‘Don’t wear a tie if you don’t need to.’ Spanish prime minister Pedro Sanchez gave fellow Spaniards this advice in July last year, tieless himself of course. Not wearing one would make the heat in shops more bearable, where air conditioning was not allowed to be set below 27 degrees Celsius to save energy.

When Russia cut gas supplies to European countries after invading Ukraine, Europe became fully aware that it needed to do something about its dependencies. This realisation began to dawn at the beginning of the Covid-19 pandemic, when face masks became extremely scarce; later, the German automotive industry ground to a halt due to a lack of microchips.

‘Let’s make sure that the future of industry is made in Europe,’ said Ursula von der Leyen

Over the years, Europe’s industrial base has fallen behind, surpassed by other superpowers. China and the United States dominate sectors which should provide major job growth in the coming years. The internet giants in Silicon Valley and solar panel and electric vehicle manufacturers in China are clobbering the competition in Germany and France. Rising tensions with China and Russia, and the increased chances of cyberattacks, natural disasters and epidemics highlighted European supply chain vulnerability.

‘Let’s make sure that the future of industry is made in Europe,’ said the President of the European Commission, Ursula von der Leyen, in her annual State of the European Union address, last September. At the core of her speech was the concept of ‘strategic autonomy’. According to the European Parliament, this means that the EU has ‘the capacity [...] to act autonomously – that is, without being dependent on other countries – in strategically important policy areas’.

An initial proposal has already been made. Subsequent to the coronavirus outbreak, European Union officials have identified EU economic dependencies and listed ten strategic sectors. The primary ones are rare earth metals, active pharmaceutical ingredients, lithium batteries, hydrogen, microchips, cloud computing, solar panels and cybersecurity. Brussels is aiming for greater independence in these sectors, for example by opening new mines or awarding subsidies worth billions to cross-border collaborations between companies within the EU.

Countering the United States

But the biggest multinationals in Europe – in particular those active in the aforementioned sectors – want even more. They have the support of France, which has argued for decades that its own companies need to be better protected from foreign competition.

The final straw was a bill approved in the United States last summer. The measures included in the Inflation Reduction Act (IRA) entail 370 billion dollars in subsidies and tax incentives for green technology. Everything is conditional to products being ‘made in America’. Anyone purchasing an electric vehicle, for instance, will only be eligible for a tax break if it was assembled in North America.

Some voices in European industry claimed that the IRA would make Europe an ‘industrial wasteland’. Chemical and steel companies threatened to move their production facilities to the US unless the EU came up with similar measures.

Their ploy worked. On 1 February, Von der Leyen presented the ‘Green Deal Industrial Plan’, intended to make Europe ‘the home of clean tech and industrial innovation’. To this end, the Commission will allow Member States to subsidise the development of such technologies if there is a risk that companies would otherwise leave Europe.

Not everyone is pleased with this approach. The Netherlands, for example, argues that ‘support given especially to businesses that claim that they will otherwise leave the EU [...] might be more disruptive than beneficial to the European market’. And many of the poorer Member States worry that loosening the rules for state support will mean that their businesses will face increased competition from German and French ones that can access strong financial support.

Many other questions still need to be answered: who will be paying for these major ambitions and where will the money end up? Follow the Money will be investigating these issues and others in its Made in Europe series.

Copy China?

China and the United States have already shown that a well-wrought industrial strategy can lead to success. The Defense Advanced Research Projects Agency (DARPA), a research and technology agency run by the United States Department of Defense, contributed to the development of an impressive array of innovations – ranging from the internet to the coronavirus vaccine produced by Moderna – and was an important factor in creating today’s American hegemony. China became the world’s biggest manufacturer and second largest economy based on a series of five-year plans.

But should Europe be taking the same route? And would it be able to? European leaders agree that Europe needs to decrease its dependency in strategically crucial sectors, from microchips to energy. And many of the reforms instigated by the European Commission in recent years seem suited to counter unfair competition from American and especially Chinese companies, caused by subsidies and lacking environmental protection legislation in the US and China.

Should Europe relinquish its open trade policy and invest heavily in strategic sectors?

