Discussing and agreeing a single and coordinated EU “industry policy” has often been difficult and controversial in Brussels. Yet, all of a sudden, the “i-word” is back in fashion; the European Union should even make it the reason for its existence, according to newly reported internal documents. Investors however have few fond memories of plans like these.
The French government last week proposed a complete overhaul of the EU’s approach to boosting its industry. It would require the creation of a «Made in Europe» strategy, with the aim of matching the flow of US subsidies, Brussels-based platform Politico reported on the basis of yet unpublished documents.
Response to US initiative
In a letter dated 9 January, the French government led by President Macron (pictured centre, alongside Dutch prime minister Rutte and chancellor Scholz) called on the EU to accelerate production targets, weaken state aid rules, create an emergency sovereignty fund and deploy trade defence instruments. It is the French response to the US Inflation Reduction Act, which has hit Europe like a bomb. Indeed, the act involves no less than 369 billion dollars in subsidies, designed to encourage US businesses to become more sustainable and - by extension - also encourage reshoring of companies back to the US.
France, which traditionally has a long history of industrial policy and still has a significant percentage of state-owned enterprises, wants an EU response to the US initiative. It argues that the EU should set new production targets «to reduce our dependence» in sensitive sectors. It refers not only to chips, but also to technologies and products related to sustainability and energy transition. Paris wants to set production targets to be achieved by 2030, as already set out in the EU›s draft chip law. The aim of the latter is to reduce dependence on countries such as China.
France states in the letter that in this context, the EU should start «reforms to simplify and speed up procedures for granting permits for the installation of new production sites». The aim is a complete reform of the energy market to make it easier for companies to make decisions about their production and investments. The discontinued supply of oil and gas from Russia, and the reliance on imported LNG gas now under discussion makes many companies in Europe question whether the old continent still has a good and safe business environment.
‘Targeted support’
The EU is reluctant to grant state aid unless there are extreme circumstances. But in its letter, France argues, according to Brussels-based platform Politico, that the EU should move towards «targeted aid - via subsidies or tax credits - based on predefined criteria, in a limited number of sectors». Thought to be tax breaks or direct subsidies for strategic sectors.
France proposes the creation of an emergency fund. The money for this could be taken from the corona emergency fund. This would involve 365 billion euro, which has not yet been disbursed and could now be allocated to sectors of strategic importance to European industry. That amount would come on top of the 221 billion euro in loans that have yet to be allocated to European industrial sectors.
The French government’s proposal does not enjoy equal support among all EU member states. For instance, strong countries like Germany and the Netherlands are showing criticism, even though the government published a plan for a «strategic and green industrial policy» in July 2022. Commenting on that plan, the Dutch minister for economic affairs and climate change wrote: ”The cabinet will focus even more on alignment with EU industrial policy. Due to changed geopolitical developments, we need each other more than ever and this policy has also become more active.”
History nevertheless makes investors cautious. The 1970s in particular, with rising government borrowing and high interest rates, depressed corporate profitability. That changed when, under the leadership of Fed president Paul Volcker, the interest rate policy was shaken up. Now the same thing is happening: interest rates are rising and profits fall. An additional complicating factor is that global trade is shrinking and geopolitical rivalries are playing an increasingly important role.