiary of a process driven and shaped elsewhere, but above all by the G2, meaning the US and China?

Europe needs an effective role, based on growing economic strength. So we have to equip ourselves with policies and structures for this changed world. It is, therefore, time for Europe to face some facts.

The fact of new emerging powers and economic forces in the world and the implications for our absolute capacity to shape global outcomes in a way that reflects European interests and values. In this world, Europe is the essential force multiplier for every one of its member states.

The fact that one of Europe’s key deficits is leadership. Lisbon is very valuable and certainly gives us a new institutional toolkit. But it is personalities and policies that will make the difference. The point I will keep coming back to today is that we have a problem of leadership in Europe and political willingness to drive change. This does not boil down to a single individual and his ideas, however relevant. It is about an entire attitude of mind.

It has become a truism to say that the only way that even the largest European member states will address the biggest challenges they face, including, of course, climate change and energy security, is through collective action. The same applies to our relationships with Russia, China and the US. It is a truism, because it is self-evidently true.

But we also face a daunting internal economic agenda, which cannot be separated from these problems of external influence projection. We are a community of values – democracy, multilateralism, pluralism, openness, sustainability, equity – and the promotion of these values abroad should always be one of the EU’s core goals. But we are also a market and an economy, and whether we like it or not, our external political influence will inevitably be tied to our economic strength.

That strength matters for its own sake – it determines the number of quality jobs and personal security and sustainable growth that ultimately underwrite everything else we want to achieve as a European society. European people, it seems to me, will judge Europe above all on its ability to deliver a low carbon, high growth, high employment, banking-crisis-free future.

These are the critical problems for the way we invest in and shape the future of the single market. But on the whole they are simply not resolvable by passing more powers to the centre. That is just not politically possible, nor necessarily desirable, given national obligations to national taxpayers.

This basic balance between the need for stability and strength for the European whole, and the need for greater accountability in the national parts, is what we have aimed for in financial markets reform and banking supervision.

This is a problem we are going to face repeatedly, and a balance we are going to have to strike again and again. We need to encourage investment in low carbon growth and high technology, and we need to do this in a way that optimizes resources across the single market – but who should, or could, decide where public money is invested?

We have industries, like the car sector, that have excess capacity, that almost all analysts recognise need to be rationalized on a European scale, but no politically agreed way of even discussing this collectively.

So the policies that address these and other problems will need a new European leadership and a whole new magnitude of political cooperation. We will have to choose the Europe we want. The right choice in my view will be the difficult choice, because it will involve painful change. An agent of change

Whether we like it or not, this recession and its preceding financial crisis will be an agent of change in Europe. It will test more than ever what is viable economically and what is not.

But Europe also faces two big waves of even more disruptive change. The transition to low carbon, which will make many current business models untenable. And the continued push to raise productivity and move Europe’s economy right to the top of global value chains in response to globalization, which will mean replacing a lot of low skilled employment with higher skilled employment. On the way we will have to create millions, probably tens of millions, of new jobs.

All of which means we will have to be deeply innovative, in every sense. The problem is that although the EU itself is an incredible historical innovation, the EU as a group of institutions does not drive with innovation in the way we need. The EU is a tapdancer with 27 feet. Our challenge is getting that strange animal to dance. Where we have it right

First we need to recognise where Europe has essentially got it right, at least in the direction of travel. Where we have got it right is in the fundamental openness of the single market, which has held up pretty well through the banking crisis and the downturn. The existence of the euro has increased the overall stability of the system and removed the risk of competitive devaluations.

We have got it right in our commitment to open competition as the basic dynamic for improving productivity. Our commitment to labour and product market reform, our commitment to better regulation. There have been plenty of people who have argued that the banking crisis has put these things in question, but they are wrong.

And as you’d expect from a former Trade Commissioner, I think that our open trade policy is central to that – and I hope that both Doha and our FTA agenda will remain high up the agenda of the next Commission.

