European Issues and Interviews

Open panel Open panel
European Issues
Economic integration
European Issue n°15

The European Union's Industrial Policy

The European Union's Industrial Policy
16/01/2006

Summary :

On the re-launch of the Lisbon Strategy the European Commission has made the industrial policy one of its priorities. By this it would like to quell concerns over the position of European industry with regard to international competition, notably in terms of the gap that has grown with the USA in the areas of productivity and capacity to innovate as well as with regard to competition from emerging countries. A set of proposals designed to improve the competitiveness of European industry and to encourage innovation were therefore put forward in various documents presented by the Commission during 2005: the Competitiveness and Innovation Framework Programme, the communication on the manufacturing industry, the communication relative to the implementation of the Community Lisbon Programme for research and innovation and the 7th Framework Programme for Research. The main objectives involve the protection of intellectual property, the improvement of Community regulations with regard to industry, enhancing the role of SMEs in innovation, the development of cross-national co-operation projects and the support of structural adjustments. The effectiveness of this new industrial policy supposes the support and diligence of the Council particularly on the question of the Community Patent. It is therefore necessary not to disperse the limited budgetary means that have been granted within the agreement on the Community budget for the period 2007-2013. To ensure the clarity of these supportive measures to innovative SMEs the Commission might also look into formulating a European Small Business Act.

Introduction



The European Council of Lisbon in March 2000 established the objective of making the European Union the "most competitive and most dynamic economy in the world" by 2010. The realisation of the slow progress achieved mid-term led the Commission to formulate proposals that aimed to boost the Lisbon Strategy. Given the concern expressed about relocation, and the position of European industry in the face of international competition, emphasis was placed on the need to improve European companies' competitiveness and to encourage innovation.

Indeed industry is still a decisive factor in the European economy. The manufacturing industry ensures 20% of the EU's entire production, 75% of its exports and over 80% of private expenditure for R&D. Growth in productivity is nearly twice as high than in the rest of the economy. Employing nearly fifty million people across EU25, industry also represents a driving force due to its links with the services sector that is used widely by industry and takes advantage of industrial innovations for its development.

On the basis of this analysis, the European Commission and its Vice President for Companies and Industry, Günter Verheugen, have laid the foundations of a Community Industrial Policy. The guidelines of this policy, approved by the "Competitiveness" Council [1] from 28-29 November 2005, are presented in various documents: the Competitiveness and Innovation Framework Programme [2], the communication on the manufacturing industry [3], the communication relative to the implementation of the Community Lisbon Programme for research and innovation [4] and the 7th Framework Programme for Research [5]. The main guidelines apply to the protection of intellectual property, the improvement in Community Technical Regulations, the strengthening of SMEs in innovation, the development of cross national co-operation projects and the support of structural adjustments.

The development of a Community industrial policy is remarkable since State intervention was an exclusively national competence until the Maastricht Treaty and remains an extremely controversial subject, which is still the subject of various traditions in the different countries of the Union.

After looking into the foundations of the Community policy with regard to industry I shall present the main guidelines defined by the Commission highlighting the initiatives that might increase its effectiveness.

I- The Foundations of Community Intervention in Industry



a. The necessary strengthening of the competitiveness of European industry in the face of international competition



Community action with regard to industry primarily finds support in the conviction that it is necessary to strengthen the competitiveness of European industrial companies. This depends on a low cost of manufacturing factors, such as capital, communication and transport infrastructures, scientific and technological infrastructures, raw materials and human resources. On the other hand companies' ability to compete depends on a favourable institutional context towards investment, competition, innovation as well as demand conditions which are affected by the dynamism of the local market, developments in exchange rates and access to international markets. The analysis of clusters has also highlighted the importance of the company's location and its interaction with suppliers, clients, competitors, universities and research institutes that stimulate their links on a local or regional level.

A certain number of indicators have fed fears with regard to the development of European industry. Between 1991 and 2000, the growth in productivity in the manufacturing sector lay at 3.1% on a yearly average in the EU versus 4.3% in the USA. This differential can be explained notably by the slower development of the high technology sector in Europe [6]. In addition to this, the EU has an insufficient innovative capability. In spite of the 3% objective established by the European Council of Barcelona in 2002, R&D expenditure has stagnated around 1.9% of GDP, whilst in the USA in 2003 it rose to 2.6% and in Japan to 3.1%. This stagnation is worrying in view of the rapid increase in R&D expenditure in emerging countries such as China [7]. Also the share of R&D financed by industry is lower in Europe than in the USA [8], in spite of fiscal incentives which are twice as high. Finally the share of venture capital investments in GDP is twice as high in the US than in EU15.

