EESC Round Table on Industrial Policy

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"Going local" in the framework of Europe 2020

EESC round table on industrial policy – Madrid, 20-21 October 2011

1.Introduction

On 4 May 2011, the European Economic and Social Committee (EESC) adopted an opinion on theEuropeanCommission Communicationon industrial policy, one of the flagship initiativesofEurope 2020. The adoptionof this opinionis linked to a number offollow-up measures. One of these measures was to organise a day-and-a-half-long round tableinMadridon industrial policy,to gather contributionsfrom theeconomic and social stakeholders mostrepresentative of Spanish industrial life, as well as senior representatives ofthe Spanish government,in order toassess local actors'commitmenttothe reform process.

Spainwas selected for local monitoringfor a number of reasons: essentially, it isone of the majorEuroarea economies, but has beenparticularly hard hit bythe fallout from the economic crisis.Moreover,it offers the benchmark of aspecificindustrialpolicy planas a basis for launchinga competitive industrial policy.

The round tablewas organised inthree sections,focusingrespectivelyon the institutions, the social partners andother stakeholders.Each ofthe threesections wasin turn dividedintoa series of interviewsbetween a delegationof three EESCmembers -therapporteur,the co-rapporteur and the president of therelevantstudy group-and one ormore stakeholders(see the attached programme).A questionnaire had previously been sent toparticipants, along withthe Commission Communication and theEESC opinion, to provideguidance onthe issues to be addressed atthe meeting.Each organisationwas given the freedom,however,to state its positionon industrial policyin its own way. This document isa summary reporton the resultsof the discussions andshould not be considered to be the official minutes ofthe meetings.

Prior tothis round tableinSpain, a similar event hadtaken placeinWarsaw on27 and28 June 2011.

2.Economic context

Since the early 1990s, the Spanish economy had experienced a decade of growth, leading to a period of expansion. From 2008 onwards, however, withthe stock market crash in conjunction with the bursting of the housing bubble, the economy suffered a fall in its macroeconomic indicators andthe effects ofthe global financial crisisheightened markedlyin Spain.Although Spain did see someweakgrowth in 2011,with an increaseof 0.7% year on year,the Spanish economywill probably sufferin 2012due to tensions caused bythe sovereign debt crisis

The contraction of the economy following the first financial crisis worsened in Spain as a result of the housing bubble burst, since from the late 1980s, this sector had been the major driver of growth in the country. The housing boom had been exacerbated by credit liquidity and the stability of the single currency. The immediate result was a) a shrinking of the economy due to a shortfall in liquidity and b) a dramatic increase in unemployment, which rose from around 11% in 2000 to the current figure of 23% (50% for young people) in 2011.

At first glance, this process and these data seem to reflect the context of global crisis, which has been compounded by the sovereign debt crisis in the Eurozone. Some might think that Spain is simply joining the group of countries paying the price for excessive expansion and lack of monitoring of the Euro zone's economic convergence criteria over the past twenty years. This view is far from accurate, however, since in the recent decade of economic expansion, Spain was one of the few countries that faithfully met the criteria for economic convergence, with a stabilising anti-cyclical fiscal policy and a budgetary surplus that brought public debt down to 37% of GDP. What is more, the Spanish banking system, although not entirely blameless, did not have to be rescued by the state.

What happened to an economy that had been experiencing full growth since the 1990s until the beginning of the crisis in 2008, with excellent results and which exceeded the economic convergence criteria laid down for the Euro zone? How could such a massive decline in economic activity occur and how could unemployment levels reach three times those of some European countries?

• Firstly, the Spanish economy suffers from structural imbalances caused by decades of low productivity, poor competitiveness and a fragmented industrial fabric. These shortcomings were temporarily "remedied" during the economic recovery that accompanied Spain's accession to Economic and Monetary Union and the increase in foreign investment, which was fuelled by low bank interest rates and the growth of industrial sectors linked to the construction of residential housing, which grew exponentially, reaching 17.9 % of GDP in 2007, although the real effect on the economy was much greater, reaching 39%, including service sectors directly related to housing.

