Lord Mandelson: When Mandy saw the light

The Business Interview: The former Business Secretary tells Andy Tarrant his time in Brussels taught him that the state can play a role in industry

Since his return from Brussels, Lord Mandelson has famously become an advocate for an active government industrial policy. His epiphany occurred while he was Europe's trade commissioner. "Working closely with all the national governments, I observed the scale and scope of the backing that industries in other European countries received from their governments. This was much more substantial than in Britain," he says. "The realisation struck that there was a 'third way' between nationalisation, a policy applied between 1945 and 1979 and considered a failure, and the laissez-faire policies adopted in reaction and applied in Britain ever since.

"The moment this crystallised was in a meeting with the chief executive of Alstom, the French-headquartered multinational engineering company. This was a meeting to discuss how the European Union could back the reinvigorated company in opening up new markets in Asia and South America.

"Yet, this was a company that had faced potential bankruptcy only a few years previously. It had been assisted in restructuring by the French state and was once again challenging on international markets. I was struck by the thought that in contemporary Britain, the Government would not have intervened. Instead, it would have offered its regrets and allowed a company like Alstom to fail."

Lord Mandelson is not advocating the specificities of the French approach which is "sometimes overly focused on issues surrounding the ownership of individual companies".

"There are plenty of other examples in Germany and in Scandinavia, where governments promote the needs of all private industry within their countries. This focus derives from the significance industry has for domestic growth and employment," he says. "These governments do not try to pick out individual national champions. Instead, they put in place framework policies intended to complement the activities of private actors."

A particular market failure with which governments should equip themselves to deal is the aversion of private banks to making long-term loans to industry. Almost every other government in Europe owns a credit institution which can make long-term industrial loans to key industries. While the British Government has set up a Green Investment Bank, its utility has been undermined by concessions to the Treasury which prevent it from making loans.

Lord Mandelson notes the initial horrified reaction of civil servants to his plans, as Secretary of State for Business in the last year of the Labour government, to make loans available to key British growth industries: "Their attitude was that this was an attempt to return to the 1970s." He says this reflects "an unwritten Whitehall rule that ministers and markets must not mix".

The commonly held view in Britain that other Europeans "cheat" when it comes to the application of European rules is, he says, "partly a derivative of the view that only a pure free market approach is the right one". He adds: "The rules agreed at European level do not prevent an active industrial policy. What they require is that it is operated fairly and does not discriminate against firms on the basis of their nationality."

However, in Britain, in his view, we tend to implement European rules in line with our ideological preconceptions. We turn them into rules which only permit the pure free market approach. Lord Mandelson's belief is that "British political parties will be forced to review the 'hands off' approach in depth".

"There is already a rhetorical commitment on the part of all three of the major parties to a growth strategy," he explains. "However, none has yet published such a strategy. But when they do, unless it contains an industrial policy, it will be merely platitudinous."

Such a strategy is necessary since Britain's reliance on financial services has proven to be both highly risky and inadequate as a motor for job creation.

The Centre for Research on Socio-Cultural Change (CRESC) – an academic group researching economic policy – has found that financial services have created only an extra 250,000 jobs since 1984. At the same time, partly as a consequence of benign neglect on the part of government, manufacturing has shed 4.5 million workers. In this context, the Coalition Government's abolition of the regional development agencies is a "very, very serious policy error", according to Lord Mandelson. "It denudes the British Government of a key lever for working with industry," he says. "Central government cannot undertake industrial policy from Whitehall seclusion. It needs to work with regional institutions to do so effectively."

The peer says one of the characteristics of a "third way" industrial policy is that "projects are not just decided by ministerial fiat". Instead, while the objectives are set by ministers, the implementation needs to be approved independently. In the case of the loan to the heavy engineering company Sheffield Forgemasters, it was approved by an independent panel, staffed by people from the private sector.

Before the last general election, Kenneth Clarke, then shadow Business Secretary, accused Lord Mandelson of a cavalier approach. He said the peer was like "a Bourbon monarch going around in his coach throwing out gold coins". Lord Mandelson points out that sums such as the £80m offered to Sheffield Forgemasters – later cancelled by the new government – were loans. "The Sheffield Forgemasters' loan would have made a good profit in the long run, since it would have allowed the company to occupy a dominant position in an emerging global market," he insists. He also says that such loans did not crowd out private-sector investment. "They were offered only when the firm requesting the loan could not find alternative investment. In the case of Sheffield Forgemasters, the £80m state loan was actually the pre-condition required by private sector investors for becoming involved."

The French Bourbon monarchs to whom Mr Clarke referred were famously expelled from power because they had, according to Talleyrand, "learnt nothing and forgotten nothing". Expect Lord Mandelson to argue that it is the Coalition which appears Bourbon-like. For while the former Business Secretary concedes that George Osborne and Vince Cable do critique the unbalanced nature of the British economy and its over-reliance on financial services, he contends "there is no evidence that either have learnt anything from actual existing examples of achieving balance".