We should highlight the fact that European averages hide major differences between individual countries. Between 1991 and 2000 industrial productivity increased by 1.2% on yearly average in Portugal and by 1.9% in France but by 8% in Ireland. Likewise the share of GDP dedicated to R&D was nearly 4% in Sweden in 2003 versus approximately 1.1% in Spain and Italy. More generally though simulated competitiveness indexes [9] enable us to gauge the size of the gaps existing between the old and new EU Member States, as well as between the extremely competitive Scandinavian States and the Mediterranean countries (Spain, Italy, Greece) which are very much below the EU15 average.

b. The theoretical foundations of State intervention in industry



State intervention in industry is a controversial matter. Indeed it is only justified in that it enables a more effective distribution of resources than offered by the simple interaction between competing markets. This supposes therefore a market failure that can be corrected by government policy. The most often debated case is that of "externalities" i.e. external effects of certain activities on industry that are not taken into account by the market. The lack of any effective system to sanction negative externalities and to compensate positive ones would imply too many of the former and not enough of the latter. R&D provides the example of positive externalities in that not only are its results an advantage to the company or institute that financed it but they also benefit other industrial players: its social return is far higher than its private return. Public authorities can therefore aim for increased expenditure in R&D by establishing a system of compensation founded on the creation of property rights, for example a patent system, or even a system for subsidies. Regulation is sometimes an effective solution: network externalities that emerge when the value of a type of technology depends on the number of users, justify the adoption of standards such as the European GSM standard for mobile phones. Finally externalities justify the collective funding of public goods, [10] which are decisive for industrial competitiveness such as fundamental research and certain infrastructures that cannot be funded privately.

Public intervention in industrial projects is an even greater controversial matter. Nevertheless it can be legitimate within the context of co-operation between public and private players to accomplish industrial projects of general interest notably with regard to defence, or to encourage innovation by drawing together public research institutes, universities and companies. Industrial policy can also be justified by barriers to entry, which are not always linked to anti-trust practices on the part of established companies [11]. If there are high fixed costs, these obstacles can arise due to loan obligations linked to the lack of information on the part of the creditors and to the doubt surrounding some projects. This argument was used to justify the establishment of loan guarantees for small innovative companies and even public participation in the funding of industrial projects that required considerable launch investments such as for example the aerospace industry.

These arguments must not mask the limits of public intervention. The State does not always have the necessary information to undertake effective choices. Public funding can therefore engender a "windfall effect" whilst the projects might easily have been funded without State aid. In addition to this, public authorities are not necessarily better placed than private investors when forecasting the success of industrial projects even though they might be deemed "strategic" or "potential successes" (picking winners). The failure of the "Plan Calcul" in France bears witness to this. Public funding of industrial projects therefore supposes a certain amount of modesty and expertise in the selection of projects, an effective monitoring and the ability to withdraw rapidly if they fail. Notably this demands independence with respect to political considerations that in the past have often been led to support declining industries (picking losers).

c. The pertinence of intervention at the Community level



Although it is possible to admit the usefulness of a policy designed to strengthen the competitiveness of European industry, it does not necessarily justify action at the Community level. In line with the principle of subsidiarity, this action is only justified if the objectives cannot be achieved effectively by the Member States and would be undertaken more effectively within the context of a Community policy. In the industrial domain the externalities that affect all European countries are revealed by this (those affecting R&D for example). Community policy can also enable major savings in the manufacture of public goods and the funding of industrial projects of common interest as demonstrated in the aerospace industry by Airbus and Ariane, which have been achieved within an intergovernmental framework. In the context of the Internal Market the existence of various national regulations can also generate high costs for companies who have to conform to each type of legislation as soon as they operate on a Community level. Barbara Pick showed in a previous Policy Paper [12], that translation costs and the renewal of a European patent in each of the Union's Member States make it twice or three times more costly than obtaining an American or Japanese patent. Under these conditions, a Community industrial policy is justified. It is not justified however if the stakes are local and the situations or preferences too different within the Union. A decentralised approach is then preferable, even though this does not mean that solidarity and convergence activities should not be made on a Community level, for example within the context of the enlargement and cohesion policies.

