Revitalising the European Industry: Analysing the EU’s Industrial Policy Strategy

Introduction

In the light of recent global disruptions, such as the COVID-19 pandemic, increasing tensions with China, and the United States’ (US) shift towards protectionism, the European Union (EU) has recognised the need for a revised industrial strategy. Historically, the EU has supported free markets, mostly steering clear of direct government interventions in industrial policy (De Ville, 2023). However, the announcement of a new long-term vision for industrial policy in 2020 (European Commission, 2020) marked a significant shift from the EU’s previous stance, aiming to enhance economic resilience, boost competitiveness, and ensure sustainable growth. 

This strategy is not merely a reaction to current pressures but a comprehensive plan to address broader challenges like technological advancements, decarbonisation, and shifting geopolitical dynamics that are rapidly transforming the global industrial landscape. Digital technologies, such as artificial intelligence (AI), the Internet of Things (IoT), and big data, are revolutionising industries and spawning new economic sectors. Concurrently, the urgent need to combat climate change is propelling economies towards green technologies and sustainable practices. Additionally, geopolitical tensions, especially between the US and China, are reshaping global supply chains and trade patterns, presenting both challenges and opportunities for the EU.

In that line, this article explores the history and evolving perceptions of industrial policy as a whole, analyses the EU’s new strategy, its potential impacts, and the future trajectory for the European industry. 

What is Industrial Policy?

Industrial policy involves targeted government interventions aimed at reshaping the production structure toward sectors believed to promise superior economic growth compared to what would occur without such intervention (Terzi, 2023). This includes sectors and technologies that could have significant geopolitical, security, and military benefits in the future (Terzi, 2023). Such government interventions encompass a wide range of measures, including regulatory reforms, financial incentives, infrastructure investments, and innovation aid (McNamara, 2023). Examples include support for research and development (R&D) to spur innovation, offering tax incentives and subsidies to encourage investment in emerging technologies, and implementing regulations that promote fair competition (Wigger, 2023). 

In the past, however, industrial policy has faced significant criticism. Historically, it has been seen as wasteful and inefficient by Western policymakers (De Ville, 2023). Critics argue that government intervention can distort market competition, misallocate resources, and favour less efficient businesses (Cherif & Hasanov, 2019). The fast-paced nature of modern economies means government plans can quickly become outdated, requiring continuous adjustments which can be slow due to bureaucracy (De Ville, 2023). This lag can make policies less effective as they fall behind technological advancements and market trends.

Political risks are also a concern, such as policy capture by interest groups, leading to resource misallocation (Terzi, 2023). Political pressures can result in continued support for failing sectors or premature withdrawal of support. The German photovoltaic sector promotion in the 2000s serves as a cautionary example; it initially thrived due to government support but collapsed in 2012 under pressure from cheaper Chinese imports. The German government failed to anticipate the sector’s continuous relevance and adjust its investments accordingly (Terzi, 2023). 

Moreover, concerns about protectionism and rising tensions remain prevalent. Supporting domestic industries through industrial policies can reduce global trade efficiency and lead to trade wars with countries that feel unfairly treated (De Ville, 2023). For instance, the recent US Inflation Reduction Act (IRA), aimed at boosting American manufacturing and green technologies, has prompted the EU to consider similar measures to protect its industries (Tyson & Zysman, 2023), hence posing a risk to free trade. Another example is the conflict between the US and China over semiconductors and the EU’s recent tariffs on Chinese electric vehicle imports, which may prompt retaliatory tariffs from Beijing (Blenkinsop, 2024).

Despite these challenges, proponents argue that a well-designed industrial policy does not rely on government omniscience. Instead, it accepts that mistakes are an inevitable part of the process and that learning from these mistakes is crucial for long-term success (Rodrik, 2023). Effective industrial policy requires a balanced approach, leveraging both government intervention and market forces to drive sustainable economic growth.

The exemplary success stories of Industrial Policy are the so-called “Asian Miracles” (Cherif & Hasanov, 2019), referring to the rapid industrialisation and economic growth experienced by Japan, South Korea, Taiwan, and Singapore from the 1960s to the 1990s. These countries used aggressive industrial policies to become major economic powerhouses (Cherif & Hasanov, 2019). Their strategies involved significant government guidance in economic development, fostering strategic industries, and promoting exports.

There is also a strong economic case for an active industrial policy in green technologies, particularly if the green transition is viewed as a new industrial revolution (Rodrik, 2023). The urgency of addressing climate change and the rise of digital technologies make a compelling case for selective government intervention to guide economic development in these areas (Terzi, 2023).

The EU’s Industrial Policy

Over the years, Europe’s approach to industrial policy has evolved, reflecting shifting political and economic priorities (Tagliapietra & Veugelers, 2023). After World War II, the focus was on rebuilding strategic industries like coal, steel, electricity, and railways. From the early 1950s to the mid-1970s, European countries pursued interventionist policies aimed at closing the income gap and reducing dependence on the US (Tagliapietra & Veugelers, 2023). During this period, some governments, particularly France, adopted sector-specific (vertical) industrial policies, targeting promising industries like steel, chemicals, machinery, communications, aircraft, and nuclear power (Terzi, 2023).