• Secondly, this is a growth model which suffers from a number of identified imbalances and which since the mid-1990s has focused on domestic demand and construction (a sector featuring low productivity and innovation). As a result, a large number of industrial sectors and related services are geared towards domestic demand in the housing market (cement, steel, ceramics, chemicals, furniture, equipment, electrical appliances, etc.). The burst of the housing bubble caused by the financial crisis is linked to the sovereign debt crisis and the lack of credit for businesses.

• Thirdly, the set-up and expansion of large and highly-competitive global businesses in certain sectors (tourism, banking, infrastructure, telecommunications, the environment, transport, etc.) has not compensated for the low level of economic activity in other sectors that have a highly fragmented industrial fabric, with small firms concentrated in traditional sectors that are largely dependent on domestic demand.

• Other factors that have contributed significantly to the worsening situation: direct contributions from the European Union (the Common Agricultural Policy and Structural and Cohesion Funds), declined substantially as of 2005, due to the accession of new countries that have large farming sectors and much lower per capita GDP. In statistical terms, these have increased income levels in under-developed Spanish regions.

It should be noted that in November 2011 a new government took office in Spain. This round table on industrial policy was therefore held in a pre-election climate, characterised by a lack of activity and substantive measures in the previous months and by uncertainty as to whether the measures adopted by the outgoing government would continue.

The new government that emerged victorious from the elections on 20 November 2011 has built on the measures initiated by the previous government in order to counter the sovereign debt crisis and boost productivity and competitiveness. Its first steps are in line with the recommendations of the European Council and are intended to restore public finances and continue the path already taken by the previous government:

• lower public spending for all public authorities. Setting targets for deficit reduction in the very short term, the cuts are proving to be extremely tough, especially in some regions, leading in particular to cuts in public sector jobs, investment and the provision of basic services such as education and public health. Against this backdrop of cuts, the growth targets in key areas to further the objectives of the Europe 2020 strategy will be revised downwards;

• boost the public coffers by combating tax evasion and raising tax revenues: basically a tax on income and capital. VAT remains at 18%, following a 2% increase in 2011. These measures are coming under heavy criticism because they are shifting the tax burden onto the middle classes, which reduces consumption and hence revenues;

• a package of structural measures, which for the moment concern two main areas: the banking sector and a major labour market reform.

3.Features of Spain's industrial policy: recent developments and how it fits in with the Europe 2020 strategy

3.1Developments inSpain's industrial policysince the country joinedthe European Community.Main linesof action and the devolution of state powers to the regional governmentsof the Autonomous Communities

During the 1980s andmid-1990s, Spanish industrial policywas shapedby the political circumstancesof the time:protecting andconsolidating democracyand membership ofthe European Community.There were basically threelines of action:

• the implementation of industrial restructuring measures. Up to 14 of the economy's flagship sectors such as steel, mining, shipbuilding etc. underwent adjustment and streamlining processes. Industrial policy focussed on both direct industrial restructuring and the industrial redevelopment of areas affected by restructuring;

• the orderly privatisation of public companies that accompanied the process of opening up certain previously state-controlled sectors (such as telecommunications, postal services, oil and tobacco monopolies etc.). Measures to boost these processes by government agencies were key to creating companies with sufficient critical mass to be able to expand outwards;

• the new regional governments (Autonomous Communities) were given full authority to design and organise their own industrial policies and the national government was obliged to transfer powers and resources to ensure that the new governments could implement them. The role of national government gradually diminished.

Nevertheless, the macroeconomic policies of that time, aimed at controlling high inflation through a restrictive monetary policy, did not produce all the expected benefits and a vicious circle developed, dealing a harsh blow to employment and to an industry in the full throes of reorganisation. Industry had improved its production structures but labour market structures and the lack of business standards reflecting European standards hampered economic recovery and industrial competitiveness. Industry had to compete in a climate of economic crisis and needed a series of monetary devaluations to boost the competitiveness of Spanish industrial activity as a whole.

