A mess made in heaven. Ludovic Marin/AFP via Getty Images.
More than two decades ago, the EU unveiled its Lisbon Strategy, which set out to transform the bloc into “the most dynamic, competitive, sustainable knowledge-based economy, enjoying full employment and strengthened economic and social cohesion”.
We know how well that worked out. Hardly dynamic, certainly not competitive, the EU has consistently lagged behind other nations across virtually every key economic metric. As the US and China intensify their race for 21st-century technological supremacy, Europe is left watching from the sidelines — beset by economic stagnation, high energy costs, political upheaval and bureaucratic inertia.
And now it’s panicking about the threat of import tariffs from Donald Trump. But would a rebalancing of the European economy, which currently runs a massive trade surplus against the US, really be such a bad thing?
The reality is export growth does not indicate a successful economy. Quite the contrary — just look at Germany. The EU has always been an exporting powerhouse precisely because of its sagging economy, caused by a lack of domestic consumption and investment.
The US has been voicing its concern about the EU’s beggar-thy-neighbour mercantilist policies for a long time — since well before Trump even appeared on the political scene. More than a decade ago, the US Treasury Department lambasted European authorities for dragging down the world economy. “Europe’s overall adjustment is essentially premised on demand emanating from outside of Europe rather than addressing the shortfalls in demand that exist within Europe,” they wrote. Since then, nothing has changed.
Trump’s trade war, in other words, has been a long time coming. And his tariffs might actually prove to be a blessing for the EU, if they force the bloc to move away from its flawed export-led model, which is fundamentally based on suppressing domestic demand and investment in favour of demand from abroad: primarily the US.
Indeed the Trumpian threat has already prompted movement within the EU to address its structural weaknesses. One such initiative was announced the other day by Commission president von der Leyen. Her new “plan” promises to undertake that rebalancing and make Europe “the place where future technologies, services, and clean products are invented, manufactured, and put on the market” — and all this “while being the first continent to become climate neutral”. It’s called the Competitiveness Compass and it largely builds upon the recommendations of last year’s Draghi report. Brussels sees it as a significant leap forward in getting the EU economy back on track.
Upon closer examination, however, the Commission’s plan appears to be little more than a familiar mix of buzzwords — AI, advanced materials, quantum computing, biotech, robotics — paired with perplexing imagery, including a compass that tellingly points in eight different directions at once. It’s a PowerPoint presentation disguised as a strategy, as Wolfgang Münchau so accurately described it.
The planned “unprecedented simplification effort”, beginning with a major overhaul in sustainability reporting and due diligence, would — if followed through — offer European companies a bit of respite from the EU’s pervasive and ever-growing regulatory framework, which has become a stifling barrier to growth and innovation, especially in the tech sector.
But this won’t solve the bloc’s underlying economic problems: its chronic shortfall of productive investment, especially in R&D; its low consumption levels; its ingrained bias against industrial policy; high energy costs; and the fundamentally bureaucratic, multi-layered nature of the Union’s governance regime. On these issues, there are only vague commitments to future strategies and proposals — all of which are likely to take years to make their way through the EU’s byzantine legislative process.
But the reality is that many of the EU’s fundamental problems do not arise from mere “policy missteps” or, even less so, from the bloc’s supposedly “incomplete” nature. Instead, these issues are deeply embedded in the EU’s supranational design. In other words, the only way to truly tackle the EU’s economic challenges is to recognise that the core issue is the EU itself.
One of the most significant — and frequently overlooked — constraints on the EU economy is the euro. The loss of monetary sovereignty entailed by the currency, coupled with the stringent deficit and debt rules enshrined in the EU treaties, remains one of the single greatest barriers to growth in Europe, hampering the ability of member states to stimulate their economies through public investment and active industrial policies.
Moreover, the EU has failed to offset this surrender of sovereignty with adequate European-level fiscal and investment tools, limiting itself to temporary measures such as the Covid-19 recovery fund. This structural limitation is a key reason why public sector investment in the EU has consistently lagged behind that of the United States and other advanced economies.
Besides, even if the EU were to succeed in expanding its “federal” fiscal and investment capacity, as envisioned by the Competitiveness Compass, this would only create more problems than it solves. Rather than addressing the EU’s structural issues, such a move would only further empower its supranational institutions, particularly the Commission, deepening the bloc’s technocratic and undemocratic governance.
Another issue is the EU’s historical bias against robust industrial policy. Since its inception, the EU has been deeply influenced by neoliberal economic doctrines that emphasise the supposedly “distortionary” nature of industrial policies. Stringent state aid rules broadly prohibit any support granted by member states that could favour certain companies or industries, unless explicitly allowed under specific exceptions. The idea is that allowing member states to support their domestic industries could lead to an uneven playing field, creating conditions where companies with state backing have an advantage over others. But this leaves Europe dramatically ill-prepared to compete with countries such as China and the US, which have relied heavily on state-led industrial policies — such as the CHIPS and Science Act and the Inflation Reduction Act (IRA) — to achieve a competitive edge, especially in recent years.
