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Sommario:

1. Introduction - 2. From industrial policy to a regulatory state? A statist alternative - 3. Privatisation - 4. Structuring markets – Mergers and acquisitions - 5. State support for selected firms in competitive markets - 6. Planning - 7.Conclusion - NOTE

Industrial policy and economic regulation of markets are usually seen as opposites. Industrial policy involves political choices to favour selected ‘champion’ firms. In contrast, economic regulation is based on legal rules focused on competition. Major literatures on (neo)liberal institutions and the ‘regulatory state’ have argued that regulation designed to ensure competition and implemented by unelected institutions has increasingly replaced industrial policies in Europe and elsewhere. However, this article challenges the proposition that economic regulation and industrial policy are always in conflict. It argues that they can be compatible, and indeed in Europe, the spread of economic regulation has in fact given rise to a new form of industrial policy. It does so by distinguishing the institutions of market regulation from instruments and their uses. It argues that although in Europe, traditional national industrial policies have been greatly reduced, market regulation designed to promote competition has provided new instruments, which have been used to support European champion firms. The article begins by outlining the key features of traditional industrial policy and the literature claiming a cross-national move towards ‘liberal’ economic institutions and a ‘regulatory state’. It draws on recent ‘statist’ literatures, which suggests that far from being diminished, state action can recur, but in new forms and that the state continues to promote domestic firms despite liberalised markets. It seeks to develop this theme by showing how institutional changes have reduced or ended traditional industrial policy instruments but provided new ones to give rise to a new form of industrial policy in Europe. It examines four related major institutional changes in regulation to illustrate its argument: privatisation; merger control; regulation of competition; medium-term planning. Empirically, it focuses on ‘regulated industries’, such as energy, telecommunications, railways, airlines, water, finance, chemicals and pharmaceuticals, since these were at the core of traditional industrial policy in Europe and have seen the greatest change towards regulatory institutions. Its conclusion suggests the processes through which the creation of regulatory institutions has aided or permitted the rise of a new form of industrial policy in Europe.

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For several decades after 1945, ‘economic regulation’ was a term rarely used outside the US. Instead, many markets were dominated by national ‘industrial policies’. Although several definitions of ‘industrial policy’ exist, at their core lies the concept that the state seeks to influence the supply side of the economy [1]. In Western Europe, industrial policies involved explicit state support for ‘national champion’ firms and/or for specific sectors [2]. They were pursued by elected politicians and their departmental civil servants executives at the national level, and sometimes also at subnational levels, together with the senior managers of state-owned and privately-owned ‘national champion’ suppliers, as well as representatives of labour. The state played direct roles in the structuring and operation of economic market. It enjoyed considerable discretion and formal powers which it used to favour selected ‘national champion’ firms as part of objectives other than just ensuring competition, notably relating to developing the overall economy, national prestige or political advantage. Such industrial policies were dominant in many sectors – notably the network industries, but also others such as banking, finance, mineral extraction and parts of manufacturing. They were seen in most West European countries, as well as Latin America and parts of Asia. Some national champion suppliers were privately owned. Others were publicly-owned firms that sought to compete with private firms. Finally, there were publicly-owned monopolies, notably in network industries such as telecommunications, energy and transport. Although not organised and presented as commercial entities, these suppliers were central to implementing policies of prioritisation of certain sectors, developing technologies and supporting other, more commercially oriented domestic firms. Of course important cross-national differences existed. Industrial policies in France were marked by ‘dirigisme’ and ‘grands projets’ which saw close cooperation between the state and selected public and private suppliers and gave rise to technological advances on sectors such as high speed trains, telecommunications, nuclear energy and aerospa­ce [3]. In contrast, Britain was often unable to promote such projects due to the gaps between public and private sectors, constraints on public spending and [continua ..]

