Europe is in a growth crisis and in dire need of reforms to boost the industry’s competitiveness. Here’s how to do it.
Industries grow and become successful in well-functioning and open market economies. A level playing field, sound competition, regulatory predictability and a high degree of freedom for businesses constitute necessary building blocks to create such an environment. So does the reliable access to affordable energy. Until now, the EU and its Member States have failed to deliver sufficiently on all these parameters. Some laudable initiatives have been launched in previous years, but none of them sufficient in turning the overall trend of a slowly and steadily declining European industrial competitiveness. The new legislative mandate must be the starting point for a new industrial agenda that delivers concrete and tangible improvements.
Europe is lagging behind in the global competition and the EU is in dire need of reforms to improve its business climate. Companies are facing growing compliance costs, mounting reporting requirements and lengthy approval procedures. These factors combined have resulted in a growth-hampering cocktail eroding the industry’s competitiveness and undermining the efficiency of other industrial policy actions. This is both an economic problem, since the regulatory burden costs money, and a waste of human resources, since too many employees are tied up with non-productive paperwork. The regulatory burden thus diverts much-needed resources away from productive investments and processes. Limiting this resource diversion must be the main priority in the EU’s future industrial policy.
The regulatory burden on European business has increased at an alarming rate, while the Single Market is being undermined by an increasingly permissive attitude to distortive state subsidies. In recent years, not only has the amount of state aid increased, the amounts granted also differs significantly between different Member States. State aid is now allowed for both mass production and to match aid offered by third countries, increasing the risk of undue amounts of aid being granted and triggering a state aid race. Not only does this undermine competition and makes the markets less dynamic, but it also erodes the integrity of the Single Market.
Despite this, several moves have been made in the past years to weaken the rules on state aid, opening for more public subsidies and political intervention that favours some at the expense of others. This trend is deeply concerning since such measures often favour incumbents and large companies, thereby disfavouring start-ups and scale-ups, and hindering competitive allocation of capital based on merit. In this regard, centralising funding to the EU level is just as bad as a continued distribution of large volumes of subsidies from the national level. Further initiatives in that direction must therefore not be part of a future EU industrial policy, irrespective of how tempting they may seem in the short perspective to inject capital into the market. Targeted public support can sometimes play a catalytic role in cases of market failure, but can never be a general solution to strengthen the economy at large.
Furthermore, the EU must avoid contributing to a state aid race where companies play countries off against each other, looking for the one that is willing to spend the most taxpayer money. Such a development would not only be hugely expensive and crowd out important public expenditures, but also erode the crucial dynamics of competition that are necessary for economic development. Also, nothing suggests that the EU, in its current and projected weak economic shape, would come out as the strongest in the end of such a subsidy race. On the contrary, Europe would have lost precious time attacking symptoms rather than the root causes of our competitiveness problem: Market fragmentation, regulatory burden, energy costs, slow permitting procedures and excessive public intervention.
In light of the increasingly hostile and challenging security situation globally and in our immediate neighbourhood, effective measures to increase Europe’s economic security and the resilience of supply chains are warranted. It is however important to recall that protection against security risks is one thing; protection from economic competition is another. While the first is essential, the second is destructive, as it amounts to protectionism that is negative for the long-term business climate in Europe. The most important factor contributing to economic security is economic strength. Therefore, an industrial policy boosting competitiveness remains the best tool to ensure security. Any special instruments restricting the freedom of businesses to trade across borders must be targeted, proportionate and designed in a way that does not undermine the industry’s overall economic strength, which would counteract the objective of enhancing security.
A future EU industrial policy that improves competitiveness and economic strength should build on these four pillars:
- The completion of a truly seamless Single Market is the strongest tool to enhance European industrial competitiveness. The economies of scale and benefits to be yielded by going from, in many cases, 27 small national markets to one big of 450 million consumers is immense. Removing existing unmotivated border barriers, regulatory discrepancies and gold-plating practices must be at the centre of the future EU industrial policy. By fully using the size of the Single Market, more EU companies can grow to a scale where they can become globally competitive.
- The future EU industrial policy should focus on delivering a concrete and trustworthy plan for how to substantially reduce regulatory burden and shorten permitting procedures. A vague commitment to reduce EU reporting requirements by 25 percent is far from sufficient, since reporting requirements is only a small fraction of the overall administrative burden – and the administrative burden only a small fraction of the total compliance costs. Reducing a small share of a small share will not solve the structural problems our industry is facing. Furthermore, the increasingly complex regulatory landscape of thousands of directives, regulations, implementing and delegated acts, guidelines and national legal acts must be streamlined and significantly simplified. The future EU industrial policy must therefore establish both a bold regulatory reduction target and effective methodologies to deliver on it.
- The future EU industrial policy must enable energy suppliers to guarantee sufficient supply of round-the-clock accessible fossil-free energy at internationally competitive prices. The Net-Zero Industry Act and the emphasis on shorter permitting procedures is a welcome and necessary first step, and its rapid and effective implementation is crucial. Co-legislators should without further delay agree on a modernised energy taxation directive and other measures to further promote electrification and thereby investment in fossil-free energy production and in energy saving measures. Pushing prices down to a low and stable level is a prerequisite for the return to a favourable industrial investment climate.
- The EU must realise that the desire to micromanage companies through ever more complex and detailed legal instruments hurts the industry’s competitiveness and adaptability. The EU should pursue its policy objectives by means of goal-oriented legislations that points out a clear sense of direction and abates undesired outcomes, while granting companies the greatest degree of freedom possible to achieve the goals in a way that suits the individual case. The European economy is made up of thousands of sectors and millions of companies – all with different means and needs. There is seldom a one-size-fits-all.
The start of a new legislative mandate can be a pivotal moment in reshaping the European agenda to focus on competitiveness and put job-creation, growth and prosperity back at the heart of the European project. The European industry is in dire need of a boost, and we need a new industrial policy that is focused, coherent and bold. Like the green deal has had an impact on all policy areas during this mandate, the industrial growth agenda should have during the next.
Deepening the Single Market creates economies of scale. Reducing regulatory burden saves money and frees up human resources. Speeding up permitting procedures accelerates return on investment. Ensuring low and predictable energy prices makes industries feel confident to invest. Pursuing goal-oriented policies instead of political micromanaging leaves room for innovation. This is where the future EU industrial policy should focus.
