Home PublicationsCommentary The EU’s Industrial Policy Requires the Right Strategy

The EU’s Industrial Policy Requires the Right Strategy

by Eline Chivot
Thierry Breton

There has been a series of calls from Paris and Berlin to rethink the European Union’s industrial policy, including easing competition rules to facilitate mergers and increasing investment to develop new technologies such as artificial intelligence (AI) and electric mobility. European Commission President-elect Ursula von der Leyen joins these calls to enhance European “technological sovereignty,” and policy officials are circulating ideas to forge high-tech European champions.

Getting the EU’s industrial policy right is critical, as the EU’s high-value-added industries are facing severe competition. But the United States is not the real threat to Europe’s industrial base: China is. The United States does boast many leading IT companies, but both European and U.S. firms are subject to similar laws and do not receive massive government subsidies. Chinese firms have no such limitations and are backed by a government intent on taking global market share in every advanced technology industry.

Getting the strategy right will require five key steps.

First, the strategy should not focus on winning already-established tech verticals like Internet search, social media, and cloud infrastructure. For better or worse, those games are over, and Europe lost. Rather than waste limited resources on lost causes, the EU should focus on the industries of the future where it has a good chance of gaining a lead—such as AI, robotics, electric vehicles, and advanced industrial equipment.

Second, the EU should remove obstacles to an EU-wide digital market. Although the number of European AI startups has tripled over the past three years, they are half as likely to develop into “unicorns”—firms valued over more than €1 billion—than startups in the United States. EU policymakers need to complete all remaining policy files for the digital single market and ensure their uniform implementation across all member states, which will create a larger domestic market for European entrepreneurs and foster cross-border trade.

Third, the EU should reform its competition policy, which remains stuck in the mid-20th century when there was little international economic competition and it could afford to bludgeon firms that got too big. EU member states should now recognize the importance of scale in the digital economy: Network effects are responsible for 70 percent of the value created by technology companies since 1994. Instead of politicizing competition policy through internal feuds over high-stake mergers, EU policymakers should adopt concrete measures for European businesses to compete with rivals which do not abide by free trade rules, such as Chinese firms. This does not mean open arms to every merger; it does mean recognizing that, in the absence of massive state support to innovation leaders, EU firms will need scale to compete against Chinese firms. As long as layers of regulations, fragmented resources, outdated competition policy, and the lack of a unified policy ecosystem stand in the way, an industrial strategy for the EU will remain an engine without thrust.

Fourth, EU policymakers should adapt the EU’s regulatory standards to future technologies.

A recent report by Dutch scientific research institute TNO suggests that digital B2B industrial platforms are a market where the EU can still achieve leadership given its strong manufacturing, energy automation, and robotic sectors. For instance, Europe is home to five of the world’s nine most modern manufacturing sites. But to ensure long-term success, European businesses will need access to data. Indeed, the value of these platforms is based on data sharing and data processing, which the General Data Protection Regulation (GDPR) limits. Moreover, these firms will also need to build their core business models around AI. While the EU has established some policies to promote data sharing from the public sector and non-personal data, they are not enough—it still needs to reduce the barriers created to AI by reforming the GDPR.

Fifth, the EU can and should back its industrial strategy with significant public funding for innovation and talent development. This is one area where they EU has real advantages over the United States, which is unlikely to make needed investments because of its free-market ideology and large budget deficits. The Commission is aware of the strategic importance of this: Its Horizon Europe program for 2021-2027 aims to increase spending for research and investment and funding for industrial platforms, and to form a European Innovation Council that ensures Europe produces more tech companies. Unfortunately, the budget has yet to receive support from member states.

The right strategic goals, coupled with the right focus—including a unified digital market, reformed competition policies, broader access to data, increased investment, and a focus on emerging technologies—will position the EU for competitive advantages and increased opportunities in the digital economy.

Image credit: Wikimedia Commons

You may also like

Show Buttons
Hide Buttons