December 3, 2024 - 7:00am
In recent years, Western governments have increasingly engaged in self-conscious industrial policies to address a variety of problems — the green transition, resilience of supply chains and, perhaps most importantly, geopolitical competition with China. Initiatives such as the Biden administration’s CHIPS and Science Act and the Inflation Reduction Act (IRA) in the US are symbolic of this new wave of industrial policy.
In response to the IRA — which many European officials have worried could harm EU manufacturing — several officials and leaders have advocated for a robust European industrial policy featuring reciprocal subsidies and support mechanisms. They are emphasising the need for a “Made in Europe” strategy to counterbalance the potential economic impacts of the “America First” policies embedded in the IRA. Calls for a more unified European industrial response have naturally grown in tandem with President-elect Donald Trump’s threats of more aggressive American protectionism.
Hence why this week, Stéphane Séjourné, the EU’s new industry chief, called for a “Europe first” strategy for key business sectors. “It’s not at all about protectionism because Europe really has no interest in a global trade war,” he said. “We have a strategic and technological interest to develop our own industries, to create employment and to create growth”.
This may sound promising, but the reality is that the EU’s institutional framework makes it seriously unfit, both economically and politically, for confronting the new 21st-century geopolitical landscape. Economically, the single currency and the EU’s restrictive fiscal rules, combined with the lack of a true common fiscal capacity, represent a serious barrier to investment — at both the national and European level. This issue is further compounded by the EU’s structural and ideological bias against state intervention in the economy. This is exemplified by the EU’s stringent rules regarding state aid, which seriously inhibits industrial policy.
Articles 107 and 108 of the Treaty on the Functioning of the European Union (TFEU) broadly prohibit any aid granted by member states that could “distort competition” by favouring certain companies or industries, unless explicitly allowed under specific exceptions. The idea is that allowing member states to support their domestic industries could lead to an uneven playing field, creating conditions where companies with state backing have an advantage over others. This approach reflects a foundational commitment to anti-interventionism, rooted in liberal economic thinking that sees competition as essential for economic efficiency and innovation.
Moreover, the EU’s highly bureaucratised, multi-level governance framework results in a slow and convoluted decision-making process, rendering the EU ill-equipped to respond effectively to the rapidly changing and volatile global environment. This is why, for example, the limited investments and industrial policies that do take place remain fragmented and split along national lines, as well as between member states and the EU.
These various factors significantly impede the EU’s capacity to implement industrial policy, particularly on a continent-wide scale. They are also crucial for understanding why the bloc has fallen behind other advanced economies, which have relied heavily on state-led industrial policies to achieve a competitive edge, as recently highlighted in Mario Draghi’s report. In other words, the current era of state-led economic policy has starkly highlighted the detrimental effects of the EU’s erosion of state capacity.
Given the diverse economic structures, political priorities and geopolitical interests of EU member states, a centralised, one-size-fits-all investment and industrial policy is inherently unfeasible. This issue becomes particularly pronounced when considering that further centralisation would only strengthen the technocratic and undemocratic nature of EU governance, which has historically resulted in suboptimal economic outcomes — as the self-defeating post-2022 energy policy and Russian sanctions demonstrate. Supranationalising the EU’s investment and industrial policy is therefore neither a viable nor a desirable approach.
The most plausible outcome is that the EU will remain entrenched in the nightmarish institutional limbo it has created. This is one where nation-states are severely constrained in their economic sovereignty, and thus in their capacity to compete in an increasingly state-driven global economic environment. Meanwhile the bloc’s only true “sovereign” power, the EU’s supranational apparatus, is not — and could never be — an actual state capable of competing with established superpowers like China or the United States, let alone a democratic one.
Thomas Fazi is an UnHerd columnist and translator. His latest book is The Covid Consensus, co-authored with Toby Green.
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SubscribeThe EU seems to be run by people who have little or no knowledge of how to build and run companies in a complex and competitive world. The longer the EU exists, the more screwed their component economies will become.
The U.K. is currently just as bad, but at least we have a constitution that allows us to fire the “PPE idiots” if it gets serious enough.
We’ve tried firing the ‘PPE idiots’, but somehow we always wake up to more.
Europe is probably the most over regulated region in the world. The EU might frown on direct subsidies, but it doesn’t have a problem constraining business with bureaucracy and top-down diktats.
Which are protectionist in intent
There are literally millions of unsold cars sitting in German fields. Manufacturers are laying off workers in the tens of thousands. Successive French governments have utterly failed for decades to persuade their countrymen to live within their means. Italy is an illegal immigration powder keg. Europe urgently needs to change direction.
