Reindustrialising Europe – a recipe for economic survival

Reindustrialising Europe – a recipe for economic survival

Europe is worried about manufacturing. Raising manufacturing’s share in gross domestic product to 20 per cent was set as a key goal by the European Union in 2012. Since the European Commission’s pronouncement, that contribution has actually declined by 1 percentage point, to 15 per cent, writes Prince Michael of Liechtenstein.

In recent decades, Europe has evolved towards a service economy, echoing the earlier transition from an agrarian to an industrialised economy in the late 19th and early 20th centuries. As this shift occurs, services account for the lion’s share of employment and value added.

Several forces are driving this trend, making it the norm in growing, mature economies.

- New technologies and widespread prosperity spur higher demand for services.

- Gains from automation and efficiency lower unit costs and require less labour. More and better goods can be produced at cheaper prices, lowering manufacturing’s nominal share in gross domestic product.

- Productivity increases due to specialisation, as companies increasingly outsource tasks to other countries or continents. A typical example is the automotive industry, which draws on a global network of parts suppliers. This requires better logistics, a part of the service economy.

- A logical consequence of this is the transfer of production to areas with lower labour costs or more efficient labour laws. This is facilitated by the ease of transporting many types of goods.

All of these developments bring long-term benefits.

Outsourcing production to more cost-efficient places does not mean exploitation of underpaid people in developing countries. On the contrary, it helps less developed societies evolve by providing jobs and training, as well as boosting demand for inputs and ancillary services, ultimately leading to a higher standard of living.

Negative examples, such as the garment factory building collapse that killed 1,138 workers in Bangladesh, should not discourage this trend, but underscore the need for proper due diligence on suppliers.

To be sure, the decline of manufacturing in Europe is also being driven by less benign forces. Bad policies, inefficient regulation and excessive bureaucracy play a role. One example is Germany’s new ‘sustainable’ energy policy, which increases power costs to uncompetitive levels and may even lead to blackouts.

The disproportionate growth of Europe’s public sector in recent decades has created economic overheads, absorbed capacities and become a dominant component in GDP statistics, thus reducing the share of the productive sector.

The EU now favours ‘reindustrialisation.’ Plans have been laid to enhance manufacturing in Europe and the term ‘new industrial revolution’ has been coined.

The problem is that such sweeping government programmes usually fail, at least in peacetime. Unless you have a command economy, an industrial buildup cannot simply be decreed, and even then its long-term sustainability is doubtful. The EU’s own midterm analysis of its broader 2020 strategy, adopted in 2010, shows the bloc continues to lag behind in job creation and spending on research and development.

This is not for lack of a foundation. Europe has more than its share of the world’s top scientists and engineers. It has outstanding technical universities and research institutes. Many of the continent’s industrial companies are global leaders in innovation and quality.

But unfortunately, Europe is no longer a leader in industry. ‘Silicon valleys’ cannot be created by governments. They only grow organically, by attracting the best talent to an environment that is not overregulated. Research centres such as universities typically serve as incubators and hubs, offering know-how to innovative businesses.

The other prerequisite is a functioning market that doesn’t suffer from the distortions introduced by central planning and government intervention. Certainly, Europe needs a robust manufacturing base, served by an efficient infrastructure. But allowing markets more free play is the only way to achieve the right balance of economic sectors over the long term.

Europe suffers from an inflexible job market. High rates of unemployment, especially among young people and in southern Europe, will eventually compel us to relax labour laws. This liberalisation will release human capacities to employment and enhance all sectors, especially manufacturing. But for now, unreformed labour codes are a ‘holy cow’ for politicians and trade unions, which prey on public anxiety and urge protectionism.

A catalyst for change could be Europe’s immigration crisis. This influx is a secular event that cannot be stopped. The question is whether to keep immigrants idle and frustrated in camps, with all the detrimental consequences to society, or to integrate them into the economy so that they can make a contribution? Flexible labour markets could turn the flood of immigrants into a real opportunity for Europe to grow, both in manufacturing and services.

The general rule should be that goods are produced at the most favourable locations, while safety and sustainability standards are enforced in ways that do not foster protectionism. Europe can develop more industrial capacity if it improves as a hub of innovation – but that can only happen in a free business environment.

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