New European Commission in Brussels, lthe president Ursula von der Leyen presented the 27 new commissioners on Tuesday 17 September 2024 to the political group leaders of the brand new European Parliament, after the spring elections. The European Union is-is it up to the economic challenges it faces?
Jean Tirole, Nobel Prize in Economics, Honorary President of the Toulouse School of Economics, recently looked at the issue of innovation in Europe, in a report which will be the subject of a conference on Wednesday at the Collège de France.
franceinfo: Your observation is alarming. Europe is falling behind the United States for several reasons. It is not just a question of public funding. The budgets are equivalent in terms of percentage of GDP. But the private sector is not investing enough. Is that part of the problem?
Jean Tirole: You are right, France is falling behind and Europe is also falling behind in terms of innovation. That is to say, we are absent from the major biotech fields, software, hardware, etc. Artificial intelligence, we are almost absent. This obviously translates into relatively little innovation. We see that of the 20 largest tech companies in the world, none are European. Start-ups are the same thing. The consequence of this is that obviously purchasing power is stagnating. This is very serious because there is still very strong pressure to have higher purchasing power.
“The only way to create sustainable purchasing power is ultimately innovation and competitiveness.”
Jean Tiroleto franceinfo
What you are saying is that when we invest, it is not in the right technology, not in the disruptive technology. Basically, we are investing in the automobile industry rather than in AI. Does this mean that Europe will always be one step behind the United States and China?
Yes, that is to say that the R&D funding deficit in Europe is essentially the private sector: 1.2% in Europe, 2.3% in the United States, compared to GNP. So, we have this deficit which essentially comes, indeed, from the fact that we invest in what we call mid-tech, the automobile in particular, which brings less added value, that is to say that the profits are much lower. And indeed, these are industries which are threatened because we see very clearly the automobile today with driverless cars, with electric cars, we have difficulties.
In Europe, we invest more in SMEs and ETIs, i.e. mid-sized companies, when we should focus on start-ups. You point out that there is also a governance problem. The European Innovation Council is run by politicians when the ARPAs in the United States are run by scientists. That changes everything. We saw that the new European Commission was presented earlier. Isn’t that likely to change?
I think that the Draghi report on competitiveness has been well understood, in particular by Ursula von der Leyen and I think that there will be a change on that side, but Europeans still have to want it.
In terms of governance?
In terms of governance, it is more complicated. First, we must invest in disruptive innovations.
“We invest less than 5% of the European research budget, which is already very low in itself, in breakthrough innovations.”
Jean Tiroleto franceinfo
So, it’s essentially aid to SMEs. We’re not on target. There are programs that work very well, like the European Research Council program, which works a bit like DARPA in the United States.
Are you hopeful that this will change with the new European Commission?
Yes, if we have the political will.
Is the political will there?
It’s divided. There are a lot of people who are in favor of changing things because we realize that we’re not making progress on innovation issues, we’re way behind. Afterwards, we also have to accept that it’s scientists who distribute the money, as is the case for health or defense in the United States. It’s scientists, not politicians who distribute the money, because they’re the ones who know which projects are promising or not. Politicians are automatically under a lot of pressure.
What you also say is that the money should be paid at the central level. So, in Brussels, for example, and not in Paris and Berlin, this avoids clientelism, betting on technology and innovation that will bring jobs to one’s own country. Except that this is a total break.
It’s a complete break. We managed to do it effectively for basic research with the ERC, the European Research Council. But it’s true that there are a lot of people who don’t want to stop handing out chocolates in a way. But it’s going to be inevitable. In the United States, research is distributed essentially at the federal level, not at the state level.
We now have a Prime Minister, Michel Barnier. But we are still waiting for a budget and a government. If you had some advice to give to the new Prime Minister in terms of economic policy, what would it be?
I don’t have any advice to give, but we’re going to have to change the way we work together a little. Here, I’m bringing the entire political class together. What strikes me during the legislative and European elections is that we talked about two things: immigration and purchasing power. I’m leaving immigration aside. Purchasing power, I do understand that the poorest are worried about their purchasing power. But when an entire country, ultimately, only talks about purchasing power and doesn’t talk about the future at all… That is to say, during these campaigns, we didn’t talk about education at all, we didn’t talk about climate change, we didn’t talk about innovation, or competitiveness. So, everything that will ultimately create wealth and well-being in the future. We talked about dividing the cake. That’s zero-sum thinking. That is to say, we only think about dividing the cake and not creating it.
Except that today, we must move forward. France is the subject of an excessive deficit procedure in Brussels. Do we need more savings or do we need to increase taxes?
We can do both. That is a political choice. Savings can be found on the right, on the left.
With plane strokes?
Above all, we must not make a uniform cut, because in this case, crucial things like innovation and education must not be touched.
Particularly the research tax credit?
The research tax credit can also be managed a little better, that is to say that, for the moment, it really benefits the aeronautics, automobile, etc. sectors. It should be a little more conditioned on disruptive innovation. We always come back to the same subject, but let’s say that there will have to be a political consensus and there, we need a union of the parties that are today opposed to believe in the future of France.
Should taxes be increased? In the report that you coordinated for France Stratégie with Olivier Blanchard, you denounce a taxation of labor that is always higher than that of capital. Do you still hold this opinion?
Indeed, in France, we have taxed work a lot. We are thinking in particular of social security contributions, but not only. So, this poses a problem because it actually encourages companies to automate and robotize. We did this because we had difficulty taxing capital, because capital is much more mobile. We can go abroad with our capital, we can decide to produce in another country, etc. So, there, we need an agreement at the international level. And there, taxation is encouraging all the same.
So this is not something that should be done at the French level?
It’s very difficult because, in this case, companies leave. We already see it at the start-up level, there are a lot of French unicorns that leave.
You are not in favour of higher taxation of capital, or of the richest, or of inheritances or successions?
We talk about inheritance in the report with Olivier Blanchard. It is better to have a European and, if possible, global body on the taxation of capital, because otherwise the country that taxes it will lose its industry, will lose the richest people and therefore the jobs and taxes that go with it. So, we can do better of course, that is not the subject. We see that there are too many ways to avoid tax: income tax, wealth tax, when there is any. But let’s say that the initial idea of also taxing, for example, real estate does not shock me, because real estate is not mobile, it does not go away, so it is a good thing. On inheritance, what we say in the report with Olivier Blanchard is that it is a good thing. After all, it is one of the factors of inequality. But it is not the rates in France that are a problem. The rates are among the highest in the world. It is rather the application of these rates that poses a problem. So we must finally implement what was voted.