In response, EU leaders have been talking more about the need for a “Made in Europe” strategy to counterbalance the potential economic impacts of the “America First” policies. But the reality is that the EU’s institutional framework makes it seriously unfit for confronting the new 21st-century geopolitical landscape of state-led economic renationalisation. In this context, even if the Competitiveness Compass recognises the importance of boosting technological sovereignty or strengthening European manufacturing, member states will find it challenging to implement the sort of targeted, industry-specific measures that could truly spur innovation or anchor supply chains.
The EU’s complex governance framework poses an additional challenge. The bloc operates through multiple layers of decision-making, involving not only the member states but also several key institutions. This highly bureaucratised, multi-level apparatus results in a slow and convoluted decision-making process, which often leads to fragmented and inconsistent policy responses. This is why, for instance, the limited investments and industrial policies that do take place remain fragmented and split along national lines, as well as between member states and the EU.
Moreover, when the EU rolls out a new policy such as the Competitiveness Compass, it must navigate multiple institutional veto points, each with its own priorities and constraints. The resulting policy is inevitably watered down or disconnected from local needs, diluting its impact and failing to address the genuine needs of citizens and member states. Furthermore, the legislative and implementation processes can stretch over years, rendering policy action behind the curve.
When viewed against these systemic challenges, the limitations of the Competitiveness Compass become apparent. Although it may set targets to boost investment, encourage innovation and improve skills, the reality is that all these efforts operate within the straitjacket of the euro, the EU’s constraints on industrial strategy, and a cumbersome governance model. Moreover, any solution aimed at further centralising industrial policy, as noted, would only further empower the very institutions that often exacerbate these structural problems through flawed policies. An obvious example is the increase in energy prices caused by the bloc’s ill-thought-out decision, under strong pressure from the Commission, to decouple from Russian gas. Both the Draghi report and the Competitiveness Compass highlight this as one of the main reasons for the EU’s loss of competitiveness.
Ultimately, a true reckoning with the EU’s economic troubles means recognising that these are rooted in the economic and political constraints of the supranational model itself. And as Europe’s industry and economy grinds ever slower, it is becoming increasingly evident that neither cosmetic reforms nor narrowly targeted initiatives can rectify the fundamental issues at play. Europe undoubtedly needs a new compass, but the solution lies in a radical revision of intra-European collaboration. If Trump really wants to rebalance transatlantic trade relations, then, the most effective approach would be to support the dismantling of the EU.
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SubscribeThe EU was a project planned and designed by, and for the benefit of, a cabal of failed 70’s socialists.
It should be no surprise to anyone that it is an unresponsive, undemocratic, and unproductive, bureaucratic quagmire.
The only surprise is that it has managed to lumber on for as long as it has, before finally collapsing.
Real socialists opposed the EU
I’ve always admired the EU’s ability to make the Left hate them because they are too Neoliberal, and make the Right hate them because they are too socialist.
Divide and conquer. The leftism is a veneer for global capital. Open versus closed – global no border versus nation state. I have seen behind the curtain. Follow the USAID scandal if UK media is able to do it. TIME TO WAKE UP!
There has always been a big divide in the Left between the people who start at the very bottom and fight for their own existence and those who have a middle class upbringing and believe in the theory of the Left. If you like, one is Left and the other is intellectually Left.
There are plenty of middle class that fight, but they are usually those with STEM skills and are surprised at the stupidity of those Oxbridge graduates, with their 1st in History, that try and run the country. So many leave, to create wealth in more appreciative countries.
The EU were an example of “No True Scotsmunism.” The next group of socialists will get it right, I’m sure.
Certainly Gaitskell did…”the end of 1,000 years of history” etc (Labour conference, 1962).
Perhaps David meant champagne socialists. The problem for the necessary reforms is that, if they could be implemented, they would work in practice, but not in (EU) theory.
Best comment on UnHerd this year!
If you’re just an average person growing up somewhere in the EU do you have a future? Can you get a degree at university, get married, have children and afford to buy a house, and a bright future? Do you even want to anymore or has globalism hollowing out your economic future, and USAID backed liberal propaganda just made you want to be a tattooed, promiscuous seeker of pleasure?
Where things are right now in the EU nations is an existential crisis of Western civilization itself. This is a dead end in every way. Leaders with bright ideas about a positive future and goals to solve the moral and economic problems that globalism and neoliberalism have left behind are needed. The old elites have failed in every way. Their time is over.
First up, this immigration issue needs to be solved. People need to be rehomed back to where they migrated from. There needs to be tax incentives for people getting married and having babies. There needs to be radical EU reform, including allowing nations to go back to their own currency or to leave the EU entirely without punishment. The EU can only continue to exist with radical reform, and turning away from a strong federal policy to power being recentralized back in the nation states themselves. There needs to be a sort of Bill of Rights for member nations that permanently diminishes and limits the EU power in Brussels.
When I read what you said about tattooed, promiscuous seekers of pleasure, it reminded me that I need to get more tattoos.
I ink therefore I am
I’m confused as to why being promiscuous or doing things that bring you pleasure are bad things
You are similarly confused as to syntax.
Pompous git.
Promiscuity, showing little forethought or critical judgment, especially over the big decisions in life, can lead to misery. Persistent promiscuity obviously increases the chances of an unhappy outcome.
Most people would judge that a ‘bad thing’, particularly if others are likely to be affected.
