In this changing landscape, can Europe find a way out of its economic crisis by moving toward a command economy, as the United States is doing? One of Europe’s leading economists, Mario Draghi (former president of the European Central Bank and former Italian prime minister), advocates greater government intervention in the economy as a possible solution. But is this the best solution? And can Europe successfully emulate the American model?
In an article published by the Wall Street Journal and reviewed by Sky News Arabia, under the title “Why is Europe adopting the new American model of economic growth?”, writer John Sendru asserts that following the US approach requires greater government intervention in industrial and trade policy.
EU politics were shaken last week after Mario Draghi, credited with saving the eurozone in 2012, published his report on how to halt an economic recession exacerbated by competition from Chinese exports and the end of cheap Russian energy. His proposal to issue more joint debt was opposed by Germany, which is not new to politics, according to the article.
The author of the article says: “The main point of the report is that it must be European Union Seeking to move closer to the US model in terms of productivity growth and innovation. What does it mean to move closer to the US model? Draghi emphasizes the importance of the technology sector, pointing out that it is responsible for all the excess growth in American productivity over the past 20 years. He argues that Europe cannot afford to remain stuck in legacy industries.
This “vertical” focus on a single sector, he explains, is a major departure from the post-1980s status quo that promoted free markets, entrepreneurship and “horizontal” policies aimed at boosting the entire European economy, such as educating the workforce and building infrastructure. This approach is rooted in the EU’s legal foundation, the 1992 Maastricht Treaty.
The author of the article asks: Why is the United States more productive? He answers the question himself: “This is an old question posed by Allen Young, head of the American economics department at the London School of Economics, in 1928. In a speech, he denied that the gap was due to better management of American companies. That is, methods of production that are economical and profitable in America will not be so elsewhere.”
“Companies will only make large investments to boost productivity if they are in growth sectors where it makes sense,” he says. “That’s why there is a gap in Europe’s non-construction investment rates compared to the US. The top three spenders on research have recently been gasoline-powered carmakers. By contrast, the top spenders on R&D in the US were in cars and pharmaceuticals in the 2000s, then in software and hardware in the 2010s, and more recently in digital applications. But countries cannot easily move into these more complex sectors, because increasing returns to scale create a natural barrier to emerging competitors.”
Indeed, today’s world of “winner-winners,” entrenched trade imbalances, and clustering in a few urban areas cannot be explained entirely by comparative advantage, or even by the effects of unbalanced exchange rates and capital flows, nor can the history of any country that has ever tried to catch up economically. Despite its record of laissez-faire, the United States, during its 19th-century catch-up with the United Kingdom, was an enthusiastic user of protectionist industrial policies.
“The United States was the champion of multilateral free trade in the second half of the 20th century, and had ample incentive to do so until very recently,” the article’s author adds. “Its Silicon Valley companies, partly generated by past military investments, used network economies to become the world champion, but America is changing its mind as China becomes a direct competitor. Industrial subsidies and a vast domestic market are now helping China flood global markets with electric cars, solar panels, and other advanced technologies at prices unattainable for smaller Western competitors.”
The response came first with Donald Trump’s tariffs, then President Biden’s Chips and Science Act and Inflation Reduction Act, which provided federal money to domestic semiconductor, electric vehicle and clean energy industries. Despite the growing pains, as Intel’s problems show, they have led to a manufacturing boom, but the EU has failed to respond in kind, according to Sendru.
Benefits of government intervention
Speaking to Sky News Arabia Economy, economic expert Ali Hamoudi said: “Recent calls for more government intervention in the European economy, which reflect the visions expressed by former European Central Bank President Mario Draghi, have reignited a long-standing debate: Can a more interventionist approach, perhaps similar to the American model, save the European economy from its current crises?”
Hamoudi believes that the argument in favor of government intervention is evident in:
- Addressing market failures, where proponents believe that government intervention is necessary to address market failures, such as lack of investment in green technologies and infrastructure and inadequate social safety nets.
- Encouraging innovation: Government-led initiatives can stimulate innovation and research, especially in sectors such as renewable energy and advanced manufacturing.
- Addressing inequality: A more interventionist approach can address income inequality by funding education, health care, and social programs, creating a more equitable society.
- Controlling inflation: Governments can use fiscal policy tools, such as increased spending and targeted tax cuts, to manage inflation and stimulate demand during economic downturns.
Risks of a command economy
But the economic expert Hamoudi pointed out the dangers of a command economy as follows:
- Low innovation and efficiency. Excessive government intervention can stifle innovation and efficiency in the private sector, creating a less dynamic and competitive economy.
- Increased bureaucracy, as expanding government involvement can lead to increased bureaucracy, slower decision-making, and reduced flexibility in responding to changing market conditions.
- Crowding out private investment: Excessive government spending can crowd out private investment, as companies may see a less favorable environment for growth.
- Moral hazard Over-reliance on government intervention can create moral hazard, where businesses and individuals become overly dependent on government support, undermining self-reliance.
Emulating the American model
Asked whether Europe could emulate the US model, Hamoudi said: “The US has a long history of government intervention in its economy, most notably in the 2008 financial crisis. However, the US model is not without its critics, who claim that it has contributed to inequality and debt accumulation. Emulating the US model in Europe would require a major shift in cultural and political attitudes towards government intervention.”
He added: Known for his bold actions during the eurozone crisis, Draghi has urged greater government intervention to address Europe’s economic challenges, including climate change, technological innovation and social inequality. His arguments highlight the need for a more strategic and proactive approach to ensure Europe’s competitiveness and resilience in a rapidly changing global landscape.”
The debate over government intervention in Europe is far from settled, says economist Hamoudi. While increased intervention could address some market failures and promote social justice, it carries the risk of reduced efficiency, increased bureaucracy, and potential distortions in market dynamics.
He stressed that the key lies in finding a balance between free markets and government intervention. This requires careful consideration of the specific challenges facing European economya clear understanding of the potential risks and benefits of intervention, and a commitment to transparency and accountability in government actions. The path forward requires a nuanced approach that addresses Europe’s unique challenges and promotes sustainable growth and the well-being of its citizens, noting that the future of the European economy will ultimately depend on its ability to navigate the complex interplay between market forces and government intervention, while maintaining a focus on sustainable and inclusive growth.
Productivity and innovation
In turn, economic expert Hussein Al Qamzi said in an interview with the Sky News Arabia Economy website: “We are talking about an economic system that relies on increasing government intervention in industrial and commercial policies, which is currently facing a difficult debate about its effectiveness in addressing Europe’s economic challenges.”
“In his 2024 report on European competitiveness, Mario Draghi believes that intensive government intervention is necessary to boost productivity and innovation in Europe, especially in the technology, artificial intelligence and clean energy sectors, where Europe lags behind the United States and China. Draghi points out that large investments are needed in these areas for Europe to be able to compete with the United States and China,” he added.
One of Draghi’s key recommendations is to increase investment by around €800 billion a year, a move that faces resistance from countries such as Germany and the Netherlands. Such investments are seen as essential to modernize Europe’s aging industrial base and boost innovation. However, political challenges within the EU, such as divisions among member states, could hamper that goal, he said.
In addition, Draghi proposed issuing joint debt among EU countries and easing competition rules to allow the creation of “European champions” that could compete on the global stage, but these proposals have met with significant political opposition.
Al Qamzi sees Draghi’s vision that Europe needs to focus its investments on specific technologies and create global innovation centers to keep pace with developments in sectors such as artificial intelligence Renewable energy requires overcoming major political and structural challenges to ensure its success.
