A 'warts and all' portrait of a new EU industrial policy

#CriticalThinking

Picture of Günter Verheugen
Günter Verheugen

Former European Commissioner for Enterprise and Industry

To fully appreciate the EU’s new industrial policy, one first has to understand the reasons behind its European-level renaissance. By the end of the 1990s, many policymakers had become fascinated with the emerging knowledge-based, sustainable and green economy, leaving anyone speaking about industrial policy as belonging to a dying species. This was in part because industrial policy was widely seen as no more than state interventionism, and so was regarded as undue intervention in free market forces. It also reflected the growing sentiment that the EU should be a frontrunner in greening the economy and building up knowledge-based societies. Even today, there are leaders in EU who hope that Europe will abandon industrial roots they regard as dangerous and polluting.

The revival of industrial policy began around 2005, when the EU at last acknowledged that strengthening Europe’s industrial base is not in contradiction with our other societal and environmental responsibilities, but rather is a necessary precondition for moving towards a sustainable, modern economy. As the EU isn’t a homogeneous entity, its member states have being exploring different economic philosophies and implementing a wide spectrum of policies. Italy, France and Germany, for example, have always cared about industrial policy needs, whereas countries like the UK and Luxemburg prefer to concentrate on developing their service sectors. Yet others like Poland, Lithuania and Slovakia, although only beginning to develop their industrial structures, see doing so as a precondition for economic development. On top of all this, some member states are having to cope with structural changes because their traditional industries are no longer competitive, while others are reluctant to retain their industrial structures.

The industrial policy design of the EU originally combined a horizontal and sectoral approach to identify the needs of crucial sectors like the automotive or pharmaceutical industries. Horizontally, the aim was to establish stable and foreseeable framework conditions that would encourage investment and innovation. But back in 2005 it was also crystal clear that a European industrial policy certainly wouldn’t encourage state intervention or protectionism. At its heart there was, and still is, a strong conviction that industrial policy is instead all about competitiveness. Ever since, there’s been a clear understanding between the key actors that governments shouldn’t try to run businesses or even influence business decisions. That’s why the EU failed to develop a coherent industrial policy – Europe’s industrial needs therefore weren’t mainstreamed across a wide range of policies. The most notable result was that the conflict between the EU’s industrial policy needs and its climate policy needs was never satisfactorily resolved.

The revival of industrial policy began around 2005, when the EU at last acknowledged that strengthening Europe’s industrial base is not in contradiction other responsibilities, but a precondition for a modern econom

The global economic and financial crisis deepened understanding around Europe that a better industrial base is vital to future growth and job creation. This realisation finally resulted in the EU’s 2010 revised industrial policy strategy, which firmly embedded industrial policy into the Europe 2020 growth and jobs strategy. The EU had for the first time set itself the quantitative target of raising industrial production’s share of EU GDP to 20% by 2020. This target coincides with the climate and energy 20-20-20 targets that are an equally important part of the EU 2020 strategy.

This new decisiveness was apparently influenced by the strong U.S. industrial revival and also by the lessons of the eurozone crisis. Generally, countries with a strong industrial base are better equipped to weather economic storms.

The major achievement of the 2010 industrial policy approach was that it won approval at the highest political level. All member governments agreed on the building blocks needed to promote the EU’s industrial base, and focused on ways to improve education and training to counter the lack of skilled labour in many parts of Europe. The EU also placed huge importance on R&D and innovation, aware that European industry can only compete successfully in global terms if it can deliver the best technology. So now the EU has defined key technologies to be mastered and is supporting R&D collaboration between companies and public/private partnerships. Brussels is also very aware that a modern industrial policy must ensure access to raw materials, given the EU’s high dependence on imported energy and a good many strategic minerals.

It became clear last year that all the efforts to strengthen the EU’s industrial base were being severely hampered by the debt and economic crises. The Commission announced that the EU had lost nearly 3.5m industrial jobs and that the overall share of industry declined from 15.4% to 15.1% of GDP. It therefore proposed that Europe should make better use of the internal market for goods and services and fully exploit the benefits of the trans-European networks in telecommunications, transport and energy. It urged vigorous market opening along with free and fair trade to enhance the competitiveness of SMEs. Smart regulation was identified as major pre-condition for stemming de-industrialisation and regaining competitiveness. Competition policy is also seen as a strong asset for an ambitious industrial policy, because it ensures a level playing field and penalises the use of subsidies for national needs.

The EU is aware that European industry can only compete globally if it can deliver the best technology

Although the EU’s modernised industrial strategy is well designed, its results are so far unsatisfactory. It is highly unlikely that the EU will reach the target of boosting the industrial share of GDP from 15% to 20% by 2020. The economic crisis has hit industries in a number of member states very hard, and has lasted much longer than expected. The EU has yet to properly advance its strengthening of R&D, despite all its policy commitments and the improved targeting of EU spending towards innovation and growth.

Some member states’ R&D performance is very strong, but others have been unable to mobilise the resources needed to drive innovation. The EU will only be able to reach its target of 3% of GDP being devoted to R&D if the larger and wealthier member states increase their efforts well beyond 3% to compensate for their weaker neighbours, and this seems unlikely.

Energy prices that are now considerably higher than in the United States are also hampering the industrial revival in Europe, with forecasts suggesting that the gap is to widen further. On top of this, the SME strategy – the Small Business Act of 2008 (SAB) which aims to prioritise the needs of Europe’s SMEs – hasn’t been fully implemented at either European or national levels. Although some EU countries excel at this, the EU is far from achieving global excellence. The better regulation agenda the EU has been pursuing since 2005 was slowed during the crisis, and now needs to be re-launched with a stronger focus on scrapping administrative hurdles and regulatory obstacles.

It is highly unlikely that the EU will reach the target of boosting the industrial share of GDP from 15% to 20% by 2020

The EU has yet to transpose its industrial policy needs into a coherent policy setting. Up to now, the EU has been developing policies for, say, the environment, energy, the internal market, climate change or consumer protection in isolation. By not taking industrial policy needs sufficiently into account, it has been creating contradictory policy objectives.

The EU’s new industrial policy is being built on the principle of free, open markets and fair competition, and the risk of falling back into national interventions and protectionism is negligible. The challenge is to translate policy goals into measurable progress.

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