The only times I was unhappy was when I wasn’t promiscuous enough personally. Managing to talk some bird into coming home with me was what turned a good night out into a great one
I’m not confused. They aren’t bad things.
I was pretty sure yours was sarcasm. There’s a good few pearl clutchers on here though who believe fun is bad
Nope. I am perfectly capable of being sarcastic, but not about the orgy of naked hedonism that is my life. Admittedly, at my age, the words “orgy” and “naked” are used figuratively, but the hedonism is still there. So are the drugs, come to think of it.
It is being able to defer gratification that sets us apart, which enabled us to build for the future and got us to where we we
I don’t agree that getting a degree should give you a guaranteed future. I don’t for one minute think that a degree in Sociology or Media Studies or English Literature can be useful to society in general. It depends on what you do with your degree to make it useful to everyone else.
I also don’t agree that the rest of Europe is agonising about buying a house – this has been a very British thing started by Margaret Thatcher. I have many friends in Italy who are quite happy to rent for ever.
Those tenants tend to have much more protections and fairer rents than is the case in the UK though, which is the Wild West by comparison
I have always had the Australian attitude to such things – buy a house as soon as possible, and then always own at least one.
In other words, you need a Trump.
Indeed we do Sir, and the sooner the better.
Yeah. We could do with a laugh.
Socialists? The EU is the most neoliberal bloc there is, with rules against state aid and running deficits (which the French admittedly ignore), as well as freedom of movement for goods, labour snd capital.
The Labour Party of old which was much more financially left leaning was opposed to membership for this reason
Neoliberalism is being used to destroy the current social order, to be reinvented as the perfect socialist state, as all socialist states are envisaged. Not only perfect, but also Tidy: no lose ends, like Businessmen or Entrepreneurs: just super-competent politicians.
Blaming the left for financial policies put in place by the right? Thats a new one I must say
A bit of historical research would help. The EU was conceived and planned well before your so called failed 70s socialists were born
Any kind of economic dynamism requires abundant and cheap energy. Here and in the EU that appears to be the problem. And in both cases there appears no plan to address that. Beyond stupid.
Bullseye
One windmill requires considerable amounts of fossil fuels to bring online. Windmills cost close to seven figures apiece, power less than 1,000 households, and last less than a decade.
Solar panels also require massive amounts of fossil fuels to manufacture, transport, and assemble. They also degrade over time, are relatively fragile, and power far fewer homes and businesses than hydropower, coal, or natural gas.
Besides being pointless insofar as “reducing carbon emissions,” they’re also economically stupid. They’re little more than dead weight loss, both economically and environmentally.
“Pointless” & “stupid” describes our Energy Tsar Minibrain exactly.
The U.S and Russia have cheap energy. Europe does not.
Trump and Putin will soon settle the Ukraine distraction. They will then turn to take advantage of the economic mess that is the EU. Both the U.S. and Russia will gain at the EU’s expense.
As to the UK, it should not count on the U.S.’s sentimental attachment to its motherland for leniency. The U.S. is disgusted with what the UK has become under Starmer. Trump is preparing to give the UK a much needed kick in the head
The EU has put in a series of regulations that have killed its competitiveness. The first was the EU VAT rules which discourage cross-border online sales except via the American dominated platforms. The second was GDPR which created a privacy industry and compelled businesses to be more administrative, with its related impact of the Cookie law. All instead of the previous ‘do no harm’ regime which was much better at favouring anonymity. As a result, it is not a surprise that the EU is lagging in AI or general e-commerce and software development. The third was Net Zero or the Green Economy, particularly the part that forces the adoption of technologies that are economically uncompetitive or, as yet, inadequate to meet consumer needs decimating existing industries. You could add immigration regulations, and the centralising of political power into the EU structures, enforcement actions against national governments etc. And individual countries have layered on top of this with ludicrous positions like closing down nuclear power stations to make electricity scarer and more expensive.
Spot on!
Best comment today Sir!
And from a very strong field indeed.
Like all good ideas, the EU was taken over by bureaucrats. Bureaucrats care about two things, their status, salary, and power and covering their ass to the max. That is why a one-page application for anything turns into a 29-page document with endless appendencies. The EU is a piece of shit organization who seems to prefer jetting around to cocktail parties in lieu of actually solving issues for the people who live in the countries to make their life better. The other major issue with these bureaucrats is that they are moral cowards, they will never act unless they have the votes.
Time for a change.
The EU has always and forever been an impossibilist, Rube Goldberg contraption that doomed itself to mediocrity at conception. Better they should have established a simple free trade zone, adhered to basic Hayekian principles, and swore a solemn oath on the sacred fire of their ancestors never to attempt suicide again.
Great comment, especially the Golberg analogy, other than adherence to Hayekian principles. Thatcher, Regan and 2008 spring to mind
Reforming or dismantling the EU would be a start, but it will take a long time to overcome the risk aversion which is at the heart of Europe’s slow economic collapse.
I’ve seen this at first hand in France where the disincentives caused by employment and other forms of regulation make it almost impossible for SMEs to grow. No-one wants to make any kind of speculative investment that involves hiring new staff because it will be almost impossible to shed those new employees should the project fail.
It’s terrifying that our current government seems intent on following the French and Germans down this path.
