In June 2023, the European Commission proposed a new platform to improve investment in strategic technologies in the 2024 to 2027 period. Called the Strategic Technologies for Europe (STEP) Platform, it is intended to direct funding toward projects that contribute to European competitiveness in strategic technologies and secure value chains. However, the involvement of cohesion funds in the proposal creates tension in its overall goals. In October 2023, the European Parliament approved the regulation with amendments to push investments to Europe’s economically weaker regions. Even if the Council adopts the platform, investment in strategic technologies working in harmony with economic convergence is no simple task.

The idea for a “sovereignty fund,” announced by President of the European Commission, Ursula von der Leyen, in the 2022 State of the Union speech, was born out of the need to support technologies deemed both vital for the future of the EU economy and risky to rely on competing economies to supply. It ended up being part of the larger Economic Security Strategy, a move by the Commission to connect economic policy with security considerations now when more countries are thinking strategically about certain technologies deemed especially important for the future of their economies or national security.

The original sovereignty fund idea was rolled back from its ambitious origins to become STEP. In the 2023 proposal, the Commission laid out how STEP could bring around €160 billion in investments toward these strategic technologies, of which just €10 billion would be new funds. The rest would come from other existing EU funds or private capital. Unfortunately, this is a far cry from the original idea of a common EU approach to finance the green transition and still largely leaves investment in these strategic technologies in the hands of national governments with the fiscal space to do so.

What technologies will be supported?

The Commission proposes that STEP will focus on three categories of technologies: deep and digital technologies, clean technologies, and biotechnologies.

Table STEP
Source: European Commission

Projects centred around these technologies would be eligible for a “sovereignty seal” that unlocks funding through STEP to enable these projects. The need for such a seal of approval is that not all high-quality project proposals submitted for funding through Horizon Europe, the Digital Europe program, the European Defence Fund, the EU4Health program, or the Innovation Fund were selected for funding. With the sovereignty seal, these projects can pivot to funding mobilised through STEP.

Which funds contribute how much to STEP?

The Commission proposal relies on top-ups of just €10 billion to a handful of innovation-oriented funds and a reorientation of some cohesion funds to catalyse €160 billion for STEP. The European Parliament amended these top-ups, adding €3 billion to increase the total to €13 billion, all pending approval by the Council.

 

The largest single source for this €160 billion comes from the assumption of a 10-times multiplier of investments (similar to this calculation) that reflects the idea that private and public sources of financing turn €7.5 billion from InvestEU into around €75 billion in total investments.

Another large source of funds in the proposal is a redirection of around 5% cohesion policy funding, amounting to around €18.9 billion.

The expectation behind the bulk of the calculated funding is that private and public investors in member states will follow the lead of the Commission and the European Investment Bank (EIB) with their own investments and that cohesion funds will be redirected toward projects that serve the STEP objectives. In general, the plan pales in comparison with similar initiatives like the US Inflation Reduction Act, which brings massive amounts of public money to the table, while STEP relies heavily on leveraging private capital.

Cohesion funds for STEP should go to transition and less developed regions

The proposed re-direction of cohesion funds does not align with some of the fundamental aspects of cohesion policy. Given that STEP depends on cohesion policy for a sizable portion of its total estimated investments, making sure STEP projects are compatible with cohesion policy should be paramount.

The objectives of cohesion policy are improving economic, territorial, and social cohesion between EU regions through thousands of projects like improving parks and schools, investing in transport, skilling and employment initiatives, and equal access to healthcare, to name just a few. Compare this to STEP, which focuses on securing the supply and development of high-tech and net-zero technologies. Cohesion policy is far broader and less oriented toward cutting-edge innovation.

This amounts to a misalignment of the goals of STEP and cohesion policy.

For STEP to, as it proposes, “preserve a European edge on critical and emerging technologies relevant to the green and digital transitions,” it should direct investment to Europe’s leading innovation regions, but these regions are the lowest priority for cohesion funds.

As a Bertelsmann Stiftung study, Technological capabilities and the twin transition in Europe, shows there is an innovation divide between the EU’s more developed regions and the rest. The most cutting-edge technological capabilities are found in Europe’s most economically developed regions. Projects most attractive to the goals of STEP and most likely to get the “sovereignty seal” of approval would likely come from such regions. This would work against the goals of cohesion policy, a view shared by the European Committee of the Regions in a recent opinion.

In October, the European Parliament reinforced STEP’s compatibility with cohesion policy in several amendments. First, the funds from the European Regional Development Fund, one of the cohesion funds subject to STEP’s plans, should only be accessible to transition regions, less developed regions, regions that fall under the Just Transition Platform, and only more developed regions in member states with below EU average GDP per capita. Further, 75% of the €5 bn top-up to the Innovation Fund specifically should be available only to entities from member states with below EU average GDP per capita.

With these proposed guardrails, what technologies and regions could benefit from STEP? To identify diversification opportunities of regions to develop twin transition technologies in the future, the study uses the concepts of relatedness and complexity. In an ideal scenario, regions develop technologies of high complexity which are also highly related to their present technological capabilities.

Therefore, regions have most to gain from investing in technologies that are closer to the upper right quadrant on these next two graphs. Transition regions, whose per capita GDP is 75% to 100% of the EU regional average, have potential in some less complex green technologies.

These technologies correspond best to the STEP “clean technologies” category and include advanced sustainable materials, alternative fuels (biofuels), water treatment, and heat pumps. Projects related to these technologies in regions of this economic classification can help both secure vital technologies and help these regions catch up economically.

In contrast, less developed regions (below 75% of the EU average per capita GDP) show some potential in the “deep and digital technologies” STEP categories like artificial intelligence, cloud and edge computer, cybersecurity, and virtual and augmented reality, albeit generally less than more developed regions. The presence of this potential for complex digital technologies in these regions can be a guiding light for STEP’s use of cohesion funds.

To track what impact STEP has on the development of strategic technologies and cohesion, the European Parliament included in their amendments the addition of an impact assessment “on the progress of implementation of the Platform objectives under each of the programmes and funds, on the overall expenditure of the STEP financed under the respective programmes and funds, and on the performance of the STEP based on the performance indicators provided for by those programmes.”

Basing the success of STEP on the performance indicators of the respective funds involved places the specific goals of cohesion in focus and will help determine if these two goals can live in harmony should a larger, more permanent sovereignty fund be established in the future.

STEP and Cohesion Policy can be compatible, but harmony is not guaranteed

STEP is a timely, but quite modest, initiative that builds on the Commission’s work to support a robust EU economy that de-risks its connections with economic competitors. It could lead to investment in a more sustainable and innovative European economy, but only one source of funding in its proposal, cohesion policy, explicitly aims to narrow the wealth gap between EU regions. If STEP can indeed guide investment into technologies in which economically weaker regions have strengths, the platform can accomplish its goals of fostering these strategic technologies, securing supply chains within Europe, and helping those regions catch up.

About the author

Nathan Crist is Project Manager in the Europe’s Future Program at the Bertelsmann Stiftung working on the Europe’s Economy Project.

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