A New European Industrial Strategy

For almost a year now, European politicians have struggled with how the future of European industry should look. On March 10, 2020, this question received its first answer with the publication of the European Commission’s “A New Industrial Strategy for Europe”. In this post, we take a look at this proposal, its implications, and main challenges.

Europe is and “will always be” the “home of industry”

The European Commission introduced its new industrial strategy paper, which depicts the industry as the core of the European economy. The document describes European industry as a long-standing pioneer of innovation, a trigger of economic growth, and an enabler of social hubs.

Most importantly, it highlights that throughout history, European industry has been able to change over time. A characteristic that now more than ever is fundamental for the future of the EU economy. At the core of the strategy is the need to transition towards climate neutrality and digital leadership, one that is characterized by a shift from linear production to a circular economy and an entrepreneurial setting in “spirit and action.” It has a new focus on “industrial ecosystems” that allow the European Union to be an enabler and regulator and is based on competition, open markets, innovation, and a strong single market.

Twin transitions and a new geopolitical order

The two biggest challenges for European industry are, according to the European Commission, are ecological and digital transition. To ensure a sustainable and competitive industry, it has “to become greener and more digital.” In addition to these “twin transitions,” the continually changing geopolitical realities of the world also exert pressure on the European industry. New protectionist tendencies, the emergence of competitors, and challenges to a rules-based system require adequate responses and actions. However, these actions and responses cannot “erect more barriers, shield uncompetitive industries, or mimic the protectionist or distortive policies of others.”

European Green Deal as the backbone of a new European Industry

In order to achieve the environmental goals, set for 2050, European industry has to commit to an active role in this process. The European Commission states in its new strategy that it is the job of industry to reduce its carbon footprint while at the same time accelerating the economic transition in Europe by providing affordable and clean technology solutions while at the same time developing new business models. The Commission sees in these actions the possibility to create leading European markets in clean technology. To achieve this, regulatory policies, public procurement, fair competition, and full involvement of SMEs is necessary, as explained in the communication.

Strategy on Shaping Europe’s Digital Future as the vision for an innovative European Industry

At the center of the digitalization process of the European industry, the Commission considers that Europe has to retain its technological and digital sovereignty thereby strengthening the digital single-market.  For this, Europe requires speeding up investments in technology-related R&D, especially in technologies like AI, 5G and metadata analytics. Furthermore, Europe needs to strengthen its industrial capacity in critical digital infrastructure. This, according to the Commission, is  a collective effort and cannot be pursued by individual member states alone.

Achieving the goals

The European Commission includes in its strategy an overall action plan divided into nine fundamentals.  Each includes individual plans, proposals of new legislation, reconsideration of existing regulation, and mechanisms that allow the European Union to achieve the goal of a greener and more digital economy within the next decades. We have summarized these nine fundamentals according to their intent and explained the main takeaways of the strategy with some examples of the measures included in each fundamental:

• Strengthening of the single market: To enable prosperous European industry across all member states, there is a need for single market regulation. These regulations include, for instance, the implementation of the Single Market Enforcement Action Plan or enhancing tax harmonization across all member states. Furthermore, a reprioritization of SMEs is required to strengthen the single market, which can be achieved through the implementation of the SME Strategy for a sustainable and digital Europe and stronger IPRs, hence the introduction of an Intellectual Property Action Plan.
• Foreign competition policies: European industries are highly international as well as integrated into global value chains. Europe should fight for fair competition and trade. Nonetheless, current threats to a multilateral rules-based system require a reconsideration of European regulation to deal with distortive foreign measures. By 2021, a proposal of legislation will follow the White Paper on an Instrument on Foreign Subsidies, which will assess trade defense mechanisms for Europe throughout 2020.
• Transition to climate neutrality: to achieve climate neutrality, modernizing and decarbonizing energy-intensive industries must be a top priority. For this, the European Commission proposes, among others, the mobilization of €100 billion within the framework of the Just Transition Mechanism to help carbon-intensive regions to achieve a fair transition of their industries and economies. Additionally, the strategy proposes the review of the Trans-European Network Energy Regulation, an EU Strategy on Offshore Renewable Energy, and a strategy for Sustainable and Smart Mobility.
• Transition to a circular economy: To incentivize reducing the environmental impact of industry, the EU has put in place a New Circular Economy Action Plan. This plan sets a new sustainable product policy framework and empowers consumers to play a more active role in the transition towards a circular economy.
• R&D of new technology: To transform the European single market into a technology leader in the global market, the communication highlights the importance of an industrial innovation strategy. This should counteract the decrease in R&D spending across Europe, which has resulted in a lack of disruptive innovation, truly breakthrough research, and essential innovation at the European level. For this, the strategy states that regulation is necessary that enables and enhances innovation in Europe. The mechanisms proposed in the strategy include the assessment of new approaches to innovation and the funding required, as well as the launch of Public-Private Partnerships within the Horizon Europe program.
• Labor market: A fundamental factor that will enable Europe to achieve its goals is the recruitment and retaining of a qualified workforce. Hence, Europe needs to ensure education and training keeps up with the challenges and requirements of the twin transitions. For this, the European Commission suggests an update of the Skills Agenda for Europe in 2030, a new European Pact for Skills, and a strategic framework for a European Education Area. Furthermore, the EU sees the necessity to achieve more parity in the industry for which it has implemented an EU Gender Strategy.
• Funding: The necessity of a comprehensive funding plan is critical to achieving the goals set in the strategy. Specifically, it highlights the need for a long-term budget plan. Moreover, the strategy suggests that enabling the mobilization of private and public investment is equally important. The strategy states that new Important Projects of Common Interest (IPCEIs) could allow quick and efficient allocation of resources. Additionally, the communication names a renewed sustainable finance strategy and new Digital Finance Strategy as a mechanism to create a large pool of funding.
• Strategic autonomy: According to the strategy, Europe needs to reduce its dependency on external sources of critical materials, technologies, food, and infrastructure. To do so, the Commission proposes an assessment of risk associated with foreign investment followed by a framework for the screening of FDI applicable by October 2020. Furthermore, it aims at the creation of an integrated defense industrial base across the EU by means of a European Defense Fund.
• Partnership approach: The European industry is built on and depends on a joint effort of all players operating in a value chain. This consists in what the Commission calls industrial ecosystems. The strategy sets the goal of systematically assessing the risks and needs of industry through partnerships and forums with representatives from industry, SMEs, big companies, social partners, and academia.

Is it feasible?

The New European Industrial Strategy is comprehensive and implies an important change in the European economic policy. In particular, the strategy represents a change in European industrial policy, which for decades has lacked a clear long-term strategy and an active approach to the future challenges of the industry.

Furthermore, the strategy includes two dimensions – sustainability and inclusiveness – that have been neglected too long, not only at the European level but also by other partners in the world when considering the future of industries.

Although the strategy proposes action plans, regulations, and mechanisms, the process of implementation will be highly complex as each of these is a further compendium of goals, mechanisms, and actions in themselves. Hence, achieving the goals will require an enormous effort not only at the European level but especially at the national level where the implementation and enforcement will take place.

The goals set by the New European Industrial Strategy are very ambitious, especially considering that the next five years should set the pace and process of transformation in the following decades. However, the European economy might be in need of ambitious goals to be able to achieve a process of transformation in the future.