As do we.
It will be interesting to see where Argentina is in five years, and where Europe and Britain are.
So, Thomas Fazi actually believes this:
“They are also crucial for understanding why the bloc has fallen behind other advanced economies, which have relied heavily on state-led industrial policies to achieve a competitive edge”
It wouldn’t actually be anything to do with excessive beauracracy and regulation and relative lack of initiative then !
He simply has no understanding of the role of technology and innovation in these things and the environments in which technology advances quickly (and slowly).
He’s also very naive about the actual implementation of EU state aid to industry rather than what the official rules are. As ever with the EU, there are at least two tiers, with a special Zil lane for the French.
In 2000 the EU had the ‘Lisdon Agenda’ the goal of which was to
“make Europe, by 2010, the most competitive and the most dynamic knowledge-based economy in the world”
this was superseded in 2010 by’Europe 2020 the goal of which was to generate ‘smart, sustainable, inclusive growth’ .
We still await the heavenly manna.
Sit back and watch while China gets EU telecoms giants to do joint ventures with mandatory technology sharing in China and then buy your telecoms kit from Huawei as it destroys your own companies. CHECK
Watch Apple, Samsung and the Chinese completely take over the mobile phone business, which was started in and originally dominated by Europe (Ericsson, Nokia, etc). CHECK
Completely miss the boat on AI. CHECK
Waste $10bns on EU funded research projects which result in no significant commercial benefits. CHECK
Regulate your dominant automotive industry out of existence. PENDING (but making promising progress)
A good piece by Fazi. Monetary union without fiscal welfare integration and multi layered bureaucracy without a national we identity and shared culture – impossible and unsustainable
And here is a good discussion on how Europe is approaching access to space https://www.thespacereview.com/article/4903/1
Tellingly one of the five new initiatives Europe is taking is ” passing a new European space law”
Meanwhile US & China forge ahead
Sorry Thomas but there are big misunderstandings here!
The EU isn’t against state intervention. It runs massive subsidy and grant programmes which are obviously exactly that. What it’s against is national governments intervening, because the EU has taken those powers for itself. This is the general pattern: the EU is against countries doing things not because it’s against them, but because it wants a monopoly on doing those things.
A quick reality check can be done by looking at CAP, or comparing how many state-supported media companies exist in the USA vs Europe. There’s no contest of course. European TV and radio is dominated by massive state media complexes. America’s are far fewer and far smaller.
The EU’s fiscal rules don’t prevent investment. They prevent government spending. Government spending is always presented by governments as “investment” but their ROI, if measured how it’s measured in the private sector, would be disastrous. European companies can easily invest in growth, if the EU would get out of their way.
Catching up to the USA isn’t rocket science, and doesn’t require EU “strategy” or “industrial policy”. None of the USA’s biggest 21st century success stories were born of industrial policy – none. All Europe has to do is look at what the US does and copy it. That means massive amounts of deregulation at both the national and EU level.
the EU is against countries doing things not because it’s against them, but because it wants a monopoly on doing those things.
That’s certainly the impression I’ve gotten on this side of the deep, blue, sea
Is seems that the word ‘deregulation’ has been revived from the 80s and 90s as a catchphrase to magically solve every problem with a bit of voodoo economics. Reality is a lot more nuanced and complex.
Governments spending typicality does mean investment. If they would actually borrow – what many people think – the amount of money in the private sector would decrease. But it doesn’t, it typically increases. Constraining governments from investing in countries that have the capacity to turn that money into something productive or useful is a waste. But that is what happens in the EU.
Also what 21st successes in US? If anything the digital revolution is precisely the result of massive cold war investment. Also don’t forget all the bubbles, especially 2008.
> They are also crucial for understanding why the bloc has fallen behind other advanced economies,
Let’s be clear the leading reason the bloc is falling behind os because they are seeing how fast they can make power and energy become the major spend in European households.
“The idea is that allowing member states to support their domestic industries could lead to an uneven playing field, creating conditions where companies with state backing have an advantage over others.”
Like Germany and France were not doing this all along
The EU is hanging by a thread with both Germany and France presently facing both economic and political crisis, Europe will be crushed when both of these countries try to deal with this. The slow moving bureaucratic EU could collapse under its own weight and incompetence. Volkswagen’s problems are just the tip of the iceberg.
Good piece. How do you solve a problem like the EU?