There Can Be No Business as Usual for European Industry

2 months ago
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BRUSSELS – A month before the European Parliament elections, many of Europe’s industries are fighting to survive. But rather than make the difficult decisions needed to reverse the European Union’s industrial decline, leaders have often settled for the status quo. Some populist leaders even oppose plans to modernize Europe’s industrial base – effectively deceiving the public in the process.

Europe’s manufacturing sector has faced a series of unprecedented challenges in recent years. The COVID-19 pandemic and the Ukraine war laid bare Europe’s reliance on others for critical goods and dealt serious blows to manufacturing by disrupting supply chains and triggering energy and cost-of-living crises.

The embrace of short-termism by corporations – reflected in their preference for dividends and share buybacks over reinvestment of profits – has further undermined the EU manufacturing sector’s dynamism and resilience. Compounding all these challenges is the biggest crisis of them all – climate change – which is generating rapidly increasing financial and human costs.

The impact on European industry is already apparent. In 2022, the EU’s trade deficit reached a staggering €432 billion ($465 billion), driven by both higher spending on energy imports and manufacturing losses linked to the energy crisis. In February 2024, industrial production fell by 6.4% in the euro area and by 5.4% in the EU year on year.

Unless the EU reverses its industrial decline, Europeans could end up without industries that have, for decades, provided quality jobs to countless workers, who gained not only economic security, but also a sense of purpose, community, and identity. And it is not at all clear how that void would be filled.

The world’s other major economic powers are already committed to industrial modernization. Two decades of aggressive industrial strategy have given China a dominant position in most of the clean-technology supply chains. Recently, the United States has responded with an industrial policy of its own, the CHIPS and Science Act and the Inflation Reduction Act (IRA). If European industries are to remain competitive in this environment – and if Europe is to achieve its goal of “strategic autonomy” – the EU will have to follow suit.

The good news is that we already have a roadmap for sustainable industrial modernization: the European Green Deal, a wide-ranging set of policies aimed at transforming the EU into a modern, resource-efficient, and competitive economy. Unfortunately, it hardly represents an easy fix, and we are a long way from delivering on it. To get there, European policymakers will have to deliver unprecedented levels of investment fast and ensure that industries and workers in all member states are included.

The Green Deal’s investment demands are considerable. With electricity consumption projected to rise by around 60% by 2030, the European Commission estimates that €584 billion will be needed this decade to modernize our grid alone. This calls for a comprehensive EU-wide investment strategy that both sustains existing heavy industry and incentivizes clean-tech innovation.

For nearly 20 years, the EU has favored the emissions-trading “stick” over carrots, or positive incentives for decarbonization. To be sure, the European Emissions Trading System – which effectively establishes a carbon price by forcing companies to acquire enough permits, or “allowances,” to cover their carbon dioxide emissions – has helped to curb emissions from electricity generation. But it has also increased pressure on European industry’s competitiveness – pressure that the IRA is now compounding.

Europe has attempted to ease that pressure through carbon border taxes and foreign subsidy regulation. But these are partial measures. EU leaders must go much further, devising a broader industrial strategy that both addresses investment shortfalls and mitigates the risks associated with the production of more expensive net-zero goods in a fiercely competitive global market.

Unfortunately, the EU’s new fiscal rules – agreed by the European Parliament and Council in February – will undermine the bloc’s ability to invest in green technology and industrial upgrading, and deepen disparities among member states. According to research by the European Trade Union Confederation, only three countries (Denmark, Ireland, and Sweden) can meet their social- and green-investment needs under the EU’s new fiscal rules. To bridge the gap across the rest of the EU, an additional €300-420 billion annually will be needed. If that funding is not delivered, the EU’s internal market risks fragmentation, which would accelerate deindustrialization.

Moreover, support for working communities – provided through strong social conditionalities on all public-funding, public-procurement, and lead-market initiatives – is needed to boost economic growth, create jobs, and protect the environment, all of which is essential to win public trust. Exceptional times demand innovative solutions, not more of the same failed policies. Approaches like austerity, labor-market flexibilization, and privatization will only exacerbate the problems we face.

Similarly, short-sighted populism is no substitute for the holistic industrial strategy Europe needs to match those of its competitors – an approach that accounts for all dimensions of the challenges ahead. For example, a one-dimensional focus on strict environmental criteria risks producing unaffordable green products, which would stall progress in electric vehicles and other critical industries.

The choices we make in the coming years will determine whether European industry – integral to the EU’s social fabric – has a long-term future. That is why the next European Parliament must make implementing a renewed European Green Deal, complemented by initiatives to bolster industry and attract broad public support, a top priority.…Read more by Judith Kirton-Darling

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