Politicians serve their own interests above all else.
Fostering dependency via handouts taken from high taxes is great for them and the politically-favoured classes at the receiving end… but creates perverse incentives that render such policies very difficult to reverse, and are ultimately unsustainable.
Basically: our economies will collapse once the costs imposed by regulation and taxation are greater than production.
Now that our ruling classes are imposing policies that are making energy much more expensive, production is collapsing while there is no reduction in the costs of regulation and taxation.
It’ll be interesting to see if Trump can reverse this… and for how long
Too right. The economy can shrink, the social democratic state can only expand.
But look at the genealogy of populist insurgents, like Reform – neo-liberals to the core – a woke right, fixated on gender and race, insulated from boring real-world economic concerns by over inflated assets and rents. Trump, in his acceptance harped on gender but failed to mention the tens of millions of Americans unable to afford health care. Current politics is a cultural spat within neoliberalism not an alternative.
Excellent piece. Trump, who is more subtle than he sometimes pretends, is not a supporter of the EU for many reasons, one of which is that he has a functioning brain. The EU began by pretending to be something it was not – a peace project, when in fact it was intended to make Europe’s former great powers great again but it could not make all of them great again – and has morphed into something not only unspeakable but something very difficult to describe (but Thomas Fazi has pulled it off). The Trumpian revolution will have an impact on the EU in more ways than one. It will eventually lead to the Member States re-asserting themselves over Brussels.
And an excellent comment to the excellent article!
Consumption in Europe is low because European countries overtax their citizens, overpay their bureaucrats, and refuse to let the free market determine supply and demand.
Three day weekends, government sinecures, and the state as a bottomless goody bag won’t replace productive economic efforts in the private sector. Not everyone should aspire to work for their government, and certainly no state should take half of its citizens entire GDP, as France does.
The EUs problems won’t be solved by policies, PowerPoints, and platitudes. They can only be solved by economic freedom, a strong private sector, and reasonable rates of taxation.
Governments should never take more than a third, in total, of all economic output. They should try to take less. When they take half or more, and force their citizens into dreary, deprived lifestyles, they ruin their native economies, and become irrelevant.
If nations with a trade surplus have low domestic demand then boosting the private sector and labor would produce even more overproduction? I think this is more of an existential problem capitalism is running into: consumerism is getting maxed out so we hav a tendency to produce financial Ponzi schemes in the ‘free market’ instead that – if you look a little bit deeper – are also state sponsored. See also ‘secular stagnation’.
Not dismantle, but improve. I foresee a new and better EU. The current model is not fit for purpose, in my view.
No failing monopoly organisation will self-improve. Same people, same vested interests, same result. Destruction and the growth of a replacement is the only way change comes.
The European Coal and Steel Community was improved into the present-day EU.
The Community was designed to prevent a war of the sort of the Great War. However, as that sort of war was impossible after 1945, the Community was already addressing a problem long after it originally existed.
Not only that but the founders of the Community overlooked the fact that without the USA’s industrial production, being the arsenal of democracy, the Second World War could not have been fought to the victory of the Allies.
If the Competitiveness Compass points in eight different directions at the same time, perhaps von der Leyen has really acquired an alethiometer.
I’m not sure the present day EU is an “improvement”. If the EU project back-pedalled to before the Lisbon and Maastricht treaties then you might have a point.
In retrospect it is a great pity ‘we’ the UK didn’t highjack the project at the very start!
The Empire had obviously had it, the US would have been delighted, and we would have foiled the French and Germans.
Sadly magnanimity was in rather short supply in 1946 and vengeance was the order of the day.
It’s an even greater pity that Germany wasn’t reunified as a neutral state as proposed by the Soviet Union, as happened with Austria.
The UK could then have been a leading state in a smaller free trade zone of West Europe.
Unfortunately somebody ‘needed’ a Cold War, so as not repeat what happened post 1919.
The Cold War was actually quite successful. After all, it didn’t turn into a Hot War, it produced lots of innovation, and it bankrupted the Russians. You could almost say we need another one.
Very, and lots of jobs to boot!
A cunning form of Keynesian economics perhaps?
It was pure luck that it didn’t turn hot.
In the Cuba Crisis the USA was depth charging Soviet submarines to force them to surface. They were equipped with nuclear torpedoes capable of destroying a US fleet. The restraint, and discipline shown was phenomenal…lucky for the world.
“The man who saved the world” Petrov was a Soviet officer who exercised judgment in NOT reporting that his radar screen showed missiles inbound to the Soviet Union. Had he done so it is almost certain a Soviet retaliatory launch of all it’s nuclear arsenal would have been ordered to prevent their destruction.
You really believe those risks are worth running? To achieve what in particular?
The Jupiter ‘nuclear tipped’ missiles in Turkey were a needless provocation which JFK sensibly, but belatedly acknowledged.
A lesson which apparently has been un-learned.
Yes. To achieve the defeat of the resurgent menace that is Russia.
Mushrooms?
“Her new “plan” promises to undertake that rebalancing and make Europe “the place where future technologies, services, and clean products are invented, manufactured, and put on the market” — and all this “while being the first continent to become climate neutral”.
What utter contradictory garbage from a woman who has always failed upwards.
