SPECIAL REPORT / Innovative technologies will form the core of a new industrial policy that the European Commission will put forward next month. But its success relies on a sharp increase of the EU's budget, which will be a hard sell for cash-strapped EU nations struggling to contain their budget deficits.

The EU executive’s proposed “priority action lines” for innovative technologies – including clean production manufacturing, electric cars, key enabling technologies and smart energy grids – require a massive increase in the EU's budget for research and development.

The European Commission wants to see research funds boosted to €80 billion in the EU's next seven-year budget (2014-2020).

By its own admission, the Commission's renewed focus on innovation is based on past failure. In recent years, Europe has witnessed the production of emerging industries like solar photovoltaic cells move elsewhere.

“Although the EU solar panel market makes up some 77% of the world market for photovoltaic energy and over 30% of the relevant patents are European, only 13% of the production of solar cells is in Europe,” the Commission admits in its draft communication on industrial policy, to be published on 10 October.

“The situation is worse in lithium batteries where the European firms hold over 30% of the relevant patents and 0% of the world production,” it adds.

Innovation is safest route for Europe

Policymakers' focus on innovation is as pragmatic as aspirational. With relatively high labour and energy costs, and high indirect taxation, Europe needs to find technologically sophisticated markets to maintain its market share, and boost productivity in these sectors.

A consultation exercise carried out by the Commission before formulating the new communication showed that one of the biggest hindrances to the European development of innovative technologies was “uncertainty regarding the future evolution of new markets” which has the chilling effect of “denting confidence and holding back investments”.

Hence the focus of the strategy paper on six sectors including wholly new industries – such as 3D printing – and existing markets, such as electric cars and smart grids.

What the initiative will actually add up to is less clear, however. The Commission is advocating increasing standardisation, better linking complementary industries (smart grids and electric cars, for example), and creating task forces to break through the policymaking silos that have hindered such efforts in the past.

It’s mostly about the money

Key to the success to any policy will be funding, as the paper makes clear.

“Public-private partnerships can provide the funding for such initiatives in the framework of 'Horizon 2020' [the Commission's proposed research programme for 2014-2020]. Risk capital funding from private sources as well as cohesion policy and European Investment Bank instruments can also be utilised,” it says.

The draft Horizon 2020 research framework programme does indeed chime with the aims of the industrial policy: it too stresses increasing the budgets for innovative and key enabling technologies, promoting ‘clusters’ of companies, and offering innovative industries less bureaucratic access to EU funds.

One clear drawback is that Horizon remains – with the rest of the EU budget – subject to political negotiations.

The European Commission and Parliament want to see research funds boosted to €80 billion in the next seven-year budget, called the multi-annual financial framework, or MFF in EU jargon.

Budget talks will affect outcome for innovative industries

That figure, along with an increase in regional funds, is reflected in the Commission’s proposal for an overall budget of some €1 trillion.

This is contested by the purse-holding member states, which argue that increased spending is not tenable and want a real freeze in the size of the budget, which would carve €100 billion from that figure, imperilling the Commission's grand ambitions on research.

So the value of the new Industrial strategy will depend to some extent on the outcome of the broader budget debate.

On the uncosted issues, such as cutting red tape, the EU will need to demonstrate a will to deliver more than words. Whilst on structural issues, business will welcome attempts to break silos and create new partnerships, but warily.

“Vertical structures to such as innovation partnerships might help to make innovation policy more coherent, but business should have a place in these structures,” warned Orgalime, the European Engineering Industries Association, in its response to the consultation.