This article is the first in a forthcoming three-part series by Cillian Doyle on the role of the state in a mixed economy.
Last month there were two seemingly unrelated events which in an Irish context can be connected. On September 9th Mario Draghi’s published his 400-page report on improving E.U. competitiveness. The report provides a series of recommendations for how the E.U., in the face of changing geopolitical realities, can acquire new industrial policy tools to deal with its ‘existential challenge’.
A day later the Irish government was given the awkward news it had lost the Apple tax case. Despite its legal advisor Paul Gallagher describing the Commission’s case as ‘fundamentally flawed, confused and inconsistent’, that’s not how the ECJ saw it. Its punishment – €14 billion in additional tax revenue. As a result, it now has a financial war chest available for investment, but a dearth of policy ideas.
This series deals with each in turn.
Europe at the Crossroads
Draghi’s report was intended to provide some harsh truths to E.U. leaders, by making them confront the reasons for Europe’s decline. Placing this within the wider geopolitical context, his report stresses that the E.U. continues to fall further behind the U.S. and China, whose successful innovation is being driven by ‘subsidies, industrial policies, state ownership and other practices’.
Writing in the Financial Times Adam Tooze argued that the report’s real target was ‘not China but the U.S.’. Perhaps Draghi and other E.U. policymakers felt catching China was a step too far but that matching the U.S. was a more realistic prospect. When we look at the share of global growth over the last ten years (2013-23) accruing to China, versus that of the U.S. and the E.U., we can see why (Figure 1).
Figure 1
% Share of 10 year global growth: China vs U.S. vs E.U. (2013-23)
Source: World Economics Database
Speaking shortly after the publication, Draghi seemed to underscore Tooze’s point, stressing that the E.U. was not only looking to defend itself from China, as much of the media commentary suggested, but also from the U.S..
This recalled the discussion around the need for ‘strategic autonomy’ that was flirted with during the Trump administration, when it was argued Europe was best placed serving as a third pillar and bridge between the U.S. and China. Something hastily forgotten with the election of the Biden administration and the Russian invasion of Ukraine.
Since then, the von der Leyen Commission has stood firmly behind the U.S., so much so that even Foreign Policy magazine stated she ‘Might be too pro-American for Europe’. The world is increasingly bifurcating into two blocs; ‘Team Unipolar’ led by the U.S. along with the E.U. and other G7 members, and ‘Team Multipolar’ led by the BRICS group, the relatively new intergovernmental organisation, which is growing in confidence and size (see figure 3).
Figure 2
% Share of 10-year global growth: the West vs BRICS (2013-23)
Source: World Economics Database
This hasn’t gone unnoticed by the E.U. institutions. The E.U. engages with BRICS, although it stresses on an ‘individual basis’. Last year the E.U. Parliament’s Committee on International Trade as part of their engagement with the Commission ‘underlined the need to keep an eye on the group’s expansion, especially considering the effect of a potential BRICS+ currency and the consequences for E.U. trade policy.’
Figure 3
BRICS expansion 2023-2024
BRICS encourages members to transact in domestic currencies for bilateral trade, as opposed to transacting in dollars and to a lesser extent the euro. They’re also trying to develop an alternative payment system to Belgian-based Swift. The dollar and Swift are key to the U.S. sanctions regime, and hence seen as posing risks.
The Washington Post pointed out that the U.S.’ is currently subjecting around one third of countries in the world to some form of economic or financial sanction. Many of these are developing countries now looking towards BRICS as an alternative to the U.S. Rules Based Order, and Western dominated multilateral institutions (IMF/World Bank).
Earlier this month U.S. Secretary of State Anthony Blinken stated that through its ‘human rights’ based foreign policy, the U.S. succeeded in rallying ‘the international community’ behind its Russian sanctions policy. However, as the Quincy Institute pointed out, ‘the large majority of countries around the world that have refused to join in sanctions and have called for an early peace — a call that has been repeatedly snubbed by Washington’.