A lot of the “industrial policy” references sound to me like government money printing, like the Inflation Reduction Act. How is more debt going to help?
Because if it causes the economy to grow much more quickly then that debt becomes a smaller % of GDP, even if the actual number is higher
That “if” is a big one …
One of these days Milton Friedman’s clear eyed view that Keynesianism is gibberish may take hold.
This would leave many bureaucrats poorer, however, and would only benefit the public.
That depends on the productivity of the investment and the cost of the debt.
If you have assets of $90 earning 2%, and then take on debt of $10 costing 5%, you have gross assets of $100, still have net worth of $90 and the revenue of $2 on the $100 of assets exceeds the $0.50 interest payment on the $10 debt . However, if both are left to compound over enough time, as they invariably are, there comes a point at which the total of the debt will have grown to equal to the total of the assets and the net worth has been extinguished completely. That is the trajectory we are currently on.
All of these economic theories have become stale and meaningless. Politicians hide behind them to excuse their bad management. Wanted: new ideas which are actually relevant today, rather than generalisations about the past. Economist should stop using -isms and think.
A lack of robust industrial policy isn’t a weakness of the EU. The EU operates the most ambitious industrial policy in the world. The EU’s energy industry policy is reconfiguring its entire energy systems at the cost of trillions of Euros, deindustrialisation, and zero growth.
Sadly the EU isn’t going to give up power or change its staff composition and the straightjacket of the Euro means radical change isn’t going to come from member states. The EU is a Gordian knot that cannot simply be undone. Europe’s Gordian knot will only release when the rope and the continent has rotted away.
Perhaps an ‘Alexander’ will appear to cut the Gordian knot, as in former times?
The Gordian Knot is a good analogy: it can’t be untied, and axe is required.
I believe that axe is called populism, a form of democracy that includes actual self-rule.
Britain left the EU because the average Briton hated it, and voted it away. Vox populi, vox dei
So, define ‘democracy’.
S.P.Q.R.
The problem with that is precisely the one we have; the Senate didn’t represent the actual people or take heed of their views…unless they rioted.
Generally the people were bought off with bread and circuses…just like today.
The elections were held annually and the candidates had to ‘work’ hard.
The Circuses didn’t really get going until the Principate.
Otherwise fairly similar disconnect!
A third of Brits didn’t vote at all. A third voted to remain. A third to leave. I’m not sure how you can say that a majority hated it.
“The US [has] relied heavily on state-led industrial policies — such as the CHIPS and Science Act and the Inflation Reduction Act (IRA) — to achieve a competitive edge, especially in recent years.”
It is true that the US has tried to put an industrial policy in place, but don’t for a minute believe that the industrial policy has worked, and given the US a competitive edge. People like Mariana Mazzucato and Bill Janeway argue that industrial policy works, but their arguments are belied by the facts.
Industrial policy assumes that the government can pick winners and losers, and have the foresight to put in place long-term plans. Centuries of experience show that the market always makes a mockery of central planning.
If you want innovation you need to nurture young companies to go along with established ones. You need a vibrant ecosystem. Breaking up big companies using antitrust laws doesn’t work. Neither does spending money on subsidies or imposing mandates or launching moonshots. What works is keeping entry barriers low and breaking up markets by making products modular with open interfaces that encourage cooperation rather than competition.
[I explain all this in my book on how to make cars better faster. I’ll send Ursula von der Leyen a copy when it’s published.]
If you want innovation, you have to fund the military. A war would be handy too, although a cold war will do.
Wars are ruinous.
Yes they speed up innovation. But the costs are enormous. Europe lost decades of prosperity and countless priceless cultural artifacts – like architecture – were destroyed.
Not to mention the ~70 million people killed…
Some wars are “ruinous”, not necessarily! You have to pick the right one to make a decent ‘profit’.
The US participation in WWI and WW II turned out to be a most profitable enterprise.
Our own participation in the Seven Years War, 1756-1763/4 likewise, particularly in India.
Look at how much technology advanced in the two world wars.
Wars help with military innovations, but not with innovation in other areas. (Since you bring the subject up, let me plug UnHerd contributor Edward Luttwak’s book The Art of Military Innovation: Lessons from the Israel Defense Forces. It’s excellent.)
The innovations “trickle down” into other areas. Look at aviation. The wars focused on producing fighters and bombers, but the advances ultimately made their way into civilian aviation.
I don’t know of any aviation innovations that came in wartime rather than peacetime. As far as I remember, the innovations Edward Luttwak points out in his book about Israeli military innovations that came during Israel’s wars are all in military rather than civilian applications.
It is true that military research and development generates a lot of innovations that also have civilian uses. Fly-by-wire in aviation is one example that I describe in detail in my book on innovations. But that did not come from war.
Look at the Ukraine war. All the innovations there use new technologies developed on the civilian side (such as drones) adapted to military use rather than new military innovations that could trickle into civilian applications. War is not spawning innovation in anything but military applications.
As I also discuss in my book,, while military research and development does result in some innovations, the cost-benefit ration is way out of whack. For example, the amount spent developing the F-35 fighter plane is staggering, yet its technology was essentially obsolete before it was deployed.
