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An Industrial Strategy for Europe

MILAN – “Industrial policy” has moved to the center of economic and even national-security debates, from the United States to the European Union. But the term can be misleading, not only because its meaning is rather vague, but also because it fails to capture the true imperative facing policymakers.

Industrial policy refers to the use of a wide range of tools, from regulations to subsidies and tax incentives, to support overall economic growth or foster dynamism in specific sectors. It is as old as the state. Go back 2,000 years to China’s Han dynasty, and you will find that iron-making was a state monopoly.

Europe has its own long history of pursuing industrial policy. European governments spent centuries supporting vital industries and technologies – especially those most relevant to war – in order to stay ahead of their enemies, who were often also their neighbors. More recently, they have pursued joint industrial policies to integrate, not fight, with one another.

The fundamental shift began in 1950, with the creation of the European Coal and Steel Community. Far from improving countries’ chances in war, this Europe-wide industrial policy to pool the production of coal and steel discouraged fighting on the continent. Putting coal and steel – both essential to the production of tanks and guns – under the control of a joint High Authority meant that no country could arm itself against the others. At the same time, the policy supported the post-World War II economic recovery.

Other crucial steps toward European integration can also be described as industrial policy. The EU as we know it today began with a program to abolish intra-European tariffs by creating a Customs Union in 1958. This was later followed by a major effort to reduce red tape at European borders by harmonizing hundreds of regulations, culminating in the Single Market Act of 1992.

European member states also pursue individual industrial policies, though strict EU controls on state aid – intended to prevent country-specific subsidies from giving firms an unfair competitive advantage – limit their room for maneuver. But national governments still invest in research and development, support technical education, and build needed infrastructure.

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Most economists agree that such interventions can enhance growth and dynamism. Where the debate about industrial policy heats up is over the question of whether governments should directly intervene in the economy by supporting specific sectors. A recent study by Réka JuhászNathan J. Lane, and Dani Rodrik, which showed that government action can have very long-lasting implications for the location of certain industries, has added fuel to the fire.

But industrial policy is not high on government agendas nowadays because economic research says it should be. Governments are motivated primarily by geopolitical tensions: both the US and China have introduced official industrial strategies that stress the need to provide support for sectors deemed critical for national security. In this sense, today’s industrial great-power competition looks a lot like the old, war-ravaged Europe.

But what about a Europe-wide industrial policy? The European Commission did recently publish a list of critical technologies. But, in implementing a US- or China-style industrial policy, Europe faces a paradox: the EU’s effort to end the use of industrial policy as a geopolitical tool among European countries significantly limited its member states’ room to respond to geopolitically motivated industrial policies by others.

To be sure, the EU has dealt with sectors in decline. In 1978, when the steel industry was struggling, the European Economic Community implemented the so-called Davignon Plan, which capped production across European countries in a roughly proportional manner. But the EU has never had an active industrial policy for the simple reason that, unlike China and the US, it does not have a federal budget with which to provide large subsidies to specific sectors.

It is thus understandable that EU Commission President Ursula von der Leyen has called for a new European Sovereignty Fund. But it also makes sense that national leaders, who would have to finance this fund, are reluctant to hand their taxpayers’ money over to the EU to foster industrial development somewhere else.

In the absence of EU-level financing for a common industrial policy, the European Commission is loosening the rules for state aid. For example, under the European Chips Act, the Commission can approve targeted national support for large semiconductor factories. But whether you believe that member states’ newfound ability to support specific industries will have the desired effect depends on which side of the industrial-policy debate you land.

Those who believe that governments can identify sectors with potential for positive growth will welcome the EU’s approach, especially because the Commission reserves the right to assess whether any proposed national state aid would be proportional and efficiency-enhancing. The skeptics, on the other hand, believe that national governments are likely to finance “national champions” or politically convenient projects, and that EU bureaucrats are not well-suited to disentangle complex supply chains and pinpoint the sectors with the most potential.

Past experience, which highlights the hold national champions have on politicians, suggests that the skeptics’ view might be the more realistic. On the other hand, industrial policy can and should be about much more than providing large enterprises with billions of euros with which to construct high-tech factories at home. Increasing R&D spending would provide a stronger base for high-tech industry in general.

This indirect support could still be targeted. For example, the microchip industry would benefit from the creation of specialist technical schools and support for local expertise on key elements of the chip-making process. Such an approach is more strategy than policy – and it is likely to do far more good for Europe than would pouring public money into a few mega-factories.

Source : Project Syndycate