Europe’s re-industrialisation agenda: A green policy U-turn?

Peugeot factory worker

European leaders are in broad agreement over the need to relaunch manufacturing industries. But walking the talk implies trade-offs and a possible u-turn – on climate, and energy policies, in particular – that some warn could put future growth at risk.

The European Commission sought to break with years of inaction on industrial policy when it unveiled a new strategy in 2012, promising a "new industrial revolution".

The strategy's headline goal is to raise industrial activity to 20% of EU gross domestic product by 2020, compared to just over 15% today, taking it back up to pre-crisis levels.

>> Read: Commission seeks 'new industrial revolution'

Europe is a world-leader in many strategic sectors such as engineering, automobiles, aeronautics, space, chemicals and pharmaceuticals, the Commission argues, saying it must build on those strengths to relaunch manufacturing.

Industry still accounts for both 80% of Europe's exports. 80% of private-sector R&D investment also comes from manufacturing, underlining the huge potential of relaunching the economy.

The policy is calling for short-term, focused investment in key industrial sectors with high growth prospects, including clean technologies.

However, activists fear the push to “streamline” industrial concerns in all other policy areas will come at the expense of environmental regulations, and sometimes consumers.

New pillars for industrial policy

Until now, industrial policy initiatives at the European level have been patchy at best, and largely uncoordinated.

Unveiled in September 2012, Europe’s new approach to industrial policy, sets out a goal to increase the industry's share of EU GDP to around 20% by 2020, up from little more than 15% currently.

From a legal standpoint, although the objective is non-binding, it marked a turning point for the Commission, which complemented existing 2020 targets on CO2 emissions, renewable energy and energy efficiency.

Unlike previous industrial policy statements, the initiative also earmarked six “priority action lines”, specific sectors where the Commission proposes immediate action and support. These include:

  • advanced manufacturing technologies for clean production
  • key enabling technologies
  • bio-based products
  • sustainable industrial and construction policy and raw materials
  • clean vehicles and vessels
  • smart grids

Other efforts aim at unlocking the digital single market which is expected to grow by 10% a year up to 2016.

The Commission also wants to improve lending to the real economy by better mobilising and targeting public resources, including those of the European Investment Bank (EIB). This should allocate between €10-15 billion in additional lending for smaller businesses.

“The first action by the European Commission is to put on the table for the first time the money for European re-industrialisation – one hundred billion euros coming from regional funds,” said Antonio Tajani, the Italian commissioner in charge of enterprise and industry at the time.

Other funds available for re-industrialisation include the €40 billion available for innovation and scientific research under the Horizon 2020 programme, which runs until the end of the decade.

Finally, in the area of human capital and skills, the Commission wants to further promote cooperation of employers, workers and relevant authorities through the creation of European Sector Skills Councils and of Knowledge and Sectors Skills Alliances.

A history of failures

The focus on specific sectors represents a departure from the past, by supporting the development of “champions” in key industrial areas.

But it is by no means a guarantee of success. So far, there have been several attempts to launch sector-specific projects at European level, with mixed results.

These include the hapless Galileo satellite navigation system. Controlled under a separate treaty agreement from the EU, it was initiated with heady ideas of a grand public-private partnership, but is now over budget, delayed, and exclusively funded by European taxpayers.

Airbus stands out as the shiniest example of a successful venture. The company owned by the EADS consortium is renowned for displacing Boeing as the world's dominant commercial aircraft manufacturer.

But the record is mixed. Employing around 63,000 people at 16 sites across France, Germany, the United Kingdom and Spain, the company has also suffered management disputes and a messy structural overhaul between 2006-2008 that led to strike action and job cuts.

One of the main stumbling blocks has been the absence of a political consensus on what should constitute industrial policy at European level.

Whilst Britain has favoured a free-trade and de-regulation agenda, France has tended to stress a strategy of picking winners, large industrial companies that receive state support to reach the critical mass to succeed. Suspicious of French interventionism, Germany pragmatically chose to support opening up markets for its exporting industries, both in Europe and abroad.

The absence of political consensus between EU member states left the European Commission with a broadly liberal agenda, based on deepening the EU internal market, free-trade, and the enforcement of strict competition and antitrust rules that often prevented government activism in supporting the emergence of European-scale industrial champions.

The EU’s role is further limited by its lack of competence on social and education policies, which are considered a missing link in the EU’s toolbox to address industrial competitiveness.

