Why the EU needs an industrial strategy

The European Commission’s plans to be ‘geopolitical’ remain ill-defined. It is unclear what kind of strategy or instruments Ursula Von der Leyen had in mind when she discussed that vision in a 2019 speech as president-elect. As a former minister of defence, she may have regarded military capacity as important. However, given that the European Union’s greatest strength is its economy, the Commission needs to develop an industrial strategy if it is to fulfil its geopolitical ambitions.

There have long been major deficiencies in the EU’s industrial development. The bloc missed one of the key targets it set out in 2000 in the Lisbon Strategy: to become “the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth and better jobs and greater social cohesion.” Even before the 2008 financial crisis severely damaged the European economy, it was clear that the bloc would not achieve this goal.

Competition and free markets are important ingredients of any successful economic strategy. But the EU will require more than just this to enhance its global economic power – especially at a time when some of its main competitors benefit from both free markets and decisive political interventions in the economy.

While the EU has in recent years made important progress in fighting unfair competition, it continues to be ideologically opposed to an active industrial strategy. As discussions of the EU budget show, the European Council has never prioritised research and development. On the contrary, the Council has often tried to cut the relevant parts of the budget that were proposed by the Commission and supported by the European Parliament. Yet strong investment in research and development lies at the heart of any industrial strategy.

The European Commission is slowly abandoning its traditional opposition to an active industrial strategy. This follows from its identification of strategic dependencies in areas such as the raw and processed materials that are vital to the decarbonisation of European industry (including cobalt, lithium, and molybdenum). Another group of dependencies concerns healthcare, as revealed during the pandemic. And the Commission states that “the EU has been gradually losing leadership in many technologies in terms of its share in worldwide patent applications”.

Of course, the EU cannot lead in all sectors of industry and research. Furthermore, some of these dependencies are mutual. But when the EU is dependent on external suppliers for its green and digital transitions, and for protecting its citizens’ health, it is in a weak geopolitical position. The bloc may have great geopolitical ambitions, but it currently lacks the means to fulfil them.

Surprisingly, none of the EU’s official documents explains why the development of an industrial strategy is crucial to the geopolitical goal of keeping authoritarian states at bay. An economically weakened EU would open the door for Russia and China to increase their political influence. This problem has been especially evident in China’s activities in south-eastern Europe and in Africa – not least after the EU proved unable to fulfil its commitments on vaccine deliveries to these regions. Sanctions may be a necessary instrument for expressing moral indignation, but they are no substitute for the robust industrial and research policies that would allow the EU to truly compete with authoritarian states.

As discussions of the EU budget show, the European Council has never prioritised research and development

At the core of the EU’s industrial strategy should be strong incentives to establish or maintain a leading position in as many economic areas as possible. The bloc also needs to plan how to train a workforce capable of implementing the digital and green transitions. The EU should not only secure access to critical research and production capabilities but should also be willing to use these resources to compete with other powers. The pandemic has shown how China, Russia, and even the United States are willing to use such resources in a way that can threaten Europe. The US executive order Ensuring Access to United States Government COVID-19 Vaccines – which was geopolitically motivated – is one well-known example of this.

Like the US, the United Kingdom has mobilised vaccination resources much better than the EU through government intervention in the economy.

All this shows why the EU should create a legal framework for a strong industrial strategy. The framework should include rules for public procurement policies that would give preferential treatment to EU products and services in critical areas. And it should also create mechanisms to mobilise such resources in crises such as a pandemic – even if it does so on a more democratic basis than the executive orders of US presidents.