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Public ownership of suppliers lay at the heart of post-1945 industrial policy in Europe. It was very wide in most countries, covering network industries such as telecommunications energy, railways, water and airlines and often stock exchanges. However it also extended to manufacturing, such as cars, aerospace, mineral extraction and working (coal, steel, oil), large parts of finance (banking, insurance) and transport. Public ownership varied a little in extent across countries (for instance, being somewhat more limited in the UK than say France and Italy) and form (being more national in France than Germany, or more indirect in Italy through IRI than in France). Public ownership of suppliers provided governments with direct and indirect policy tools to promote industrial policy. It provided suppliers who could then enjoy privileged treatment, often in the name of ‘the public good’. In network sectors, this took the form of legal doctrines of ‘service public’or ‘servizio pubblico’ [15]. Public ownership aided governments to structure markets, deciding how many suppliers should exist and their size; indeed, nationalisation of firms in the 1960s, 1970s and 1980s was often linked to merging several suppliers in order to create large ‘national champion’ suppliers (for instance, in cars or steel). Thereafter, state-owned suppliers allowed provision of orders and other forms of support to privately-owned firms. Other policy instruments were influencing prices, investment and the selection and development of new technologies. Government policy choices about which firms and sectors to support often passed through the decisions of state-owned suppliers. Privatisation has swept through Europe, as well as other parts of the world [16]. In Europe, ‘privatisation’ has at least two senses: legal transformation into a company; transfer of ownership from the public to the private sector [17]. In the first sense, almost all suppliers have been privatized – including postal operators (e.g. Deutsche Post, the Post Office, La Poste). Moreover, in the second sense, ownership of many state-owned enterprises has also been transferred to the private sector. Thus for example, most telecommunications operators, banks, car companies and airlines have been sold off [18], plus a majority of energy suppliers. Even some railway and postal operators have been privatised (e.g. Deutsche Bahn [continua ..]

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A key purpose of structuring markets in traditional European industrial policy was to develop large ‘national champions’, both publicly and privately – owned, with the aim that these suppliers would enjoy economies of scale and world-market size. National policy makers held powers over mergers and acquisitions; indeed, in some countries there were no specific merger authorities and very few legal rules. Governments could use their powers to allow mergers and acquisitions that formed part of their industrial strategies, notably expansion by ‘national champions’, including state-owned enterprises. Conversely, governments could block undesired market restructuring, especially hostile foreign takeovers. Just the threat of such action was usually sufficient to ward off overseas predators, a situation that prevailed even in a ‘liberal’ market economy such as the UK. A major institutional change since the late 1980s has been the great reduction of the legal powers and discretion of national governments over mergers and acquisitions. Thus for instance, under the 1989 European Merger Control Regulation, most large mergers and acquisitions are decided by the European Commission – with thresholds that catch most major acquisitions [23]. The Commission acts almost entirely using competition criteria– whether the merger creates a ‘significant impediment to competition’ and has little legal scope for looking at other criteria [24]. Even when mergers fall under national jurisdictions, almost all European countries have created independent competition authorities who act under legislation that is focused on whether a merger could impede competition. Often elected politicians have lost their previous direct powers over mergers – for example, in the UK, under the 2002 Enterprise Act, government ministers can only block a merger on very narrow grounds such as national security. Yet while these institutional changes in merger powers, in combination with privatisation and the end of legal monopolies, have reduced the scope for traditional industrial policies to structure markets, they have paradoxically contributed to the development of European champions. Most large mergers attempted have been between European firms, either cross-border or domestic. Thus in three major sectors – banking, energy and telecommunications – 60% of all mergers were cross-border European ones (i.e. forms [continua ..]

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Under traditional post-1945 industrial policy, national policy makers could direct support to selected suppliers through a series of instruments. The most obvious was legal monopoly, which prevented direct competition and allowed policy makers to set prices. This was closely linked to public ownership, especially in network industries. However, even when competition was permitted by law, the state could shape and limit it through national standards, which privileged firms found easy to meet whereas others (especially foreign companies) found such standards difficult and expensive to comply with. They could also influence or indeed set ‘administered prices’. Equally, policy makers could provide direct and indirect subsidies to favoured suppliers. In addition, they could provide support through public orders, and less directly through publicly – owned banks or cooperation over research and development. Regulatory institutions have greatly curbed the legal scope for such instruments. Thus for instance, legal monopolies in almost all network industries have been outlawed by EU law and replaced with re-regula­tion of competition designed to ensure ‘fair and effective competition’. [29] Equally, non – tariff barriers to trade, including national standards, have mostly been outlawed by EU and international law. State aid and public procurement are regulated by the EU, which legally is bound to prevent discrimination on grounds of nationality. Government subsidies are regulated by EU rules on state aid, and have greatly been reduced – for example, for the EU as whole, it went down from 1.085% of GDP in 1992 to 0.669 in 2000 to 0.521% in 2012 [30]. Public financing of investment has been severely constrained by fiscal targets and by the privatisation of state-owned banks. Systems of government-determined ‘administered prices’ have been greatly curbed. Nevertheless, national policy makers have found considerable scope for aiding selected ‘national’ or European champions. Although legal monopolies have largely been ended, licensing (or authorisation) and licence conditions have offered powerful tools to aid national champions in many industries – from network sectors to finance. Sometimes the number of licences affects how many suppliers exist in a market. Even when ‘competition’ is an official policy objective, governments can protect existing suppliers through [continua ..]

