Level Up or Lose Out: How to Ensure the Success of the Green Deal Industrial Plan

After decades of scaling back on interventionist state policies in the hopes of “levelling the playing field” in the EU single market, industrial policy in the EU is now back with a bang. The $369bn Inflation Reduction Act – Joe Biden’s ambitious plan to re-shore the production of clean technologies – has spurred the EU into action to prevent falling behind the United States and the other global superpower China, which has long been engaging in active industrial policy to establish itself as a dominant player in clean technologies. The European Commission and EU leaders were left with little choice but to draw up an industrial emergency plan to remain globally competitive – not only in economic terms but also from a security perspective. Many are now expecting a full-scale subsidy race for market shares in critical technologies for the green transition.

If the new push for a green industrial strategy is to be successful, it must be coherently designed to ensure inclusive growth and economic resilience for all, or it risks creating further divergence in the heterogeneous landscape of European member states and regions.

More flexibility for national governments

State support measures in the EU are mainly directed towards funding research and development, in particular through the Important Projects of Common European Interest (IPCEIs). The Green Deal Industrial Plan now aims at scaling up industrial production and manufacturing capacities. The details of the plan are still to be finalized, but the main channels through which the commission aspires to enhance clean technology investments are:

1. Acceleration: Speeding up investment for critical clean technologies through facilitated access to funding in form of faster permits, less bureaucracy, and streamlined application procedures.
2. Flexibilization: The proposed rules will provide member states with more flexibility for financial support measures – in the form of subsidies and tax incentives – directed towards the manufacturing of clean technology products.

The GDIP’s focus on a flexibilization of national subsidies and tax incentives is a victory for the industry champions among member states. The primarily peripheral member states, however, were not particularly thrilled – citing concerns of single-market distortions, as they possess much less financial firepower to nurture their own industry. The anger over Germany’s 200 billion subsidy solo-run to stabilize its energy sector has still not eased, and fear is that continued German industry support could not be matched by other member states.

Additionally, and to offset possible distortionary effects of the uneven capacities for national state aid, Commission President von der Leyen has announced the establishment of a European Sovereignty Fund. However, EU leaders and the EU Commission are still haggling over how to design and – most importantly – finance the fund.

Levelling the EU playing field is imperative for a successful industrial strategy

Public investment in green emerging sectors can create jobs, increase productivity, and stimulate innovation while simultaneously advancing the net-zero transformation. But a coherent industrial strategy for Europe would need to create a framework for inclusive economic growth to ensure that all member states and regions can participate and benefit from the green industrial transition. Therefore, it is crucial that the GDIP avoids the fragmentation of the single market and protects cohesion between member states and regions.

To ensure the “do no harm to cohesion” principle, certain strategic projects – that take place in regions where Gross Domestic Product per capita is below 75% EU average or that involve multiple member states – will be eligible for higher industry support. This allows for matching the level of subsidies or tax breaks for companies provided by third countries, such as the USA or China. Notwithstanding, the concerns regarding possible single-market fragmentation should not be taken lightly.

Experience with the previous Temporary Crisis Framework, established in response to the war on Ukraine and subsequent energy crisis, shows that Germany and France – who already account for 38% of the EU’s industrial production – together made use of more than two-thirds of the state aid relaxations granted under the TCF (figure 1).

Economically lagging countries, on the other hand, made much less use of state aid opportunities, even though debt limits were suspended during that period. Now with the Commission insisting on a return to fiscal deficit limits as of 2024, it remains unclear how the financially more disadvantaged member states should carry out large-scale industrial spending while simultaneously having to return to tighter budget discipline in the foreseeable future.

With these severely uneven capacities for utilizing the extra financial wiggle room, it is vital that the GDIP becomes embedded into the broader industrial framework. The EU’s efforts for an industrial strategy to promote the green transition are commendable and necessary, but the current plan is still far from ideal.

The EU must now avoid going ahead with a half-hearted compromise and thus find a balanced approach toward an industrial strategy that recognizes the heterogeneous economic reality of member states. Sacrificing convergence for the sake of external competitiveness could not only jeopardize the fight against climate change but could also put at risk internal stability.