The reason? The military uses waterfall development where an integrated design is specified in detail from the very beginning and then frozen through years of development. Innovation comes from agile development of a modular design where new technologies can be quickly integrated into an existing design at any stage of development.
As Edward Luttwak also points out in his book, the Israel Defense Forces are so innovative because they nurture innovation coming from the bottom up instead of the top down. Soldiers on the ground and in the trenches are encouraged to come up with new ideas which often times cost almost nothing to test. Those that work bubble up to the top, while those that fail are dropped.
Militaries that spend a lot of money on developing new technologies during wartime rarely succeed at innovation because they impose things from the top down, and that stifles innovation rather than encourage it. Innovation is stochastic, and bottom-up development lets innovation be nurtured when it occurs while top-down development rarely captures innovations.
Look at military aviation in 1914. Five years later, Alcock and Brown crossed the Atlantic in a converted bomber. in 1938, airforces still largely had biplanes. In 1946, a lot of them had jets.
You need both. It wasn’t the market and young companies that got us to the moon, produced nuclear technology and won wars. That was actually central planning. The market is good at innovating for consumers, not rarely by commercializing the fundamental science produced by public endeavours.
That is besides the fact that, what appears to be the free market, upon closer inspection, is often sill heavily subsidizes.
I would say that it’s all about making the right choice when and under what circumstances the public sector would bring about better results v the private sector.
Still, I am inclined to believe that the private sector would be almost always more efficient and responsive.
One thing is certain: bloated government and suffocating bureaucracy are never good for economy.
That really depends. Competition can produce innovation for sure. But sometimes you already know what you want to achieve and then it is better to redirect all resources to one project instead of half of the resources to two competing projects.
The almost religieus free market and “government is the problem” rhetoric is of course also something we got actively shoved down our throats since Reagan/Thatcher. But if you look at how those ‘neoliberal’ governments, together with big capital, actually operate, it does not seem they actually believe in it themselves. Just because something is private on paper does not mean it truly operates in a free market. In practice, government (and central bank) support, as well as central planning has always been everywhere.
Thank you for replying and, indeed, you make a valid point about many projects being branded as private, but de-facto being funded by government – something that has become increasingly common.
Still, I would maintain that government intervention should be kept in check, with the caveat I already made that when government funding and/or regulation is justified , opting for it would be a reasonable choice.
For sure, the complete control of the economy as attempted by the Soviet Union was a disaster, and that is also why they introduced the New Economic Policy pretty quickly, thus falling back on a degree of state capitalism. Although one could argue that we would be able to do a much better job designing a command economy with modern information technology and algorithms. In fact, something like Amazon could be seen as a digital command economy environment operating within a state capitalist system. There is also this book the People’s Republic of Walmart that argues how giant companies are basically operating like command economies.
That said, in general I agree, people should be able to get out there and do something interesting without too much interference from the government (or other powerful entities). In fact, I think that dynamic goes beyond economics: something like open source communities are good examples of true free markets in my opinion. If the government wants to do something they can provide safety nets. If people are able to take risks without ruining their lives more people might be doing something interesting.
You have made a lot of interesting points. Thank you:-)
Thank you also for the book recommendation, will definitely look it up.
Nuclear technology was being developed well before the State got involved because it saw the potential for more destructive weaponry.
We might well have not gone to the moon, if private individuals had not decided it was worth spending the money on. However the success of SpaceX suggests otherwise.
Yes, many companies get subsidies… but plenty of successful companies do not.
What people fail to realise is that all these government subsidies come at a cost to other existing businesses. The resources that went into putting a man on the moon were resources that weren’t expended curing cancer.
Google “Bastiat seen unseen” for further details
I think you are referring to the Manhattan project but before that nuclear science was primarily developed in the public sector as well.
The government does not need funding from the private sector for things like going to the moon. It can print money after all. The reason why it issues, for example, a lot of (war) bonds is to make sure people are no longer spending on other things as this would be very inflationary. So it is a way to focus the economy and resources to one major goal, something a private entity cannot do.
As for subsidies it goes much further than the direct subsidies. It is a bit of a public secret that much of the tech sector is the commercialization of public defense spending, mainly DARPA. Similar methods are used for big pharma. Also the state plays a major role in protecting big capital against market discipline with tariffs, tax cuts and by maintaining things like intellectual property laws in certain ways. And then there is quantitative easing flooding the stock market with public liquidity. Does all of this come at the expense of businesses and private individuals? Well yes, small businesses and the middle class.
Agree with everything you say, but would like to ask you why you think that breaking up big companies doesn’t work. I have always tended to believe that this is a reasonable and pro-market, pro-competition approach. Or maybe your point is that it doesn’t work in practice, despite being good in theory, just because it’s not done properly?
Would be really grateful to you for replying, because this made me wonder when I was reading your comment.
And please keep us informed about your book, I would definitely like to read it, once it’s published.
Why doesn’t a “break ’em up” strategy spark innovation? That’s a good question. Let me try to answer.
Research shows that innovation is a stochastic process, meaning it involves randomness or unpredictability. While there are structured approaches and methodologies to foster innovation, the outcomes depend much more on a combination of serendipity, timing, and unexpected insights. Groundbreaking innovations occur through a combination of planned effort and fortunate happenstance, with an emphasis on the latter.