It was primarily the other members of Team Unipolar which rowed in behind the leader, with the von der Leyen Commission being particularly enthusiastic. As research by Thomas Fazi has shown, she used this exercise to assume more competencies for the Commission at the expense of E.U. Member States.
Some portray this growing global divergence as one between democracies and autocracies. As Joseph Borrell recently acknowledged, however, this framing is used for political reasons. As he said himself, the West is allied with plenty of autocracies on the basis that they’re aligned with Western foreign policy.
Super Mario World
Where the E.U.’s future lies in all of this remains to be seen. But in the meantime, it must confront its challenges which are real, severe, and somewhat self-inflicted. Draghi’s report sets out in stark terms its relative decline in output and productivity growth. The latter singled out as a primary cause of its sagging growth. His report couldn’t have been published at a more appropriate time with the likes of Germany, Austria and Sweden falling into recession.
Figure 4: GDP growth rates Q2 2024
% Change over previous quarter (seasonally adjusted)[1]
His report attempts to shift the E.U. away from what’s often seemed like a single-minded focus on competition policy, toward a new focus on industrial policy (hereafter IP). Whether such sweeping changes are possible in the absence of significant E.U. treaty change has been debated by legal scholars (see here for one critique).
I’m more concerned with its proposed economic reforms, and in particular one which was curiously absent. It’s true these present something of a departure from established E.U. policy thinking and the conventional (neoclassical) economic philosophy which has generally underlain it.
It’s also worth noting that up until quite recently, IP was described as ‘the economic practice that dares not speak its name’. Or as one leading member of the profession once said, ‘the best industrial policy is none at all.’
Yet with the success of China’s IP and the U.S.’ recent adoption through the CHIPS Act and the hilariously misnamed Inflation Reduction Act, the E.U. had to act in kind. For students of history, those with an interest in development economics, or a general disdain for market fundamentalism, this move may have seemed long overdue.
Every major power that developed did so through successful IP. The rapid recovery of Western Europe after WW2 was built on the back of it. The East Asian Tiger economies managed rapid industrialisation and technological advancement through a developmentalist approach, which often shirked the dictates of the Washington Consensus.
But if you were thinking Draghi’s proposed ‘new Industrial Deal’ portends the return of state capitalism in a ‘post neoliberal’ world – not so fast. It was as interesting for what it didn’t say, as much as for what it did. The five most common tools of IP are (1) state-owned enterprises (SOEs), (2) trade policy, (3) public R&D, (4) long-term financing and (5) targeted supports for business.
Table 1: Key recommendations of Draghi Report
| Industrial Policy
Instrument |
Draghi Report? | Recommendation(s) | Comment |
| State-owned
enterprises |
No | N/A | N/A |
| Trade policy | Yes
|
A new “Foreign Economic policy”.
Coordinate purchases based on the European Union’s large internal market. Greater focus on need for E.U. Strategic Autonomy |
Use of preferential trade agreements to help facilitate direct investments in resource rich countries. More E.U. common procurement. |
| Public R&D | Yes
|
Creating a European Advanced Research Projects Agency (ARPA), suggests increasing R&D spending, investing in research infrastructure, and fostering a more innovation-friendly regulatory ecosystem | Says there’s a need to tackle fragmented public R&D spending. Increase public R&D spending. Streamline multi-country trial management to make the E.U. a more attractive location for clinical R&D |
| Long-term
Financing, investment |
Yes
|
Common E.U. borrowing framework,
Need for additional investment (€800m p/a) E.U. Capital Markets Union, Banking Union |
Common borrowing could be a powerful tool but likely to draw resistance from certain E.U. states (i.e Germany). Desire to shift E.U. away from bank-based finance to market based finance (shadow banking). |
| Targeted business
support |
Yes |
Replacing state aid with European aid, simpler and more flexible regulation for SMEs, reduced administrative burdens | GDPR legislation to be re-examined in the context of companies working on AI. Increasing computational capacity dedicated to the training and fine-tuning of AI models for innovative E.U. SMEs |
As we can see above, there’s a glaring omission from ‘Super Mario’s’ toolkit. Any serious discussion of the role of SOEs was absent. But we’ll return to this in part 2 and 3. First let’s deal with some of the report’s big takeaways.