The differences in industrial policy traditions in the Member States have also been an obstacle in the adoption of a Community industrial policy. These differences are supported by varying conceptions of the merits of State intervention. In France the idea that the government should subsidise industrial projects whose technological potential appears to be decisive in improving or maintaining the competitiveness of the national economy has led to a policy of "grands programmes", to the creation of national champions [13] and more recently to the creation of an agency for the promotion of long term industrial technological programmes in the context of private/public partnerships (the Agency for Industrial Innovation [14]). French industrial policy also provides ample room for aid to companies in difficulty [15]. This type of interventionism, which exists to a lesser degree in Germany in the form of Federal State or Länder aid, is the source of suspicion on the part of some countries with a liberal tradition, such as the UK and Ireland who have focussed their strategy on the attractive nature of their territories for industrial investment, notably via advantageous fiscal measures.

These differences explain why we had to wait for the Maastricht Treaty for the Union to provide itself with a legal base enabling it to undertake an industrial policy although the industrial co-operation established within ECSC and EURATOM had played a major driving role at the start of European integration and that other Community policies had greatly influenced industry (trade policy or the constitution of the internal market for example [16]). Article 157 of the Treaty establishing the European Community makes the competitiveness of industry an objective of Community action that must be continued via measures that aim to accelerate industry's adaptation to structural change, to create a favourable environment for the dynamism of companies notably SMEs and exploit the industrial potential of innovation and research policies [17]. We shall examine the content of what has been provided to this new area of Community action.

II- The New Community Industrial Policy



The first work undertaken by the Commission on industrial policy goes back to a communication published in October 1990 [18]. This was followed by a White Paper on Growth, Competitiveness and Employment in 1993, the Green Paper on Innovation in 1995, and more recently by three Commission Communications in 2002, 2003 and 2004 [19]. These texts are the basis of the Community conception of the industrial policy as a horizontal one aiming to create an environment to encourage innovation and companies' competitiveness. The European Commission's "new industrial policy" [20] intends to be a pillar in boosting the Lisbon Strategy and in reality is a continuation of these texts. It comprises a set of proposals presented in 2005 by the Commission in a variety of documents: the Competitiveness and Innovation Framework Programme, the communication on the manufacturing industry, the communication relative to the implementation of the Community Lisbon Programme for research and innovation and the 7th Framework Programme for Research, Technological Development and demonstration Activities (7th FPR). I thereafter present the main guidelines defined by the Commission, highlighting the initiatives that might increase its effectiveness.

1. Ensuring effective protection of intellectual property



The Commission has established itself an objective of achieving a system to protect intellectual property that is affordable, legally secure and easy to use. After the establishment of a regulation protecting designs, the Commission would like to lead Member States to an agreement on the issue of the Community patent as well as on the fight against counterfeiting and pirating. To this end, it announced that it would undertake a debate in 2006 to put forward proposals that would lead to such an agreement. It is vital for the Commission to enjoy the full support of the Council on this point and that the latter makes it a priority in its agenda in order to find a rapid solution in spite of the present differences of opinion. It would be useful for the "Competitiveness" Council than the European Council to provide impetus in this direction during their meetings in March.

2. Improve the Regulations Environment



Industrial companies are submitted to a set of technical rules with regard to safety, health, the protection of the environment and the consumer. In order to reduce the complexity of these rules and their influence on company competitiveness the Commission has promised to simplify existing legislation notably in the automotive, construction and waste sectors [21]. To do this, it suggests coding, modifying, rewriting and sometimes repealing over 220 regulations and directives over the next three years.

The Commission is committed to launching public debate, employing impact studies (including an assessment of the administrative charges) in order to improve the quality of legislative proposals that might affect industrial companies' competitiveness. Major work has been accomplished on regulations governing chemicals for example, with the aim of improving the protection of health and the environment and yet safeguarding the competitiveness of the chemical industry and its capability to innovate. After a long debate on the REACH proposal that was released by the Commission in October 2003 [22], a compromise agreement was reached during the extraordinary "Competitiveness" Council on 13th December 2005.