We haven’t delivered as well as we might have on those commitments over the last decade, but they must remain central to our conception of European prosperity.

And they need to be pushed forward. In particular I think that the next big step for the single market is making a reality of open trade in services, especially professional services, and I think the next Commission’s work should be targeted in this area. I also think we are long overdue for a Community patent, and I think, in particular, we need a fast track patent for green technologies.

These are the kinds of ideas I hope Mario Monti focuses on in his work in helping President Barroso define his 2020 agenda. That agenda should be radical. Spending money better

But this Commission also needs to recognise that we need to challenge some important parts of the European status quo. I’m thinking in particular of some of our attitudes to what government can do to equip the EU economy for growth and innovation, and how European rules and policies could reflect that. This statement is often interpreted in Europe as a signal for a return to dirigisme. It isn’t and shouldn’t be.

What we need is an entirely different kind of activist government that, rather than trying to direct industry or counter the basic logic of comparative advantage or commercial viability as we too often have in the past, invests heavily in the things from which that viability and comparative advantage emerges: education, adult skills, a flexible labour market, infrastructure, our science and research base and the effectiveness of our capital markets.

The challenge for the EU is to make these investments in its future in a way that is coherent and self-reinforcing across the single market – even though 99% of those investments will be made by Member States.

But we also need to think more strategically about the way the EU itself spends money – think more like a government investing intelligently in Europe’s capacity and less like a grant office. Our first big problem in my view is that we simply do not put innovation at the heart of the EU budget. I have heard so many people say that the EU budget is “only” 1% of EU GDP, as if this was an excuse for spending it badly.

That one percent, targeted well, could make a huge difference. It is unacceptable that we only spend 5% on low-carbon initiatives when this is an area where network and infrastructure problems such as electric car charging and smart grids suggest real added value for the EU’s pan-European perspective.

All three core areas of the EU budget should be framed as innovation policies. The Research Framework Programme should do more to connect innovative businesses and the European research base, in the way that, say, the Fraunhofer institutes do in Germany.

Instead of spending only 25% of the structural funds on research and development and innovation we should spend considerably more. That means combining the aim of regional convergence with low carbon targets, upgrading skills and building businesses.

I’d like to see the European Investment Bank get more involved in many of these areas. This would require the EIB to increase its risk appetite, although not by too much. But it would have the benefit of making sure investment reflected market priorities. Rules that encourage investment

Our second big problem will be investment more widely – and here I believe an important role for governments demands a change in EU rules. The Commission’s Spring forecast projected a 2.5% increase in the EU household savings rate over the next couple of years. If that shifts the EU away from growth driven excessively by consumer debt then it’s a good thing – and I’m the first to say that the UK has a particular problem here.

But it means that growth and job creation will have to be financed by new investment. And the contraction of bank lending and a general climate of risk aversion will pull that trend in the wrong direction. The Commission projects a worring10% drop in investment across the EU this year. What we can’t afford is to trade an acute credit crunch for a chronic one.

So we need to think about the way EU rules affect the flow of capital to innovation and we have to be aware of unintended consequences. Nobody can credibly argue that the EU doesn’t need greater regulation of it financial markets, and greater EU coordination. The UK has broken with the habits of a lifetime on this and has even gone further in some respects on harmonization of EU and global rules than De Larosiere himself.

But we need to look very systematically at the way we structure and impose new capital requirements – which are necessary, let me be very clear – so that they don’t close off available credit.

And while I understand the Commission’s objective of better oversight of Hedge Funds through the Alternative Investments Directive and welcome the continuing progress and negotiations under the Swedish Presidency. But any measures must be proportionate and fully consulted upon. We must be vigilant against burdening industry with excessive costs, and resist any moves that place restrictions on investor choice, leaving the EU open to accusations of protectionism. The EU must remain an attractive destination for venture capital.

