Europe’s Big Industrial Policy Push
But Also — TikTok, Poland, Ireland
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The Briefing
Relaxed state aid rules, bolstered foreign subsidy controls, promoting ‘made in Europe’ — the Old Continent’s worldview is definitely shifting. While Macron and Breton are the usual suspects, Vestager, von der Leyen, and Michel seem to be closing ranks to support a big and bold industrial push ahead of a critical European Council meeting in February.
OP-ED • European Council President Charles Michel put pen to paper to defend ‘going big for EU industry’. The op-ed, published in Politico on 15 January, is definitely a leap into unchartered territory for the EU, traditionally distrustful of industrial policy.
The EU’s competitive positioning, notably vis-à-vis the US, has “fundamentally” changed, according to Michel. The EU’s state aid rulebook, which ensured that EU Member States did not engage in bottomless subsidy races, was premised on the existence of a functioning international rules-based trading system. This world is no more.
While China failed to live up to the promises made when it joined the WTO, the US has turned its back on the very system it created. Sadly, Biden’s ‘America is Back’ has come to really resemble MAGA.
With the Inflation Reduction Act, “our American ally has also embraced a massive state aid policy to foster its green transition” by throwing public money at energy-saving technologies, “the very same technology that the EU is investing”, notes Michel.
FORTRESS EUROPE • The op-ed comes less than a month before a Special European Council, planned for 9–10 February in Brussels.
There, Michel sets outs a four-pronged agenda, to be discussed by the EU-27 leaders, on how to get the EU out of its strategic naivety:
Relaxing state aid rules. The EU must shore up “support for strategic industrial companies” and SMEs.
More flexibility in EU money spending. The goal is to take “full advantage” in using untapped NextGenEU money.
More common borrowing. Michel calls for extending SURE, a bond-backed programme launched at the beginning of Covid to provide financial assistance to Member States struggling to address increased public spending for the preservation of employment.
Create an European Sovereignty Fund. It would finance “strategically important projects in green energy, digital technology and defense”.
LET’S DO IT • On trade, Europe’s barking has rarely lead to any serious biting, but Michel’s words and timing are an important signal. Remember Michel cannot totally go off-script as he talks on behalf of the EU-27. His initiative means there is at least some support at the highest political level for his plan.
It’s undoubtedly a victory for Macron. While France’s calls for an EU industrial policy have often been derided — remember strategic yoghourts — Macron’s positions have gained traction since Covid-19 threw Europe’s economy into disarray.
Macron is trying to get as many allies behind its ‘Made in Europe’ strategy — conveniently rebranded into a crusade against the IRA, whose targeted tax breaks threaten to divert critical industrial investment away from Europe. France sent a letter to the EU-27 countries last week, calling for a revamp of the EU’s state aid rulebook and the establishment of an emergency sovereignty fund.
Internal Market Commissioner Thierry Breton has been a clear political ally of Macron. His advocacy for a beefed-up industrial policy and vigorous campaign against the protectionist elements of the IRA have aligned with Macron’s priorities. In addition, Breton’s services are dishing out regulations — from the space sector to clean tech or chips — at an unprecedented pace to make ‘strategic autonomy’ something real.
UNITED FRONT • Competition Commissioner Margrethe Vestager has for long pushed back on Breton’s plans — insisting that support for EU companies should never come at the expense of effective competition within the internal market.
State aid rules, which constrain how Member States can use public money to support their own companies, have been put on pause since Covid-19 broke out. A consultation on state aid reform is open until 25 January 2023.
On 13 January, Vestager sent a letter to EU finance ministers, recognizing that the IRA “risks luring some of our EU businesses into moving investments to the US”. Reformists are pushing for bigger carve-outs for strategic industries. At a press conference in Sweden last week, European Commission President Ursula von der Leyen was also quoted defending a “global playing field”.
NOT SO QUICK • With all this show of unity, one could be fooled into thinking reform will go ahead smoothly. Relaxing state aid rules is a red flag for many ‘smaller’ Member States who are afraid that big countries will outspend them.
Understandably, some are concerned that further relaxing state aid rules will just allow Germany to reap all the benefits. Under the Temporary Crisis Framework, Germany notified 356 billion euros in state aid measures. That is more than the rest of the EU combined — which ploughed a total of 316 billion euros into their economies under the temporary scheme.
Some see the sovereignty fund as a way to compensate for the potentially distortive effects of relaxed state aid rules with fiscal solidarity. But we should not expect this to be an easy discussion. Political support for more common borrowing is fickle. And on the legal front, Germany’s Constitutional Court has made it clear in a ruling dated 6 December that it won’t let the EU use its emergency powers to establish permanent common borrowing.