The headline figure which stands out was the call for increased investment of around €800 million per annum to ensure the E.U. meets its key competitiveness, climate and defence targets. This equates to the E.U. investing around 5% of its income on an annual basis. There’s something of an historical irony here.
You might recall a certain former Greek Finance Minister proposing this very measure. Yanis Varoufakis once proposed allowing the European Investment Bank (EIB) to issue bonds which would have been purchased by the ECB to fund a Green New Deal. Despite presenting his proposal to E.U. Finance Ministers and Central Bankers, he was given short shrift.
Whether such a measure is now possible seems unlikely. As Varoukafis points out, the disillusionment with the much smaller sized issuance of bonds by the Commission – as part of its NextGenerationEU – means there’s unlikely to be much appetite from investors or member-states at the more ambitious scale outlined by Draghi.
Investors doubt the Commission’s ability to sufficiently expand its fiscal powers, and member states – particularly groups like the German ordoliberals – are cautious that such borrowing would be a Trojan Horse for the Commission to massively expand its tax competencies.
In terms of trade policy, it argues for a new ‘foreign economic policy’ explicitly described as ‘statecraft’. This would marry decarbonisation with support of direct investments in resource rich countries. Preferential trade agreements could serve as bargaining chips to encourage such resource rich countries to open up to E.U. investment.
It doesn’t hide the sense of urgency behind this, stating bluntly the E.U. has ‘lost its most important supplier of energy, Russia.’ It’s less the case that the E.U. has completely lost access, and more that due to sanctions it’s now purchasing Russian energy at a higher price via secondary countries (Turkey, Azerbaijan, etc), albeit at reduced levels.
This coupled with rising tariffs on China (e.g. from 10% to 45% on EVs over the next five years) means the German economy – the E.U.’s workhorse – has, on the one hand, been starved of cheap energy inputs. On the other, its main trading partner (China) is demonstrating less demand for its high-quality outputs (cars, chemical products, etc).
Germany is thus undergoing deindustrialisation. The U.S., thanks to its new IP turn and the manufacturing subsidies it’s now providing, has been one of the main beneficiaries. Deloitte found that two thirds of German companies had moved some of their operations overseas. That’s good news for the U.S., but bad news for Germany.
Member states are also incurring high costs from the construction of LNG infrastructure (terminals, storage, and regasification units). Over 50% of LNG imports are from the U.S.. Again, good news for the U.S., but bad news for member states bearing the higher costs associated with LNG, placing it at a competitive disadvantage.
One thing that seems to have been lost on the E.U. Commission is that they’ve replaced the energy risk associated with one overly dominant supplier (Russia), with that of another (the U.S.), whilst locking in higher prices for supply. If some future U.S. administration were to tax LNG exports to the E.U., then it could find itself at an even further competitive disadvantage.
The report sets out various recommendations to boost public R&D and thereby help E.U. companies to innovate, particularly those in the tech sector. As we can see from table 2 of the top 10 public research institutions according to Nature Index Research Leaders 2024, seven of these were Chinese institutions, with just two from the E.U. and one from the U.S..
In terms of the top 10 technology companies and banking institutions the situation for the E.U. is worse again. It’s not represented in the top 10 in either category. Draghi thus wants to allow for greater ease of mergers between E.U. tech companies which it’s hoped would see them rival their U.S./Chinese counterparts.