There are many other questions, especially concerning the concrete implementation of such an industrial policy. Should Europe relinquish its open trade policy and invest heavily in strategic sectors? Which sectors are these and why? What is the chance of success? Can the complex structure of the EU deliver the dynamics and flexibility required to implement a grand industrial strategy?

There are questions of principle too. What is the point of spending billions in tax income to benefit extremely wealthy multinationals? Why can’t these companies cover these investments themselves? Will such policies open the door to cronyism, chauvinism or even corruption? The recent bribery scandal in the European Parliament shows that vigilance is required with regard to the latter.

And finally there is the ethical question of whether competing support packages are in line with Europe’s fundamental values or could perhaps fan the flames of potential conflicts.

Following France’s lead

Working as a journalist in Brussels these past seven years, I have seen up close how France has taken the lead in promoting greater support for its own business sector and for ‘European champions’. The country has traditionally always had more of a government-driven economy. It also is home to many more major multinationals than other European countries.

At the European level, French endeavours usually were thwarted by the British, who led the free trade faction that the Netherlands and the Scandinavian countries also belonged to. This economically liberal culture is also dominant in the European Commission, which has received strong powers from the Member States in trade and competition policy.

Emmanuel Macron’s election in 2017 gave fresh impetus to the economic nationalism favoured by the French. Shortly after his victory, Macron not only advocated European sovereignty in relation to security, but also regarding migration, foreign affairs, ecology, digitisation, the economy and financial policy.

In 2019, Paris experienced a setback when European Commissioner Margrethe Vestager blocked the merger of French train manufacturer Alstom and its German peer Siemens. The French minister for Economic Affairs, Bruno Le Maire, believed that the merger was the ‘most efficient answer’ to the ascendant Chinese state company CRRC. Vestager argued that the merger would lead to a monopoly and would inflate the prices of trains and signalling systems. She pointed out that CRRC was hardly active on the European market.

‘We are looking to foster strategic independence by producing crucial products and semi-finished products in Europe’

Today, Paris is taking the lead with its interventionist agenda. When the United Kingdom left the EU in 2020, the Union lost its most fervent advocate for free trade and international competition.

Subsequent to Brexit, the Dutch also sought a closer relationship with France. ‘We are looking to foster strategic independence by producing crucial products and semi-finished products in Europe,’ the Rutte IV cabinet’s coalition agreement stated in January 2022.

Germany long had the best of both worlds. Berlin would often support Paris in public – if only to emphasise that the two countries are the EU’s economic engine – but behind the scenes and in German ministries the liberal agenda took pride of place. A popular bon mot has it that Berlin ultimately determines what Brussels decides.

The economic consequences of the pandemic and the war in Ukraine have led many European policymakers to the conclusion that the EU has to manage its own affairs. The British can now no longer do what they did best: thwart the French agenda.

In this new constellation, the Commission gave its blessing to over 18 billion euros in subsidies for cross-border projects involving hydrogen, batteries and microchips. European companies received protection from subsidised competitors from abroad, mainly Chinese ones. The Commission introduced the Chips Act, intended to strengthen the European microchips sector. This month, the Critical Raw Materials Act is on the agenda, a proposal that aims to ensure access to raw materials which are crucial for wind turbines and batteries for electric vehicles, among others. The expenditure of the European billions will no longer only be assessed against green and digital objectives, but also against resilience to external shocks.

France wants more though. In response to the 370 billion dollars that the US has earmarked for green technology, French minister Bruno Le Maire announced that France would also be investing heavily in green technology. The Member States are now putting pressure on the European Commission to make it simpler to approve state support.

‘We are experiencing the end of eighty years of liberal globalisation,’ Le Maire said in early January.

The risks 

There is a clear reason for Europe aspiring to achieve strategic autonomy. The risks, however, are downplayed. Follow the Money intends to explore these.

‘Strategic yoghurt’

Since Europe will always remain strongly entwined with the global economy, the costs of complete autonomy are astronomical. The European Union will have to determine which sectors it identifies as strategic and will thus wish to protect or even to base in Europe again.

Europe is much more dependent on China than on Russia, for instance. In 2021, the EU imported 472 billion euros in goods from China, more than double the imports from the US (232 billion) and nearly three times the amount from Russia (162 billion). Producing all these goods in Europe would weigh very heavily on government budgets, given – among other reasons – the much higher labour and production costs.

