The Revival of Industrial Policies in the EU?

ABSTRACT

This article provides an in-depth analysis of the evolution and current state of industrial policies in the European Union (EU) from the 1980s to the present day. We specifically focus on the resurgence of interest in such policies from 2020. We argue that industrial policies in the EU during the second half of the 2020s and into the 2030s will differ significantly from previous decades, while acknowledging challenges in fully understanding their scope and implementation. In particular, it is argued that the lack of a meaningful EU fiscal capacity constitutes the biggest challenge for the design and implementation of effective industrial strategies, which risks exacerbating regional and national disparities in the dual transition.

KEYWORDS:

• Industrial policy
• EU
• green transition
• digital transition

JEL CODES:

• L52
• O52
• R11

Acknowledgements

We warmly thank all the participants of the 20th STOREP Conference and two anonymous referees for their comments and suggestions. All errors remain our own.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 See, among others, Stiglitz, Lin, and Patel (2013), Cherif and Hasanov (2019), Aiginger and Rodrik (2020), Juhász, Lane, and Rodrik (2023).

2 For an in-depth discussion of the case of the IRI see Ciocca (2015) and Gasperin (2022).

3 For the main Asian experiences, see Johnson (1982) and Amsden (1989).

4 Despite facing constraints such as a funding crisis, Germany successfully increased state intervention in credit allocation via its Development Bank (KfW), thereby pursuing proactive industrial policies through the financial sector in the post-1980s era. Facing higher demand and fiscal constraints post-1980s, the KfW addressed its funding challenges by leveraging state guarantees to secure low-cost borrowing from international and domestic markets, as this approach did not add to government debt (Naqvi, Henow, and Chang 2018).

5 The funds are distributed to pursue three main objectives: i. support the EU's position at the forefront of the global science ranking; ii. assert industrial leadership in innovation; iii. address key issues common to all Europeans, distributed across six basic themes.

6 It is worth noting that between 2020 and 2022 two temporary measures were approved to cope with the Covid-19 pandemic as well as with the negative spill-overs of the Russian war in Ukraine. In fact, as can be seen in Figure 1, these temporary frameworks together are worth more than two times the non-crisis aid in Italy, and at least as much as the non-crisis aid in the other European counterparts.

7 It is worth noting that the Commission had previously established conditions for securing exemptions for IPCEI in both the R&D and innovation framework in 2006 and in the 2008 Environmental Guidelines (Traversa and Sabbadini 2022).

8 The Council and Parliament arrived at a provisional deal on the right to repair in February 2024 (European Council 2024).

9 Florio, Gamba, and Pancotti (2023) analyze nine different vaccines and find that whereas companies invested 16 billion euros in research and production, states provided 30 billion euros in grants and advanced purchase agreements. The findings challenge the narrative of pharmaceutical companies bearing the most risk for the development of vaccines, arguing that there is a need for public intervention in research, development, and pricing decisions, emphasizing the importance of public control over the biomedical innovation cycle.

10 The NGEU was approved in early May of 2021 by the Eurogroup of finance ministers and then in November by the Council and European Parliament. Part of the funds — €338 billion euros — is disbursed to member states in the form of grants. The other part — up to €385.8 billion — is financed by loans to individual member states (European Commission 2022g).

11 Including the resources from RePowerEU.

12 It is worth noting that the stimulus packages approved by the 117th Congress stand out for their substantial investments in place-based industrial policy (deliberate government interventions in specific industries aimed at transforming the economy, with a particular emphasis on targeting underdeveloped locations). As argued by Muro et al. (2023), nearly $80 billion were allocated for these policies, which, in a historical context, can be interpreted as a significant resurgence after four decades.

13 The U.S. also uses public procurement as a countercyclical tool (Crespi and Guarascio 2019).

14 On 7th June 2021, the Council adopted a regulation establishing a €17.5 billion fund to make the green transition equitable and inclusive. The Just Transition Fund (JTF, henceforth) will finance projects that will reduce socio-economic costs for EU communities heavily dependent on fossil fuels or GHG-intensive industries and in need of local economic diversification (the total amount includes €7.5 billion available from budget commitments for 2021–27 and €10 billion available from 2021–23) (European Council 2021d). Member states will also contribute to JTF programs and will be able to transfer resources from the European Regional Development Fund and the European Social Fund, potentially mobilizing some 30 billion euros in investment.

15 In addition, on 15th July 2022, the Commission approved the ‘IPCEI Hy2Tech’, the first IPCEI in the hydrogen sector. The project aims to develop innovative technologies for the hydrogen value chain to decarbonize industrial processes and mobility, involving 35 companies and 41 projects from 15 member states (European Commission 2022c). Still concerning in the energy sector, the Commission declared that it would expedite approvals for renewable energies (European Commission 2022d), besides launching a new industrial alliance to enhance EU solar energy and energy security (European Commission 2022e).