While innovation has stochastic elements, it thrives in environments that encourage creativity, collaboration, and openness. By cultivating these conditions, the likelihood of innovative breakthroughs increases, even if the exact nature of those breakthroughs remains unpredictable.
Oddly, competition does not encourage innovation. Indeed, it discourages it. Same with subsidies, mandates and moonshots. Same with government regulation. These all favor big, established companies, not young companies with new ideas.
What is needed for innovation is an ecosystem of big and small companies that combines the top-down, economy of scale approach of big companies with the bottom-up, innovative approach of young companies. A book that describes this well is Loonshots: How to Nurture the Crazy Ideas That Win Wars, Cure Diseases, and Transform Industries, by Safi Bahcal. The book is not scholarly, but it’s a solid work that my research supports.
The computer industry has this innovation-nurturing structure. Innovation is computing has been staggering. I can hold the smartphone I am typing on in the palm of my hand, yet it is a million times faster than the computers of 50 years ago that took up a room and weighed tons.
The carmaking industry has a structure that stifles innovation. The big carmakers (called OEMs) have long had an oligopoly that is protected by high barriers to entry. Rather than agile, innovative development, carmakers use waterfall, economy of scale development. They innovate, but slowly. Cars from 50 years ago are fundamentally not that different from those we drive today. I could easily use a car like that as my daily driver. A computer from 50 years ago, by contrast, is an unusable museum piece.
Breaking up big companies doesn’t create the vibrant ecosystem we see in the computer industry. The hipster antitrust, neo-Brandeisians like Lina Khan, Tim Wu, Jonathan Kanter, and Barry Lynn (and on the conservative side, “Khanservatives” like JD Vance, Josh Hawley and Matt Gaetz) believe in the curse of bigness, and that making big companies smaller creates a better ecosystem.
But it doesn’t. We need big companies. They don’t innovate but they optimize, keeping prices down by finding all possible economies of scale. They just need to be balanced by lots and lots of young companies, most of which fail, that bring relentless innovation to the market.
Breaking up big companies doesn’t build the ecosystem we want. It weakens big companies but does nothing to nurture young companies. In practice, “break ’em up” has never worked to increase innovation, and I don’t think it works in theory either.
Thank you so much for this detailed and really well-argumented reply!
It was truly interesting and eye-opening for me to see this point of view. I never thought about this in the way that you describe.
I think that I was led by some kind of intellectual inertia, taking at face value what is customarily said about big companies and the need to unbundle them.
Thank you once again, most sincerely! 🙂
And will be waiting for your book to be published 🙂
I wrote a lengthy reply to your cogent question, but Unherd blocked it. It should be visible in about 12 hours.
Thank you for replying! Indeed, UnHerd’s moderation system is infuriating .Now, all votes have disappeared- yet another time.
Thank you also for telling me about your reply being held in captivity… 🙁
Will be checking regularly the comment section, to be able to read your detailed answer – albeit with the unfortunate delay…
That’s the Technology Bull***t Bingo card. The slideshow is completed but action in the real world (almost impossible in the EU) is required.
Yeah! The EU should do all of that stuff!
Europe’s “bias against industrial policy” is one of the few things it has going for it.
WTF is net zero? It is an anti-industrial policy.
Luddites at their very best.
The EU just announced OpenEuroLLM mostly funded by Digital Europe Programme. The total budget is about 40 million, which is of course much too low, though it is mostly aimed at the public sector. Perhaps they should quickly throw a commercial spin-off on the stock market with a strong PR department making bold claims. I feel that a major part of the AI arms race is actually PR.
But that does not solve the real problems the EU is facing of expensive energy and dysfunctional bureaucracy. A currency without a treasury and common fiscal policy, as well as the Maastricht treaty 60%/3% deficit rules do not make sense anymore in the post-neoliberal 21st century. The most productive countries like Ireland, Denmark, and the Netherlands – often matching or exceeding productivity of the US – are restricted because of this. However, dissolution of the EU will probably produce a whole range of different (geopolitical) problems at this point.
Where there is competition, excellence becomes the norm. Many Europeans including the British are frightened of competition and do their best to suppress it. But Europe’s creativity and wealth was a result of its diversity. The EU was essentially a rebranding exercise by Germany to transform itself from the third Reich to good Europeans with their lapdogs the French tagging along to share leadership and see what benefits they could get. Yes have a military alliance (NATO), sensible cooperation, common standards and a free trade area but destroy the EU before it destroys Europe.
Very insightful article and well researched. It occurs to me that a risk taking mindset is critical for innovation, new business creation and dynamic adjustments to any economy as it evolves. I don’t see that in many EU countries with the excessive regulation as a hallmark of fearing risk and failure. Until that mindset evolves along with another key ingredient, integrated capital markets, for innovation then I do not see much changing in the EU other than a slow slide downwards
EXACTLY !!!
“Ultimately, a true reckoning with the EU’s economic troubles means recognising that these are rooted in the economic and political constraints of the supermodel itself.”
Kakistocracy is a decidedly apocalyptic phenomenon!
The Maastricht Treaty did NOT advocate a supranational unelected unaccountable institution.
The present structure is its very anathema!
