The Institut Louis Bachelier, in partnership with the BNP Paribas Foundation, organised another edition of the Conversations A/venir on 7 November at the Collège de France. During the event, Philippe Aghion, economist and professor at the Collège de France, spoke on the subject of the reindustrialisation of Europe.

While the last few decades have been marked by a reduction in the contribution of industry to value added, the covid-19 pandemic and the ecological transition underline the need to rebuild industry in Europe. This observation is shared by the United States, which is pursuing a particularly proactive policy in this area. In fact, the Inflation Reduction Act (IRA), adopted by Congress in August 2022, will direct almost $400 billion in funding towards the US energy and climate industry over the next 10 years.

Towards the end of Ricardo’s theory of free trade?

However, the need to reindustrialise Europe is not self-evident. “Ever since Ricardo’s work in the 19th century, we have known that a country benefits from specialising in the factor of production in which it has a competitive advantage“, pointed out Jean Michel Beacco, General Delegate of the Institut Louis Bachelier in his introduction. So why should Europe go into industry when its labour costs are higher than in emerging countries, notably China?

The Washington Consensus and triadic patents

Philippe Aghion’s presentation provided some answers. The neo-liberal model, defended by the IMF since the 1980s (“the Washington consensus”), is opposed to any state intervention in industry. Policies should be limited to horizontal interventions – schools, institutions, respect for the law – to create a climate conducive to innovation. It is innovation, driven by rent-seeking actors, that is the source of growth, as explained by the model developed by Philippe Aghion and Peter Howitt in 1987.

However, the weakness of Europe’s industrial policy, particularly in France, is at the root of relocation, which explains why several scientific sectors are falling behind. To measure the distance to the ‘technological frontier‘, Philippe Aghion compares the number of ‘triadic’ patents, i.e. those filed simultaneously in the United States, Japan and Europe. While France remains among the top 15 countries in the world, it has fallen further behind in areas such as medical technologies and the cars of the future.

Industrial policy is therefore justified on the grounds of the positive externalities it generates in the economy, to resolve coordination problems (the transition from prototype to industrialisation and marketing) and to limit “path dependency”, i.e. the influence of past technologies on innovation, particularly in the area of fossil fuels.

A European agency

Against this backdrop, Europe needs to reform. The European Union (EU) is a “regulatory giant, but a budgetary dwarf“, explains Philippe Aghion. The economist is therefore urging the EU to make a common borrowing mechanism of around €500 billion permanent, along the lines of the “Next Generation EU” recovery plan adopted after the Covid-19 pandemic. This fund could give rise to a European industry, with the help of private funding.

Philippe Aghion also advocates the creation of a “European DARPA”, modelled on the US defence agency, to improve links between research and industry. Finally, the professor at the Collège de France suggests that the EU should facilitate state aid, which is theoretically prohibited, for industries that support the ecological transition.

Lost Einsteins

Philippe Aghion’s speech was followed by a round table discussion, moderated by Guillaume Ledit, Editorial Director of ADN Studio, to discuss possible solutions. Priority must be given to “decarbonising industry“, explained Sylvie Jehanno, CEO of EDF subsidiary Dalkia. This can be achieved in a number of ways: improving energy efficiency, electrification and digitalisation. Isabelle Loc, CEO of BNP Paribas Leasing Solutions, defends the “circular economy”, which can be a distinctive driving force for industry in Europe.

And the speakers agreed on one crucial point: the education system is the foundation of any economic policy. Without high-quality scientific training, efforts are in vain, because talent does not emerge. Philippe Aghion quoted the economist Xavier Jaravel, who spoke of “lost Einsteins“. To avoid this situation, and to enable industrial vigour to be restored, the EU needs more than ever to redouble its political efforts.

You can listen to the audio recordings of the conference here