However our biggest challenges in my view are adapting European rules to a structural problem in European capital markets for growth and risk capital. Even before the credit crunch we just weren’t getting enough venture capital to innovative and high tech companies. Even in this environment, US firms could tap venture capital markets for investments worth over $5billion a quarter. In the EU it was about a fifth of that.

I believe that we need new public sources of growth capital, chiefly as a way of seeding much larger public-private funds, managed by professionals just like any other venture capital operation. The UK has created an Innovation Investment Fund that will work this way – using £150million of public investment with the aim of creating a fund worth up to £1 billion. Germany has its KfW.

The new Commission should explore the same sort of thing at EU level to pool capital and risk across the EU and back high tech firms. We should ask ourselves – can we make better use of the European Investment Fund? Could it administer a much larger pool of venture capital to invest in technology funds? Or a fund of funds? What do we need to do to match the US’s pool of capital? Think about it this way: the public investment component of a fund comparable to the US market is unlikely to be more than what is spent every couple of days on the budget of the CAP.

This area of growth finance for innovation is the one big caveat to the argument that there must be a hardheaded end to the crisis flexibilities in EU State Aid rules when the temporary framework ends in 2010.

I have the greatest admiration and respect for Neelie Kroes in sticking her neck out and defending fair competition, even in tricky cases of cars and banks. She is right in principle and in practice. But new guidelines for risk capital are needed, including bigger deal sizes for near-market funds to support expensive technology-based investments. Political roadblocks to sustainable growth

Finally, we need to recognise that if we want the single market to operate effectively and to maximize our economic potential then we will have to find politically acceptable ways of tackling some big resource allocation problems. Both for existing industries, and for the industries of the future.

I don’t think the problems of solving overcapacity in the car industry can be solved by the sort of mechanisms used in the 1980s – production quotas and tariffs. But by invoking the Davignon work recently, Breughel has posed an interesting question about how we can encourage rationalisation

I don’t underestimate for a moment the political challenge in talking about continental restructuring or rationalization, but it is surely preferable to a subsidy war or wasted resources.

This kind of process will be impossible without strong Commission leadership. President Barroso proved his intellect and his authority in his first term. Now he needs to put the accent on his radicalism. The Commission also needs to take the lead in pushing Member States to redefine EU policy around innovation.

I’d go so far as to suggest that this might even mean rethinking the shape or focus of some of the Commission’s policy baronies. Even quite radically. What about a DG Innovation? What about a DG Digital Economy? And if the Commission is creating a Climate Change Directorate General what about having two Commissioners – one dealing with international climate action and the other one dealing with the transition to a low carbon economy in Europe – both more than full time jobs!

At the very least, the Commission’s ability to apply cross cutting policy on these themes needs to be tightened up – and I say that as a respectful former insider with a very high opinion of the Commission and its staff. Conclusion

I’ve made three big points today, all tied to how we redefine the EU’s core spending and policy around innovation. The basic thrust of the open single market and its rules is right and needs to be protected and pushed forward. But I see three big challenges.

First, the EU’s budget priorities are misaligned, and that needs to change. We need to start seeing that “just 1%” of EU GDP as a critical 1% of added value for the EU and the cutting edge of our investment in European innovation, especially in the skills that help people get good jobs and in low carbon job creation.

Second, EU rules risk suppressing investment in innovation. Again, change is needed. Our rules need to encourage private capital to invest and innovate, and state aid rules need to provide the right kind of space for governments to encourage and facilitate such investment. That’s a departure, but it is necessary.

Finally, we need to confront head-on the problem of the tension between what is necessary and prudent economically in the EU and what is politically possible. That means we need an innovative new European politics capable of building coalitions for very difficult European economic reform and compromise. This is the heart of the economic compact for jobs and growth that Gordon Brown proposed last week.

That means building a shared sense of our collective economic future. A clear sense that environmentally, economically, demographically, vis-à-vis China and India and America we are all basically in the same boat. This is a Europe in which leadership will be at an absolute premium. If we shy away from that, the costs will run far into our collective future.

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