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Medium and long-term planning was a central part of industrial policy after 1945. In most countries, it was led by governments and specialised planning agencies. Their activities involved not just setting macro-economic targets but also public signalling of investment priorities for both the public and private sectors (for instance, special importance was given to certain industrial sectors such as energy or telecommunications). Planning often also meant selecting particular technologies (e.g. a particular technology for nuclear energy), and balancing different objectives, such as national autonomy, regional development, building a technological lead or national security. Forms of signalling varied across countries. In some, such as France, centralised national agencies set out goals for several years, and sought to allocate or direct investment to sectors. In others such as the UK, planning was much more indicative. Although medium-term official government macro-economic planning has been mostly ended, and planning organisations abolished or downgraded (even in France), new forms of sectoral planning have emerged. Governments have set medium and long-term targets for sectors such as energy, transport and telecommunications. Frequently, these targets concern the behaviour and decisions of privately – owned firms, and have translated into long-term investment programmes and contracts – from nuclear energy to ‘fourth generation’ communication networks to high speed rail programmes, in countries as diverse as Britain and France. Equally, independent regulatory agencies engage in a form of planning by their decisions concerning which costs are allowable in setting price controls and their direct negotiations with major suppliers over medium-term investment. One example concerns water in the UK, where the regulator has set price formulae according to plans for capital spending and agreed targets for such spending, thereby in effect engaging in medium-term investment planning. Policy makers have also implicitly or explicitly influenced choices of technology through their sectoral investment plans and also tax and (cross) subsidies. Hence for instance, governments and IRAs have taken very direct roles in decisions about energy mixes, notably between nuclear and renewables, through instruments such as nuclear and renewable levies, long-term investment contracts for nuclear energy or regulation of tariffs and rights to sell [continua ..]

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National policy makers pursued traditional industrial policies using instruments available from a well-established institutional framework. Some elements of that framework continue to exist, such as limited explicit public ownership or direct state subsidies and state aid. However, as studies on the spread of (neo-)liberal institutions and the regulatory state rightly identify, major reforms have replaced many past institutions with new regulatory ones. Privatisation, the transfer of powers over monopolies and mergers to the EU and national competition agencies, rules designed to ensure ‘fair and effective competition’ and the abolition or weakening of planning mechanisms have all represented a move towards competition-based regulation of markets. They have ended or limited traditional instruments of industrial policy. However, when looked at closely, these regulatory institutions have not ended industrial policy. Instead, they have offered new instruments for national policy makers. Legal and ownership privatisation have offered instruments to shape the development of partially – state firms or fully private firms, as well as indirect forms of state ownership. The transfer of powers over mergers and acquisitions and a focus on competition have allowed mergers and acquisitions by existing large European firms. Re-regulation of competition has provided several tools to aid firms, from licensing and licence conditions to regulatory standards. The decline of formal planning and previous planning organisations and increased reliance on ‘the market’ to direct choices of technologies and investment have permitted governments and independent regulatory agencies to plan and attempt to influence market choices through their orders and multiple objectives for a well-functioning market. The outcome has been a new form of industrial policy, operating through a combination of both traditional and newer regulatory instruments. It is centred on aiding selected firms, particularly aiding Europeanised or internationalised champion firms. These firms have a historic link with a nation state, often being former national champions, but have increasingly expanded abroad. Some are majority state-owned such as EDF. Others are minority state-owned such as GDF-Suez, ENI or ENEL, or indirectly state owned such as Deutsche Post or Lloyds and Royal Bank of Scotland. But many are state-supported privately-owned firms – from network operators [continua ..]

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