Economists Entering the Political Stage

The recipe for how to increase a country’s Gross Domestic Product (GDP) can look counterproductive. Cleaning up after the Deepwater Horizon oil disaster has increased the economic growth of the United States for example. A growing economy is thus not in all circumstances desirable, just like growth in general is not always a good thing (think of obesities, or cancer). Nor is a declining economy necessarily something to wish for, as more productive employees require more GDP to keep the same level of employment. GDP is not “good” or “bad”; it is just an economic statistic. It is the politicians who are obsessed with GDP and who are focusing on economic growth as a measure of our nation’s wellbeing.

The GDP obsession is part of the broader trend of economists and financial entrepreneurs entering the political arena as directors. Of course it is quite convenient to have an economist calculate the costs and benefits of a policy measure in monetary terms and see if the benefits outweigh the costs. In this way, we can even save the trouble of electing politicians as they have become redundant; we can just have economists do the job for them! At least that is what must have been on people’s mind when they made the finance ministries the most important part of the government apparatus. When a banker was appointed as prime minister in Italy. And when economists from the IMF and the European Commission started to run Greece.

Don’t get me wrong: ever since the 1970s the “invisible hand of the market” really has led most of us to more wealth. China opened up its borders for trade and with this move lifted three hundred million of its citizens out of poverty. EU citizens are now living longer than ever before, with better access to good healthcare facilities and education.

But in the past decade creases in the system became visible. The economy was growing faster than the underlying market fundamentals and ‘bubbles’ were created, most recently in the housing sector. When this bubble burst in 2008, stock markets collapsed and economic growth stemmed. The “invisible” hand of the market was tightening its grip. The financial sector needed saving and states had to reach deep in their pockets to bailout banks and insurance companies. Since this move reflected badly on the countries´ housekeeping books, the “invisible” hand of the market demanded credit rating agencies to downgrade states´ financial status. Enacting unpopular and severe austerity measures was as this point the only option left to politicians to stop the interest rates on their sovereign debts from going through the roofs. Politicians were (and still are) forced to play at the whims of the financial entrepreneurs who are setting the rules of the game.

Globalisation, Growing Inequalities and Failing Industrial Policies

The EU is no exception to the growing influence of capitalists on politics. The Economic and Monetary Union was created at a time when capitalism gained the upper hand and socialism ended up as the loser of the game; and the internal market is seen as the shining star of EU’s achievements. The argument goes that more market leads to more competition; hence lower prices and more choice for consumers; and more wellbeing and jobs for citizens.

While this has indeed partly come true, more market and globalisation have also led to more competition from abroad and the countries abroad do not necessarily abide by the free market rules of the EU. As a result jobs could be outsourced to countries where taxes are lower, companies could move to countries where government support is higher and the majority of our energy imports could originate from one single country that has invested heavily in building the pipelines to Europe. Delocalisation -production moving to emerging economies like China- has hence sparked fear and public anxiety over job losses. Since the 1980s Europe witnessed a period of sustained economic growth, but still the socio-economic inequalities in most EU countries are higher today than in 1980. These growing inequalities and job losses appear to fuel nationalistic sentiments against outsiders, immigrants, EU interference.

There is no such thing as a global free market, European officials have now come to realise. In 2010 the quest for economic growth therefore became the quest for economic growth that is smart, sustainable and inclusive. Not that much later investigations into Gazprom’s monopoly position and the dumping of Chinese solar panels were initiated. It seems to be part of a grander strategy to reindustrialise Europe since more regionalisation can underpin job creation and enable the transition to a climate-friendly, resource-efficient economy.

However, reindustrialisation is not easy. The EU market makes up almost 80% of the world market for photovoltaic (solar) energy and over 30% of the relevant patents are European. Nevertheless, only 13% of the production of PV cells takes place in Europe. The reasons can be multiple: one explanation could be that China is offering its producers cheap credit, another that the wages and energy prices in Europe are higher than abroad. But simply put, European politicians and officials are just not that good at industrial policies.