16 The extraordinary council meeting on February 9 was preceded by a visit to the United States by the French economy minister (Bruno Le Maire) and his German counterpart (Robert Habeck) to demand more transparency from the Americans in accounting for the amount of subsidies and tax credits that would be granted under the Inflation Reduction Act (IRA) introduced by Washington, so that European governments could respond (European Council 2023a). Opening, however, a State aid race that could hardly be contested on a level playing field.

17 It is important to stress that industrial policies in China are not easily measurable and comparable given the lack of data availability. The figure presented in Table 1 makes reference only to the period after the pandemic crisis within the ‘Made in China 2025’ plan, the ‘10,000 Little Giants’, and the subsidies to the energy sector between 2021 and 2022 following García-Herrero and Schindowski (2024). However, it is worth noting that the ‘Made in China 2025’ plan builds upon and expands on previous efforts in terms of industrial policies announced in the last decades by the Chinese government. For instance, in 2006 China launched the ‘Medium- and Long-Term Science and Technology Plan (2006–20)’ introducing the concept of ‘indigenous innovation’ and setting specific targets for bureaucracies to advance China’s technological capabilities. Moreover, in response to the global financial crisis of 2007–08, China initiated a massive stimulus package through state sector firms, which provided substantial funding to support innovation initiatives. This period also saw the launch of 16 state-funded megaprojects and the Strategic Emerging Industries Program (2010–20), marking a pivotal point in China’s modern industrial policy by focusing on high-tech sectors (Doshi 2024). For an in-depth collection and comparative analysis of Chinese policies see DiPippo et al. (2022) who estimate that 2019 alone the Chinese government devoted as much as 1.5 per cent of its GDP to industrial policies. These estimates are mostly concentrated on subsidies, which, as argued by García-Herrero and Schindowski (2024), are only the ‘the tip of the iceberg’.

18 It is worth noting that of the total €300 billion in funding of the REPowerEU, €225 billion is taken from part of the remaining loans under the recovery and resilience facility (EUR-lex 2023). The remaining €75 billion (represented in Table 1) will be provided by the Innovation Fund and by the sale of permits within the Emission Trading System (ETS) as outlined in the Fit for 55 package.

19 This disparity between the U.S. and Europe is also reported in Romer (2021) and Ciaffi, Deleidi, and Levrero (2023).

20 However, as previously mentioned, cohesion policies finance at a regional level significant measures aimed at supporting firms.

21 The so-called ‘frugal’ member states: Austria, Denmark, the Netherlands, and Sweden.

22 Of some interest, for example, is the discussion of the ‘performance-based’ features of the NGEU, which are different from the traditional ways of financing EU policies.

23 Adding to the lack of fiscal capacity we can also mention the recent rise in defense spending that could impact resource allocation and present further challenges to policy implementation.

24 As mentioned, industrial policies are not necessarily synonymous with subsidies to firms. They rely on a plurality of instruments devoted to promoting large-scale joint public-private research projects, supporting with a mix of interventions the development of infant industries, and encouraging localized development of new economic activities with place-based policies (Juhász, Lane, and Rodrik 2023).

25 It is worth noting that the total investment in Magdeburg was planned to amount to €17 billion, with €6.8 billion sourced from German state aid. However, these figures have been later revised with Intel requiring €10 billion in state aid (Euractiv 2023).

26 For instance, the Bundesländer of Mecklenburg-Western Pomerania and Brandenburg play a crucial role in the field of renewable energy, in particular, related to the hydrogen initiative (BMWK 2020) in the former and wind, solar, and biomass power in the latter. Brandenburg alone already generates more electricity from wind, solar, and biomass per capita than any other German Bundesland. Renewables cover 94 per cent of the federal state's electricity demand, compared to Germany's national average of 46 per cent (Miller and Chazan 2022). The green transition is also the focus of the projects on electromobility, with Leipzig in Saxony and Grünheide in Brandenburg emerging as key centers (Fina et al. 2019). In the race for innovation, the cities of Magdeburg in Saxony-Anhalt and Dresden in Saxony stand out in the semiconductor sector (Fina et al. 2019; GTAI 2016). Dresden serves as a significant production hub with semiconductor factories operated by Infineon, GlobalFoundries, and Bosch (Clark and Satariano 2022). Additionally, the implementation of Excellence Clusters, with a focus on Berlin, Jena in Thuringia, and Dresden in Saxony, underscores East Germany’s commitment to promoting centers of excellence in various sectors, thereby consolidating its fundamental role in the dual transition (BMBF 2019).

27 This argument aligns with Bontadini and Vona (2023), who found green specialization in EU manufacturing concentrated in a few high-tech industries, with countries focusing on either green or polluting sectors, driven by factors like first-mover advantage and diversification. Similarly, Bachtrögler-Unger et al. (2023) highlight significant disparities in green and digital technological capabilities across European regions, threatening regional cohesion and widening income gaps.

Additional information

Funding

This paper was developed in the context of the Italian National Research Project - PRIN 2017 ‘Regional Policies, Institutions and Cohesion in the South of Italy’ (Project code 2017-4BE543; website www.prin2017-mezzogiorno.unirc.it), financed by the Italian Ministry of Education, University and Scientific Research.