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Europe in the Age of Industrial Policy

While China and the US take advantage of scale to pursue large-scale investment in critical sectors, the EU struggles to follow suit, owing to its decentralized fiscal structures and rules limiting government subsidies to industry. A new EU-level investment program is urgently needed.

MILAN – The European Union, like much of the rest of the world, is facing powerful economic headwinds. But whereas other major economies, such as China and the United States, are well-positioned to use industrial policies to help counter the challenges they face, the EU faces significant structural impediments on this front.

As it stands, EU economic growth is slow and decelerating, with some of the bloc’s economies doing worse than others. It does not help that the drivers of export growth are faltering, partly because of increased competition from China, which is moving rapidly into major industrial sectors like electric vehicles.

Moreover, while Europe’s commitment to leading the world on climate action and the clean-energy transition might eventually result in a competitive advantage, it is now acting as an economic impediment – and will continue to do so in the medium term – not least because carbon-intensive industrial sectors dominate exports. The Ukraine war has exacerbated this problem, not only by raising energy costs, but also, and even more so, by forcing the EU rapidly to diversify away from Russian fossil fuels – a very expensive process. As a result, carbon prices in Europe are significantly higher than in other regions.