Free Market as a Religion

One of the reasons why politicians have failed to make Europe the birthplace of the Third Industrial Revolution is our unjustified and unlimited trust in the free market. Government interventions or (“over”)regulation are shunned in Europe for they supposedly distort the free market and thereby diminish the potential of the economy to flourish, even though recent history tells us something else. The impact of the global economic crisis was less adverse in the emerging countries like China than in the US and Europe for example, partly because financial liberalisation in the BRIC countries was restrained and deregulation of domestic financial sectors paced. Protectionist measures are excluded in Europe as the state could bet wrong. Still the US government interventions in and support for certain industries have proven quite successful if you look at Silicon Valley or Boeing.

Europe has been quite successful in setting the rules, with the aim to create a level playing field or address market failures so that the market can operate more efficiently. We fall short of providing public support for clean technologies but we do create demand for green products through our CO2 market that sets the carbon price. Our believe in markets is apparently so great, that when confronted with environment problems, market-based solutions are all we can think of. The CO2 market is already showing creases however; it is suffering from a structural oversupply of CO2 permits and a structural low CO2 price. Investors like Deutsche Bank and market players like Shell are hence losing confidence in the market and are calling for government intervention. Too bad that intervening in a market is not something you do in Europe.

Sustainable Reindustrialisation

But let’s not only be negative as by and large the new focus on the reindustrialisation of Europe is a good development. And market-based solutions are essential for sustainable reindustrialisation to take place. We really do need to get the prices right, by pricing pollution and resource use to capture the societal, but unvalued impacts on public health and the environment. One can equally argue that a shift in taxation from labour to capital is required: Globalisation has benefitted capital at the expense of the working class and thereby increased inequality. Labour productivity has increased twentyfold since 1850, but somehow this did not benefit the workers. In the US, the wages of labourers remained roughly constant, while the value of their output per labour hour rose. Hence, profits rose sharply and the inequalities of wealth and income increased. Restoring the imbalances between capital and labour is crucial and taxation can do part of the job.

The sustainable reindustrialisation of Europe needs more than “better functioning” markets however. Politicians need to shake off their economist hat and start guiding the market, instead of following it in the name of more economic growth. We want Europe to become a smart, sustainable and inclusive society, so let’s put our money where our mouth is. Our CO2 market puts a price on the pollution of industries, but the revenues do not flow back to support the uptake of innovative, climate-friendly technologies and innovations. Neither companies, nor citizens are completely satisfied with a Europe that makes rules, but does not provide incentives.

With a budget of more than 100 billion euros, Europe is able to provide incentives. Currently, almost half of the total EU budget flows to the agricultural sector even though most farmers do not want to be dependent on EU subsidies for their livelihoods. Giving farmers a fair price for their products presents a fairer deal and the bio-based economy opportunities could help in this regard. The post-petroleum, bio-based economy will replace the oil used to produce plastics, chemicals and pharmaceuticals by biomass.

By supplementing food production, bio-refineries that sustainably process biomass into a spectrum of marketable products present a chance for the agricultural sector to diversify revenues. Creating more value added products close to the agricultural production could thus enhance the revenues of farmers. Reindustrialising rural Europe without the industrialisation of agriculture, so to say. The EU budget can instead increasingly flow to support R&D, the uptake of innovative and sustainable products and technologies and to compensate for the delivery of public services like ecosystem services.

The Vision

While free markets and globalisation boosted our incomes, our wellbeing was not always improved as the inequalities between capital and labour increased and a growing trend of delocalisation can be observed. Public anxiety for job losses is rising, fed by popular media, as more and more jobs migrated to other parts of the world. Regionalisation and the reindustrialisation of Europe are touted as solutions but can only be successful if the politicians start directing the show again and do not leave all problems for the free market to solve. Our vision about where we want to go is clear: the Europe of the future is an equal, but diverse, society, with clean air, a healthy environment and a resilient economy providing quality jobs for quality wages.