Table 2:
Top 10 Research Institutions, Tech companies and Banks
| R&D (2024)[2] | Technology (2023)[3] | Banking (2024)[4] | |
| Rank | Institution/Country | Company | Financial institution |
| 1 | Chinese Academy of Sciences (China) | Apple
(U.S.) |
JP Morgan Chase
(U.S.) |
| 2 | Harvard University
(U.S.) |
Alphabet
(U.S.) |
Bank of America
(U.S.) |
| 3 | Max Planck Society
(E.U.) |
Samsung
(South Korea) |
Industrial and Commercial Bank of China
(China) |
| 4 | University of Chinese Academy of Sciences
(China) |
Foxconn
(Taiwan) |
Agricultural Bank of China
(China) |
| 5 | University of Science and Technology China
(China) |
Microsoft
(U.S.) |
Wells Fargo
(U.S.) |
| 6 | Peking University
(China) |
Meta
(U.S.) |
China Construction Bank Corp
(China) |
| 7 | French National Centre for Scientific Research
(E.U.) |
Dell Technologies
(U.S.) |
Bank of China
(China) |
| 8 | Nanjing University
(China) |
Huawei
(China) |
Royal Bank of Canada
(Canada) |
| 9 | Zhejiang University
(China) |
Sony
(Japan) |
Commonwealth Bank of Australia
(Aus) |
| 10 | Tsinghua University
(China) |
Tencent
(China) |
HSBC Holdings
(U.K.) |
Financialisaton: Problem or Solution?
Draghi sees a ‘lack of finance’ as being at the heart of the problem, unsurprising given his former roles in investment banking (Goldman Sachs) and central banking (Italy/ECB). He thus stresses the need to complete the E.U. Capital Markets Union (CMU) as a remedy for this.
The CMU is intended to bring about an E.U.-wide union for market-based forms of financing (think asset managers, hedge funds, private equity, pension funds, etc), to provide an alternative to what has been traditionally, predominantly bank-based finance in Europe. This could allow for more equity-based financing as E.U. companies choose this over initial public offering (IPO) their stock.
But it will also mean a single European market for the alphabet soup of obscure acronyms which denote the various complex, opaque, and risky financial instruments that got us into trouble during the Financial Crisis of 2007-2008. Essentially, more shadow banking. Is this really what the E.U. needs? It’s certainly taken as axiomatic that it is.
The assumption is that the CMU would help to drive capital to SMEs and the real economy, which they see as overly dependent on bank finance. However, in the run up to 2008 U.S. capital markets had become highly developed, and it’s not clear at all that this led to increased lending to their SMEs or the real economy.
What’s clear is that it led to huge levels of debt, the risk of which was masked in the system through opaque and poorly understood financial engineering techniques. And when it went sour it led to massive contagion effects, which brought down many financial institutions leading to costly public bailouts.
One of the main problems the E.U. faces, although not alluded in the report, is that it’s allowed itself to be turned into (to a varied extent among member states) a high-cost, financialised economy with declining public provision, largely privatised primary health care services, high-cost housing, and childcare, and poor and deteriorating public infrastructure.
Financialisaton has rightly been criticised on the basis that it can lead to increased financial fragility and the risk of financial crises. But it’s also identified as shifting the ‘orientation of the non-financial sector towards financial activities ultimately leading to lower physical investment, hence to stagnant or fragile growth, as well as long term stagnation in productivity’ (Tori and Onaran 2017).
Figure 5: Growth of Financialisaton in Europe
Total Financial Assets (TFA) as a % of GDP (2000-23)
Source: ECB Data Portal
The Fingerprints of Institutional Investors
Another issue with financialisaton is that it provides financial elites with more power.
It’s interesting to note who Draghi consulted as part of the research that fed into his report. The economist Isabella Weber pointed out the list of stakeholders consulted lists four pages of “trade and business associations”, “professional consultancies” and “companies and groups”, but just a single trade union.
There was a total of 82 companies/corporate groups which fed into it. These ranged from large PLCs, to established private companies, to even newer start-ups. But they also included some current or former commercial SOEs (25), which makes the lack of consideration of public enterprise even more noteworthy.
