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If you act like Europe, you get growth rates like Europe

Europe's solution is, and always has been, to attract capital, not reject it

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The eurozone needs putting upright
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Daniel Lacalle
On 8 February 2013 16:08

Rick Santelli - "When you act like Europe, you get growth rates like Europe"

A few days ago I was invited to give a talk at the London Business School. One student asked me what the biggest mistake of European politics was, to which I said, "The conscious decision to support expensive and inefficient sectors, instead of promoting a process of substitution through quality, price and competitiveness."

Why? Because "picking winners" is easier; public funds are treated as if they belonged to no one, demand estimates are always optimistic, and cost does not matter to politicians... Meanwhile, even the most patient investor gives up and leaves. The silent Depardieu.

I admire Gerard Depardieu, an excellent actor. After years of contributing tens of millions in taxes, he decided to leave his country due to the unbearable tax system. It was his right. That is why I use the term "silent Depardieu" to illustrate the process of European de-industrialization which is essential to understanding the current economic environment and the loss of potential GDP.

The de-industrialization of Europe cannot be attributed to liberal policies. In fact, if anything it is characterized by the implementation of giant "industrial policies", Soviet-like plans of public spending on infrastructure, and government support of dinosaur-type national champions in "strategic" sectors. What our politicians call "growth plans." Hundreds of billions... in debt.

The problem created by these plans is an enormous cost that citizens pay in taxes and excessive tariffs, and an "eviction effect" on companies, which need to close or leave to other countries because costs soar and the system penalizes start-ups. And now politicians ask for more of the same. Nothing like repeating a formula that has failed.

Blaming China or India, cursing globalization, and promoting protectionism lead us to where we are. Stagnation and praying that next year will be better.

Governments have a role in the economic transformation of a country, of course. But their mission is not to maintain low-productivity sectors at all costs. Government’s job is to understand globalization and facilitate the transition to high productivity economic models; to encourage innovation, not subsidize it, and promote high education. The problem is that politicians do not like it, because it does not come with photo opportunities.

The current model of "intervention-subsidy-fail-debt-impoverishment-subsidy" leads Europe, and peripheral countries in particular, to compete only through internal devaluation. This is our great success.

When our economic model resembles the policy of an ostrich – that is to say burying one's head and wait for 2005 to return, hoping that the world will recognize our acquired privileges – the only outcome is recession and devaluation. Impoverishment.

Producing low added-value products for others, focusing on construction and concessions, leads to seeking competitiveness through lower wages. It's a patch, but it impoverishes. There will always be a country willing to produce the same good at a lower price.

The point is that the production of such goods must not only have an adequate cost, but a technological and logistical advantage; growth through margin expansion. Europe must change a rapidly decaying model and let change and innovation thrive; not try to go back to 1977.

The industrial plans promoted by the European Union have been characterized by:

- Huge cost to the taxpayer. Industrial plans have always been promoted through spending – more debt – not through tax incentives and deductions. Now most of Europe has public debt above 90 percent of GDP.

Capricious and non-economic political decisions to pick "winning sectors", only to let them fall after a fake price and demand signal created by subsidies.

Read more on: European Union, euro crisis, Daniel Lacalle, and gerard depardieu
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