Protecting Europe’s Declining Industries Will Not Stop the Far Right
The AfD’s success has given Europe’s political and business elites another excuse to blame Brussels. They should confront their own failures to invest in innovation and skills. A commentary by Lorenzo Bini Smaghi
Much has been written in recent days trying to explain the success of the neo-Nazi Alternative für Deutschland party in the German state election in Saxony-Anhalt.
The most interesting, if unsurprising, feature of the debate is how readily responsibility is shifted on to others, following a populist pattern that has become contagious.
As so often, Europe has become the preferred scapegoat of politicians and business leaders alike.
The reasoning is simple.
Saxony-Anhalt is one of the regions that have suffered most from the deindustrialisation affecting the continent. It is in these left-behind regions that anti-democratic sentiment takes hold and the traditional ruling class is rejected. The main responsibility for all this lies with Europe and its notorious policies, starting with the Green Deal. The car industry is often cited as an example of excessive European regulation and insufficient protection against ruthless Chinese competition.
In short, at the heart of Europe’s democratic predicament lies a failure to protect businesses. According to this argument, democracy must be defended by reindustrialising Europe.
It is an appealing thesis. Nor is it unlike the argument advanced by the MAGA movement, which casts the deindustrialisation of the Midwest as the source of all the ills afflicting American democracy.
Yet the argument is wrong on several counts.
First, it is not true that industry is a bulwark of democracy. In Germany, as a recent Financial Times article shows, populist parties are strong in the heavily industrialised regions of the east, but less so in the western states.
In other countries, such as France and the Netherlands, these anti-democratic movements are concentrated mainly in rural areas and small towns.
The phenomenon is therefore far more complex. It depends less on the predominance of a particular sector than on the underdevelopment of the economic and social fabric, which makes it difficult to adapt to technological change. This problem will not disappear with the spread of artificial intelligence.
Defending industry at all costs is therefore no solution. On the contrary, it risks making the problem worse.
Not least because the hardship caused by falling incomes and declining manufacturing employment, particularly in the car industry, stems from businesses’ inability to keep pace with competitors, rather than from European constraints. Chinese cars are cheaper, but also better in quality, especially at the more affordable end of the market.
China’s competitiveness stems from the substantial investments it has made to modernise production processes, which are now extensively robotised, and from massive reductions in employment. Over the past 20 years, Chinese manufacturing has shed about 18 million jobs.
The belief that, in these circumstances, businesses can remain competitive while maintaining employment levels and subsidising old technologies has been, and remains, an illusion shared by Europe’s political and business leaders.
Without industrial and energy policies that encourage innovation, European companies will continue to use outdated plants to produce goods for which demand is gradually shrinking.
This brings us to the crucial point.
In Europe, industrial policy is the prerogative of national governments. These policies have focused primarily on rescuing struggling companies, often at those companies’ own request, rather than encouraging innovation and helping businesses grow in scale, as China has done.
State aid, although constrained by EU rules, is administered looking at the rear-view mirror, instead of fostering competitiveness.
Social policies, also a national responsibility, tend to prioritise job protection, even in sectors with no future, rather than investing in the human capital needed to use new technologies.
Trade policy, by contrast, is an EU responsibility. Yet for many years businesses, particularly German and Italian companies, opposed the introduction of targeted tariffs on China. They preferred to continue exporting to and investing in that country for as long as they could, even at the cost of transferring technology. Now that Chinese technology has become superior, European business leaders are demanding protection.
The cause of populism lies not in European institutions and policies, but in the failure of national governments and the business community to pursue policies that foster innovation and strengthen the social fabric to support the most vulnerable.
Of course, it is easier to blame Europe for everything that goes wrong. Until now, this was the populists’ favourite sport. It has now become also the elites’..
A previous version of this article was published in the Italian daily Il Foglio
IEP Bocconi does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