With the furthering of European economic integration in 1957 – when the European Economic Community (EEC) was established – and the ascent of neoliberal economics from the 1980s onwards, there was a shift towards more market-oriented policies, emphasising economic liberalisation and reducing direct government intervention (McNamara, 2023). This period led to the implementation of the Single European Act in 1986, aiming to eliminate inefficiencies from uncoordinated national policies. The European Single Market, which emerged from this, harmonised regulations and standards across Member States and facilitated the free movement of goods, services, capital, and labour. Its principle of a free market is therefore often seen as incompatible with national industrial policies (De Ville, 2023).

However, the 2008 Financial Crisis and the 2010 Eurozone Crisis triggered a revival of industrial policy across Europe (Tagliapietra & Veugelers, 2023). In 2012, the European Commission published a new industrial policy communication, “A Stronger European Industry for Growth and Economic Recovery”, highlighting the need for a strategic industrial framework (European Commission, 2012). Shortly afterwards,  in 2014, a new communication, “For a European industrial renaissance”, was published, stressing the need to combat the decline of industry’s share of GDP and restore Europe’s global competitiveness in the aftermath of the two crises (European Commission, 2014). In  the same year, the Horizon 2020 programme was announced, which lawmakers hoped would support industrial growth and sustainability by promoting research and development across Europe, while also shaping the industrial landscape towards a more environmentally friendly approach in the following years (European Commission, n.d.-a). 

In March 2020, the Commission officially unveiled the “New Industrial Strategy for Europe” (European Commission, 2020a). The COVID-19 pandemic, declared a day after the strategy’s release, prompted a substantial revision of the policy. The updated strategy, announced in May 2021,  put its focus on managing the green and digital transitions while reducing external dependencies, particularly with China (Tagliapietra & Veugelers, 2023).

Key initiatives under the new strategy include the European Chips Act, proposed in February 2022, which aims to enhance the resilience of the EU’s semiconductor ecosystem by increasing domestic chip production capacity and reducing reliance on countries such as China and Taiwan (De Ville, 2023). In response to supply risks associated with the green transition, the European Commission also introduced the Critical Raw Materials Act (CRMA) and the NetZero Industry Act (NZIA) in March 2023 (Tagliapietra & Veugelers, 2023). While the CRMA seeks to secure a sustainable supply of critical raw materials necessary for green technologies, the NZIA aims to support the development and deployment of clean energy technologies within the EU.

National vs. European Approaches: A Call for an EU Industrial Policy

Historically, industrial policy in Europe has largely been carried out at the national level, with individual countries pursuing strategies tailored to their unique economic contexts, such as Germany’s “National Industrial Strategy 2030” and France’s long tradition of state-directed economic planning (Terzi, 2023). However, the unequal economic powers and budgets of the European states mean that a national approach to industrial policy will always inevitably favour the countries that already have a strong economy (Wigger, 2023). This results in inconsistency across Member States and a potential undermining effect on the EU’s Single Market’s effectiveness and benefits (De Ville, 2023).  Therefore, a call for European industrial policy initiatives to be coordinated at the EU level has been significantly increasing among academics (De Ville, 2023).

A robust European Industrial Policy could present significant benefits and allow the EU to harness the opportunities presented by the double transition, while minimising the risk of inequalities (Cherif & Hasanov, 2019). A common EU Industrial Policy could enhance public control over the green and digital transitions, create jobs in emerging sectors, and promote a positive narrative around these transitions. Even a global subsidy race related to green energy industries could be leveraged to accelerate progress towards net-zero emissions (De Ville, 2023). This EU-wide approach to industrial policy would ensure cohesion across Member States, strengthen the Single Market, and maximise the positive impacts of subsidies and incentives on job creation and technological innovation, particularly in sectors critical for the decarbonization of the EU’s economy. 

It is important to notice that an effective stakeholder engagement is also critical for navigating tensions and maximising the benefits of EU industrial policy (Wigger, 2023). The EU Battery Alliance, for example, brings together over 700 stakeholders from industry, academia, and government to develop a competitive and sustainable battery value chain in Europe (European Commission, n.d.-b). Collaborations like this are advantageous as they increase the effectiveness of the EU’s industrial policy by promoting cooperation, allow Member States to capitalise on their comparative advantage, and enhance the pool of  specialised knowledge. 

However, with global tensions already high and China expected to retaliate against EU tariffs on Chinese EV imports, there is a persistent risk of a shift towards a more protectionist global approach, which may be beyond European influence. This poses a significant challenge, especially since many crucial sectors are located outside the EU and several Member States are currently struggling economically (De Ville, 2023). It is therefore increasingly important for the EU to continue strengthening its home-grown economies and diversifying and solidifying its supply chains. 

Policies like the European Chips Act (EU Regulation 2023/1781), aimed at reducing dependence on Taiwan in case of Chinese aggression, and the EU’s Hydrogen Strategy (European Commission, 2020b), which focuses on developing clean hydrogen to diversify energy supplies and reduce reliance on external providers, are crucial for securing a resilient economy even amid rising geopolitical tensions. 

