What is often referred to as the ‘financial crisis’ is in many ways a ‘real economy’ crisis. It is no coincidence that two of the biggest problems, Greece and Italy, have the lowest productivity figures in Europe, and little spending on key areas that cause growth like R&D.
In the last weeks we have heard about the need for more monetary and fiscal union in the EU in order for the Euro to work. Another key point repeated is that global imbalances must be checked: ‘surplus’ countries (those that export more than they import, like Germany) must increase domestic demand of goods produced by deficit countries (UK, France, etc). And the latter must focus on reforms that will allow their economies to become more competitive. Yet the reforms we then hear about are different types of cuts, rather than spending. This makes little sense as the surplus countries have become surplus not by old style devaluation, or protectionism, but by their ability to produce knowledge intensive competitive products. A fruit not of their ‘austerity’ plans but of their spending in the right places.
Take Germany and China, the surplus countries most commonly named. They export more than they import because the world wants their products, as was recently witnessed in the UK when a German train manufacturer (Siemens) won a UK government procurement bid for green fast trains. There were many complaints about how this would affect UK jobs, but the complaints should have been directed not towards the procurement decision but towards the lack of industrial policy in the UK which limits the degree to which UK can compete with the German innovation machine.
As I have argued in The Entrepreneurial State, those countries that are currently leading the competitive race are those that are putting money behind key new sectors, and doing so with active industrial policy that is not scared of ‘picking winners. Not only are the Surplus countries spending more on general R&D (Germany has increased its R&D budget by 9% after the crisis), but also they are spending in a more targeted way on what will surely be the ‘next big thing’ after the internet: green technology.
And this spending means that they will continue to be surplus countries, as will countries like South Korea which in July 2010 announced that it would double its spending on green research to the equivalent of £1.9 billion by 2013 (almost 2 per cent of its annual GDP), which means that between 2009 and 2013 it will have spent £59 billion on this type of research.
Data for 2007 shows the UK (the current big spending chopper) near the bottom of the league when comparing government investment in energy R&D, spending less than US and Asian competitors and some other European countries (see Figure). The problem is that the private sector is not coming in to fill the gap so, overall, the UK’s investment of 12.6 billion in 2009/10 is, according to PIRC, ‘under 1 per cent of UK Gross Domestic Product; half of what South Korea currently invests in green technologies annually; and less than what the UK presently spend on furniture in a year’ (*)
Government energy R&D spend as % GDP in 13 countries, 2007 (*)
So what is the solution? A common EU fiscal policy that sees EU countries becoming more competitive, producing more products that the world, including China, wants to buy. This will mean not just ‘reforms’, but spending on a Green New Deal, as many of us have been arguing for, as in the Plan B launched on October 31st by UK economists.
It is a myth that there is no money. Companies are hoarding cash, and the public sector can ‘create money’ which as long as it produces growth (which green tech will) will not produce inflation. This is much better than quantitative easing, or different types of ‘bailouts’, which simply end up in the coffers of banks, which have no intention of lending, or engaging with the ‘good’ type of risk that creates new products, processes and markets.
(*) PIRC, The Green Investment Gap: An audit of green investment in the UK, Machynlleth: Public Interest Research Centre, March 2011.
This blog was originally posted on the MSN Politics Blog.