While the clean-tech investment gap in the EU is glaring in comparison with the US, internal imbalances are also apparent. On a general note, only Croatia and Sweden were able to match per capita clean-tech investments of the US in 2022, but investment-levels differ significantly per member state as well (figure 2).

And further imbalances prevail in the green industrial capabilities of member states, which is rendering some less prepared for the green industrial transition and thus more vulnerable to falling further behind in a possible race to the top to produce clean technologies.

Diverging paths in the historical evolution of the EU’s industrial base have left its members in different positions concerning their ability to reap the benefits from the green industrial transition. As upgrading on related technological value chains is strongly dependent on pre-existing industrial capabilities, a coherent green industrial plan can thus not be blind regarding technological lock-ins and different patterns of economic specialisation.

Where there are no or little productive capabilities and related skills for manufacturing of clean technologies, subsidies would need to stimulate tremendous leapfrogging to build up a competitive green industry. Chances are that subsidy flexibilization would rather benefit those that possess the know-how and financial means to effectively make use of enhanced state support regulations. For others, more comprehensive solutions are required to prevent them from falling behind.

The Green Deal Industrial Plan is an emergency instrument – now, form must follow function

Given the varying levels of financial constraints, industrial capacities, and expertise among member states, loosening state aid rules alone will likely not do the trick in promoting the advancement of lagging regions or countries, and neither will this prevent the further concentration of green industry hubs in already developed areas. And although the push towards a green industrial strategy was certainly the right move – given the global competitive pressures and the urgency of climate change – the EU has now to figure out a way to reconcile its global competitive ambitions with the structural imbalances that prevail between its members. In this regard, the next crucial step towards a European industrial framework will be the launch of the sovereignty fund.

Yet, the fund is still a conceptual notion at this stage. Major questions remain on who will ultimately have access to the fund and how member states will be able to draw from its resources. Will it support member states in matching subsidies of the IRA for critical technologies or even finance national strategic projects independently? Contrary to the purpose of NextGenerationEU, some – like Economic Commissioner Paolo Gentiloni – suggest the fund be directed towards funding joint European projects rather than supporting weaker member states.

While enhancing common European projects can certainly boost necessary technology developments like hydrogen or solar panels – it could have negative implications for less developed regions, and weaker member states if this would lead to stronger agglomeration of capital and industry in already leading regions.

Further questions remain over the time-extent of such a fund. Is it conceptualized as a new long-term solution that runs concurrently with other strategic programmes in the current Multiannual Financial Framework, such as the different cohesion funds or the Horizon Europe programme?  Or will it be another short-term emergency solution? The recent experiences with the EU’s increasing use of flexible financial instruments point to the latter.

What is causing the most anxiety among decision-makers is likely the question of how this fund will ultimately be financed. Even though the success of NextGenerationEU has shown that large-scale common debt-funded programmes can work in the EU, the honeymoon phase with joint borrowing has now eased against the backdrop of bloated public budgets stemming from the efforts to combat the recent energy crisis.

The traditionally frugal member states are wary of further joint borrowing rounds, and for now, this option seems off the table. Rather, it appears that the Commission and EU leaders are keen on further shuffling around the unused money from the Recovery and Resilience Plans, REPowerEU, and cohesion funds, a method already relied upon in response to the energy crisis.

This flexible approach to finance has proven effective in making use of the EU’s limited fiscal capacity. But against the backdrop of an intensifying global competition for shares in the clean technology value chains, the EU will likely have to figure out a more long-term and predictable approach to finance the industrial transition.

Questions concerning the size, scope and finance of the fund will need to be cleared sooner than later. In any event, the ultimate decision on the details of the sovereignty fund will prove to be a major touchstone for a coherent strategy of a long-term and sustainable Green Deal Industrial Plan that creates a more diverse and resilient EU economy and does not risk further division going ahead.

About the author

Lucas Resende Carvalho is a Junior Project Manager at the Bertelsmann Stiftung in the Europe’s Future Program.

Read more on the EU’s path to a green economy

Europe and the IRA: How a Green Subsidy Race Could Both Help and Hurt

Green Partnership Agreements – How They Advance the EU Green Deal and Strengthen EU Relations with its Southern Neighborhood

Climate Protection and Industry Support – Why the EU’s CBAM is not Sufficient

Digital and Green Transition Threatens to Widen the Gap between EU Regions

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