These companies/groups covered a broad range of industry sectors including: finance, extractive, transport, pharma, tech and so on. Table 3 examines 72 of these, for which some or all data could be compiled, and looks at that their level of institutional ownership, notable institutional owners, and state-owned shareholdings.
The reason for doing this is simple. Over the last few decades, the ownership landscape of companies has changed radically. Whereas in the past large companies were owned by individuals, pension funds, insurers and indeed states, today they’re overwhelmingly owned by asset managers. These are financial intermediaries investing on behalf of wealthy individuals, pensions funds or other financial institutions.
Today they’ve extraordinary levels of assets under management (AUM). By one estimate they own €1.8 trillion worth of real estate in Europe. Brett Christophers’ book Our Lives in their Portfolios highlights how asset managers have also become major owners of public infrastructure throughout Europe. He describes our current juncture as being one of ‘asset manager society’.
Many Europeans have some sense of this, but may be unaware of the extent to which they’ve come to own such large shareholdings in companies across most sectors. This explains their description as ‘universal owners’: their portfolios are so large and diversified that they represent a chunk of the entire economy.
Of the companies that fed into the report a significant level of institutional ownership is observed, with the highest being NXP Semiconductors (95.37%). Excluding those which had no institutional ownership (5 cases), the average level of institutional ownership was 40%. As we can see Blackrock, Vanguard, and State Street feature heavily.
| Table 3- Ownership structure: Institutional owners vs state owners | |||||
| Corporate body group | % shares held institutional investors | Notable institutional
Shareholders (Big Three italicised) |
Former SOE? | % shares held state investors[5] | Notable state
shareholders |
| Airbus | 32.80% | Amundi, State Street | Yes? | 25.7% | France, Germany, Spain |
| Air France KLM | 6.08% | Vanguard | Yes | 41.7% | France, Netherlands, China |
| Alstom | 71.20% | Vanguard | Yes | 25.04% | Canada, France |
| Amazon | 50.81% | Vanguard, Blackrock, Fidelity, State Street | No | 0% | N/A |
| Amundi | 6.08% | Vanguard, Blackrock, Fidelity | No | 0.47% | Norway |
| Ariston Group | 34.76% | Schroder Investment Management, Vanguard, Blackrock | No | 9.94% | Norway |
| ASML | 21.10% | Capital Research and Management Company, Blackrock, Amundi | No | 0% | N/A |
| BASF | 43% | Amundi, State Street | 0% | N/A | |
| Bayer | 44% | Blackrock, Vanguard, Oakmark | No | 6.67% | Norway, Singapore |
| BMW Group | 17.61% | AQTON SE, Vanguard, Amundi | No | 1% | Norway, Australia |
| BNP Paribas | 82.60% | Blackrock, Amundi, Vanguard, Oakmark, iShares (Blackrock) | Yes | 7% | Belgium, Luxembourg |
| Bolt | 26.00% | Fidelity, Sequoia Capital | No | 0% | N/A |
| Clarios | 30% est. | Brookfield Asset Management | No | 25% est. | Canada |
| Deutsche Telekom | 69.40% | Vanguard, Goldman Sachs | Yes | 27.80% | Germany |
| DHL Group | 0.04% | Altrius Capital Management, Amundi, State Street | Yes | 17% | Germany |
| Dompé Farmaceutici | 0% | N/A | No | 0% | N/A |
