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The European Union and its member states have discovered a new passion for industrial policy. However, not all ideas are actually in the interests of industry - some may even endanger small and medium-sized industrial companies.

By Eike Radszuhn

Emmanuel Macron has a vision for the European Union - and promoting global industrial champions located in Europe is a key part of it. A couple of days ago, the French president came forward with a letter to European citizens, outlining his ideas for a "renewal" of Europe. Macron's letter, published by newspapers in all 28 EU member states, called for a relaxation of EU competition policy and preferential treatment for European companies in public procurement in strategic industries. In addition, Macron concluded, Europe should penalize or ban business that would compromise the "strategic interests and fundamental values" of the European Union.

Macron is not the only European leader to believe that an active European industrial policy will be essential in responding to globalization and increasing competition from China. German Chancellor Angela Merkel also recently urged business leaders to "cooperate very closely" with EU politicians in creating a strategy for the bloc's industrial sector. The EU and especially Germany need to overcome the traditional gap between companies and state officials, she argued. "We cannot just keep going with the [policies] we developed 10, 20 years ago."

Size is (not) everything

Both examples clearly show the rising interest in industrial policy in the run-up to the European elections in May. However, there is some debate about whether this development is actually in the interests of industry.

Firstly, both Macron and Merkel pursue a rather state-driven approach to industrial policy - but the question of whether politicians should pick winners (and losers) in European industry, or whether this should be left to free competition, is debatable. Secondly, the proposals on the table aim (among other things) to create European champions to compete with Chinese state corporations on the global market. One could argue that this plan neglects the interests of the small and medium-sized companies that form the backbone of European industry today.

VDMA has been rather skeptical of the ideas out forward by the French and German leaders. "State intervention is not yet an industrial policy," warned VDMA's Managing Director Thilo Brodtmann. Policies should focus on creating a good business environment, for example by strengthening the internal market, competitive tax policy, or investment in infrastructure and education. On the other hand, the Association acknowledges that global competition and the rise of China require a European response. "Europe must not be naïve," said Brodtmann. "The goal must be to create a level playing field" with competitors from Asia and elsewhere.

Europe must not forget the Mittelstand

When discussing state-driven industrial policy, politicians often refer to the European aircraft company Airbus, which essentially splits the world market for commercial planes with the even larger American company Boeing. However, many hidden champions of the European mechanical engineering industry are proof that size is not the only factor in success on the world market. Capacity to innovate is also crucial, as the Kiel Institute for the World Economy stressed in a recent publication.

Critics of an active industrial policy argue that state intervention would endanger this strength of European industry, since a strategic plan for industry would mainly favor large businesses. As a consequence, some experts argue, European champions would become too powerful on the EU domestic market and put pressure on smaller companies, especially those with a direct business relationship as clients or suppliers.

A start has been made

Despite these concerns, the EU and its member states have already begun shifting towards a more active industrial policy. Earlier this year, the EU finalized plans that allow the European Commission to screen foreign direct investments in companies in the defense industry and acquisitions in strategic industries. This includes technologies such as artificial intelligence and robotics, making it relevant to the mechanical engineering industry.

The European Commission is also investigating how the EU could boost its capacity in technologies they regard as promising, such as e-mobility. One idea is to promote European production of battery cells. However, critics argue that such a policy would focus too much on electromobility at the expense of other technologies.

Other possible steps are also in the pipeline. One advocated by both Merkel and Macron is a reform of European competition law, for instance to assess market concentration of single companies by looking not only at the European market, but also at the world market. A second initiative might be to provide financial support for specific technologies, for example through the coming European research program Horizon Europe or the European Fund for Strategic Investments (EFSI).

Despite these positive developments, the EU Commission recently also set a counter example by blocking the planned merger of the two train manufacturers Alstom and Siemens due to competition regulations. If the trend towards active industrial policy in Europe continues, similar cases may have different outcomes in future.

Further information

VDMA European Office

Eike Radszuhn, VDMA European Office.