The EU's Industrial Policy Needs Better Governance
By Wolfgang Polt
Europe's fragmented approach to industrial strategy undermines its ability to compete with China and the United States.
The European Union stands at yet another crossroads. A "poly-crisis" demands fundamental changes to patterns of production and consumption to meet the challenge of climate crises, keep pace with the economic and societal challenges of the new wave of digital transformation, and ramp up defence production to meet looming military conflicts—all against the backdrop of losing competitiveness in major industries and facing ruptures in international value chains. Any successful response clearly hinges on an elaborate and forceful industrial policy—primarily, though not exclusively, of the mission-oriented type.
The reasons for needing an explicit, well-funded and forcefully implemented industrial policy are manifold. First, many of the goals are societal in nature—such as abating global warming—which markets would not pursue on their own behalf. Second, markets operate with too short-term an orientation for coping with challenges like climate change. Third, European countries find themselves in the position of catching up economically and technologically in an increasing number of industries characterised by huge network economies and strong concentration tendencies. Europe lags especially in sectors with high growth rates that constitute battlegrounds for future competitive advantage, particularly artificial intelligence (AI) and digital services. Hence, there exists ample need and room for "directional" and even "developmental" industrial policy initiatives.
In recent years, there has indeed been recognition of the need for industrial policy at the European level, and this recognition has found its way into a number of policy documents and initiatives, contributing to what the Organisation for Economic Co-operation and Development (OECD) has labelled "strategic orientation". Yet these documents have not been formed into a coherent "industrial strategy" at EU level—which the OECD defines as an overarching document comprising different sub-parts of industrial policy across sectors, instruments, and other dimensions. In fact, the EU remains a latecomer to formulating such a strategy compared to countries like China, Korea, Japan, and most recently the United Kingdom.
As of recently, these policy approaches were not funded sufficiently to match the policies of other countries, notably China and the United States but also those of Japan, Korea and Taiwan. This pertains to the overall volumes—though they have risen in Europe as well—but also to the much more complicated provision of funding compared to other countries. And finally, apart from the problems of strategic orientation and funding, the main obstacle for a successful industrial policy in Europe lies in the governance structures—which prove insufficient at all levels, from formulating a strategic vision to policy coordination up to implementation and funding.
Strategic Orientation and Governance Deficits
European industrial policy has historically been characterised by its horizontal nature, with a focus on creating favourable framework conditions and coordinating policies at the member state level. In recent years, EU communications on industrial policy have been increasingly calling for a change in EU policy towards more active, mission-oriented and directional policies. Likewise, in some member states, these approaches have been gaining ground. The diverse national industrial policies, though, are often only loosely articulated with EU-wide policy goals and initiatives.
What is more, national policies are—in all likelihood—not able to reduce the "size gap" that European initiatives face in comparison to China and the United States. This size gap constitutes a systemic challenge asking for governance structures which would be able to formulate and implement a coherent industrial policy at the European level. Such a strategy—which would be accepted as binding and directional also for the national level—does neither exist as an overarching industrial strategy nor in sub-areas like the Green Deal, although in the latter case there are at least some steps in this direction, such as the Green Deal Industrial Plan or several technology roadmaps.
A good example of the difficulties resulting from lack of governance can be seen in the relationship between the EU missions set up in the EU Framework Programme for Research, Technology Development, and Innovation (RTDI), and one of the main EU industrial policy instruments, the Important Projects of Common European Interest (IPCEI), which also introduce elements of mission-orientation. While the mission-oriented approach has started to gain traction—though still in its early phases of implementation in many countries—it became apparent that industrial participation was less than satisfactory and one of the main deficits of these early phases of implementation.
Both novel policy approaches—EU missions and IPCEIs/industrial alliances—could gain in effectiveness and efficiency if they were developed in better alignment and with more reference to each other. Yet the current governance settings for the two approaches are not conducive for such an alignment and would have to be changed significantly if cross-fertilisation and synergies were sought. Current governance of European industrial policy mainly lies with the Directorate-General for Competition of the European Commission, with a focus on regulatory and cooperation instruments, while actual industrial projects are developed and funded on the member states level. While concordance with overarching EU policy goals and regulations serves as a selection criterion—for example, in relation to compliance with competition and single market rules—actual thematic priorities emerge bottom-up from the member states and their regions.
Conversely, the mission topics of EU research and innovation policy were defined top-down under the aegis of the Directorate-General for Research and Innovation and are implemented mainly via the EU framework programme and complementary national and regional policy initiatives. Most of these initiatives can be said to still be strongly rooted in the Science, Technology and Innovation (STI) domain and hence fall into the "policy trap", meaning that the sectoral policies that would be crucial for achieving the mission goals are largely left aside.