>> Read: Social issues: The missing link of industrial policy

Environmental policies under the spotlight

One of the rare areas where the Commission does have a mandate to legislate relates to environmental policy provisions of the EU treaties. This led to a flurry of initiatives in this area, some of which had unintended consequences on industrial activity.

The REACH chemicals regulation is one example. Adopted in 2006, REACH required phasing out chemicals which pose an unacceptable threat to human health or the environment, thereby encouraging innovation in safer substances.

But the law also created headaches for industries that use chemicals as a key component of their supply chains. Manufacturing sectors affected include automotive, machinery, aeronautics and electronics – all heavy users of chemicals which sometimes cannot be replaced.

The Emissions Trading System (ETS), which limits carbon dioxide emissions from large industrial plants, is another example of environmental policy which has deeply affected manufacturing activity in Europe.

Energy-intensive industrial sectors – such as chemicals and steelmaking – have been particularly vocal in criticising the scheme, saying it pushed up energy prices and undermined their ability to compete against international rivals.

In both cases – REACH and the ETS – the chief accusation is the same: the European Commission has tended to develop environmental laws in isolation, without sufficiently taking industrial activity into account.

"The Commission takes numerous initiatives which are unfortunately not coordinated under an industrial competitiveness heading," said François Gayet, from the French industrial lobby the Cercle de l'Industrie. "And it seems that each Commissioner, each directorate-general, has a tendency to act in his corner."

Gayet singled out the ETS as penalising for European industry, because "it requires our businesses to pay additional taxes while their competitors do not have the same constraints."

German industry too has specifically targeted the poor management of the ETS scheme within the EU executive.

“Investments in power plants and low-carbon technologies need stable and predictable framework conditions in which business solutions can develop. Policy measures as the recently proposed 'set-aside' of CO2 allowances by means of altering the ETS Auctioning Regulation are counterproductive in this regard,” a senior German industrialist told EURACTIV.

Changing political winds

The European Commission took note of these criticisms.

Its new approach to industrial policy, which was further fleshed out in January 2014, proposed mainstreaming industry-related competitiveness concerns across all EU policy areas, including climate and energy policy.

For industry ministers, who debated the proposal in March 2014, this means environmental policies need to be considered in a broader context.

“The political climate is totally different” today than it was before the financial crisis erupted in 2008, said Kostis Hatzidakis, the Greek minister for development and competitiveness who was chairing the ministerial meeting.

“There is a shift towards industrial policy,” Hatzidakis added. “I think all of us have realised the mistakes committed in the past.”

Cheap energy

Underlining the new approach, Antonio Tajani, the EU’s enterprise commissioner, said the Commission proposal for a new ‘industrial renaissance’ for the first time looked at energy policy, climate change, and shale gas “altogether” in a single package, putting them on equal footing.

Cheap energy is at the centre of the EU’s initiative although doubts remain about its ability to deliver. As EU industrial output declined, the US meanwhile has been re-industrialising with the help of a cheap-energy boom from the exploitation of shale gas.

>> Read: EU seeks to tackle industrial decline, high energy costs

Some industry, especially the chemical sector for which gas is a feedstock as well as an energy source, have been relocating investments to the US to take advantage of it.

European leaders acknowledged it would be hard for the EU to match the US shale gas revolution because of different geology, land ownership and environmental concerns. They instead emphasised resource efficiency, although the European Union a whole has failed to meet its own energy-savings goals.

Climate pragmatism

Still, the change of course appears most visible on the climate protection front.

BusinessEurope, the EU employer’s organisation, has successfully lobbied for a greenhouse gas emissions target for 2030 that can be adjusted according to the result of international climate talks, which are expected to conclude in December 2015.

The cautious approach was endorsed by European leaders, who adopted flexible goals for 2030 at their October 2014 summit meeting.

>> Read: EU leaders adopt 'flexible' energy and climate targets for 2030

But for environmentalists, Europe’s renewed focus on competitiveness sounds like a direct attack on green policies. Brook Riley, an activist at Friends of the Earth, says he is worried that “industry” has won the argument on climate policy.

“There is a similarity of language between what BusinessEurope says on rebalancing climate change” and the messages being given by the Commission and EU member states, Riley told EURACTIV. “They are using the same rhetoric so in itself that is worrying.”

“I think it’s balancing far too much one side over the other.”

The Commission however expressed confidence that both climate and industrial policies could be met at the same time. “This is the political message – it is possible to have an industrial policy with strong engagement against climate change through good work on energy policy,” Tajani said.

Improved governance

To critics, the Commission’s attempt at reconciling climate and re-industrialisation goals bears testimony to its indecision on industrial policy, which also reflects infighting between Commission departments pulling in opposite directions.

Kostis Hatzidakis, the Greek minister who was chairing the March industry ministers’ meeting, said the Commission should avoid a “fragmented approach” to industrial policy, adding that Tajani’s initiatives were “valuable” but insufficient.

“We have some actions concerning industry, some other actions concerning energy, some other actions concerning environment – they have to be coherent, they have to be coordinated in order to have added value,” Hatzidakis said, calling on the new Commission led by Jean-Claude Juncker to go “from theory into action”.

All eyes are now on the new Juncker Commission and its First Vice-President Frans Timmermans, who will be in charge of coordinating the work of individual commissioners and have a veto right over proposals coming from any of them.

This new governance structure should allow a more streamlined approach to industrial policy at the Commission, which will also rely on stronger impact assessments guidelines.

>> Read: When science meets politics: the EU’s impact assessment review

Progress is also being made at the Competitiveness Council, which brings together industry ministers of the 28 EU member states.

Meeting in September 2014, the Competitiveness Council agreed to adopt “a more strategic role” in overseeing industrial policy and decided to strengthen the capacity of the so-called High Level Group on Competitiveness and Growth (COMPCRO HLG) in the EU Council of Ministers to support their work.

Industry ministers emphasised in particular the importance of associating “representatives from energy-intensive industries to discuss energy prices” in Commission advisory groups.

Low-carbon leakage?

Whether those attempts will deliver remain to be seen. But the Commission may be ill-advised to play too much in the hands of Europe’s ageing heavy industries.

Indeed, there are already signs that some clean energy industries are relocating outside of Europe because of the EU’s declining interest in green policy goals.

>> Read: 'Low carbon leakage' begins as EU prepares to junk efficiency goal

Jürgen Trittin, a former environment minister of Germany, has warned that Europe risked missing out on the renewable energy revolution, at a time when renewables were just becoming more competitive.

With regard to renewable energies, e-mobility, energy storage and smart grids, the EU economy is currently still a leader in global markets, according to a report by the European Climate Foundation (ECF), published in October.

The ECF study described an imminent threat of migration in these sectors – to China, Japan, the US and other newly industrialised countries. Production of low-carbon technologies such as solar panels is now happening chiefly in China for instance.

The discourse on ‘low carbon leakage' developed in response to a successful campaign by energy intensive industries, which argued that they were at risk of ‘carbon leakage’ – or relocation abroad – because of EU climate laws.

In a recent comment piece, the climate commissioner, Connie Hedegaard, said that carbon leakage was “an important risk” but one that the EU had already addressed.

“Maybe we should be a bit more concerned about the risk of low-carbon leakage,” Hedegaard said. “Without ambitious climate polices, Europe will fail to attract investments in rapidly innovating economic sectors and the high-quality jobs we so badly need.”

>> Read: Europe warned on 'low carbon leakage' if it falters on renewables

Business organisations broadly welcomed the Commission’s renewed focus on industrial policy.

BusinessEurope, the EU employers’ organisation, said the Commission’s “industrial renaissance” proposal, which was published alongside the 2030 climate and energy package, were steps in the right direction. "It is positive that the pack of measures published today acknowledges the challenge of high energy prices in the EU and addresses the risk of investment leakage better than in the past,” said Markus J. Beyrer, BusinessEurope director general.

However, it warned that Europe should be ready to adapt its climate ambitions in view of international climate negotiations, urging the European Commission and the European Council “to make sure that Europe will not be once again a lone frontrunner without followers”.

“Industrial electricity prices in the EU are more than double those in the US and 20% higher than in China and most of our major competitors do have a convincing industrial policy. Europe faces an ‘investment leakage’ trend and new investments in manufacturing are increasingly taking place outside Europe,” it warned, adding that “much clearer and more stringent action will be needed to really put industrial competitiveness back at the heart of EU policies.”

Adrian Harris, director general of Orgalime, the European Engineering Industries Association, commented: “It is good to see that at last the European Commission has reacted to the real needs of the economy by re-establishing a clear focus on manufacturing, growth and job creation. Moreover the setting of a new 20% target for industry in relation to GDP should serve to focus the minds of policymakers on what is a core truth: that manufacturing is vital to Europe’s economic recovery and future. It is time that the EU worked on getting the right framework conditions in Europe to attract industrial investment."

Hubert Mandery, the director general of the European Chemical Industry Council (CEFIC), applauded the Commission's goal to increase manufacturing’s share to 20% of EU GDP, saying the target is both ambitious and achievable. “All in all, the communication addresses the right elements of a 21st century industrial policy for Europe, but only if related policy such as energy, climate change or environment policies are aligned with this goal,” Manderey said in a statement.

Affordable energy “is the number one priority for Europe’s energy-intensive industries,” CEFIC stressed, pointing that gas and electricity costs in the USA are respectively one third and half of those in the EU. “If the EU wants to raise industry’s contribution to EU GDP to as much as 20% by 2020, industry should not be saddled with additional policy costs,” CEFIC said, referring to the Commission’s proposed 2030 targets on climate change and renewable energy.

“Energy and climate policy must be affordable. Undermining Europe’s competitiveness leads straight to de-industrialisation!” CEFIC warned.

Eurofer, the European Steel Association, underlined that the Commission’s proposed CO2 reduction targets for 2030 were simply “impossible to achieve with current technologies” in the steelmaking sector and had to be revised.

Eurofer admitted that the economic recession will make it easier for steelmakers to meet their 2020 emissions reduction goals. But this advantage will soon evaporate, Eurofer argues, because the bar has been set too high for 2030.

“With the so-called correction factor cutting down free allocation since 2013 even the most efficient steelmaker in Europe will have a cost disadvantage vis-à-vis its non-European competitors. Some of the most efficient steel plants may have to buy up to 30% of their needs in emission permits already by 2020. The current surplus from the crisis will in the short term turn into a huge shortage,” it warned.

“The steel industry has lost over 15% of its workforce since 2008. EU crude steel output is down 20% of pre-crisis levels. Without rebalancing the EU’s industrial, climate and energy policies our sector … will further decline and with it industrial manufacturing and jobs in Europe.”

“We need a clear decision that at least the most efficient European companies do not have additional costs from the EU’s climate and energy policies.”

Europia, the European oil refining trade association, welcomed the Commission industrial policy initiative, saying it "gives a positive signal to EU industry by policy makers of the general concerns about the competitive pressures facing EU manufacturing industry."

Europia welcomed in particular the decision to undertake a fitness check for the oil refining sector. Chris Beddoes, Acting Secretary General of Europia commented: “A strong EU economy needs a wide range of industries, from the 'traditional' energy intensive manufacturers to those developing new technological solutions. EU refining is not only important for secure and competitive fuels supplies, but is also a vital and increasingly threatened part of the industrial infrastructure."

But Teresa Presas, director general of CEPI, the Confederation of European Paper Industries, was less enthusiastic. "We, the paper industries, believe that one size does not fit all. We are starting our own work on breakthrough technologies that will allow our factories to release resources that can be invested in new added value products. The communication on EU Industrial Policy must be more than an update. It has to set the grounds for sector specific policies,” Presas said in a statement.

The European Policy Centre (EPC), a Brussels-based think tank, underlines that Industrial policy is not a one-off task. “It is a cross-cutting policy requiring a comprehensive set of measures which need to be implemented in a coherent manner,” argues the EPC in a paper published in November 2014.

Claire Dhéret, the study’s author said, “Fostering a more innovative, knowledge-intensive, new technology-oriented and resource-efficient manufacturing industry in Europe is the right way to go.”

  • Oct. 2012: Commission unveils new industrial policy strategy, aiming to raise industrial activity to 20% of EU gross domestic product by 2020
  • 25 Oct. 2013: Commission’s industrial competitiveness report shows industry’s share in Europe’s GDP declined from 15.5% of GDP in 2012 to 15.1% in summer 2013
  • Jan. 2014: Commission unveils communication calling for “a European industrial renaissance”
  • Sept. 2014: Council adopt conclusions on mainstreaming industrial competitiveness in other policy areas
  • Oct. 2014: EU adopts climate and energy targets for 2030
  • 2020: Target date for bringing industry’s share in Europe’s GDP to 20%

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