Reflections on how COVID-19 is reshaping the EU’s industrial strategy

In March of this year amidst EU countries going into quarantine, the European Commission finally delivered its long-expected new industrial strategy that addresses several of the most important economic and geopolitical challenges Europe faces.

Now that countries are coming out of lockdown, it is clear that a new landscape of resurrected state intervention has emerged. Although movement towards greater intervention initiated long before the current crisis, COVID-19 is accelerating these developments while reshaping our perceptions on the need for state intervention and industrial policy.

In the most recent turn of events, Germany and France jointly proposed a recovery fund to aid regions most severely struck by the Corona crisis. If adopted, it would present a landmark step towards a truly European industrial policy. Furthermore, the 500bn Euro fund is explicitly linked to digitalisation and decarbonisation, two of the cornerstones of Europe’s proposed new industrial strategy. Meanwhile, the European Commission has proposed an even more ambitious 750bn Euro fund predicated on the same principles.

It seems then that this crisis is finally bringing the political momentum necessary to modernise and Europeanise industrial policy. Although much will undoubtedly change in these challenging times, one thing is certain: new initiatives will be moulded onto existing policies. As such, it is worth diving deeper into the EU’s industrial strategy.

In a nutshell: what industrial strategy?

In the vision of the European Commission, the EU is to be(come) globally competitive, green, and digital. How will it get there?

• By avoiding protectionism and ‘naivety’. Between rising US protectionism and state-backed Chinese enterprises, Europe must find its way. While remaining committed to free trade overall, the Commission proposes to strengthen trade defence instruments, providing increased protection against ‘unfair’ trade practices. Additionally, the strategy seeks to curb state-subsidised foreign enterprises from accessing the EU’s internal market and buying up European companies.
• SMEs, SMEs, SMEs. Small and Medium-sized Enterprises are the backbone of the European economy. They thus feature prominently in the new industrial strategy. Here, the document mostly recycles proposals for creating digital innovation hubs and easing access to capital.
• ‘Mission-oriented’ industrial policy. As opposed to traditional horizontal (creating an actor-agnostic competitive business environment) and vertical (picking winners and losers through subsidies and state aid) industrial policy, ‘mission oriented’ policy seeks to bring together key players in strategic value chains to leverage synergies and create a European manufacturing base for key enabling technologies. Important Projects for Common European Interest (IPCEI) aim to do just that.

While these proposals are the most ambitious yet, they still mirror many aspects of earlier reports. Indeed, when reading the 2005, 2010, 2012, 2014, 2017 industrial strategies, one also encounters ‘integrated approaches’, ‘competitiveness’, and ‘digitalisation’. More problematically, however, is that the two most thorny issues are absent entirely:

1. Creating European champions: Arguably the catalyst for reinvigorated debates on industrial policy pre-Corona was the blocked Alstom-Siemens merger. The inability of these railway giants to merge inhibited their global competitiveness, so the argument went. The pursuit of ‘digital sovereignty’ after the Huawei 5G turmoil should be seen in the same light. Still, one must ask the question: for whom will European champions be good? Additionally, a review of the evidence shows that the Commission actually already has a strong pro-merger stance.
2. Reshoring/nearshoring: The hallmark of globalisation is the configuration of production into truly global value chains. While saving cost, COVID-19 has exposed the inherent vulnerability of value chains to disruption. Crucially, the capability of the state to provide public services and goods in areas such as personal protective equipment, nursing equipment, and a prospective COVID-19 vaccine is undermined by the globalised and privatised nature of their production. Therefore, it has been argued that a reshoring strategy is a necessary component of future EU industrial policy.

Why is the Commission (mostly) serving old wine in new bottles?

The most likely explanation is one of tied hands. Although the Commission uses the terms ‘strategy’ and ‘policy’ interchangeably, the key differentiator between the former and latter is money. Boosting output and changing the structure of production costs money. Problematically, most of that money must come from the EU budget, which is relatively small and politicised.

For instance, a recent proposal to redirect parts of the cohesion funds to the EU’s flagship innovation platform HorizonEurope, was shot down. In the wake of increasing Euroscepticism and Brexit, it is unlikely that the EU’s budget will be increased. With budgetary means mostly ruled out, the Commission has turned to what it does best: regulating and coordinating.

What will COVID change?

With COVID-19, the old dictum to never waste a good crisis once again becomes salient. Beyond the aforementioned Europeanisation of industrial policy, European leaders can and arguably must introduce some form of transfer system from North to South. Indeed, recent research has shown that persistent regional inequality is a key feature in Europe’s political economy, giving rise to more Euroscepticism.

Coming off the heels of the highly contentious debate around Eurobonds/Coronabonds, the plans for recovery funds are quite the turnaround. Then again, the recent ruling by the German Constitutional Court all but necessitates quick and decisive action.

In a nutshell, put in perhaps slightly normative terms: without an industrial policy addressing the fallout of COVID-19 properly, the EU risks being ripped apart by centrifugal forces or collapsing upon itself by centripetal forces.

Conclusion: old and new realities

From the ever-changing stream of events, we can distil two observations. First, COVID-19 is accelerating many developments predating its unprecedented political-economic crisis. The piecemeal comeback industrial policy will likely be accelerated to boost economic recovery. Second, COVID-19 pushes industrial policy further. The Commission thus far eschewed from addressing the most heated issues: combining a level playing-field internally with global competitiveness, and addressing the asymmetries in Europe’s productive landscape. COVID-19 has made one thing clear: muddling through on these issues will no longer cut it.

 

Luuk Schmitz is a PhD researcher at the EUI’s SPS department. His research deals with the return of industrial policy in the European Union. More generally, his research takes interest in how global political economy processes enable and constrain political action by state and nonstate actors.