I read the statement about Ursula’s plan three times and it sounded like she had channeled Kamala. A lot of meaningless words about clean and climate. As long as that governs every decision, there will be no improvement.
The EU is quite simply a protectionist construct. It does nothing to promote free trade although it preaches that. Trump knows this but neither he nor anyone else knows how to reverse that. Brexit should have reversed that but instead only resulted in the wagons being drawn in ever tighter. What is clear is that any favourable dispensation for the UK by Trump will distance us further from the EU and the reverse would be true. The UK cannot be a false flag of trade convenience for both sides of the Atlantic.
Putin said the following about Trump and Europe this week:
“I assure you: Trump, with his character, with his persistence, he will restore order there quite quickly. And all of them, you will see — it will happen quickly, soon — they will all stand at the feet of the master and will wag their tails a little. Everything will fall into place.”
Deliciously disdainful, Putin’s assessment will prove correct. The European experiment has been on borrowed time with the U.S. Trump is going to reset Europe’s alarm clock. And when it goes off, Europe will awake to a world it doesn’t recognize.
The example of Brexit allowed the EU to claim that for all the problems and contradictions of the European project, they were nothing compared to the difficulties that member states would face if they left. The cost-benefit balance is gradually moving, a bit like a melting iceberg. The US tariffs will shift the balance still further and it won’t be too long before it shifts altogether. and Europeans become completely disenchanted with the EU. The implications of deconstructing the Euro Bloc will then hit home. The EU is more likely to implode as distinct from an orderly dismantling.
Agree completely, and it would be no bad thing if the EU did implode. Smaller independent political units can always respond much more quickly to changes in the economic landscape than members of ill-defined federations that are constrained by the federation’s rules, and as an added bonus there is a much greater chance that a country’s citizens will feel they actually live in a democracy where their vote actually counts.
And Starmer wants us to rejoin. Go figure.
For followers of LOTR, I always think of the EU as Rohan with the King hypnotised by Grima Wormtongue. It needs an old wizard in a white robe to turn up and banish the socialists. Even Ukraine latched on to the armies of the East as Orcs. What would JRR say now? Orwell?
I am so proud of those of my fellow British citizens who so very intelligently decided to ignore the advice of the leadership of all the then leading political parties and voted for Brexit. Sadly, but maybe unsurprisingly, the same politicians have subsequently failed to capitalise on our escape from the sinking ship. In truth they long to be back on it – rearranging the deck chairs. We can only hope that we will eventually get the type of smart, principled and aware national leaders who will put Britain first. Sadly I don’t see the current lot doing that. They seem more intent on attaching the lifeboat into which we escaped back to the sinking ship.
What appears to be the case is that the Europeans do not adhere to the same notions of “better” that the US and China believe in. For Europeans, a work-life balance has been the focus. The regulatory environment and the high cost of fuel are the main factors in the “decline” of Europe at this time, but perhaps Europe is just a frontrunner. The cost of energy extraction is going up globally over the next decade. On top of ecological crises and military crises, and a shortage of raw materials for green transition, it’s pretty clear that the dreams of “forever growth” are absurd. In that sense, many nations will be de-industrializing, whether they like it or not. Perhaps we could see Europe as ahead of the curve in terms of lowering consumption and deindustrialzation, and a forced return to some of the “old ways” of doing things might be better in the long run for European sustainability than a purely financial lens would illustrate.
The bloc’s “ingrained bias against industrial policy”. It’s had nothing but industrial policy. That’s its problem.
No doubt Starmer will succeed in taking us back into the EU, just in time for the whole thing to collapse on our heads.
“Tthe Commission’s plan IS a familiar mix of buzzwords — AI, advanced materials, quantum computing, biotech, robotics, etc.” Vive le dirigisme français! This has never been a sucess.
The most important for the French is to retire at the age of 62. The Germans want cheap energy but not produced by nuclear power. The whole of Europe has been and still is flooded by illiterates from MENA. The possibility of successe?
I wasn’t aware that the EU had ever been influenced by neoliberalism; I imagined that it was governed throughout by social democrats.
It can’t have escaped your attention that the hard Left hate it because it is too “neo-liberal”.
How important is it for those of you in Europe to have vibrant growing economies with risk and less government (control, regulation, payments, healthcare, pensions) in your lives?
I defer to those of you who live there to make the electoral choices that put your countries and economies on a healthy trajectory.
such a move would only further empower its supranational institutions, particularly the Commission, deepening the bloc’s technocratic and undemocratic governance.
Annnd — You expected something else?
This reads very much like – we need to remove the barriers to more government planning. Not much of a plan. In my view the only two ways forward to avoid the death spiral are for the EU to disband or to become a fully integrated state. The first option would probably be the least painful.
In the aftermath of WW2 the “United States transferred $13.3 billion (equivalent to $173.8 billion in 2024) in economic recovery programs to Western European economies [though not a cent to the UK] …” [Wikipedia]. Moreover, as Trump has correctly pointed out, the USA has covered the majority of the NATO costs since the inception of that treaty.
In its increasingly arrogant worldview, the essentially undemocratic and authoritarian EU appears to have forgotten its gigantic debt to the USA over the decades since 1945. Now that Trump is calling the odds, the EU is squawking.