The Commission also established a consultation programme that aims to identify regulation obstacles to research and innovation. It proposes to rewrite the rules governing State aid to R&D and venture capital so that public/private partnerships, cross border co-operation and major projects of general interest for Europe are facilitated.

3. Enhancing the role of SMEs in innovation



Within the framework of its innovation policy the Commission intends to enhance the role of European SMEs, whose dynamism and survival rate are lower than those we might see in the USA for example. To this end the CIP includes a set of specific measures to a total cost of 1 billion euros for the period 2007-2013. Having observed that the European market to fund innovative SMEs is still under-developed in Europe, the Commission would like to encourage private investors and financial institutions to take more risks. To achieve this, it has made a proposal to strengthen the role of the European Investment Fund [23], which is the EU's specialised funding institution for SMEs. The EIF implements guarantee instruments covering loans granted by financial institutions to SMEs and via participating in venture capital funds and business incubators [24]. The Commission has suggested granting it a new guarantee mechanism that aims to improve SME access to equity capital and to increasing the use of micro-loans. Encouraging corporate ventures [25] is also a means that deserves exploration in order to stimulate large companies into dedicating a small share of their budget to more daring investments in innovative SMEs.

The Commission has also suggested the establishment of technology transfer mechanisms for SMEs to encourage their role in the use of research programmes led by research organisms and universities according to the model of the American Small Business Technology Transfer Program. The EIF published a study on this subject in May 2005 that led to the launch of the TTA programme (Technology Transfer Accelerator) whose first initiatives involve ICT's and biotechnologies.

Finally the Commission announced its intention to strengthen the participation of SMEs in EU research programmes. It might be of interest here to look into the establishment of a system that is comparable with the American Small Business Innovation Research Program. This reserves a limited amount of public R&D funds for SMEs and encourages the marketing of SMEs fundamental research results. More generally and to ensure the clarity and coherence of Community and national measures that aim to promote the role of SMEs in innovation, the Commission might consider the creation of a European Small Business Act.

4. The Funding of Community Projects



Although the Commission defends an essentially horizontal approach to the industrial policy, it does however take part in the funding of industrial projects. It has a budget line dedicated to the Trans-European Networks that enable it notably to intervene in the area of radio-navigation, the railways and air traffic control. The most significant example is that of the satellite radio-navigation system Galileo, which aims to be a civil alternative to the USA's global positioning system (GPS). The project's development phase (2001-2005) required a budget of 1.1 billion euros financed equally by the Commission and the European Space Agency. The deployment phase [26] is a public/private partnership to a total of 2.1 billion euros one third of which will be funded by the Community budget and the remainder by the Eurely/iNavSat consortium that was granted the project concession and will be the sole manager of the operational phase as from 2008 on.

The Commission also supports the launch of long term research programmes on subjects of European public interest chosen in consultation with industry, the so-called "joint technological initiatives" [27], of which terrestrial observation programme GMES (Global Monitoring for Environment and Security) [28] is an example. These initiatives must be supported by public/private partnerships associating Union resources (within the context of the funds of the 7th FPR), national governments and industry. The European Investment Bank will also intervene via loans. The EIB also plays an important role since it dedicates more than 6 billion euros yearly to the "Innovation 2010" initiative, which notably includes mid or long term loans in R&D projects, ICT development and education or training. This initiative is supported by funds of the 7th FPR designed to encourage research in ICT's (12.8 billion euros). In order to encourage the distribution of ICT's the CIP proposes for its part "a strategic support programme for ICT's" for a total of 800 million euros.

Finally in support of R&D, the Commission is proposing the creation of a European Research Council (ERC) according to the model set by the National Science Foundation. It comprises an agency that grants funding to research teams as well as bringing entities into competition on the basis of peer review. The 7th FPR proposes a budget of 11.8 billion euros for the period of 2007-2013. The ERC is due to start its activities in 2007 if the Council of Ministers and the European Parliament approve the Commission's proposal.

