Europe’s industrial policy will need to be upgraded to ensure resilience, competitiveness and compatibility with the bloc’s climate targets. Governments should focus on innovation, the green transition, and cooperation for a smart industrial policy, write Simone Tagliapetra and Reinhilde Veugelers.
Simone Tagliapietra and Reinhilde Veugelers are Senior Fellows at Bruegel think tank.
A spectre is haunting Europe–the spectre of industrial policy. Discussions about the economic and security challenges posed by China’s emergence as a global economic power mirror the unease felt by European governments in the 1970 and 1980s about the technological leadership of the United States and Japan.
Old industrial policy questions are rapidly re-emerging, yet with a new level of complexity because of the urgent need to move forward with the green transition.
In a globalised world grappling with the impacts of climate change, industrial policy needs to address multiple objectives, including global decarbonisation, world competitive economic value and job creation, and strategic autonomy.
When these objectives conflict, they present policymakers with a challenging trilemma: how to combine decarbonisation with economic growth and jobs and world competitiveness, while also reinforcing resilience and sovereignty/autonomy/security of supply?
What is the best way socio-economically to achieve decarbonisation and resilience? How and how far to go in moving towards sovereignty/autonomy/resilience, and what does this mean in terms of moving away from the traditional economic efficiency paradigm?
How far to move away from a horizontal policy approach to shaping of framework conditions, such as through strong competition policy and open trade? How can resilience be turned into an opportunity to create quality jobs and accelerate, rather than impede, the decarbonisation process?
In a new Bruegel book, we have asked some of the finest minds in economics to tackle some of these difficult questions. In the volume, a consensus emerges on the legitimacy and significance of revitalising industrial policy.
Authors agree that governments have a pivotal role to play in managing the transition from fossil fuels to low-carbon energy systems while addressing social challenges. Leaving the challenges to market forces is not an option in view of the externalities and path dependencies that can slow down or interrupt the course of private actions.
The focus lies on the necessity of a future-proof industrial policy infused with strong ‘green’ elements. The question is what such an industrial policy should look like.
Although the details of such an industrial policy are not yet clearly laid out, there is a consensus in this volume’s chapters that a mix of policy instruments is needed.
Effective industrial policies should recognise the complementary nature of both supply- and demand-side instruments, combining public support with regulatory frameworks, target setting and carbon pricing.
In the contributions, there is a strong consensus that priority should be given areas for support that require innovation capacity building. Authors concur that governments can and should shape technological progress in line with societal needs and should enhance the skills of the workforce.
The objective is to ensure that industrial policies coexist with competition, facilitating structural change and business dynamics. Safeguarding competition and enabling the entry of new firms to challenge less efficient incumbents is crucial.
There is also agreement on the need for more directionality in industrial policymaking.
Ex-ante choices will have to be made about technologies and projects that contribute most to the multidimensional objectives, but which are impeded by market, system and transition failures, even if the risk of selection failures is high.
Managing this risk of government failure calls for a good mix of vertical and horizontal instruments, bottom-up and top-down selection, limiting support in time and the importance of ensuring competition as a level playing field.
Recommendations range from establishing agencies modelled after the United States Defense Advanced Research Projects Agency (DARPA) to conducting complexity analysis of value chains, all with the goal of developing flexible policies that can be evaluated regularly and adjusted accordingly.
The success of industrial policy will be defined ultimately by whether it succeeds in unleashing private-sector investment to meet society’s targets in a globally competitive and resilient manner, putting public-private partnerships at the core of industrial policymaking.
The authors in this volume call for explicit policies and continuous collaboration between firms and governments to establish objectives that promote the creation of ‘good jobs’.
Building coalitions at domestic and international levels, even among countries that may be rivals in other areas, is of paramount importance to navigate the green transition and other transformative processes effectively.
The regional dimension is particularly crucial for a ‘smart industrial policy’, whether focused on green initiatives or not. While some argue that efficiency and a region’s inherent comparative advantage should guide industrial policy, others caution against straying too far from industry economics or regional strengths.
Caution is also advised when pursuing national interests through industrial policy, as this may trigger an international race for subsidies, adversely affecting developing countries and potentially accelerating deglobalisation.
In short, there is agreement on the benefits of an industrial policy that supports international coordination and cooperation, rather than adopting a short-sighted Europe-first approach.