As decentralisation was gaining ground, there was a shift towards an industrial policy closer to the idea of an "industrial district" that would be closer to the level of the ultimate stakeholders - businesses. The Spanish central government has thus gradually adjusted to the active role developed by the autonomous communities and local authorities and has focussed more on overall coordination and on protecting and promoting Spanish industrial interests in the European and global contexts.

Most economic players, however, suggested that political decentralisation in Spain may not have produced the expected results. In fact, some participants provided evidence that the transfer of full powers to the autonomous communities has produced some unwanted effects arising from excessive regulation and the diversity of legislative activity, which have a negative impact on production and business management. The result is a greater administrative burden and increased legal uncertainty, leading to a fragmentation of the internal market within the state itself. On this point, their views chime with the announcement made by the new government, which stated in its election manifesto that one of the key objectives to boost industrial activity would be to restore the market's unity.

While this is the general picture, the Basque Country is a case apart, given its approaches to industrial policy in recent decades. It has managed to develop and modernise an industrial fabric that is separate from construction and is geared towards producing industrial goods by establishing links between SMEs, technology centres and the financial system, with high export rates.

3.2Spanish industrial policyagainst the backdrop oftheEurope 2020 Strategy: Aspecific plan to provide structuredsupportforindustrial activity: Integrated Industrial PolicyPlan2020

It has been noted previously that Spanish economic activity/industry suffers from a number of structural imbalances, which became all too clear with the emergence of the current economic crisis. One of the biggest imbalances is based on the construction industry's excessive share of the production structure since the 1990s, which has had the effect of focussing a large part of industrial production on goods and services related to the building of new homes, a sector that is relatively uncompetitive and which makes little use of innovation and technology. The feeling among participants was unanimous: the growth model must be redirected towards a sustainable industrial policy that is fully competitive and contributes more to GDP within the framework of the Europe 2020 strategy.

In 2009, the government adopted an action plan entitled "Planto stimulate the Economy andEmployment (PlanE)"which basicallyprovided a cash injection for the differentregional and local authorities,withspecificmeasures forlabour and publicservices. It waswidely criticisedby economic operators, as it had the effect ofincreasing the public deficit, whichtook its tollin later yearsonce thesovereign debt crisis emerged.

No commitmentto a sustainable economywas madeuntil 2010,with theSustainableEconomy Act(Law2/2011), which containsmeasures topromote sustainableindustrial development, including measuresto improveenergy efficiencyin linewiththe principles of the Europe 2020 strategy.Intandem with theseinitial steps,a specific planfor industrial policy was drawn up, entitled the"Integrated Industrial Policy Plan2020" (PIN 2020), designed as a 10-year planproviding a frameworkfor adopting,reorientingand strengthening anew industrial policy.This planrepresents aqualitative advance intherecognition of industry as a key pillarof growth, giving it full support and recognisingthe need for all actions aimed at its recovery to be specifically designed. It also requiresa long-term and organised vision.

PIN 2020Objectives:

modernisethe growth model;

raise industry'sshare of GDPto levelscomparable withthe European average;

make Spanish industry more competitive;

bringSpanish industrial policy into line withEuropean guidelines andensure theirefficiency.

ThePIN 2020recognisesand legitimisesthe existence of abroadindustrial policy, i.e. includingprocessing andall related services, except financial services.Theplanidentifies the weaknessesof Spanish industrythat need to be addressed. These are essentially: industry's low share of Spain's totalproduction structure(15%, which is well below theEU average of 18%), poor use of technology, production geared towards domestic demand, the gradualloss ofcompetitiveness due toinsufficient growthin productivity,andthe small sizeof SMEs.The planalsopinpointsthe benefits of boostingindustrial policy,andgovernmentactionis basedaround fivekeystrands, each one with a five-year plan for concrete measuresin the various fieldsconcerned.Most of thesestrands orpriority action linescontainhorizontal measures, but also some specificpowersor strategicpriority sectors.

Priority Action Lines under the PIN 2020:

improving competitiveness;

improving innovation and R & D;

growth and dynamism of SMEs;

focus on International Markets;

strengtheningstrategic sectors such as automotive, aerospace, biotechnology, pharmaceuticalandhealth technology, ICT and digital content, environmental protection industries, renewableenergies and energy efficiency andagrifood.

