David Harrison / Jan 2025
Image: Shutterstock
Europe would benefit from a judicious synthesis of ordoliberal and Keynesian economics to surmount its twenty-first century crises.
At first sight diametrically opposed, in reality these two different economic philosophies address different aspects of the same market economy: ordoliberalism how to promote competition and avoid excessive concentrations of power in production and supply; Keynesianism how to ensure effective demand for what is produced, and mitigate booms, bubbles and crashes.
German ordoliberal thinkers of the Freiburg school, keen after the Second World War to put in place frameworks preventing the excessive concentration and misuse of economic and political power, left a strong imprint on European competition policy. German ordoliberal Hans von der Groeben, with French economist Pierre Uri, largely co-authored the 1956 Spaak Committee report, setting out how the European common market should be built on the Coal and Steel Community, later becoming first Competition Commissioner of the European Commission.
Creating a vast European common market by merging separate national markets required strong competition rules to prohibit practices and behaviour by companies distorting that market. These were embodied in the 1957 Treaty of Rome, establishing the European Economic Community, and maintained in subsequent amendments of the Treaties, up to the present day.
Until 2004 the European Commission enforced the rules itself, on a centralised basis. Since then, after the enlargement of the EU from the original six to (then) 25 member states, a decentralised network system has brought together national competition authorities, plus the European Commission, to apply EU competition law consistently where the activity of companies has an effect on trade between member states.
This merging of national markets into a larger European single market, underpinned by a strong competition policy, focuses on the conditions of production and supply, and is still underway – perhaps never to end as technology creates new goods and services. In 2024 both the Draghi and Letta Reports have recommended significant further action to bring down internal barriers within the single market.
However, supply does not create its own demand. This was the message of John Maynard Keynes’s The General Theory of Employment, Interest and Money, written in the Depression of the 1930s, and of renewed relevance after the 2008 global financial crisis. “Effective demand” in the economy, as Keynes put it, requires two elements: a sufficient volume of consumption expenditure and a sufficient volume of investment expenditure.
Of these, the smaller element of investment is volatile and unreliable, and private markets cannot be relied on to supply it sufficiently and without booms, busts and crises, as in 1929 (and again in 2008). Keynes concluded in The General Theory that the duty of ordering the current volume of investment “cannot safely be left in private hands”. By one means or another there has to be cooperation between the public and private spheres to ensure a sufficient and steady volume of investment in the economy.
It is this element of effective demand which is missing from today’s European economy. There is no automatic mechanism, or invisible hand, to ensure there will always be a sufficient and steady volume of investment. It is a question of public policy. In the expression used by Keynes in The General Theory, investment has to be “induced”.
After the 2008 crisis gross fixed investment in the EU fell by 17% from its peak; and the Draghi Report of 2024 suggests extra investment is needed on an unprecedented scale of some 5% of EU GDP – greater than under the Marshall Plan.
The solution in The General Theory to unstable financial markets is for the state – taking a long view, and on the basis of general social advantage – to have an ever greater responsibility for directly organising investment.
Translated onto a European level, this implies public institutions collectively taking on a much more active role to ensure that investment levels are sustained.
Here, the Community method could be put to work again. An innovative European Investment Community, building on the European Political Community, could organise the necessary degree of cooperation between public and private sectors to ensure sufficient investment, including through networks of European and national institutions. A European board of public investment could coordinate public investment projects and plans; build up a pipeline of future plans; and mobilise finance from Europe’s high level of household savings. Private investment levels could be raised by better cooperation with public sector institutions and plans; and by creating a pan-European capital market to match long-term institutional savings (pension and insurance funds) with the investment requirements of companies.
Europe has made progress in difficult and complex areas in the past by taking a step by step approach, over a period of years. The immediate priorities for extra investment are set out in the Draghi Report: decarbonisation; defence; and increasing productivity through innovation.
Adoption by European political leaders of a programme and a staged timetable to put the investment aspects of that report into effect could be a first step in the right direction.
