European Industrial Policy: More funding is not enough

This article is a summary of the paper by the same author published by the Elcano Royal Institute: European industrial policy: the lessons from NGEU in the new geopolitical framework, "more funds are not enough".

To develop a successful European industrial policy in the new geopolitical framework, the experience from NextGenerationEU shows that the increase in European dimension funds must be accompanied by profound changes in the way in which they are invested, transforming public-private cooperation with the aim of raising the scale of European industry and technology (scaling up). Europe lacks success stories such as those that have led the United States (US) to lead and exert technological and industrial leverage on a global scale from large space and defence projects.

If the European Union (EU) is to succeed in its industrial, technological, and wealth-generating race with China and the United States, other objectives such as the creation of the Capital Markets Union, the Banking Union, and the Energy Union, accompanied by a new financial instrument or sovereign wealth fund, must be achieved. New instruments and policies should be able to guarantee the efficiency, simplicity, neutrality, and robustness that the US has achieved with the IRA. Europe has created too many administrative and regulatory hurdles for its financial instruments.

Europe needs to change the way with which it relates to the rest of the world, engaging and reinforcing its external agenda with industrial and investment elements that allow clear benefits for its counterparts in an equitable and sustainable way (Global Gateway, or the EU-US initiative in the G20 as an alternative to the Chinese Silk Road), while defending the Single Market by avoiding national fragmentation and competition between member states. It must also avoid the use of national aid to attract investment projects or bail out companies in an asymmetrical way that runs counter to the principles of European integration.

Trump, Covid-19, and Russia have triggered the acceleration of a previous geopolitical trend, the need for a new common industrial policy in Europe, for two main reasons:

First of which are the constraints and obligations imposed by the global geopolitical transformation initiated at least a decade ago and becoming evident during President Donald Trump's term in office in the US along with the growing confrontation between China and the US. This confrontation is increasingly oriented towards trade, industry, and technological competition.

Secondly comes the acceleration of this trend triggered by the global pandemic of Covid-19, which highlighted the risks and consequences of industrial and technological vulnerability that were then exposed and exacerbated by the subsequent supply crisis, the so-called bottlenecks. This process became even more evident with the invasion of Ukraine that extended vulnerability to the energy sector, highlighting the risk that Russian dependence had generated in Europe – a reality that, taking advantage of the investment instruments created to deal with the pandemic, mainly the NextGenerationEU, led to an acceleration of the European energy transition.

The IRA Wakes Up Europe

In this context, other relevant events have occurred, such as the approval by President Joe Biden's administration of the Inflation Reduction Act (IRA) in August 2022, and subsequently, the speech by Jake Sullivan, National Security Advisor to President Joe Biden, in April 2023 at the Brookings Institute, on the renewal of US economic leadership.

Industry as the new key to national security

This speech has made clear what the new paradigm is: national security dictates economic strategy – economic, industrial and trade policy – something unthinkable only a short time ago.

The big question is whether the EU can and should do the same, and whether it will be able to contribute to shaping a new international order that is open, multilateral and based on its traditional values and principles: liberal democracy, rule of law, welfare state, and open market economy and compatible with the transatlantic link, while rivalry between China and the US grows, and Russia becomes the main destabilising factor at the global level and also in the European neighbourhood.

In the US, leading voices such as Larry Summers have warned of the risks to the welfare of the American middle class of increased protectionism and the consolidation of de-globalisation if this leads to the loss of access to lower-priced consumer and industrial goods.

The true question Europe must ask itself is how to combine the new energy, technological, and productive geopolitics with the strengthening of the Single Market, with its security and defence objectives and needs, without falling into protectionism, while boosting the adaptation of multilateralism to the new global reality.

Europe must protect its internal and external competitiveness while strengthening the attractiveness of the Single Market for sustainable or green investments, maintaining the efficiency of its internal decarbonisation process. As an external actor it must reinforce its agenda where China does not reach or does not reach enough by giving the Open Strategic Self-Government debate real and practical content in both its technological and investment industrial dimension.

