The EU needs a more focused and localised industrial strategy
Leslie Huckfield was MP for Nuneaton from 1967 to 1983, and MEP from 1984 to 1989; he is a Visiting Senior Fellow at the Yunus Centre for Social Business and Health, Glasgow Caledonian University
Introduction and Context
Last September’s Report on EU Competitiveness by Mario Draghi, former Italian Prime Minister and President of the European Central Bank, and the EU Commission’s January 2025 response in its “Competitiveness Compass” are both symptomatic of EU politics struggling to keep abreast of global developments. Both tell us what we’ve known for some time – that we live in a world of competing industrial strategies, dominated by China and the United States. But the EU has almost failed to notice.
The latest iteration in this series of belated EU Commission reactions is a so called Clean Industrial Deal, with its “building a growth-conducive regulatory framework to support industry and innovation.” Rather than promoting its own industrial strategy, this latest EU programme represents a none too subtle repudiation of its previous Green New Deal policies to assuage the private sector and encourage their investment.
At the time of writing, much of this is already being obscured through EU Commission President Von der Leyen’s obsession with securing additional defence spending for Ukraine with an €800bn fund to “re arm Europe”. Despite the EU Commission’s lacking any competence in defence, this surely means that any meaningful competitiveness policy will be suborned by companies like British Aerospace, Thales and Rheinmetall as part of an EU “defence led regeneration”, against which the lack of competitiveness of EU industry is clearly visible in mass layoffs at Thyssenkrupp, Bosch, Volkswagen, Airbus, Schaeffler and Siemens.
The author questions whether the EU Commission’s broadbrush Competitiveness Compass approach following the Draghi Report is sufficiently focused and whether some Member States might be better placed to pursue their own trade strategies. Though there is ample evidence to support EU programmes and policies of more detailed intervention as the basis for an EU industrial strategy to respond to the US and China, after its word salad Competitiveness Compass and its new defence fund, the Commission now leans heavily on the private sector.
Competition from China and the US
Chinese exports are outpacing global trade—with Chinese exports up 12% in volume terms while global trade is growing at 3%. Chinese export volumes are up 13% while import volumes are only up 2 percent. Most of this stronger growth this comes at the expense of Europe. Previous China export success came in sectors like consumer electronics, furniture, apparel and household appliances, and not as today in the automotive and engineering sectors which are at the heart of the German economy.
The US also has a strategy. Despite the inflation effects of Biden’s policies, extensive US support also poses challenges for EU companies in advanced digital technologies from the US Chips and Science Acts, and in clean technologies. The US Inflation Reduction Act (IRA) works through the tax code and its finances are huge (perhaps $1.2 trillion). IRA amounts are significantly higher than anything on offer in Europe, despite the sizeable funds available via Next Generation EU and Member State coffers.
The US responded to its first “China Shock” during the 1990s and 2000s, when one million jobs were lost, especially in the Mid West. But EU could suffer more than the US from a second China Shock, with its 30mn manufacturing jobs compared with 17mn in the US in 2000 and with China’s manufacturing trade surplus as a share of global GDP now twice as large.
Following these significant developments in China and the US, enabling their substantial inroads into Europe, Draghi’s Report and Von der Leyen’s Competitiveness Compass are belated entrants to a world where industrial strategies are the new normal. Six months before Draghi, the International Monetary Fund’s Regional Economic Outlook for Europe had already focussed on the need for reform – but at regional level.
EU Low Productivity
At the heart of Europe’s failing position is its low productivity growth.
Europe’s industrial research and development (R&D) is biased towards established, “mid-tech” sectors like automotive parts, based on the transport industry in Germany, France, and Italy. Between 2014 and 2021, the average year-on-year growth rate in R&D expenditure in the US was almost twice that of the EU, at 5.6% against 2.7%. “EU policymakers should put firm productivity at the centre of their thinking but avoid targeting in advance which activities – let alone firms – should be more productive than others. Here again, the role of the single market is crucial in fostering greater market dynamism.
