Beyond subsidies: Keys for a European industrial policy
The NextGenerationEU plan has shown that, for the industrial transformation that the EU needs, it is not enough to increase funds. It is also necessary to rethink the way they are invested.
In July 2020, still in the midst of the COVID-19 crisis, the EU approved an ambitious aid package budgeted at 807 billion euros. More than just a recovery plan, NextGenerationEU sought to be “a once-in-a-lifetime chance to transform our economies and societies and design a Europe that works for everyone”.
However, the experience so far with NextGenerationEU shows that, in order to come up with the promised transformation, the increase in European funds should go hand in hand with profound changes in the way they are invested. Juan Moscoso del Prado, senior fellow at EsadeGeo, set forth this view in a recent article published at the Elcano Royal Institute.
In his analysis, Moscoso del Prado argues that developing a successful European industrial policy that is capable of putting the continent on a par with competitors like China or the US involves progressing towards a capital markets union, a banking union and an energy union.
The new instruments and processes that are created must be governed by four parameters: efficiency, simplicity, neutrality and solidity. Otherwise, the researcher warns that “Europe has created too many administrative and regulatory obstacles for its financial instruments.”
Beyond regulation and subsidies
One of the main stumbling blocks for a European industrial policy is the unsustainable regulatory fragmentation of the systems of price setting and subsidies. As they depend on each Member State, Europe’s response capacity is very limited (especially in the energy sector) and budgetary and legislative efforts are hard to combine.
Europe is at risk of uncontrolled proliferation of state aid and subsidies
Up to now, the joint European focus has been to apply a common regulation to its members. However, Moscoso del Prado argues that this approach is insufficient. An industrial transformation such as the EU needs requires “something more than an incentive or a regulatory straitjacket [...], because it requires complicity and business confidence to assume complex productive and technological investments from the private sector firsthand.”
Furthermore, there is a risk as regards the proliferation of uncontrolled state aid and subsidies in Europe. The financial volume that the Member States have devoted to subsidies that are not coordinated on a European level is at least equivalent to what the US has put into circulation with the Inflation Reduction Act (IRA), around 173 billion euros in energy subsidies in 2020, before the invasion of Ukraine.
“These figures are the best demonstration that Europe is risking a lot if its only reaction to the new industrial and energy challenges [...] consists of giving state aid from the different Member States and making them individually more flexible. If so, the northern Member States will have no incentive to create a European Sovereignty Fund, destroying the Single Market and prolonging the paralysis until there is a new single or common community instrument”, explains the EsadeGeo researcher.
The lessons of NextGenerationEU
The NextGenerationEU funds have shown that it is not the same to finance the public provision of a good (such as a road) as the transformation of the production process of a private company (even if it is publicly co-financed). The latter requires technology and carries a greater risk. “Efficient public-private cooperation up to market parameters is not that easy to reach,” says the author.
In this respect, the EU lacks experience in the practical application of industrial projects with which to develop its own technologies. The EsadeGeo researcher believes that it would be necessary to bring together all the emerging technologies (artificial intelligence, the aerospace industry, quantum computing, defence technologies, cutting-edge healthcare, etc.) and scale them up jointly at the European level in order to move forward along these lines.
The EU lacks experience in industrial projects with which to develop its own technologies
Moreover, he states, “complementary structural reforms are also necessary [...] in areas such as employment quality, the resolution of insolvencies, bankruptcy and market unity within Member States.”
Lastly, “a broad economic governance with a greater orientation towards real productive activity gains is needed, including fiscality and taxation [...]. Also, [...] the reform of the Union’s battered institutions at all levels to improve their capacity to deliver.”
The EU and its role in the world
The need for a common industrial policy has been rendered more urgent by the geopolitical transformation of recent times, at the core of which lies the confrontation between China and the US: a deadlock that is increasingly focused on trade, industry and technological competition. COVID-19, the war in Ukraine and supply chain disruptions have made an effective European consensus even more pressing.
In this context, the EU is obliged to change the way it relates to the rest of the world. It must do so by “engaging and reinforcing its foreign agenda with industrial and investment elements that generate clear benefits for its counterparts in an equal and sustainable way.”
The need for a common industrial policy has been accelerated by current geopolitical shifts
Thus, Europe’s challenge is “how it can combine the new energy, technological and productive geopolitics with the reinforcement of the Single Market, with its security and defence needs and goals, without falling into protectionism, while it pushes for the adaptation of multilateralism to the new global reality.”
It is no coincidence that the new international paradigm sees industrial policy as being intrinsically linked to security: more and more, national security dictates economic strategy, “something unthinkable a very short time ago,” in the author’s words.
In this respect, the EU must protect its internal and external competitiveness while at the same time reinforcing the appeal of the Single Market for sustainable investments, maintaining the efficiency of its internal decarbonisation process. “As an agent abroad, it must reinforce its agenda where China does not go or reach by filling the debate on the Open Strategic Autonomy with real and practical contents in its technological and investment industrial dimension,” says Moscoso del Prado.