Industrial Policies: France, Germany and Italy

As the UK government reviews evidence submitted by stakeholders to its Modern Industrial Strategy consultation, I want to take a look at industrial policy priorities of other similar economies to the UK. Of course, this is not the first time that the UK has developed an formal industrial strategy. Many of us remember the one conceived under the Theresa May administration (yes, that really is four Prime Ministers ago!). Whilst the strategy proposed by the current government has eight ‘growth driving sectors’ (advanced manufacturing, clean energy industries, creative industries, defence, digital and technologies, financial services, life sciences and professional and business services), Ms. May’s administration looked at four ‘sector deals’ (construction, AI, automotive and life sciences) and four ‘grand challenges’ (AI, clean growth, ageing society and future of mobility).

Whatever the similarities or differences of these strategies, new action is critically needed. The Office for Budget Responsibility (OBR) noted in October that they expect the ‘weak growth in imports and exports over the medium term’ (partly reflecting the continuing impact of Brexit) to ‘reduce the overall trade intensity of the UK economy by 15 per cent in the long term’.

Whilst many countries, such as the UK, create their own industrial strategies – even if under other names – blocs also drive industrial strategies. Earlier this year, Economy and Business Ministers from France, Germany and Italy said that they believed that the EU needed a new common economic and industrial strategy, particularly in response to the EU’s middle-man position between the US and China. With over 30 million EU jobs in 2021 supported by EU exports to non-EU countries in 2022, safeguarding this legacy is crucial.

The latest update to the EU’s 2020 New Industrial Strategy took place in 2021, but the world is a different place now to what it even was three years ago. In February, there were calls from European industry leaders (the Antwerp Declaration) for a European industry deal to complement the EU Green deal and safeguard European jobs. Mario Draghi, former European Central Bank President then published a report in September, commissioned by the European Commission, on the future of European competitiveness. It’s a document that is an education in and of itself in maintaining a strategic industrial advantage and strengthening supply chain resilience. It also clearly reflects the challenges of weaponization of industrial and trade policies. Draghi spoke in June this year, for example, about three responses to ‘changed world trade rules’. The first was to repair the damage to the multilateral trading order. The second was to encourage inward foreign direct investment. The third was to use subsidies and tariffs to ‘offset unfair advantage created by industrial policies’, whilst caveating that this must be part of a ‘pragmatic, cautious and consistent’ approach.

News broke, over the weekend, that European Commission President, Ursula von der Leyen is setting up a team of officials to take forward Draghi’s blueprint for competitiveness and look at effective implementation. This follows her comments in the European Parliament last Wednesday stating that her next five-year term will be a ‘competitiveness compass’.

From the three key countries calling for this kind of strategy earlier this year, here are a whistle-stop tour of some key highlights from France, Germany and Italy’s industrial policies.

France

According to the ‘Qualifying Industrial Strategies’ project, France’s industrial strategy expenditures in 2021 were significantly higher compared to countries of a similar benchmark (e.g. UK, Canada, Denmark, Israel, Sweden). The majority of this was spent on supporting jobs and skills, reducing labour costs and supporting apprenticeships through grants.

In 2021, a new investment plan was also drawn up – France 2030 – which focuses on encouraging investment and innovation in priority sectors to drive growth in France’s industrial sectors by the year 2030. The priority sectors were: automotive, aerospace, digital, green industry, biotechnology, culture and healthcare, worth 30bn euros over five years. Whilst five years might seem a short time for this fixed spending, France is seeking to respond to its own difficulties in terms of general deindustrialization and loss of interest in industrial sector jobs.

One particularly interesting aspect to note about France’s industrial levers is BPI France, a body whose goal is to grow France’s economy by helping entrepreneurs thrive. However, it also manages France’s export finance schemes and almost 98% of other financial instruments. 40% of support through non-export financial instruments is focused on firms below a certain size threshold (e.g. ‘SMEs and young firms’) and this focus is an important one. More interestingly, the French government actually created BPI France in 2012 in order to specifically help French entrepreneurs revitalize the country’s economy. Today, therefore, it is essentially owned by both the French government and the Caisse des Dépôts, the country’s sovereign wealth fund – this means that the organisation can take different (and bigger) types of risks on investments. This model is not dissimilar to Business Sweden, jointly owned by the Swedish state and the Swedish business sector. Models such as this, delivering key industrial strategy goals, are worth the UK government’s attention.

Germany

Germany set their industrial strategy last year, with the rather long title: ‘Industrial policy in changed times – safeguarding our industrial base, renewing our prosperity, boosting our economic security’. Littered throughout it are references to Germany’s strong exporting performance and linking it directly to the efficiency of the German industrial sector, with the manufacturing sector along selling almost 50% of its output to customers outside of Germany. However, it is also recognised that there is a shift in patterns from ‘traditional’ industries to the ever-growing services sector. A link is drawn between the interdependence of these areas, with service providers functioning as ‘upstream suppliers’ for industry and product-related services growing in significance in the marketing of industrial products.

Technologies are what stand out to me the most from this strategy, though – both in intention and delivery. One of the key aims of Germany’s industrial strategy is to ensure that Germany is the kind of environment where semiconductor and transformation technologies wish to base themselves. There is also acknowledgment that, reacting to the US’ government’s then stimulus, competitive conditions for future technologies are in danger of becoming unbalanced to Europe’s detriment. Two clear points of interest are climate-friendly production technologies and a specific plan for a ‘Development of Digital Technologies’ programme, which includes progression of artificial intelligence and quantum computing research to set Germany ahead in the race for technologies of the future.

Italy

Italy’s industrial policies have developed over time, most recently with a Made In Italy Framework Law which last year which protects Italian industries, establishes a national sovereign fund and prioritizes ‘excellent supply chains’. Their Made In Italy plan naturally prioritises their export sector strengths: apparel and fashion, food and beverages, home furnishings and automation-mechanics.

One fascinating aspect of Italy’s industrial policies over recent years is that Italy’s financial instruments tend to support SMEs in greater measure in comparison to similar sized economies. For example, 16% of grants and tax expenditures in Italy target SMEs, in comparison to 11% on average for benchmark countries and 57% of non-export financial instruments target SMEs, in comparison to 27% on average for benchmark countries, in OECD data from 2021. This becomes more interesting when we know that Italian SMEs contribute about half of national exports (45%). This is greater than the preceding two countries we have looked at, which fall around the 20% mark. Additionally, if we look at Eurostat data from 2022 which notes that the share of SMEs in the number of enterprises exporting outside the EU was highest in Italy (98.2%). It is hardly accidental that funnelling more investment into SMEs means that a greater proportion of SMEs are able to both participate in exporting and also consider new and emerging markets, beyond the EU.

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We already have a glimpse of what the UK’s new modern industrial strategy may look like in comparison to European industrial policies laid out above. With formal publication of the strategy there is now time of the UK government to reflect, take in stakeholder feedback and look at industrial policy priorities.