Return of Big Government demands care and circumspection
In the midst of the Covid-19 crisis and its associated economic downturn, Big Government is back in a major way across Europe. European countries are almost universally jettisoning the austerity policies which came into vogue in the wake of the last financial crisis; instead, they are taking on ballooning debt in a bid to breathe life back into their stuttering economies, and in many cases choosing to take stakes in private companies in an effort to save flagging industries.
Under the circumstances, the European bloc’s return to interventionism was almost inevitable – but countries will have to tread carefully in order to avoid doing more harm than good. In particular, Italy and France have illustrated the potential pitfalls of the government taking private industry into its own hands.
Interventionism over austerity
As the coronavirus pandemic has left economic destruction in its wake, the EU sought to aid member states in supporting their populations by suspending its typically stringent rules on state aid and budget spending. This has allowed governments to subsidize ailing businesses which would have otherwise almost certainly fallen by the wayside, thus avoiding the mass unemployment rates which have plagued the US since the viral outbreak.
Evidence of the sea change in policy is notable across the board. Berlin, historically leery of budget deficits, has taken a 23% stake in vaccine makers Curevac and a 20% share of struggling airline Lufthansa. France has torn up its budget in order to provide financial aid for health workers, insolvent companies and others in need, as well as fending off external bids for supermarket giant Carrefour. Italy, meanwhile, is employing an almost scattershot approach to its economic policy, seeking to invest in fields as diverse as aviation, infrastructure and finance. While all of these approaches may be well-intentioned, they may not constitute the healthiest strategy on a long-term basis.
Risky telecoms merger highlights Italy’s shaky industrial policy
In particular, the Italian government’s program of renationalization and curbing competition has come under heavy fire, often from within its own ranks. The proposed merger of onetime monopolist Telecom Italia (TIM) with wholesale competitor Open Fiber has ruffled particular feathers. Launched in 2016, Open Fiber provided some much-needed competition for market leader TIM and its introduction was the catalyst for greater rollout of the internet in rural areas and steady progress in Italy’s performance in the Digital Economy and Society Index (DESI) – although there still remains much room for improvement in that respect.
Given that the Italian state lender Cassa Depositi e Prestiti (CDP) owns a stake in both companies, it’s clear that the government favors a merger in order to avoid the costly logistics of a duplicate network. However, concerned consumer groups have written to the EU complaining that the deal would simply facilitate a return to a quasi-monopolistic access network and allow TIM to rest on its laurels rather than investing in the network, as it has done much for of the previous two decades. EU antitrust authorities reportedly also have misgivings about the merger.
What’s more, the plan contributed to the tensions which recently broke apart Italy’s fragile coalition government. Matteo Renzi, the leader of minority coalition member Italia Viva, called out Prime Minister Giuseppe Conte’s prioritization of such seemingly retrogressive deals over bolstering the country’s stressed healthcare system, as highlighted by the fact that Conte’s initial budget for 2021 allocated a mere €9 billion to the sector. In an attempt to appease Renzi, Conte redrafted the government’s plan for spending its €209 billion in EU recovery funds, earmarking more money for areas such as health, education and research, but Renzi still withdrew his party from the coalition. Conte won two votes in parliament to remain in power, but his weakened administration collapsed just days later, as Conte resigned rather than face defeat in a Senate vote. The erstwhile prime minister is aiming to form a fresh coalition, but he will need to get his priorities straight if he hopes that his third administration will be more stable.
France may rue rejection of Carrefour takeover
If Conte endangered his own coalition, France’s own return to Big Government has also come with regrettable knock-on effects: Paris may have risked its drive to attract foreign investment. French Finance Minister Bruno Le Maire kicked off 2021 by blocking the acquisition of Carrefour by Canadian convenience store behemoth Alimentation Couche-Tard. The Canadian outfit had tabled a €16.2 billion bid for the supermarket chain, but Le Maire spoke out against what he perceived as a threat to France’s “food security”. While Le Maire (and, by extension, President Emmanuel Macron) can hardly be blamed for wishing to protect one of the country’s biggest assets in the middle of a global pandemic, nixing the deal may have several deleterious effects.
Not only has it been damaging in the short term – causing Carrefour’s share price to fall by over 10% and disgruntling the company’s major shareholders – but it could also discourage future FDI into France in the long run. As the Canadian government have pointed out, the acquisition of Canadian company Bombardier by French outfit Alstom last year has produced favorable results, so why shouldn’t the arrangement be a two-way street? If other investors are alienated by the Macron government’s hands-on approach to a hands-off stance, it could significantly disadvantage the French economy going forward.
Uncertain roads lie ahead
Governments, businesses and individuals across Europe are wrestling with unprecedented circumstances which call for extraordinary measures. Viewed in that light, an abandonment of laissez-faire austerity principles in favor of providing the support that industries and their constituent enterprises require was nearly inevitable.
Even so, policymakers should not embark on a spree of nationalizations and private sector interventions without an overarching strategy. Rather than throwing good money after bad at projects which promise nothing for the future, governments must do their utmost to preserve jobs and stabilize industries, all the while still courting FDI and planning for a greener, stronger and more digitally advanced exit from the pandemic. The return of Big Government isn’t necessarily a bad thing – but it is a change in policy which must be managed with prudence, progressive ideals and one eye on the potential of tomorrow, as well as the demands of today.