5. Supporting Structural Adjustments



The Commission would like to anticipate restructuring trends better and use the Structural Funds to safeguard industrial competitiveness and the attractiveness of the regions involved. Amongst the measures planned feature financial aid in the constitution of clusters and for the transfer of technology in these regions as well as initiatives that aim to help workers anticipate and adapt to economic change.

6. Prospective Details



In order to make proposals over the next few years with regard to other aspects of industrial policy, the Commission has planned for the creation of working groups bringing together the industrial players involved. Amongst the objectives that have been announced feature the elaboration of a new commercial strategy in terms of access to international markets, the assessment of industrial competence requirements and the harmonisation of competitiveness, energy, environment policies with a view to developing an integrated approach. The Commission will also launch a study aiming at continuing the improvement of the regulations and at proposing specific initiatives in certain sectors of the manufacturing industry [29].

7. Financial Perspectives



The launch of a new industrial policy for the European Union is supported in part by the promise of Community expenditure. These have been planned for in the 7th FPR and the CIP whose respective budgets for 2007-2013 total 72.7 and 4.2 billion euros in the Commission's proposals. This would have tripled annual Community expenditure on research and innovation by 2013. This expenditure will then have reached 0.12% of the Community GNI [30] i.e. around one sixth of public expenditure in the Union. However this ambitious objective is due to decrease because of the results of the negotiations on financial perspectives during the European Council of Brussels in December 2005. Whilst the funds planned for in the chapter "Competitiveness for Growth and Employment" (including measures for innovation and research) reached 141 billion euros in the Commission's proposals, it was reduced to 72 billion euros by the Council [31]. The means provided for in the 7th FPR and the CIP will therefore be much lower than previously planned for by the Commission.