Which ‘strategic’ products would you focus on in a Plan B, for example if China were to attack Taiwan? If Paris had its way, this would no doubt include many products made by French companies. This was apparent in 2005, when the American company Pepsi attempted to take over Danone, the yoghurt maker. French prime minister Dominique de Villepin called the company a national ‘crown jewel’ and swore that he would ‘defend the interests of France’. Pepsi had to relinquish its plans. In Brussels, it has since become common to snidely refer to French protectionism with the term ‘strategic yoghurt’.

Who will be paying the bills?

In order to support businesses in dealing with the energy crisis, the French European Commissioner for Internal Market, Thierry Breton, and the Italian European Commissioner for Economy, Paolo Gentiloni, advocated the EU borrowing money in the financial markets. Although they did not mention how much, they did state that the new fund should help poorer Member States to deal with the 200 billion euros that Germany has earmarked for its companies.

The grand investment plans came shortly after the Recovery and Resilience Facility (RRF) was established to deal with the economic fallout of the Covid-19 pandemic. Opponents of the plans of Breton and Gentiloni claim that the RRF still has capital that Member States could use to set up new funds for dealing with the energy crisis. Moreover, it still is unclear how the RRF will be repaid, as Follow the Money explained last November.

Now that government budgets are strained while businesses are making huge profits, the obvious question is why the private sector cannot make these investments itself.

Failures

History shows that another pitfall of greater government involvement is that authorities have a poor track record on doing business. The European Union is no exception. Perhaps you recall Quaero, the European search engine from 2005 that we would soon be using instead of Google. But you probably don’t. More recent initiatives such as Fiware, ‘the next generation of software’ and GAIA-X, Europe’s new cloud-based data infrastructure, also seem to be on the wrong track.

This still does not stop the EU – and France in particular – from advocating to invest billions. The pandemic was a new reason to pump billions in strategic state support into businesses via various routes. When Von der Leyen announced her Green Deal Industrial Plan in February, she repeated that she would be releasing a proposal for a ‘new European sovereignty fund’ before the summer.

Bureau Brussels intends to investigate this together with the ‘Recovery Files’ team that Follow the Money set up to examine how the billions from the Recovery and Resilience Facility are being spent. How are the many government investments in the economy benefiting European taxpayers? Will political demands frustrate the implementation of these policies?

Cronyism

The Made in Europe policy harbours the risk that a select group of multinationals will profit, by using their connections to make rules and subsidies benefit them.

As a journalist specialised in competition and industrial policy, I have witnessed over the past decade how European multinationals endlessly lobby the European Commission. They complain about the dominance of Big Tech or the threat of Chinese state companies, and then use this to argue that the rules they themselves have to deal with need to be relaxed. Companies like telecom provider Orange, German software colossus SAP and French rail manufacturer Alstom will also often turn to their political relations at national level to influence European policy.

The lack of transparency about the close ties between politicians and the business world fosters various types of abuse. This is another theme we will be addressing. Who are the European lobbying champions and what do they manage to achieve that other companies cannot? Are politicians subject to conflicts of interest? If so, how do they deal with this?

Europe as peace project

And finally, there is the question of whether Europe is chipping away at the basic values of the unification process, with its bombastic stance and economic about-face. According to the 1950 Schuman Declaration, released shortly after the Second World War, creating a European Coal and Steel Community (the predecessor of the European Union) would make war between France and Germany ‘not merely unthinkable, but materially impossible’.

The conviction that countries’ economic integration leads to peace would inform the international trade policy implemented by the EU in the following decades; in Germany this is referred to as ‘Wandel durch Handel’.

The Russian invasion of Ukraine and Xi Jinping’s authoritarian policies in China have led the German government to voice doubts about this approach. In a government statement three days after the invasion, German chancellor Olaf Scholz said: ‘Putin’s war is a turning point, for our foreign policy as well.’ The German minister of Foreign Affairs, Annalena Baerbock, put this as follows in September: ‘Mutual dependency also carries risks. And trade does not automatically lead to democratic change.’ Follow the Money plans to find out in this collection whether she is right.

Follow the Money counts on its readers contributing to its investigations. Do you have any experiences or insights that you would like to share with us? Please do so, either in the comments section or in a direct message.

Translation: David Raats