The main challenges for EU industrial policy in the next decade

27 January 2020

The EU needs to focus on innovation, China, cohesion and the Green New Deal.

by Michael Landesmann and Roman Stöllinger

Industrial policy is again en vogue, both in the EU and around the world. A major reason for this is dissatisfaction in many countries with the outcomes of economic policies of the 1990s and early 2000s. These policies have left a very difficult social legacy, with (as we now see) far-reaching political consequences. In the EU, concerns about de-industrialisation in several member states, the rise of China, persistent regional disparities, and the uneven impact of the financial and economic crisis after 2008, have all played their part in altering the way industrial policies are perceived.

Industrial policy in the EU has traditionally been a mixed approach, incorporating horizontal (limited to general framework policies) as well as sector-specific measures—with significant variation in focus throughout the decades. More recently, new types of industrial policy have emerged at the EU level, such as ‘mission-oriented’ policies (Mazzucato emphasises the need for a coordinated strategy around focussed goals, such as the European Green Deal) or ‘smart specialization’ (in the sense of Foray et al, 2009). One unifying theme, though, seems to be the insight that purely horizontal industrial policy is either inadequate or simply not possible.

A new wiiw study evaluates quantitatively the way industrial policy was implemented at the EU and national levels over the period 2014-2017 (the most recent period for which comparative data are available). It then analyses the set-up given the four main challenges to EU industrial policy identified in the paper:

  • Technological/innovation challenge. Keeping pace with the technologically most advanced economies in future-oriented technological areas, which includes the digital transformation, has been one of the long-standing aspirations of EU industrial policy.
  • Emerging markets challenge. Meeting the challenge of fast catching-up emerging economies (foremost of China) through both competition and collaboration.
  • Cohesion challenge. To foster progress in the field of convergence and cohesion policy within the EU. A major issue in an industrial context here is the fact that peripheral regions and countries are confronted with strong agglomeration tendencies inherent in tradable activities in core areas of Europe’s economy. 
  • Environmental challenge. Dealing with the challenges of the Paris Agreement on climate change and sustainability issues more generally.

The current EU industrial policy set-up

Our research establishes the following conclusions about the current set-up of EU industrial policy:

1. Spending on industrial policy is low by historical standards

At the aggregate level, national spending by member states on industrial policy amounts to about 0.75% of the EU’s GDP, while the financial resources from the EU budget devoted to industrial policy related measures account for 0.35%. Hence, on the whole expenditure on industrial policy by member states far exceeds the amounts spent at the supranational level. In total this amounts to about 1.1% of EU GDP. This is certainly a non-negligible amount of public support, but is low by historical standards. During the 1970s, subsidy spending in the EU is estimated to have amounted to 3% of GDP, and was still around 2% during the 1980s.

2. In EU-CEE, a substantial share of industrial policy expenditure is funded by Brussels

The ratios of industrial policy funding received from the EU budget compared to national expenditures differs widely across member states, ranging from 1.3 in the CEE-5 (PO, CZ, HU, SK, Sl) and 1.7 in the EU-Balkan countries (BG, RO, HR) to 0.1 in Germany or 0.13 in the Nordic EU countries. The combination of comparatively high state aid levels and generous receipts from the European Structural and Investment Funds (ESIF) resulted in expenditures for industrial policy amounting to 3.7% of GDP for the CEE-5 (with 2% of GDP coming from the EU budget), 3.5% for the Baltic countries, and 2.9% for the EU Balkan countries. These figures are high even by historical standards.

3. Western Europe spends more on RDI and technology, while EU-CEE devotes more resources to infrastructure

The spending from EU and national sources differs also by support areas, both in the aggregate and across country groups. We differentiate between five sub-areas: research, technology and innovation, SME support; employment, education and training; ecological transformation, i.e. ‘green industrial policy’; and investment in infrastructure. In the EU-15, the bulk of EU support for industrial policy is in the area of RDI and technology (about three quarters). This drops to around 40% in EU-CEE, where a much higher share of available EU resources are devoted to infrastructure spending , mainly through the Trans-European Network (TEN) projects.

Policy prescriptions

Based on our findings, we recommend the following policies to address the four main challenges confronting EU industrial policy:

1. Direct research and innovation towards concrete, measurable and achievable outcomes (the so-called ‘mission’-based approach)

In line with Mazzucatto we suggest to conduct innovation policy in a way that produces outcomes that are concrete, measurable and achievable. This would facilitate a focused and coordinated strategy to keep abreast regarding developments at the global technology frontier but also to become forerunners in new societal challenges that are in line with the specific European social and political context. Most prominent amongst these challenges are the ‘Green New Deal’ and a digitisation agenda. In both, but especially in the latter, the strategy also has to cover the social and distributional implications of technological (and workplace) developments. In addition, innovation policy has to be designed such as to cover the wide span of technological, skill and know-how levels that characterise the spectrum of European regions and countries. Only this could fully exploit the technological and innovation potential in Europe (see our separate work on an ‘appropriate innovation policy’).

2. Use the EU’s soft power to cooperate with Asia

As regards the challenge from the much stronger presence of emerging economies and of China in particular in the global trade, production and innovation system, the EU has to develop and keep a balance between technological and competitive rivalry, on the one hand, but also exploit both the potential for cooperation on the other. In future such a strategy of cooperation will definitely extend to India but also other economies in Asia and – hopefully in future – Africa and the Middle East. The EU is better placed in this respect than other advanced countries (especially the USA, but also in the Asian regional context Japan and South Korea) as its geo-strategic political power and interests are still perceived as rather small and hence the scope to pursue a path of economic and technological cooperation (also in the area of training and education) could be wider.

3. Use industrial policy to address regional disparities within the EU

The internal cohesion challenge of the European economy is indeed important and has also increasingly asserted itself politically both as regards uneven regional developments within countries and across countries. The empirical evidence suggests very strong agglomeration tendencies particularly in industrial production but also in other areas (such as high value-added business services). This also lies behind some entrenched macroeconomic imbalances that countries in the EU (and wider Europe) face, such as sustained current account imbalances. Industrial and regional policies can play an important role in supporting second- (or third-) tier hubs and clusters that would not otherwise emerge if left to pure market dynamics. The design and implementation of ‘appropriate industrial policy’ is again central here. Furthermore, assistance has to be given to upgrade institutional quality and capabilities, as evidence suggest that lagging regions are at a great disadvantage both in tenders and successful implementation of available EU-funded projects.

4. Take the lead in the Green New Deal

We are optimistic that the EU will be a frontrunner in implementing a supportive regulatory framework and giving assistance to important technological initiatives for a Green New Deal. This should make an important contribution to combating climate change at the global level. In this endeavour, given recent developments of civil society mobilisation, it will also get the support of important sections of the European population, both in their willingness to adjust lifestyles and give it the necessary political backing, even if this support will not be forthcoming to the same extent in all countries and sections of society. This will require some political manoeuvring, including provision of side-payments (such as in current negotiations of closing down coal-mines in Poland), but this should be feasible.