The reality is that the EU has not yet taken a clear path. The EU must address this issue from the perspective of the European value chain – technology, raw materials, research, development, and innovation – and also of the construction of the European Energy Union, which will require reforming the Treaties (art. 194).

It is not only a question of security as in the US, for Europe it is also a question of survival to maintain its wealth and welfare and the way of life of European society.



The unsustainable national regulatory fragmentation of Member States' pricing and subsidy systems weakens European responsiveness, in the energy sector more than anywhere else, and prevents combined budgetary and legislative efforts.

The usual European approach emphasising the regulatory dimension is insufficient. Soft power is not enough. The required degree of industrial transformation that Europe deserves needs more than a regulatory incentive or straitjacket because it requires business complicity and trust to take on complex private productive and technological investments first hand.

The Risk of National and Uncontrolled State Aid and Subsidies in Europe

Europe should also be aware that the financial volume it devotes to industrial subsidies in an uncoordinated manner at the national level is at least equivalent to what the US has put into circulation with the IRA (see figures in the original article, €173 billion in energy alone in 2020 before the invasion of Ukraine).

International Trade

On international trade, the EU must combat the worst of the IRA – rules of origin or restrictions on spare parts for electric vehicles – and negotiate a multilateral agreement on green subsidies and energy transition, as well as on complex issues such as trends that accentuate inequality and quality work and threaten democracy. 

Likewise, within the EU-US Trade and Technology Council (TTC), it is necessary to make progress on substantive issues with effective content that anchor open negotiations to ensure trade in specific industrial and technological sectors.

Reducing Risks with China

With respect to China, on the trade front, President Von den Leyen has declared that the EU wants to reduce the economic and diplomatic risks, but not to disconnect, "decoupling not de-risking" because a total withdrawal such as that which the US seems to be pursuing would not only be unfeasible but also contrary to European interests.

Europe must know how to combine the strengthening of its strategic autonomy in production, technology, and industry with the objective of not giving up on the Chinese market. This desire is not exclusively European. For many multinationals of all types and sectors, the Chinese market is essential.

The Lessons of NextGenerationEU and the Case of Spain

The absorption capacity of the European private sector is limited, and this absorption depends on expectations, experience in technological scaling-up (less in Europe than in the USA) along with the difficulties of the national and European administrative systems that allocate funds to projects. Efficient public-private cooperation within market parameters is not so easy to achieve.

The main reason for the difficulties encountered is the nature of the projects financed with the new financial facilities, which are much more difficult to implement than those traditionally financed with European funds.

It is completely different to finance the public provision of a good – such as a road – than the transformation of a productive process of a private company which, although financed or co-financed, needs to make sense and be financially and market coherent according to its competitive and sectoral specialisation, requires technology and involves risk.

Expanding European Technology

Europe suffers from a serious lack of experience in the practical application of industrial projects capable of scaling up its technology, or in the words of James Bradford DeLong, “scale up technology”, following guidelines such as those that have led the US to exert traction from large space and defence projects.

Technologically and from an industrial perspective at least, it is necessary to bring together everything "new" at the European level (AI, aerospace, quantum computing, defence technologies, cutting-edge health) and scale up European technology.

Efficiency, Simplicity, Neutrality, and Robustness

Incentives and simplicity are essential, even more so for comparatively small and vulnerable Spanish and European companies. If there is one thing to highlight about the American IRA and the measures it envisages, it is its simplicity – administrative, fiscal, and financial – and its technological neutrality with respect to the energy transition.

Conclusions

If Europe as a whole is to succeed in its industrial, technological, and wealth-generating race with China and the United States, Europe's main focus should be on the need to build a truly European industrial ecosystem, along the lines of the old debate on European industrial districts.

Complementary structural reforms are also needed in areas such as job quality and skills, insolvency and bankruptcy resolution, or market unity within member states.

Finally, broad economic governance more oriented towards real gains from productive activity is needed, including fiscal and taxation, as well as reform of our ailing institutions at all levels to improve their capacity to deliver. Reluctance to embrace change can only lead to a worse world.