| EDF | 0% | N/A | Current | 100% | France |
| Enel | 58.60% | Vanguard, Goldman Sachs | Yes | 23.6% | Italy |
| ENGIE | 21.18% | Blackrock, Vanguard, Capital Research and Management | Yes | 23.64% | France |
| ENI | 51.35% | Morgan Stanley, Blackrock, Natixis, Goldman Sachs | Yes | 30.50% | Italy |
| Equinor ASA | 6.60% | Vanguard, Blackrock, State Street, DNB Asset Management | Current | 71% | Norway |
| Ericsson | 9.30% | Hotchkis & Wiley Capital, Morgan Stanley, Vanguard | No | 0% | N/A |
| Euroclear | 21.47% | Fidelity, Citibank | No | 32.50% | Belgium, France, NZ, China |
| Euronext | 61.02% | CDP Equity SpA (Private Equity), Amundi, Capital A Management BV, Vanguard | No | 8.03% | France |
| ExxonMobil | 57.82% | Vanguard, Blackrock, State Street | No | 0% | N/A |
| E.on | 60% | Blackrock | Yes | 4.90% | Canada |
| Ferrovie | 0% | N/A | Current | 100% | Italy |
| FINCANTIERI | 4.20% | Vanguard, Blackrock | Current | 71.44% | Italy |
| Flix | 35.00% | EQT Future. Kühne Holding, Vanguard, Fidelity | No | 0% | N/A |
| Glencore | 41% | Blackrock, Vanguard, EUROPACIFIC GROWTH FUND | No | 8.60% | Qatar |
| 61.98% | Vanguard, Blackrock, State Street, Morgan Stanley | No | 1.83% | Norway | |
| Iberdrola | 77.80% | Blackrock, Vanguard, Fidelity | No | 12.15% | Qatar, Norway |
| Infineon Technologies | 24.70% | iShares (Blackrock), Blackrock, Amundi | No | 0% | N/A |
| Investor AB | 25.42% | Vanguard, Blackrock, Fidelity | No | 2.65% | Norway |
| Leonardo | 50.30% | Vanguard, Dimensional Fund Advisors LP, Capital World Growth and Income Fund | Yes | 30.20% | Italy |
| Lufthansa Group | 54% | Vanguard, iShares (Blackrock), Goldman Sachs | Yes | 0% | N/A |
| LyondellBasell Industries | 73.18% | Blackrock, Vanguard, State Street, Dodge & Cox | No | 0% | N/A |
| L’Oréal | 37.33% | Amundi, State Street | No | 0% | N/A |
| Maersk | 25.19% | Vanguard, iShares (Blackrock) | No | ||
| McPhy Energy | 17.14% | Global X Hydrogen ETF | No | 19.14% | France |
| Mercedes Benz | 45.95% | Amundi, State Street | No | 15.50% | China, Kuwait |
| Meta | 79.06% | Vanguard, Blackrock, State Street, Fidelity | No | 0% | N/A |
| Meyer Burger Technology | 19.52% | Vanguard, Scupltor, Credit Suisse | No | 2.99% | Norway |
| Neste | 31.69% | Vanguard, iShares (Blackrock), Fidelity | Yes | 44.77% | Finland |
| Nokia | 6.17% | DANSKE INVEST FINNISH EQUITY FUND, Blackrock, Goldman Sachs | No | 5.7% | Finland |
| NovoNordisk | 71.80% | Jennison Associates, Morgan Stanley, Bank of America, Vanguard, Fidelity | No | 0% | N/A |
| NXP Semiconductors | 95.37% | Fidelity, JP Morgan, Vanguard, State Street | No | 0% | N/A |
| Orange | 16.52% | Vanguard, Blackrock, Thornburg, UBS | Yes | 22.9% | France |
| Ørsted | 10.71% | Blackrock, Amundi, Vanguard, iShares (Blackrock) | Current | 50.1% | Denmark |
| OVHcloud | 12.62% | KKR, Towerbrook Capital Partners | No | 0% | N/A |
| Renault | 29.04% | Vanguard, Blackrock, Paradigm Asset Management Company | Yes | 15% | France |
| Repsol | 33.61% | Blackrock, Vanguard, iShares (Blackrock), Fidelity | Yes | 3.20% | Norway |
| Rolls Royce | 32.16% | Vanguard, Blackrock, Causeway Capital Management | Yes | 0% | N/A |
| RWE | 88% | Blackrock, Fidelity, Vanguard | No | 9% | Qatar |
| Ryanair | 48.38% | Capital International Investors, Fidelity, Vanguard | No | ||
