Stabilising Europe or reshaping it?

What the Italy-Germany axis reveals about EU industrial policy

As EU leaders meet for the European Council in Brussels, competitiveness is finally being treated as a governing priority rather than a background concern. Italy and Germany have helped create that moment. Since a January Italo-German push – followed by the Rome forum – the euro area’s two biggest manufacturing powers have been pressing a common line: cut red tape, speed up permits, defend industrial capacity, keep energy and critical raw materials high on the agenda, preserve room for technological neutrality in automotive, and make the Single Market work better for firms. That broader January push also gestured towards a wider Single Market agenda, especially on services, energy and the conditions for firms to scale. But finance and digital were not central to the Rome discussion, which remained focused above all on stabilisation, supply chains and industrial relief.

That is more than a bilateral communiqué. When Rome and Berlin line up on industrial policy, they help shape the language in Brussels. But the language still matters. The Italy-Germany line is more ambitious than a simple plea for deregulation. It is also still, at heart, a strategy of stabilisation.

Europe does need stabilisation. Industrial production is weak, energy remains a structural handicap and strategic supply chains are more exposed than they looked a few years ago. The case for simplification, faster permitting and some form of de-risking is real. The problem is that stabilising the industrial base is not the same as repositioning it. And the gap between the two is widening.

At the Rome forum in January, the public emphasis was still overwhelmingly on cost pressure, regulatory burden, energy, supply chains and a gradual multi-powertrain transition in automotive. Digital questions were present, but mostly as background conditions. That matters because the next battle in European industry will not be won only on factory footprint or export resilience; it will be won higher up the value chain, where control sits in software, data, cloud, semiconductors, cyber and computers.

This is already visible in automotive. A continent that preserves assembly capacity but loses control over software-defined architectures, data flows and platform layers may keep factories, yet surrender future margins and strategic leverage. Europe’s dependency problem is no longer only about where inputs come from; it is also about who controls the layers through which industrial value is increasingly created and captured.

Here, the EU debate has moved faster than the Italy-Germany conversation. The Commission’s 2026 work programme now places the 28th regime for innovative companies, a European Innovation Act, a Cloud and AI Development Act, a new Chips Act and a Public Procurement Act in the competitiveness pipeline. The Industrial Accelerator Act, presented on 4 March, goes further by introducing “Made in EU” and low-carbon requirements in public procurement and public support for selected strategic sectors. On finance, the Savings and Investments Union is no longer just a slogan: the Commission’s market integration package is on the table, and Germany has now joined France, Italy, Spain, Poland and the Netherlands in backing more centralised supervision for the most systemic cross-border market infrastructures.

So, the real question is no longer whether finance and digital are absent from Europe’s competitiveness debate. They are not. The question is whether they are entering it in a transformative enough way.

So far, only partially.

Much of the new agenda still treats finance mainly as an efficiency problem: reduce fragmentation, ease cross-border activity, harmonise supervision, remove barriers. All of that is necessary. But Europe’s weakness is not just that capital markets are inefficient. It is that the continent still lacks enough instruments and political appetite to finance strategic capabilities at scale when returns are long-term, uncertain or dual-use. Capital-market integration helps. It does not by itself create industrial depth.

The same caution applies to digital sovereignty. Brussels is moving: the cybersecurity package of January linked 5G, cloud certification and the phase-out of high-risk suppliers from mobile networks; the new EURO-3C project points to a federated European telco-edge-cloud infrastructure; and the defence side is more operational, with the 2026 European Defence Fund dedicating €1bn to collaborative R&D. But these are still fragments of a strategy. Europe is better at acknowledging the problem than at concentrating enough demand, funding and governance around it.

That is where Rome and Berlin could still change the debate. Not by embracing broad protectionism, and not by pretending that “Made in Europe” alone is a strategy. What they should champion instead is a European Scale-and-Stack Compact.

The logic is simple. First, connect capital-market integration to an explicit project pipeline in strategic technologies: industrial AI, cloud and edge infrastructure, cybersecurity, power electronics, advanced materials and other dual-use capabilities. Second, use public demand much more deliberately where Europe already has political justification and procurement leverage: defence, energy grids, telecom resilience, space and selected public fleets. Third, tie public support to governance over critical software, data and cloud dependencies, not in the name of autarky, but to reduce coercive vulnerability.

That would be more credible than a generic “Buy European” instinct and more ambitious than a narrow export-support logic. It would also widen the coalition. France would recognise the state-capacity element. The Nordics and Baltics would recognise the cyber and digital infrastructure logic. Germany could still defend an open, trade-oriented model, but with strategic guardrails. Italy, meanwhile, would gain a path out of its familiar trap: remaining a high-quality manufacturing base while control over the technological and financial nodes of value creation sits elsewhere.

The Italy-Germany axis has done something important: it has helped move competitiveness from a generic concern to a governing priority. The harder step comes now. Europe must decide whether this agenda is mainly about defending its industrial present, or about building the capabilities that will let it shape its industrial future.

At this stage, stabilisation alone is no longer enough.

The views expressed in this #CriticalThinking article reflect those of the author(s) and not of Friends of Europe.