New EU industrial policy can only succeed with focus on completion of single market and public procurement

France and Germany recently unveiled a manifesto for a European industrial policy fit for the 21st century, sparking a lively debate across the continent. The manifesto is based on a simple idea: at a time of increasing global competition, Europe must pool its strengths to remain a global manufacturing and industrial power.

To do so, the manifesto calls for a new EU industrial policy based on disruptive innovation funding, as well as a revision of EU competition rules and implementation of protective measures for European technologies and companies.

The fundamental idea underpinning the manifesto is a good one: Europe does need an industrial policy to ensure that EU companies remain highly competitive globally, notwithstanding strong competition from China and other big players. There is a real need for better coordination of EU countries’ respective national industrial policies, to prevent market distortions and to allow synergies and economies of scale. However, the Franco-German priorities are unsuitable for the pursuit of this goal.

First, it should be noted that the focus on disruptive-innovation funding echoes a long-lasting industrial policy narrative in both France and Germany, driven by the US experience of the Defense Advanced Research Projects Agency (DARPA). As an agency of the US Department of Defense responsible for the development of emerging technologies, DARPA has significantly contributed towards many technologies embedded in our computers and smartphones, from microchips to GPS, from voice recognition technologies to the internet itself.

The DARPA experience should be carefully handled; simply transposing it into the EU context might not work. The success of DARPA indeed relates to the overall US economic ecosystem, which strongly favours innovation, and to its capability in translating disruptive innovations into marketable products – also through public procurement.

That is, public funding for innovation alone does not guarantee industrial development. DARPA’s limited budget, around $3 billion per year, shows that creating the conditions for making innovative products marketable – also through public purchase of goods and services – can be more important than public funding itself. After all, in both the US and China the bulk of investments for innovation comes from the private sector.

The fragmented EU single market in services prevents innovative European companies from scaling up in the way that US and Chinese competitors do in their own domestic markets

The European fascination with DARPA is not new. Back in 2005, the French government established a DARPA-like agency aimed at investing in disruptive technologies such as nanotechnology and biotech. Notwithstanding the initial endowment of €2 billion, the initiative proved not to be successful and quickly vanished. In 2018, the German government set up the Agentur zur Förderung von Sprunginnovationen, an agency aimed at promoting breakthrough innovations, again modelled on DARPA.

To create the conditions for innovative European companies to flourish, a new EU industrial policy should be focused on two elements.

First, the completion of the EU single market is paramount. This continues to be fragmented in services, preventing innovative European companies from scaling up in the way that their US and Chinese competitors do in their own domestic markets. It is vital to develop a solid regulatory framework, focused on ensuring competition and access to a truly single market with common standards. To do so, national industrial policies need to be coordinated – otherwise they create distortions that lead to further fragmentation of the EU single market by, for instance, influencing companies’ location decisions.

Second, Europe must make use of public procurement to promote its innovative companies. In the EU, the public purchase of goods and services has been estimated to be worth 16 per cent of GDP. Given its size, this represents a unique tool to foster innovation. For example, mandating clean mobility solutions in public procurement tenders could provide a solid boost to the demand of electric cars and buses, propelling the transformation of the European automotive industry. After all, to become the global leader in electric cars China did not focus on public funding for innovation, but rather on creating demand for them through supportive government policy, including public procurement programmes.

The completion of the EU single market for services and the strategic use of public procurement to create a market for innovative products each represent fundamental steps toward creating the right ecosystem for innovative European companies to grow in a receptive market. This should be the core of a new European industrial policy fit for the 21st century.