Both settings have flaws which limit the effectiveness and efficiency of the policy areas they are designed for, but also for a cross-fertilising interplay of the two approaches of missions and IPCEI. Industrial policy governance as it is set up for the most important instruments runs the risk of being dominated by industry and lacking governance structures which would allow for a better articulation between European policy goals and business interests. It also risks a concentration of funds and activities in rich member states and in large enterprises, hence running the risk of further aggravating regional concentration of innovation.
Mission governance, on the other hand, suffers from several critical weaknesses. First, the top-down political processes of selecting mission areas were neither transparent nor guided by clear criteria, resulting in arguably too broad missions of moderate urgency, which do not reflect the needs and capacities of member states properly. Second, very uneven state capacities and processes of policy learning exist for implementing missions in a flexible way over longer periods of time. And third, in particular, there is a lack of coordination mechanisms between the STI, sectoral and regional policies.
When it comes to implementation—funding and channelling of the funding—again, huge governance gaps open up. As industrial policy remains in the domain of the member states, EU funding could only come from other sources, such as the Framework Programme for RTDI or the Structural Funds, or was provided via temporary vehicles like the Recovery and Resilience Facility (RRF), which a number of countries used to finance their national funding for IPCEI participation, amounting to an indirect funding from the EU.
There are clearly visible constraints to this governance of funding and implementation, as the repurposing of funds at the EU level runs into problems of compatibility of the different funding streams, while the dependence on overwhelmingly national sources is likely to exacerbate regional differences in the EU, thus running counter to another longstanding policy goal of the EU, namely regional cohesion. Without a stronger carrot, and potential sticks, the ability to create "directionality" by the EU remains very limited.
Proposals for Change
Recently, a number of proposals have been made to rectify these governance problems. Here, I refer to the ones that I see as the most important. On a general level there is certainly the urgent need for pan-European coordination of industrial policies. This could be leveraged, for example, by a singular decision-making body at EU level, and by a stronger "Europeanisation" of the policy instruments, in terms of governance and funding, including by the set-up of dedicated funds and greater roles of the European Investment Bank (EIB) and the European Central Bank (ECB). More specifically with respect to the link between research and industrial policy, there is need for an expansion of the governance of EU's RTDI Framework Programme to include sectoral policies like defence and security, and the establishment of new missions for industrial policy.
Operationally, the implementation of a "new industrial policy" at the EU level would greatly benefit from several concrete measures. First, the creation of dedicated agencies as operational vehicles for the implementation and distribution of funding. This could take the form of an overarching agency—for example, to administer the Competitiveness Fund—or specific agencies addressing energy, environment, or specific sectors. Also, mixed forms are conceivable where the activities of a European Agency—such as the formation of a European ARPA or ARPA-E—are implemented through existing national agencies. This might be the more pragmatic option, as some countries have already started to create dedicated agencies like SPRIND in Germany—again an example of the difficulties to arrive at a coherent European institutional architecture.
Second, the greater "Europeanisation" of the tools and instruments, both with respect to priority-setting and funding. This means, for example, a stronger Europeanisation of the IPCEIs as the main tool of European industrial policy, implying a higher share of European funding, a stronger role of the European Commission in co-defining the priorities together with the European Parliament, member states, industry and societal stakeholders, an increased role of the EIB and even of the ECB in funding, and a much closer coordination with the Framework Programme for RTDI through joint programming, joint priority settings and other mechanisms.
Third, the flexibilisation and harmonisation of EU funding programmes to facilitate their connectivity and coordination, along the principles suggested for a Competitiveness Fund in the next Multi-Annual Financial Framework.
Fourth, the creation of specific European enterprises, like the examples of Euratom, Airbus, Galileo and the European Space Agency (ESA), especially when it comes to addressing infrastructural and dependency logics—for example, for the procurement of raw materials or in defence production. In this vein, the creation of European Public Enterprises of General Interest (EPEGI) has been proposed, which could be vehicles for direct industrial policy at the EU level.
While first steps in these directions do exist—the Joint European Forum for IPCEIs, inter-DG coordination at European level for the EU missions, attempts of whole-of-government approaches in the member states—as of yet these approaches fall short of solving the governance challenges of the "new industrial policy" the EU has envisioned. They also fall well short of the governance structures the United States and China have in place with their simplicity and degree of directionality, respectively. It remains to be seen whether the institutional architecture needed to implement the new Multi-Annual Financial Framework (MFF) will take these necessary steps—or whether the EU will remain a laggard, constrained by its governance deficiencies when it comes to industrial policy.