EU Approach
Draghi’s Report recognises some of these failings. “Europe does not coordinate where it matters. Industrial strategies today – as seen in the US and China – combine multiple policies, ranging from fiscal policies to encourage domestic production, to trade policies to penalise anti-competitive behaviour, to foreign economic policies to secure supply chains….. But owing to its slow and disaggregated policymaking process, the EU is less able to produce such a response.
Draghi recognises that the EU has advantages in clean tech and more mature technologies, “The EU’s decarbonisation goals are also more ambitious than its competitors, with binding legislation to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels. “Heavy industrial production has so far been largely covered by free allowances under the EU’s Emissions Trading Scheme (ETS), but which will be progressively phased out with the introduction of the Carbon Border Adjustment Mechanism (CBAM)”. Despite this, Von der Leyen’s Competitiveness Compass favours an EU wide approach, rather than focusing on these regional growth areas. “The composition of EU members and the competitiveness issues they face has fundamentally changed, yet the EU’s approach toward enhancing competitiveness has not…….EU institutions can help but should encourage differentiation and uniqueness, not prescribe generic EU-wide policy priorities in areas where location-specific circumstances are critical”.
EU Ways Forward: Clean Tech
There is ample evidence elsewhere which supports a narrower more detailed EU focus on specific areas and sectors, especially when the shortening of production supply chains is working to the EU’s benefit. There are now significant divergences in the fortunes of Europe’s regions. Though previous substantial interventions have featured the EU’s Cohesion Fund, based on economic and social convergence, there might now be the “creation of optional EU-wide frameworks for specific corporate areas”. There is also much scope for enhancing the EU’s climate related policies and for removing other specific barriers to participation in global value chains.
Competitiveness Funding
“The Draghi report assesses the combined additional investment needs in Europe at EUR 750-800 billion per year by 2030, meaning that the EU’s total investment to-GDP rate will need to rise by around 5 percentage points of EU GDP per year, to reach levels last seen in the 1960s and 1970s”
The centrepiece of the Commission’s Compass is a new “Competitiveness Coordination Tool to act together with Member States on common competitiveness priorities in selected key areas and projects deemed of strategic importance and of common European interest”. “The Coordination Tool will work in conjunction with a streamlined European Semester focused on reforms and investments for competitiveness at the national level.
But the European Semester process does not have a good track record. “In terms of the implications for EU economic governance, our results cast serious doubt on the effectiveness of the European Semester and suggest that policymakers should reconsider it.” Attempts to coordinate structural policy through the European Semester have been largely unsuccessful. “Overall, influencing national policy decisions via the European Semester remains a challenge”
Conclusion
The Draghi Report and the European Commission’s Competitiveness Compass response represent a belated European recognition that the world has changed.
Faced with major funding and implementation difficulties, contributions above support Ketels’ and Porter’s view that the emphasis on strategic decisions and action priorities need to be made in regions and at the country-level. There is an inability of the traditional top-down, centralised EU policy approaches to deal with the fundamentally different competitiveness challenges Europe is facing today, due to the evolving global economy, the nature of the EU economy and the impact of EU policies.
Rather than being overwhelmed by the details of its Competitiveness Compass proposals and its deregulation Clean Industrial Deal agenda or being diverted through its latest obsession with defence spending, the EU needs a more focused and localised industrial strategy, as highlighted in many contributions above. Though implementation of Draghi’s proposals will require significant funding, the EU should move beyond leveraging a narrow set of EU structural funds, with a re-orientation toward more direct financial engagement through various EU policy tools, drawing also on the support available from the European Investment Bank. The EU’s Clean Tech advantages may be enhanced through more focused and detailed policies at regional and Member State level. Since is application process is based on applications from individual Member States there could also be refocussing of its NextGenerationEU Fund, which is almost as large funding needs projected by Draghi.
Despite the EU currently projecting a significant increase in spending on defence and security, leading Member State industrial economies are in considerable difficulties. Unless the EU recognises the need for a detailed industrial strategy to respond to the US and China, none of this can be afforded.
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