Although industrial policy has not always played a leading role, it has always been an important component of German and European economic policy. Today it is at the core of policy debates as in March 2020, the European Commission will adopt an EU industrial strategy

The last two posts in our series “The Future of European and German Industrial Policy” focussed on the industrial policy stance of the US  and China, including a discussion of their strengths and weaknesses in respect to innovation facilitation. In this post, we will have a look at the European and German approaches.

The industrial sector plays an essential role in the European Single Market. It produces about 80 percent of EU exports and provides over 30 million jobs. In Germany, it has even more weight. The manufacturing industry provides around 6.3 million jobs, a turnover of almost 1,900 billion euros, and thus 27.6 percent of Germany’s gross value added. With a share of 86 percent, it is also the core of Germany’s export strength. Given this importance, what stance do the EU and Germany have towards industrial policy, and which factors challenge European and German innovation capacity?

The European Industrial Policy Approach

European industrial policy is primarily geared towards prerequisites for competitiveness in accordance with Article 173 TFEU:

  • to facilitate the adaptation of industry to structural changes, to promote an environment favorable to initiative and
  • to the development of undertakings, particularly small and medium-sized undertakings, throughout the Union,
  • to promote a favorable environment for cooperation between undertakings, and
  • to support better exploitation of the industrial potential of innovation, research, and technological development policies.

In their Lisbon Strategy, the European Commission in 2005 called for the development of a more integrated approach to industrial policy:

  • Making Europe more attractive to investors and workers.
  • Placing knowledge and innovation at the heart of European growth.
  • Developing strategies to enable businesses to create more and better jobs.

The European Commission publishes communications with priority action lines and work programs at irregular intervals. These particularly focus on far-reaching structural reforms and better-coordinated policy measures in the member states, sectors with high innovation potential, and the promotion of the manufacturing sector.

Therefore, European industrial policy now has a clear strategic component. The focus on maintaining competitiveness and promoting future technologies is much stronger than in the past. This is also shown by the renewed EU Industrial Policy Strategy, which the Commission published in September 2017. The strategy focusses on:

  • Strengthening cybersecurity
  • Free cross-border traffic of non-personal data
  • New measures for recycling management
  • Security of supply with critical raw materials
  • New proposals for clean, competitive, and connected mobility
  • Modernization of the legal framework for intellectual property rights
  • Improvement of public procurement in the EU
  • Extending the Skills Agenda to new key industry sectors (e.g., green technologies and renewable energy, steel, manufacturing)
  • Initiatives for a balanced and progressive trade policy and a European framework for screening foreign direct investments

In recent years, the growing tension between the US and China has led to calls for a more targeted EU industrial policy by some member states. In this respect, Germany and France made a first proposal in February 2019 with their Franco-German Manifesto for a European Industrial Policy Fit for the 21st Century.

The German Industrial Policy Approach

Germany has been historically reluctant to actively pursue industrial policy. However, on several occasions, the state has actively intervened in the economy. These interventions targeted support of specific sectors (e.g., mining) and even companies (e.g., BMW rescue in the 1960s), but also the promotion of high-tech areas in response to the rise of new global competitors such as Japan and South Korea and their active industrial policy stances.  In recent years German reunification at the beginning of the 1990s and the global financial crisis of 2008/2009 led to distinct industrial policy measures.

Today, in Germany and in the  EU, there is significant attention being paid to industrial policy. The Bündnis Zukunft der Industrie launched in 2014 brings together industrial and employer associations as well as trade unions  establishing five working groups to develop appropriate policy actions in the following areas:

  • WG 1: Acceptance – attractive Industry:

How can existing prejudices against industry be reduced among the population, and how can its importance for Germany’s prosperity be communicated?

  • WG 2: Investment-strong industry:

How can the German framework conditions for private and public investments be improved?

  • WG 3: Future of work in industry and industry-related services:

How can the skilled workforce be secured in times of digitalization and demographic change, and how must the technological change be shaped so that opportunities can be exploited, and risks minimized in the working world of the future?

  • WG 4: Value creation structures of the future:

What are the risks and opportunities of digitization for Germany?

  • WG 5: International competitiveness of German industry:

How can the German and European framework conditions be improved to strengthen the international competitiveness of the industry?

Six concrete guidelines and demands are the Alliance’s first results:

  1. Strengthening global competitiveness through innovation and investment
  2. Creating an energy union and exploiting potential for energy efficiency
  3. Achieving global commitment for climate policy
  4. Setting a sustainable framework for a successful European automotive industry
  5. Shaping the way to a digital European Single Market
  6. Shaping EU-China trade relations

There seems to be a fundamental consensus by government, trade unions, and associations in Germany that a strategic overarching industrial policy can be a useful instrument for strengthening Germany’s international competitiveness. This led to the publication of the Nationale Industriestrategie 2030 in February 2019, followed by the revised version Industriestrategie 2030  at the end of November 2019  designating three central industrial policy tenets to:

  1. Improve national and international framework conditions for the industry
  2. Activate innovation potential and strengthening key technologies
  3. Protect Germany’s technological sovereignty

Given the importance of an economy’s ability to innovate in the Fourth Industrial Revolution age, the second field of action, “Activate innovation potential and strengthening key technologies,” seems particularly central to our discussion.

Challenges to the EU and Germany: Decreasing Innovation Capacity

Productivity gains are the most important prerequisite for long-term real economic growth. The measure usually used for productivity, the so-called “total factor productivity” (TFP), is an indicator of the technological progress of economies. It describes which part of economic growth is not attributable to an increase in the capital stock and the higher number of employed persons. In short, it is a measure of the efficiency and degree of innovation in the economy.

EU countries – measured in macroeconomic terms – have lost innovative strength over the years: TFP growth was just below three percent in the 1960s but has now stagnated. On the contrary, other economies have shown higher growth rates in technological progress. In China, for example, TFP growth averaged almost three percent between 2011 and 2016, and even 3.5 percent in 2017  (even if a catch-up effect is likely to have played a role.)

graph productivity growth

International competition for patents and innovations

With information and communication technology becoming increasingly important, a large number of new and rapidly growing companies have become active through patent applications. This is also evident from patent applications filed with the European Patent Office. Among the top ten companies with the most patent applications, the majority come from outside the EU.

graph patent applications

Weakness in growth industries

Europe’s market growth in high-tech industries (3D printing, AI, semiconductors) is comparably low. These markets are becoming increasingly important in the context of the networked industry. As cross-sectional technologies, however, it is above all those industries of the future that have considerable potential for higher labor productivity.

Lack of risk capital and start-up support

Despite intensive efforts to improve the start-up culture and to promote growth companies more strongly, EU countries still lag far behind the USA, Canada, Israel, and South Korea. Proportionate spending on venture capital as a percentage of GDP is highest in Israel, the USA, and Canada. It is clear that EU countries still have enormous catch-up potential here as well.

Skills shortages due to demography and inefficient talent allocation   

Human capital is an important driver of innovation. Companies around the world are faced with the challenge of finding suitable personnel for increasingly complex tasks. Specific challenges for the EU and Germany arise in particular from demographic change and less successful talent matching

A last word

Germany and the EU have a renewed interest in industrial policy. Facing external pressures, it is of central importance to improve innovation capacity in fields where they are lagging. Some ideas for improvement can be drawn from the USA and China as we discussed in previous blog posts.