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Europe’s growth gap: reconciling Keynes and Schumpeter

Summary:
Governor François Villeroy de Galhau of Banque De France in this speech points to growing growth gaps between Europe and US. How to bridge the gap? Take advice of Keynes or Schumpeter? After the diagnosis, I will now move to potential explanations and cures. For that, let us call to mind two of our most famous economists of the 20th century: Keynes and Schumpeter, who are viewed as opposed in terms of policy prescription. John Maynard Keynes emphasised the importance of both macroeconomic active policies and the welfare state for citizens.  Joseph Aloïs Schumpeter focused on what causes dynamism and innovation in market economies. As you know, he was born in Europe but passed away in America – and it’s probably no coincidence. Accordingly, I would like to elaborate on three

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Governor François Villeroy de Galhau of Banque De France in this speech points to growing growth gaps between Europe and US.

How to bridge the gap? Take advice of Keynes or Schumpeter?

After the diagnosis, I will now move to potential explanations and cures. For that, let us call to mind two of our most famous economists of the 20th century: Keynes and Schumpeter, who are viewed as opposed in terms of policy prescription.

John Maynard Keynes emphasised the importance of both macroeconomic active policies and the welfare state for citizens.  Joseph Aloïs Schumpeter focused on what causes dynamism and innovation in market economies. As you know, he was born in Europe but passed away in America – and it’s probably no coincidence.

Accordingly, I would like to elaborate on three potential “candidates” as explanations for Europe’s lag: the first two – our social model and our macroeconomic policies – would be Keynesian failures and the third one – our lack of innovation – is on the Schumpeterian side. To put it in a nutshell, I don’t believe in the first two explanations, but I believe in the third one. Hence, Europe ultimately needs to gather together its two sons, to reconcile Keynes and Schumpeter.

Would Keynes consider himself as European or strictly British especially after Brexit? 🙂

If the main explanation is neither social nor “macro”, and hence not Keynesian, it is more on the “micro” and Schumpeterian side. Over the last two decades, growth has had to confront numerous “headwinds”, to quote a seminal article by the famous American economist Robert Gordon. In Europe, our lack of innovation and agility in crises is probably the most severe: in 2019, among the 100 most innovative firms in the world, 38 were based in the United States, 21 in China and 15 in Europe. And of the large digital corporations – the GAFAM and other bigtechs – whose power equals that of sovereign states, none is European. Europe is clearly losing momentum at a time when this crisis is triggering a further acceleration of digital technology.

In the short term, a too persistent provision of public support to firms could have perverse effects on innovation, as it would prevent creative destruction from occurring. This lack of a “cleansing effect” calls for a sufficiently selective approach in assisting the recovery: public support for “building back better” should not be aimed at preserving yesterday’s world.

In the longer term, what can we do to put Europe back on the path of innovation? I’m not going to claim to know more than all the research, which is often better qualified than I am. But I firmly believe that innovation is perfectly compatible with the European model and with our choice of the euro. Economic stagnation is not written in our destiny: we can – provided we have the patience and tenacity to remain mobilised over the long term – achieve a great deal by liberating two European energies. First, that of Europe’s talent and its human capital: 448 million men and women, whom few can rival in terms of qualifications. Then the energy of its single market, which we now have to push to its full potential.

Hmm..

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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