Conclusion



The need to boost the Lisbon strategy has led the Commission to propose a great number of measures designed to support industrial competitiveness and innovation specifically. These measures do not exclude participation in the funding of targeted projects in spite of the accent placed on a horizontal approach to industrial policy. To ensure that it is effective the Commission must enjoy the support and diligence of the Council notably in the search for an agreement on the Community Patent. It is also important for it to ensure the clarity of the measures established at the Community level and of their coherence with national measures. In particular, in the domain of support to innovative SMEs the Commission might consider the creation of a European Small Business Act. It should also avoid dispersing the limited budgetary means granted to it within the context of the agreement of the budget 2007-2013. Since a re-assessment of the means granted to the 7th FPR and the CIP is inevitable it will be necessary to clarify the Commission's priorities. This might be the subject of a single document presenting all of the Community's actions in terms of support to industrial innovation and competitiveness, as well as the budgetary means at their disposal. The Commission would therefore possess a summary of its new industrial policy.
[1] The “Competitiveness” Council is the Council of the European Union’s formation that deals with questions relative to the internal market, industry and research. Depending on the points on the agenda, the Council comprises Ministers of the Member States responsible for industry, research or European Affairs.
[2] Proposal for a Decision of the European Parliament and of the Council establishing a Competitiveness and Innovation Framework Programme (2007-2013), COM (2005) 121.
[3] Commission Communication: “Implementing the Community Lisbon Programme: A Policy Framework to Strengthen EU Manufacturing - towards a more integrated approach for Industrial Policy”, COM (2005) 474
[4] Commission Communication: “Implementing the Community Lisbon Programme: More Research and Innovation - Investing for Growth and Employment: A Common Approach”, COM(2005) 488.
[5] Proposal for a Decision of the European Parliament and of the Council concerning the seventh framework programme of the European Community for research, technological development and demonstration activities (2007 to 2013), COM (2005) 119.
[6] The high technology sector only represents 16% of the added value of EU25’s manufacturing sector versus 23.3% in the USA.
[7] The share of the Chinese GDP dedicated to R&D expenditure is increasing by 10% per year and this is due to lead the Chinese economy to the same level of R&D as the European economy by 2010.
[8] The share of R&D funded by industry was 54.6% in 2003 in EU15 versus 63% in the USA.
[9] We might refer for example to the Global Competitiveness Report, published yearly by the World Economic Forum.
[10] Public goods are goods the consumption of which it is impossible to restrict simply to those who take part in its funding and the availability of which does not depend on the number of consumers, leading to “stowaway behaviour” and discouraging its production by private players. Public funding is therefore justified.
[11] Anti-trust practices are dealt with within the context of the competition policy.
[12] Barbara Pick, “The European Patents Policy”, Policy Papers by the Robert Schuman Foundation, n°8
[13] During the 1960’s and 70’s France developed “grands programmes” in the railway, telephone and nuclear areas. Major projects were linked to a concern for national independence that gave rise to the creation of national champions such as Alcatel-Alsthom, Elf or Aérospatiale. More recently the French government provided its support to the constitution of the “European Champions” in the context of concentrations that led to the creation of Aventis in 1999, EADS in 2000 and Arcelor in 2003.
[14] This agency was created on the grounds of recommendations made in a report by Jean-Louis Beffa, Pour une nouvelle politique industrielle, published in January 2005.
[15] This aid emerged via plans that aimed to “save” certain sectors (coal, steel, textiles, ship-building) and more recently the case of Alstom.
[16] Commercial policy influences the access to international markets. The completion of the internal market abolishes the obstacles to trade of goods between Member States and hence offers a larger market to companies.
[17] The measures that are not included in policies or action that the Community undertakes by other means in the treaty are the subject of a qualified majority vote by the Council within the context of a co-decision procedure with Parliament.
[18] Commission Communication: “Industrial Policy in an open and competitive environment: Guidelines for a Community approach”, COM (90) 556
[19] Commission Communications: “Industrial policy in an Enlarged Europe”, COM (2002) 714 ; “Some key issues in Europe's Competitiveness - Towards an integrated approach”, COM (2003) 704 ; “Fostering structural change: an industrial policy for an enlarged Europe”, COM (2004) 274.
[20] “A New Industrial Policy” is the title of a speech delivered by the Vice President of the Commission for Companies and Industry, Günter Verheugen, 18th November 2005 in Bologna, on the invitation of Cofindustria.
[21] Commission Communication: “Implementing the Community Lisbon programme: A strategy for the simplification of the regulatory environment”, COM (2005) 535
[22] Proposal for a Regulation of the European Parliament and of the Council concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH), establishing a European Chemicals Agency, COM (2003) 644
[23] The European Investment Fund was created in 1994 in the framework of a partnership between the European Investment Bank, the European Commission and a group of European financial institutions.
[24] Business incubators are structures that receive people who have projects to create innovative companies and which help them to succeed by offering training, advice and funding.
[25] Corporate ventures are a specific type of venture capital used by major companies to finance innovative companies and to take part in their capital as a minority shareholder.
[26] The deployment phase notably comprises the construction and launch of satellites.
[27] The criteria for selection of a joint technological initiative are a major financial commitment of the private sector, notable and measurable industrial impact, a significant contribution to the achievement of public objectives, the ability to raise national contributions and additional private funds, a real added co-ordination value at the European level and the impossibility to achieve objectives by simple, traditional bids at the Community level. These initiatives are planned for in the areas of innovative medicine, nanoelectronics, aeronautics and air traffic control, hydrogen and fuel batteries.
[28] The project is presented in the Commission’s Communication: “Global Monitoring for Environment and Security (GMES): Establishing a GMES capacity by 2008 - (Action Plan (2004-2008))”, COM (2004) 65
[29] The sectors involved are pharmacy, biotechnologies, chemistry, defence, ICT’s, mechanical construction, food-processing, fashion and design.
[30] Gross National Income.
[31] These are totals for the period 2007-2013. Whilst the Commission proposed to take the Community budget from 1.1 to 1.15% GNI of the Union by 2013, the Council chose to limit it to 1%. The main victim of this reduction is precisely the chapter on “Competitiveness for Growth and Employment”. Its share in the Community budget is due nevertheless to rise beyond 6.6% in 2006 to 9.9% by 2013.
Publishing Director: Pascale JOANNIN
Available versions
The author
Jean-François Jamet
Lecturer on European and International Economic Policy at Sciences Po.
Support us
Today, Europe needs us !
By supporting the Robert Schuman Foundation you are helping Europe to move forward, find the strength and ideas it requires to overcome the challenges ahead.
This is why we need your support !
Subscribe to our Letter
A unique document with 200,000 subscribers in five languages (French, English, German, Spanish and Polish), for the last 12 years our weekly Letter provides you with a summary of the latest European news, more necessary now than ever before.
I subscribe to the Letter free of charge: