We live in tempestuous times. Russia is fighting a war of aggression in Ukraine, the US and China are locked in an escalating trade dispute, and European industry has fallen behind in the technology race.
US President Donald Trump’s return to the White House could derail climate action (with his orders to withdraw the US from the Paris climate agreement and “unleash” oil and gas drilling), escalate the Israeli-Palestinian conflict (with his proposal to “clean out” Gaza), and embolden Russia and Europe’s far right.
Despite all this, the election of a new European Parliament and the appointment of a new European Commission last year, with their plans for a Clean Industrial Deal (now public) and a European Competitiveness Fund, provided cause for optimism. On Jan. 29, the commission took the first step toward achieving these ambitious goals by presenting its “Competitiveness Compass” — a set of specific proposals for the next four years.
The reliance on old-fashioned imagery was telling. A compass, one of the tools that helped Christopher Columbus on his 1492 voyage across the Atlantic, hardly seems useful in this age of satellite navigation. More to the point, the most effective instrument for navigating the current geopolitical storm is arguably common sense — and that seems in short supply.
The Competitive Compass reaffirms the creation of a European Competitiveness Fund, albeit under the next EU budget. This demonstrates a profound misunderstanding of the challenges facing the bloc. The next EU budget would not be launched until early 2028, postponing the much-delayed reforms for another three years. By then, it might be too late to strengthen European competitiveness to the extent needed to catch up to the US and China, particularly in the automotive industry.
Moreover, financing the European Competitiveness Fund from the EU budget means that it would compete with other policy goals. European policymakers could, of course, attempt to increase the EU budget, but member states would be unlikely to approve it, given the strain on public finances and the growing strength of anti-establishment politics across the continent. This implies either less spending on other priorities, whether cohesion, agriculture or future security, or insufficient funds for industrial policy.
In addition to the question of direct financing, the Competitiveness Compass calls for the increased use of public guarantees to stimulate private investment in European clean-tech firms. However, lack of access to capital is not the reason for the EU’s lagging competitiveness. The bloc’s inability to produce clean technologies, such as electric-vehicle batteries or photovoltaic panels, that can compete on price with Chinese products stems from the fact that Chinese firms produce huge quantities and operate at very low margins.
The only sensible response is to establish a fund, financed by issuing joint debt, to subsidize European manufacturing directly. The same bond-issuance scheme was used during the COVID-19 crisis. That fund, NextGenerationEU, ends next year, after which the new instrument could enter into force.
This support would last only until European clean tech reaches maturity and the bloc’s producers capture a sufficient share of the market. Former US president Joe Biden understood the power of such a mechanism, which led him to pass the Inflation Reduction Act (Trump, for his part, has sought to freeze this funding). Although the Chinese government does not disclose official data, it is safe to say that they are following the same principle.
The EU’s new industrial policy should aim to defend not only its manufacturing base, but also its social model, which rests on a broad middle class. The Competitiveness Compass raises the question of whether leaving the European support system in the hands of individual member states would guarantee the bloc’s cohesion. Plenty of recent examples suggest that the answer is no. For instance, the Net-Zero Industry Act’s relaxation of state-aid rules — a fundamentally anti-European solution — has facilitated the energy transition in Germany and France, but not in less wealthy member states such as Italy and Poland.
The broad deregulation announced in the Omnibus package is another source of uncertainty. Rolling back legislation that has not even been implemented is not the most reassuring sign for any business planning its investments for, say, the next decade.
In 2019, when announcing the European Green Deal, European Commission President Ursula von der Leyen called it Europe’s “man on the moon” moment. Sadly, the Compass by itself is hardly up to the task of guiding the moonshot mission that the bloc must undertake to regain its competitive edge. The EU needs modern, sophisticated tools to compete in today’s complex world. Our economies need a transformative Competitiveness Fund.
Marcin Korolec, a former Polish minister of climate and environment, is director of the Warsaw-based Green Economy Institute and chairman of the Foundation for the Promotion of Electric Vehicles. He is a member of the European Investment Bank’s Climate and Environment Advisory Council, and a board member of the Institute for Sustainable Development and International Relations, MevaEnergy, InnoEnergy, and Transport and Environment.
Copyright: Project Syndicate
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