Introduction & scope
The decline in the EU’s competitiveness has several causes:
- A very complex regulatory and incentive framework, which struggles to attract private investments into the EU and boost innovation in companies based in the EU.
- The high cost of energy in the EU.
- The increasing fragmentation in the Single Market.
- The attractiveness of the Inflation Reduction Act (IRA) in the USA.
- In addition, the EU has a significant dependence on China which has a dominant role in the supply chain of digital tech and green tech (e.g. net-zero equipment and components, as well as critical raw materials).
To raise awareness about the pressure on industry and share recommendations with political leaders and policymakers, ERT stepped up its advocacy:
- An Industrial Competitiveness Alert was issued in October 2022 describing the downsizing and closure of manufacturing facilities in the EU in the past year, particularly in energy-intensive industries, such as steel, aluminium, chemicals, fertilisers, cement, glass and ceramics.
- An internal analysis of the attractiveness of the IRA formed the basis of recommendations issued in ERT Letters to the European Council.
- ERT Delegations had high-level meetings in early March with President von der Leyen, the Swedish Prime Minister, and the Spanish Prime Minister.
This Note contains an initial appraisal of various initiatives aimed at improving the EU’s competitiveness, which the European Commission published in March 2023 after the adoption of the Green Deal Industrial Plan on 1 February:
- Communication on the Single Market at 30 – page 6
- Communication on Long-term competitiveness – page 8
- Temporary Crisis and Transition Framework (TCTF) – page 11
- Legislative proposal to reform the Electricity Market Design – page 14
- Legislative proposal for a Net Zero Industry Act (NZIA) and a Communication on the European Hydrogen Bank – page 17
- Legislative proposal for a Critical Raw Materials Act (CRMA) – page 20
The analysis below focuses on the main parts relevant to European industrial companies, a comparison with any previous messages from ERT, a positive appraisal of progress, and a list of shortcomings and open questions per initiative.
This Note was circulated within ERT to fine-tune the analysis of the EU’s package. In addition, it can serve as a basis for formulating new policies to improve the EU’s competitiveness.
Executive Summary
Whereas competitiveness is higher on the EU agenda, there are limitations in the EU’s institutional set-up and the focus or impact of the recent Commission’s initiatives.
During the mandate of Commission President von der Leyen, competitiveness has not before featured so prominently on the European agenda. The package in March is possibly even the most comprehensive EU effort to support European companies in at least a decade. It is also the most significant attempt ever in Brussels at shaping an EU industrial policy.
There are various positive elements as well as shortcomings in the package. Several industrial leaders have expressed disappointment in the media because the nature of the measures under the EU’s response does not match the speed and simplicity of the IRA in the USA, where tax incentives for 10 years are very attractive for companies. However, given the institutional set-up of the EU, the European Commission does not have the competence to decide on tax incentives that are directly applicable across the entire EU.
The EU cannot copy/paste the approach that the US is using, so the response of the European Commission should be evaluated within its current “action radius”. Therefore, the EU needs to use those tools that fall within its (current) power, such as relaxing State aid rules, proposing legislation, adopting delegated acts, and issuing non-binding Communications or guidance towards EU Member States.
When evaluating the initiatives of the European Commission in March, we note that:
- The (non-binding) Communications on the Single Market and Long-term competitiveness contain some aspirations that could improve the business environment, but only if these are further beefed up and adequately followed up on:
- Despite advocacy from ERT and other associations, the Commission has not formulated any ambition to shape an encompassing programme to deepen the Single Market, address barriers and simplify regulatory frameworks.
- The Commission did commit to publishing proposals by the autumn to reduce reporting requirements of companies by 25%. Furthermore, the ERT’s call for tracking competitiveness through a set of KPIs has somewhat been taken up.
2. The Temporary Crisis and Transition Framework (TCTF) is a further flexibilisation of State aid rules to enable EU Member States to grant more State aid faster.
- ERT remains concerned about distortions to the level playing field within the Single Market, but the TCTF is generally seen as positive by the energy-intensive industries. However, as the framework has a temporary application (until the end of 2025), the need for more structured financial support remains high.
- Currently, there is no new money foreseen at the EU level. However, a European Sovereignty Fund would be proposed by the summer.
3. Legislative proposals:
- The Electricity Market Design reform will be targeted and not completely overhaul the current functioning of the electricity market and pricing (as recommended in an ERT paper).
- The Net-Zero Industry Act (NZIA), the Critical Raw Materials Act (CRMA) and the set-up of a European Hydrogen Bank aim to scale up the EU’s production of clean tech needed to cut emissions. For the first time, targets have been set by the EU for the domestic production of a well-defined list of “strategic” clean tech (at least 40% by 2030). The NZIA and CRMA also contain efforts to accelerate permitting processes, which is a recurring request from ERT, but the implementation will depend on local authorities.
An initial analysis reveals that these recent initiatives will do very little to:
- Reduce the cost of energy in the EU.
- Support energy-intensive industries in the decarbonisation transition.
- Actively address the fragmentation in the Single Market, drive harmonisation and enable large-scale investments in the EU and SMEs to expand rapidly.
- Map all the burdens on companies and then systematically reduce the complexity of the regulatory frameworks, simplify regulation, streamline reporting requirements, remove barriers to doing business and speed up administrative processes.
- Support a more innovation-friendly framework in the EU, fund more (breakthrough and close-to-market) innovation and upskill the workforce.
- Drive an ambitious international trade agenda (concluding new Free Trade Agreements) and beef up trade defence instruments.
Building an EU industrial policy should not overshadow the need for fundamentally improving the EU’s business climate.
The package lacks a thorough analytical assessment of the EU’s competitive position in international comparison. Hence, the proposed measures mark a substantial shift away from the EU’s traditional, more liberal-minded ideals, making way for a more interventionist approach (“dirigisme”) in which the state has a revamped role to steer the economy. EVP Frans Timmermans summarised it as follows: “For too long, Europe thought the market would take care of everything itself (…) We now understand that the strategic choices China made a decade ago are now coming home to roost and we also have to make our own strategic decisions now for the decades to come.”
Whereas ERT welcomes a more assertive industrial policy at EU-level, this package is not containing sufficient measures to fundamentally improve the EU’s business environment and investment climate (which was the key ask from ERT’s Letters to the European Council). The package still falls short of a more encompassing agenda that can tangibly improve the competitiveness in the EU for all companies and is unlikely to lead to significantly better business cases for large-scale investments in the EU.
The initiatives are mainly geared towards the Green Deal agenda, focusing in particular on the production of clean technologies, and not sufficiently on the decarbonisation transition of energy-intensive industries (to avoid their relocation to non-EU countries) or on boosting digital infrastructure. This package is a far cry from the “Lisbon Agenda” that was crafted in 2000 with the ambition to make the EU “the most competitive and dynamic knowledge-based economy in the world” by 2010.
Unless and until such a new Agenda is designed, it is very questionable if the EU will manage to catch up with the US and China; and reverse the declining trend of the global market share of the EU’s industry’s value-added, knowing that the EU industry already lost 30% of global market share in the past 2 decades (from 20.8% in 2000 to 14.3% in 2020).
In sum, The Economist rightly stated that: “Instead of copying the protectionism and meddling of other governments, the EU should draw on its strengths: a free internal market, limits on state subsidies and a vigorous trade policy.”
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