EU Prioritizes Industrial Policy for Economic Security and Diversification

Europe’s Path to Economic Security: Industrial Policy and Diversification

In the wake of recent global economic challenges, the European Commission has recognized the imperative of economic security as a cornerstone for the future. With the world economy becoming increasingly fragmented, the European Union is revisiting the concept of industrial policy, a strategy that involves guiding market forces to bolster sectors and firms considered strategic.

The pursuit of economic security encompasses two main objectives. The first is ‘de-risking’—a strategy that calls for businesses to not only focus on growth and profit but also to enhance the resilience of their supply chains. This approach has gained traction following the EU’s energy crisis, underscoring the significance of diversification, particularly in critical areas such as energy sources and raw materials essential for the energy transition.

The second objective centers on achieving scale, a concept that is easier to rationalize than to execute. This involves examining the EU’s growth model and determining how it can remain competitive on a global stage where scale is increasingly important. The EU looks towards China, with its state capitalism model, and the United States, with its innovation-driven economy, as examples of how scale can be achieved through different means.

However, the EU faces its own set of challenges in reaching this scale, including an incomplete market for goods and services and fragmented financial markets. The solution may lie in identifying strategic industries that will drive economic growth and providing them with the necessary support to expand.

While economists have long debated the efficacy of state intervention in ‘picking winners,’ the global prevalence of industrial policies has shifted the discussion towards how these policies can be applied effectively. The International Monetary Fund suggests that for government support to enhance productivity and benefit consumers, it must be well-designed, non-discriminatory towards foreign firms, and target industries that yield tangible social benefits, such as those contributing to low carbon emissions.

Industrial policies are not without risks, and their justification hinges on the presence of clear social advantages. With the urgency of the green transition presenting new opportunities, the EU is poised to leverage these strategies to secure its economic future.

Maria Demertzis is a Senior fellow at Bruegel think tank, Brussels. The article was posted by Bruegel and on the blog of the Cyprus Economic Society.