Europe urgently needs a new industrial master plan

This article was first published by the Financial Times.

This is a pivotal moment for Europe. The global energy crisis is threatening to deal a heavy blow to large swaths of its industry and severely undermine its ability to compete on the global stage. At the same time, the region is having to grapple with the implications of the major steps other leading economies are taking in their own industrial policies.

The Inflation Reduction Act in the United States is a game-changer, channelling hundreds of billions of dollars into building the energy and manufacturing industries of the future. However, the US is not alone in pursuing such mammoth efforts. China has been ahead of the curve in developing domestic manufacturing of clean energy technologies, while countries such as Japan, Korea and India are also pushing increased investment and support in that direction.

This requires the EU to reassess its own industrial strategy with the aim of positioning the region’s economy for new growth in the decades ahead. The EU’s Fit for 55 package and REPowerEU plan have set the path for the bloc’s overall clean energy transition. But the magnitude of the actions being taken elsewhere, and the immense fallout of the energy crisis in Europe, calls for a bold new EU industrial strategy.

Natural gas prices — which have soared as a result of the Russian invasion of Ukraine — are at the heart of the current crisis and its threat to European industry. The most energy-intensive sectors are already suffering, with a growing number of companies halting and even permanently shutting down operations. Europe’s major gas-consuming industries — including chemicals, food processing, steel and paper — generate economic value of more than $600bn a year and employ almost 8mn workers.

Those areas may be the most at risk, but they are only the tip of the iceberg. Exposure to high energy costs is posing broader challenges to the competitiveness of Europe’s industrial sector. So far, it appears to have adapted well during this tumultuous year, thanks in part to emergency action from governments. But it needs a master plan for the future that goes beyond survival mode.

The inconvenient truth is that, for decades, the business model of many European industries was based on the availability of abundant and cheap supplies of Russian energy. That business model was shattered when Russia invaded Ukraine. And it’s not coming back.

Nor are high energy prices just a temporary phenomenon. Europe now faces structurally higher fuel import prices in the absence of Russian gas. This is a clear signal that the region needs to find new sources of competitive advantage or risk deindustrialisation.

One area where it can find an edge is in the next generation of industrial production. Attention is increasingly turning to the potential of low-emissions manufacturing, which will only grow in importance as countries step up efforts to reach their climate goals and the new energy economy expands. This means increased demand for clean energy technologies — such as electric vehicles, solar panels and wind turbines — and for key materials like steel, aluminium and cement that can be produced with substantially lower emissions than they are today.

In the electricity sector, solar and wind are already the cheapest options, providing strong economic incentives that are helping drive their deployment. But the situation is different in other sectors of the economy, such as long-distance transport and heavy industry, where more work is needed to improve the competitiveness of low-emissions options.

With offshore wind, Europe has shown that it can be a global leader in clean technologies. It now needs to become much stronger in areas such as batteries, electric vehicles, electrolysers for hydrogen, heat pumps and more. And it faces strong competitive challenges, with China, the US, Japan and many others seeking to lead the next generation of clean industrial and manufacturing technologies.

Europe has its own strengths: its large internal market, skilled workforce, broad network of research institutions and centres of expertise, and long history of producing higher value-added manufactured products. But these need to be allied with a strong push in the form of a new industrial policy from the European Commission and EU member states.

It is clear that the EU is not going to go back to where it was before the current energy crisis. It needs to be clear-eyed about this situation and bold in the actions it takes if it wants to remain a global industrial power.