| Safran | 41.90% | Europacific Growth Fund, Aristotle Capital, Vanguard, Fidelity | No | 11% | France |
| Sanofi | 77.80% | Dodge & Cox Stock Fund, Morgan Stanley, Blackrock, Fischer Asset Management | No | 0% | N/A |
| SAP | 6.30% | Blackrock, Dietmar Hopp Stiftung GmbH, Vanguard | No | 0% | N/A |
| Shell | 11.73% | Fidelity, Vanguard, Morgan Stanley, Blackrock | No | 3.03% | Norway |
| Siemens | 67% | Blackrock, Vanguard, EUROPACIFIC GROWTH FUND | No | 2.98% | Qatar |
| Sobi | 77.25% | Investor Aktiebolag, Morgan Stanley, State Street | No | 1.24% | Norway |
| Spotify | 62.07% | Baillie Gifford & Co, Blackrock, Morgan Stanley, Vanguard | No | 0% | N/A |
| Stellantis | 47.88% | Blackrock, Vanguard, Amundi, JP Morgan | No | 7.29% | France, Norway |
| STMicroelectronics | 14.85% | Blackrock, Goldman Sachs, Grantham | Yes | 27.51% | Italy, France |
| Telefónica | 1.26% | Blackrock, Morgan Stanley | Yes | 9.9% | Spain, Saudi Arabia |
| TenneT | 0% | N/A | Current | 100% | Netherlands |
| Thyssenkrupp Steel E.U. | 85% | Amundi, Merill Lynch, Vanguard, iShares (Blackrock) | No | 3% | Norway |
| TotalEnergies | 6.94% | Fischer Asset Management, Morgan Stanley | partial | ||
| Uber | 83.54% | Blackrock, Vanguard, Fidelity, State Street | No | 0% | N/A |
| Vodafone | 17.27% | Vanguard, Blackrock, Legal & General Investment Management, UBS | No | 18.01% | UAE, Norway |
| Volvo | 54% | Vanguard, Oakmark iShares (Blackrock) | No | 0% | N/A |
| ZF | 0% | N/A | No | 0% | N/A |
According to Braun (2020), ‘Asset Manager Capitalism’ is dominated by the ‘Big Three’; Blackrock ($10tn AUM), Vanguard ($9.3tn AUM) and State Street ($4.3tn AUM). The Harvard Business Review points out ‘One of either Blackrock, Vanguard, or State Street is the largest shareholder in 88% of S&P 500 companies’. They’re also some of the largest shareholders in each other. Institutional investors (passive/active funds) now own 80% of all stock in the S&P 500.
In a study of the Britain’s FTSE350, the 350 largest companies in Britain, the authors found a 20% of its total value was controlled by just ten investors, 10% of which was controlled by Blackrock and Vanguard. The largest foreign owner of the Milan Stock Exchange is Blackrock. According to the OECD in Ireland, Sweden and Poland just three institutional owners control around 20% respectively.
Naturally, concerns have been expressed that such concentrations of economic and financial power leads to a concentration of political power. With the sector today managing an estimated $100 trillion or so in assets (about two-fifths of the world’s wealth) – how could it not?
The Big Three have been described as the “most powerful cartel in history“, with journalists from Bloomberg describing Blackrock as the ‘fourth branch’ of the government. Some have even described asset manager capitalism as an entirely new corporate governance regime. However, the source of this power and the way its wielded is still a matter of contention amongst legal scholars, economists and political economists.
There’s no question that the Big Three want to influence politics at the highest levels. Blackrock has been pouring record amounts into U.S. political campaigns. The same applies in the E.U., where by one estimate they spend an annual €30m lobbying E.U. institutions to ensure their voices are heard.
