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Putting industrial policy at the top of the next Commission’s priority list

Industrial policy / COMMENTARY
Johan Bjerkem

Date: 01/04/2019

In the past few months, France and Germany have been vocal on the need for a gear change in European industrial policy, pushing to place it at the very top of the EU’s agenda. The last European Council conclusions called on the Commission to present “a long-term vision for the EU’s industrial future, with concrete measures” by the end of 2019. This is a (somewhat late) step in the right direction and should provide the next Commission with the necessary impetus to develop a comprehensive industrial strategy for Europe. With European industry increasingly facing fierce, and sometimes distorted, competition, having to adapt to a transformative technological revolution, as well as simultaneously aiming towards net-zero emissions by 2050, there is little time to lose. There clearly is a need for action at the EU level: member states going ahead on their own will not only be ineffective, it also risks fragmenting the single market and the EU’s common commercial policy.

European action – but in what shape and form?

Currently, much of the debate focuses on whether the EU should review state aid and merger rules with a view to adjusting to global rather than national markets. The recent German draft industrial strategy for 2030 includes reforming EU competition rules to better allow for European champions to take on competition from China and the US. It was quickly followed by the Franco-German ‘Manifesto’ on industry, with much of the same language.

But there are concerns that such an approach would hamper the single market, which is dependent on competition. In the case of the proposed merger of Siemens and Alstom, Competition Commissioner Margrethe Vestager argued that it would harm consumers and competition in Europe. Vestager has outlined her own vision for an industrial strategy for “all of Europe”, noting that it can “work hand in hand with competition policy”.

In any case, the focus on ‘critical mass’, in the form of creating large national or European champions, is misplaced. More attention should be paid to assessing whether a merger or particular policy actions facilitate investment and innovation. When competing with China and the US, larger European firms will not do better by just being big and defending market positions if they are unable to innovate.

Industry and the single market: two sides of the same coin

Over the years, the Commission and Council have made innumerable calls to ‘complete the single market’, with little impact. However, these calls are increasingly falling on deaf ears, and there is a reluctance among some member states to further integrate the single market. Still, the latter is the foundation upon which a future-oriented EU industrial policy should be built. There is a need to find a new narrative for making progress on the single market, and the current debate on EU industry might offer one.

Manufacturing and services are more and more intertwined, even more so with the digitalisation of industry. However, while the single market has reduced trading costs for goods by 20%, the trading cost for services only went down by 7%. This means a lot can be achieved by better enforcing the rules that are already in place. A full implementation of the Services Directive could boost the EU’s GDP by 2%. If the goal of an EU industry policy is to boost competitiveness, services cannot be left behind.

Moreover, the single market is also key in establishing European value chains and making sure that European companies are well equipped to take part in global ones. The revival of protectionist strategies by third countries are already impacting European players embedded in global value chains. A functioning market at home remains a prerequisite for European firms to be successful globally. The European Battery Alliance, for instance, aims to put in place a strategic value chain for sustainable battery cells, but its success will depend largely on a well-functioning single market.

A more strategic approach

What is certain is that a new EU approach to industry will require more strategic thinking on how to promote industrial competitiveness more effectively. Europe’s open market to trade and FDI is one of its greatest assets, but Europe cannot remain naïve in granting access to foreign industry that does not play by the same rules. In levelling the playing field, the EU needs to find new instruments in enforcing reciprocity and equal market access. It should start with the following actions:

  • The International Procurement Instrument (IPI) should be adopted as soon as possible. The IPI is a tool that should improve European industries’ access to public contracts in third countries. Still not adopted by member states, the instrument would allow leveraging reciprocal market access by restricting the access to European public markets for third countries if necessary.
  • The Important Projects of Common European Interest (IPCEI) framework should be reviewed and used much more actively in delivering targeted support for the development of new technologies and sustainable industries. So far, the IPCEI seems to have been completely underutilised: there is only one project under the framework at the moment, on microelectronics.
  • The adoption of new rules on the screening of foreign direct investments is a step in the right direction, but beyond facilitating the exchange of information and the Commission issuing opinions, the Commission and member states should agree on more stringent, binding measures in cases where FDI might represent an external threat.
  • At home, more should be done to improve market enforcement and surveillance. On the one hand, the Commission could be bolder in referring cases to the European Court of Justice. If the politicisation of the Commission continues, one possibility could be to establish a separate and independent competition authority to play a more impartial role in referring cases to the ECJ.

The EU member states and the next Commission will have to take decisive steps if the transition towards a more sustainable, innovative, digital and competitive European industry is to succeed. EU competitors will not stand by and wait for Europe to get its act together. There is now a political window of opportunity that should be used. It might be the last chance for much of EU industry.

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