These fivepriority areasare linkedto some 124 highly varied measuresofverydifferenttypes, such astaxation, business legislation, technology and materials, ICT, R&Dand innovation, vocational trainingand qualifications, logistical infrastructure, transport, environmental regulations, security and industrial qualityetc.Thetotal directeconomic impactwould beEUR83billionin the first fiveyears.

Mostparticipants atthe round table agreed that thisplan should be welcomed. They endorsedthe need to boost industry's share ofthe Spanish economy andto strengthenaspectsto make Spanish industry morecompetitive and raise its international profile.They also agreed withthe assessment of theindustrial situationin Spain andthe main points tobe worked on.Noteveryone agreed, however, with themethod put forwardand the measures identified.

Indeed, despite the efforts made by theprevious governmentto designand implementmeasures to supportindustrial policy, most of the economic and social stakeholders on the panelwere critical of the same points.In their view:

• The added value ofthis planwould be reducedto a textcoordinating and steeringvarious measuresaffecting companies that were already present in different areasof activity.Itsmain achievementwould be greatertransparency and information, collating all measuresaffecting theindustry, but according to this view, would lackinnovative featureswith the power to effectindustrial change.

• No reference is made to the problems arising from a lack of coordination between the various authorities that have full powers to design and implement industrial policy in their territories (the State, autonomous communities, local authorities) and nor is there any mention of overlapping regulations, or suggestions of possible solutions.

• Some of the areas that would be affected by the plan touch on points that require long-term planning (education and training, energy etc.) in order to ensure a degree of stability. This would require agreements or arrangements between the various political parties and governments.

Someparticipants reiteratedone very specific point: the goal is to make businesses more competitive in order to raise their international profile.To achieve this, any policy that is drawn up should emphasisereducingregulatory and administrative barriersofall kinds, which often resultin excessivelegislationandrepresentan added costin terms of timeand money. This iscompounded bythe highly diverse legislation amongst the different autonomous communities.This would give a decisive boost tothe unity of theinternal marketwithin theSpanish state.

Regarding the roleplayed by theeconomic and social partnersin drafting the PIN2020, opinionis divided. Governmentrepresentativesindicatedthat they had allbeen consulted abouttheir projects, as had the autonomous communities,through the official channelsestablished by law.Some participantsfrom the business sectors, however,did not feel that the government had sufficiently involved them in shaping theplan.

Thegeneral feeling ofall participating businesseswas one of total support forEuropean interests andapproaches. This rock-solid feeling had grownover recent decadesand had beenfully incorporatedinto their approachesand strategies.The entrepreneurial mentality and policy had been taken fully on board and had accepted the approaches adopted by the European Union.

4.Foreign investment/big businesses' access to foreignmarkets

Overthe last 15years, Spain hasgone from beinga net recipient offoreign direct investment (FDI) to being a net supplierof FDI in othercountries.The reason for this shiftisnot only agreater volume ofcapital outflows, but alsothe fall in inflows.

After threeconsecutive years of worldwide declinein FDI,in Europethis grewby nearly 19% in 2011, butSpain's share of theEuropean total is just 6%.Of the total investment, the vast majority is due to merger and acquisition (M&A)transactions, but "greenfield" projects or projects that generate employmentfell significantly (38.6%).

The Spanish economy isentirely open andduring the1990saprocess of opening up various industrial sectors began. This process achieved success,due to the excellentfinancing conditionsof the time andto businesses' own dynamism.Foreign capitalflowed in continually fromthe mid-1980s onwards,coinciding with Spain's membership ofthe European Union andlater withthe adoption ofthe euro, reachingvery high levels withinextremely short timeframes.Some companies adopted a strategic responseto avoid beingtaken over:the response was simply to grow andremain on the offensiveand they thus decided toincrease theirpresence abroad, taking advantage of the favourablecredit conditions in place since the mid 1990s andthe process of business liberalisation.