Europe needs an industrial strategy

Last month, in Davos, European Commission President, Ursula von der Leyen , announced the Green Deal Industrial Plan (GDIP) in an effort to assemble a reaction to the United States’ Inflation Reduction Act (IRA). The plan aims to support industry in the transition to net zero, tackle unfair competition beyond the European Union’s borders and steer away from strategic dependencies abroad. The announcement is a positive development for EU-level industrial policy, although the emphasis could be better placed on one pillar over another. What is certain, however, is that there remains a case for a broader industrial policy at the EU level to complement green and energy policy objectives.

The Green Deal Industrial Plan

Another plan…

Throughout this era of what some have labelled permacrisis, the Commission has launched plan after plan to calm nerves and signal understanding to those affected. The latest plan – this one for industry – is certainly a welcome development in the industrial sphere. Indeed, it is hitting all the right points to address concerns about uncompetitive industry in the global marketplace. With four pillars constituting a simplified and predictable regulatory environment, faster access to funding, skills, and open trade for resilient supply chains, it seems the Commission is on the right track. However, the emphasis on the second pillar vis à vis green subsidies that, when stacked up against the goliath $369 billion (€345 billion) IRA pot, calls into question whether it is the most impactful point of emphasis.

…the fit for REPowering green industry in Europe recovery plan

This heading is a mouthful, but it represents well the Commission’s repackaging of prior plans into a novel industrial plan. This latest policy, although industrial in scope, essentially represents a repackaging of the Recovery and Resilience Facility, originally earmarked for Member States to finance their COVID-19 recovery, which was then looped into fund Fit for 55 objectives (those themselves being key building blocks of the EU Green Deal), which was then expanded (in objectives, but not necessarily funding) with the REPowerEU plan as a response to Russia’s invasion of Ukraine, and our over-reliance on imported fossil fuels. Are you still with me?

What this is all to say, is that, although there is a plan, funding – a key pillar accordingly – has not necessarily been bolstered. Internal Market Commissioner Thierry Breton called it in an interview with Financial Times , “a succession of temporary fixes”. Our Policy Director, Cillian O'Donoghue told S&P Global Market Intelligence just as much, calling it a “quick and dirty response”. This will be the third time in as many years that the EU will amend its subsidy outlays, which, as pointed out in Mr Breton’s interview, is not a recipe for a well-functioning single market.

Subsidy battles

For months, subsidies have been the eye of a brewing transatlantic storm as Europe labelled the ones marked for green industry in the IRA as protectionist. Now, they appear to have become the centrepiece of the Commission’s latest plan as well. Although many question the sense of this. In POLITICO Europe ’s Playbook this week, Bruegel - Improving economic policy Senior Fellow, Simone Tagliapietra , broke this down, pointing out that Europe was already going toe-to-toe with the IRA without any new subsidies, and that the only true laggard is $40 billion (€37.1 billion) in IRA tax credits for the manufacturing of clean tech — including the parts for the solar, wind and battery industries – to which Europe requires an attractive response.

However, subsidies and at what level they should be applied remain controversial and pose a credible risk of widening economic disparity within the EU. O’Donoghue told S&P that, specifically, discrepancies in state aid allocation are a major concern and could boost rich nations and reduce clean-tech investment in less developed regions, effectively creating a "two-speed Europe." There does exist, nonetheless, a need for a broader EU industrial plan with new sources of funding to ensure equal development, but such an undertaking should be the focus of the next Commission starting in 2024.

Why stay?

The tirade around subsidies seems to drown out the underlying concern that prompted the GDIP in the first place – Europe’s industrial competitiveness. As Tagliapietra alludes, it needs to be attractive to be in Europe for industry to want to remain here. Lowering subsidy standards alone will not accomplish that. For better or worse, the regulatory environment in Europe is far more complex than in the US. This brings us back to the first pillar of the GDIP as the real fit-for-purpose response: a simplified and predictable regulatory environment.

Take hydrogen. In Europe, the REPowerEU plan put a major emphasis on green hydrogen (produced with renewable energy) and diverted significant funding towards it. Despite this, the process remains bureaucratic, forcing prospective producers to wait years while their project languishes in an approval process, constraining capital that may not even guarantee a return. That is not to mention the pedantic accreditation to be labelled “green” in the first place.

This plays out again when it comes to permitting for renewables projects. We have been calling for an expedited process for years now to roll out renewable assets en masse, but the permit for deploying a wind turbine still takes longer to attain than it takes to actually build it. As per Energy Monitor ’s global data, there were four times more wind projects in the permitting phase than under construction in the EU in 2021, with up to eight years of permitting compared to the two required for building. Beyond that, just this week, Denmark announced it would put nearly 20GW of offshore wind projects on hold over concerns of infringing on EU state aid rules, leaving investors in a state of purgatory.

It is a similar tune again for nuclear energy, battery hubs, and photovoltaic manufacturing. Nuclear, a controversial technology in Europe, is on its way to being phased out right when global competition is ramping up to perfect the next generation of reactors. Battery hubs face red tape that cut into the viability of getting off the ground in Europe. This is beyond the access to the raw materials needed, which to develop, unsurprisingly, also faces red tape constraints. Photovoltaics fall into this trap as well. This paints a picture that developing industry in Europe is a complex undertaking that is simply outcompeted when compared to President Biden’s more efficient, effective, and accessible policies in the IRA.

Green Deal Industrial Strategy

Europe suffers from a sort of cognitive dissonance, wanting to be the world’s green workshop, but also not particularly allowing it to develop. No euro value of subsidies can change that. What industry needs are the circumstances that make staying here the easy option. Cutting the red tape is a good start and should be the primary focus of the Commission’s Green Deal Industrial Plan. Longer-term, however, we need a strategy; a broader strategy as O’Donoghue mentioned that aligns energy, climate, and industrial policy at an EU level. The separation of climate and energy policy at the supranational level, and industrial at the national level is proving inefficient, so the incoming 2024 Commission would do right by upping the ante with a true Green Deal Industrial Strategy.