Big Government Muscles Back Into Europe’s Covid-Hit Economy

(Bloomberg Businessweek) -- French Finance Minister Bruno Le Maire had just recovered from Covid-19 in October when he faced a familiar adversary at a parliamentary hearing. The government, a leftist legislator told him, needed to bring industry and jobs back to France and was being naive about global trade and the benefit of free markets.

“There are a number of points on which I agree with you—Covid must have unblocked something in me,” Le Maire quipped, citing massive spending on job support, a push for carbon border taxes, and the huge sums earmarked for state aid to encourage domestic investment. “Everyone is able to change their beliefs and ideas to respond to the very particular crisis we are in.”

Le Maire, a frequent critic of laissez-faire capitalism, may have somewhat exaggerated the change in his own mindset. What’s less in doubt is how the devastation wrought by the coronavirus has reinvigorated state intervention in Europe’s biggest economies, with potentially far-reaching consequences.

The pandemic pushed Europe to ditch the austerity that mauled its economies after the global financial crisis to mount the biggest fiscal action in recent memory. Not only have governments spent big to prevent the kind of mass unemployment that roiled the U.S., but they’ve also seized on low interest rates and the suspension of European Union budget and regional state-aid rules to shape their post-Covid recoveries with targeted spending to protect companies or encourage them to invest at home.

EU governments usually can’t give financial support freely to businesses under restrictions to prevent the bloc’s richer members from gaining an unfair advantage over others. But the scale of the economic shock is so far drowning out warnings about protectionism, the politicization of corporate decisions, and the surge in public debt.

“Given the crisis, it’s not surprising that all governments intervened,” says Gilles Moëc, chief economist at Axa SA, a global insurer based in Paris. “But what’s striking is that there’s almost no discussion—it’s ultraconsensual everywhere.”

Germany, long obsessed with balanced budgets, recorded its biggest deficit in a quarter century after stimulus measures that included taking stakes in airline Deutsche Lufthansa AG and vaccine maker Curevac. Italy is using a state-backed lender to exert more control over industries from telecommunications to infrastructure, reversing decades of privatization.

France offered aid to companies expanding production in impoverished rural areas or in strategic sectors such as health, electronics, and 5G industrial applications. Earlier this month, it also intervened to scupper a planned takeover of supermarket chain Carrefour by Canada’s Alimentation Couche-Tard Inc., citing a need to ensure food sovereignty in a pandemic.

While politicians will have to discuss the debt pile at some point, a report that Citigroup Inc. published this month says the EU is unlikely to go back to the restrictive budget rules, one of which was a deficit limit of 3% of gross domestic product. “European fiscal support is now a reality,” it says.

Instead, governments are focused on how to use the landmark, multiyear €1.8 trillion ($2.2 trillion) joint budget and recovery fund—dubbed NextGenerationEU—to create jobs and invest in green industries and technology.

The challenge is not so much finding the political will, says Laurence Boone, chief economist at the Organization for Economic Cooperation and Development, but spending quickly and cutting through the red tape that’s impeded grand projects in the past. If successful and sustained, the effort could motivate businesses. “It’s a very good step, but Europe should go further,” she says. “This has to become a long-term feature of the EU, because what also helps investing is to have confidence in the stability of your institutions and your economic landscape.”

Supporters would agree, seeing the revival of Big Government as a way to address issues such as climate change and jobs and even helping Europe build its economic might and resist being squeezed between the U.S. and China. But with vaccine rollouts poised to allow economies to reopen later this year, there will be a debate about whether Brussels should continue to look the other way or renew its curbs on state aid at the end of June.

Even though the EU funds come with strings attached—no aid to coal plants is one—there’s the familiar skepticism that governments won’t spend wisely, with Italy’s poor track record often cited. Its coalition government is near a breaking point because of a disagreement over how to deploy the EU money. Another question is whether the bloc should be intervening to pick and build industrial champions, as France has long demanded. “In Europe, in many quarters, the prevailing view is that such a great concentration of economic power would not be beneficial,” says Zsolt Darvas, a senior fellow at the Bruegel think tank in Brussels.

Not every country is following the same blueprint. Italy’s activism has extended to intervening in corporate decisions such as the sale of stock exchange manager Borsa Italiana SpA.

In Germany the government has been more hands-off. As part of the €9 billion rescue deal for Lufthansa negotiated by Deputy Finance Minister Jörg Kukies, a former Goldman Sachs Group Inc. executive, the state refrained from imposing conditions such as job cuts.

A government official said the policy has encouraged more companies to come forward for aid as a kind of a safety net to help them tap markets for financing. But even here, there’s rumbling about too much political influence. Klaus Peter Willsch, a lawmaker in German Chancellor Angela Merkel’s party, says intervention could undermine competitiveness.

France is preparing to use billions of euros in state guarantees to repair the balance sheets of small firms, alongside a plan to beef up its industrial base with funds to encourage bringing production home and investing in high-value-added areas. To get the money flowing fast, while rules are still relaxed, the government has focused on small companies that can quickly present projects.

In northern France, yeast manufacturer Lesaffre ET Cie. won a €15 million grant for a plant where it will make natural vanilla flavoring and use fermentation to produce a food supplement that’s currently made from animal cartilage, mainly in China. It aims to create about 400 jobs in an area where unemployment is around 35%.

“It’s significant help that really encouraged us to decide on that site,” says Lesaffre Chief Executive Officer Antoine Baule. “Everyone is fighting to create jobs, and industrial jobs in particular, so this possibility of giving us a hand is absolutely welcome.” —With Alessandra Migliaccio, Zoe Schneeweiss, and Aoife White

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