ABSTRACT
The Europe Community appears to be reaching a critical turning point in industrial policy and trade policy. The context within which those policies are formulated has been revolutionized by the Single Market program (EC-92), and, with the signing of Treaty of European Union, further economic integration has been agreed. The impact is likely to be immediate as countries struggle to align monetary and fiscal policies. Monetary union and a single currency may come sooner rather than later, and geographic expansion will likely occur in the next few years as consideration is given to membership applications by Austria, Sweden, and Finland.
The New Europe is therefore emerging, but as change takes on a more permanent cast, new problems are emerging. Since World War II, Europe has struggled between opposing visions of economic and social life. On one side lies the demand for efficiency, which has come to mean a relatively unfettered, and, in Europe’s case, integrated market. On the other side lies equity, and the belief that markets must be regulated, and market outcomes mitigated for a variety of economic and non-economic reasons. Europe’s struggle has been to accommodate efficiency and equity at the same time.
For nearly 30 years after World War II, the balance tilted heavily toward equity. Government policies sharply limited competition, 258encouraging instead the creation of “national champion” firms which dominated their home markets. In the context of the long post-War boom, this did not appear to be such a great problem, because the rising economy lifted all ships, including those that remained tethered to the shore. By the end of that golden age (around 1970), the Europeans discovered that growth was not automatic. They had to confront harder choices between equity and efficiency, as economies slowed and inflation and unemployment rose.
Traditional solutions were tried first. Industrial policy had worked in the past, albeit better in some sectors than others. Because industrial failure has consequences that go far beyond the firm, one major European response to slowing growth was to prop up failing industries to help ensure a graceful transition. However, the internal contradictions of this logic were quickly exposed as favored firms simply failed to adjust fast enough to meet the competition. Protectionism was another option. Yet as global competition increased, a retreat into national markets too small to support modern industries was simply not a viable option.
The solution to the impasse came in the mid-1980s with the drive to establish a single market in the EC. The EC-92 program is fundamentally about market liberalization and the opening of tightly controlled national markets. In consequence, the balance of policy has been tilted away from equity within national markets toward an efficient European market. This has been accomplished partly by preventing European governments from using the industrial policy tools they have long favored to help domestic firms survive and compete.
EC-92 has been a roaring success. But as a direct result, it is now becoming its own victim. Europe faces an imminent future of radical—and in some cases catastrophic—change, as market forces threaten to demolish some of the well-established national champions. In France alone, Renault, Thomson, Bull, Usinor, and even Matra are only some of the chosen firms now in deep trouble. The national champions of other countries face similar problems. Firms, workers, and governments are unlikely to accept sweeping changes of this magnitude, even though they may continue to favor the overarching strategy behind EC-92. The equity tradition will not be easily discarded.
As a consequence, Europe is now going through another policy revolution. Out of the conflicting pressures to save old industries and yet create competitive firms, an entirely new industrial policy seems to be developing as a middle way between equity and efficiency. This new European industrial policy weaves together elements of traditional industrial policy, trade policy, and, most importantly, a policy toward foreign direct investment. Gradually, and without any action that even approximates a conscious policy choice or coherent decision on the part of the Community, foreign direct investment is coming to play a pivotal role in the New Europe.
Foreign direct investment is adding a massive dose of efficiency by challenging domestic producers on their home turf. Comfortable national champions are comfortable no longer as invaders from Asia, the United States, and indeed other European countries attack long-dormant markets. Yet at the same time, the Europeans 259are taking a more activist approach to foreign investment, with a focus on attracting it and then managing it in such a way that it makes a positive contribution to European development. The result is that foreign investment is beginning to produce European jobs with a high level of European content and value-added. It is also contributing the skills and technology that will help to cushion needed transitions. In effect, the Europeans are trying to make foreign direct investment into an engine for promoting both efficiency and equity.