Conclusion

In conclusion, the EU’s shift towards a more active and coordinated industrial policy is an important response to contemporary global challenges. The EU’s new strategy is designed to enhance economic resilience, competitiveness, and sustainability, addressing critical issues such as digitalisation, decarbonisation, and geopolitical tensions. By strengthening collaboration among Member States and implementing forward-looking policies like the European Chips Act and the Critical Raw Materials Act, that will enable a more secure and sustainable supply of essential materials, the EU aims to secure a resilient economic future. 

However, the rising risk of protectionism presents a significant challenge. Increased tariffs and trade barriers can lead to retaliatory measures from other big economic powers, disrupt global supply chains, and undermine the benefits of a coordinated industrial strategy. Ensuring a balanced approach that promotes open trade while protecting critical industries and domestic production is therefore crucial for the EU’s interests, values and objectives.

Bibliography 

Blenkinsop, P. (2024). EU hits Chinese EVs with tariffs, drawing rebuke from Beijing. Reuters. https://www.reuters.com/business/autos-transportation/eu-impose-multi-billion-euro-tariffs-chinese-evs-ft-reports-2024-06-12/ 

Cherif, R.,Hasanov, F. (2019). The Return of the Policy that Shall not be Named: Principles of Industrial Policy. IMF Working Paper 19/74. https://www.imf.org/en/Publications/WP/Issues/2019/03/26/The-Return-of-the-Policy-That-Shall-Not-Be-Named-Principles-of-Industrial-Policy-46710

De Ville, F. (2023). The Return of Industrial Policy in the European Union. GIES Occasional Paper. https://www.ugent.be/ps/politiekewetenschappen/gies/en/research/publications/gies_papers/2023-global-energy-crisis/pdf-files/10-the-return-of-industrial-policy-in-the-european-union-ferdi-de-ville.pdf 

European Commission (2012). A Stronger European Industry for Growth and Economic Recovery.  Industrial Policy Communication Document 52012DC0582. https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=celex:52012DC0582 

European Commission (2014). For A European Industrial Renaissance. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A52014DC0014 

European Commission (2020a). Making Europe’s businesses future-ready: A new Industrial Strategy for a globally competitive, green and digital Europe. Press Release. https://ec.europa.eu/commission/presscorner/detail/en/ip_20_416

European Commission (2020b). Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: A Hydrogen Strategy for a climate-neutral Europe. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52020DC0301 

European Commission (n.d.-b). European Battery Alliance. Internal Market, Industry, Entrepreneurship and SMEs. https://single-market-economy.ec.europa.eu/industry/industrial-alliances/european-battery-alliance_en 

European Commission (n.d.-a). Horizon 2020. Research and Innovation. https://research-and-innovation.ec.europa.eu/funding/funding-opportunities/funding-programmes-and-open-calls/horizon-2020_en 

EU Regulation 2023/1781. Regulation (EU) 2023/1781 of the European Parliament and of the Council of 13 September 2023 establishing a framework of measures for strengthening Europe’s semiconductor ecosystem and amending Regulation (EU) 2021/694 (Chips Act). https://eur-lex.europa.eu/eli/reg/2023/1781/oj 

McNamara, K. R. (2023). Transforming Europe? The EU’s industrial policy and geopolitical turn. Journal of European Public Policy. https://www.tandfonline.com/doi/pdf/10.1080/13501763.2023.2230247 

Rodrik, D. (2023). Productivism and new industrial policies: learning from the past, preparing for the future. In: S. Tagliapietra and R. Veugelers (Eds.). Sparking Europe’s new Industrial Revolution. A policy for net zero, growth and resilience. (pp. 42-71). https://www.bruegel.org/sites/default/files/2023-08/Bruegel%20Blueprint%2033%20080823%20web.pdf 

Tagliapietra, S.,Veugelers, R. (2023). Industrial policy in Europe: past and future. In: S. Tagliapietra and R. Veugelers (Eds.). Sparking Europe’s new Industrial Revolution. A policy for net zero, growth and resilience. (pp. 13-28). https://www.bruegel.org/sites/default/files/2023-08/Bruegel%20Blueprint%2033%20080823%20web.pdf 

Terzi, A. et al. (2023). European industrial policy for the green and digital revolution. Science and Public Policy 50 (pp. 842-857). https://doi.org/10.1093/scipol/scad018 

Tyson, L., Zysman, J. (2023). Cooperation or conflict? A transatlantic look at whether industrial policy will produce solutions or generate unmanageable conflicts. In: S. Tagliapietra and R. Veugelers (Eds.). Sparking Europe’s new Industrial Revolution. A policy for net zero, growth and resilience. (pp. 90-106). https://www.bruegel.org/sites/default/files/2023-08/Bruegel%20Blueprint%2033%20080823%20web.pdf 

Wigger, A. (2023). The New EU Industrial Policy and Deepening Structural Asymmetries: Smart Specialisation Not So Smart. JCMS 61/1 (pp. 20-37). https://onlinelibrary.wiley.com/doi/pdfdirect/10.1111/jcms.13366