What the Asset Managers Want, they Get
What do they want when it comes to a new IP approach? In a word, they want assurance of ‘investability’. But not just any kind of investability. To quote Mark Blyth, the want the state to operate as a kind of ‘insurer of first resort’ whereby it uses the public ‘balance sheet to insure private investors against losses’.
Accordingly, this is done by ‘tinkering with risk/returns on private investments in sovereign bonds, currency, social infrastructure (schools, roads, hospitals and houses, care homes and prisons, water plants and natural parks) and most recently, green industries’ (Gabor 2023). This is what political economist Daniela Gabor terms the ‘derisking state’.
A practical example is public private partnerships (PPP). Here private investors commit to finance public infrastructure projects (hospitals, schools, accommodation, etc) and manage them for a long-time horizon, in return for the state bearing certain risks stipulated in the PPP contract. Risks like an increase in the minimum wage, higher taxes, some new regulation, emissions reductions, etc – anything which might negatively impact cashflow.
You see with higher institutional ownership of companies comes higher dividend pay outs. In a study by Buller and Braun (2021) of the largest companies listed on the British stock exchange, they found shareholder pay-outs as a proportion of profits rose substantially ‘reaching nearly 80% of pre-tax profits at the end of 2020’, but productive investment fell.
Asset managers have also engaged in, and rightly been criticised for, extensive efforts at ‘greenwashing’—misrepresenting investment products as more environmentally sustainable than they really are, while refraining from enforcing ESG principles at their portfolio companies. So, I’m not sure how helpful they will be with Draghi’s decarbonisation efforts.
As should be clear from the above, the investability relationship forged between the state and capital is one where capital dominates. It’s certainly not the kind of arrangement witnessed during the ‘golden age’ of capitalism, or what was seen in the East Asian Tiger economies, when capital was disciplined and directed toward the industries thought most productive.
As Gabor points out; derisking and capital discipline are fundamentally at odds ‘because the former relies on private profitability to enlist private capital while the latter forces capital into pursuing the strategic objectives of the state even where these may be at odds with changing market conditions or profit calculations.’
The latter occurred during periods when states were willing and able to do so through means such as nationalising banks to regulate their financial markets, and having their Central Banks impose credit quotas to drive bank lending to what were deemed strategic sectors, often in the presence of capital controls.
The only real prospect of E.U. member states nationalising banks today would be to bail them out in a crisis, I’m not sure whether credit quotas have ever been employed by the ECB’s constituent Central Banks, and capital controls violate one of the E.U.s four freedoms (free movement of capital).
There is, however, another way to take a more direct approach: through the capitalisation of new SOEs. Although Draghi is famed for his ‘whatever it takes’ approach from saving the euro, he clearly doesn’t apply this to IP, as demonstrated by the absence of any serious discussion on this.
Despite the large wave of privatisations that occurred in the 1970s and 1980s, and indeed the more recent reduction in the number of SOEs in places like China, the relative importance of state ownership has actually been increasing. As the OECD points out, ‘the share of SOEs in the list of the top 500 global companies tripled’.
Part 2 takes a closer look at this missing tool from Draghi’s proposed new toolbox, with part 3 considering what possible options Ireland could have with the €14 billion additional tax revenues it now enjoys, some of which could be used for such investment.
[1] https://ec.europa.eu/eurostat/web/products-euro-indicators/w/2-06092024-ap#:~:text=In%20the%20second%20quarter%20of,by%200.3%25%20in%20both%20zones.
[2] Nature Index 2024 Research Leaders
[3] Tech companies ranked by total revenues for their respective fiscal years ended on or before March 31, 2023
[4] 10 biggest banks as measured by market capitalisation.
[5] These shareholdings are variously held by government Ministries, Central Banks, state pension funds, Sovereign/Public Investment Banks, Sovereign Wealth Funds, Sovereign Development Funds and SOEs.