In Case You Missed It
TIKTOK • On 10 January, TikTok CEO Shou Zi Chew visited Brussels to discuss tech policies with key EU officials. His visit took place amidst potentially illegal data transfers to China and violations of children’s privacy under the General Data Protection Regulation (GDPR), for which the platform is currently under investigation by the Irish Data Protection Commission (DPC) — Ireland being TikTok’s main regulator in the EU.
On 12 January, TikTok was fined 5 million euros by the French privacy regulator, who found the company guilty of making it more difficult for users to refuse cookies than to accept them on Tiktok's website. Recently, TikTok’s parent company ByteDance admitted that some employees had accessed the private data of two journalists, feeding spying accusations on the company.
During his European trip, Shou Zi Chew met with Commission Executive Vice President Margrethe Vestager to discuss TikTok’s compliance with the Digital Markets Act (DMA) and Digital Services Act (DSA), which will enter into force in mid-2023. TikTok CEO also met with Values and Transparency Commissioner Vera Jourova, who shared her concerns regarding political advertising, child safety, users data and Russian disinformation.
“I count on #TikTok to fully execute its commitments to go the extra mile in respecting EU law and regaining trust of European regulators”, Vera Jourova tweeted. Twitter’s attitude regarding compliance with the DSA, the DMA and the GDPR is likely to greatly influence the already distrustful position of EU member states towards the app — which was notably banned from all US federal officials’ phones in December.
POLAND • Amidst record-high inflation and fear of credibility loss on financial markets, Poland is trying to get its EU money. As a reminder, the European Commission is currently holding up 36 billion euros in loans and grants which Poland is entitled to as part of Next Generation EU, the EU’s Covid-19 recovery plan. The money has been withheld because of concerns in Brussels regarding the independence of the Polish judiciary.
In early November, Polish President Andrzej Duda said he was against any new concession to access the funds. But with elections coming in the fall and struggles over inflationary pressures, Poland’s far-right ruling party — the Law and Justice party (PiS) — is now determined to get the money. “We don’t have time for tug-of-war [with the Commission]. I have appealed to the opposition to start working on the proposed law as fast as possible”, Prime Minister Mateusz Morawiecki declared on 14 December.
During the same month, a draft law aimed at rolling back some of the controversial reforms to the Polish judiciary was presented. On 11 January, the bill was voted in the Polish Parliament where Unite Right, the right-wing coalition led by PiS, holds the majority. Most of the opposition abstained from voting after amendments to make the bill more ambitious were rejected.
The bill now has to be approved by the Senate, where the PiS will have more difficulties as the opposition holds a thin majority. But even if the bill passes and is signed by the president: Poland has already tried to convince Brussels through superficial reforms, to no avail.
NORTHERN IRELAND • The UK and the EU are reportedly making progress on post-Brexit trade disputes in Northern Ireland. Talks are now set to intensify, with both sides working towards a solution for a legal dispute over Tariff Rate Quotas (TRQs) — which have prevented Northern Ireland from benefiting from reduced British import tariffs on products such as steel.
Officials from both sides are currently conducting a "scoping exercise" to evaluate each party’s position and seek technical solutions to still-unresolved issues. This scoping exercise could be followed by a “tunnel” — a period of intensive talks between high-ranking officials.
While the mood between the EU and UK is improving, European diplomats remain concerned about the potential internal opposition British Prime Minister Rishi Sunak may face from the Conservative Party as a final agreement draws near.
Sunak must also deal with Northern Ireland’s dysfunctional politics: talks aimed at resolving the ongoing trade protocol dispute descended into chaos on 11 January when the leader of Sinn Féin, Mary Lou McDonald, was unexpectedly barred from attending a meeting with UK Foreign Secretary James Cleverly, which resulted in a boycott of the meeting by Sinn Féin and the Social Democratic and Labour Party (SDLP).
What we’ve been reading
Should democracies favor trading with one another? For the Peterson Institute, Marcus Noland engages Canadian Deputy Prime Minister and Minister of Finance Chrystia Freeland’s vision of the future of globalization.
In Bloomberg, Max Hastings reflects on the plight of refugees globally, as 2023 is set to be the worst year since 1945 for the displacement of peoples from their homelands, with immense political, social and economic consequences.
This week’s newsletter is brought to you by Augustin Bourleaud et Maxence de la Rochère. See you next Monday!