A new EU industrial deal with developing countries

The wind is shifting on the EU’s approach to industrial policy. What started as a hesitant move, loosening the reins on member states’ ability to subsidise industries, has turned into a broad call for a new industrial deal, and even a European version of the US Inflation Reduction Act (IRA), providing substantial subsidies for green industrialisation. 

The EU will need to respond to domestic demands to strengthen Europe’s industrial base in key strategic areas. But it will also need to flesh out the external dimension of this emerging approach to Europe’s industrial and economic future. 

The EU depends on partners in the Global South for resources, energy and markets and as allies in multilateral fora. Deep connectivity and strong partnerships with those countries will therefore need to be one of the pillars of the EU’s emerging industrial and economic strategy. Without this, the EU risks falling back into defending an ever diminishing economic Fortress Europe.

Open strategic autonomy: an uncertain EU offer full of tensions

Europe’s rhetoric and action on industrial policy is full of tensions. While the EU has aggressive ambitions to build up its industrial base in key technologies, it cannot outspend the US or China, nor is it in a position to develop these industries in isolation. This calls for a smart mix between offensive and defensive tactics, balancing the interests of EU member states, European industry and global industrial players, including the US and China.

This is why European leaders settled on the term ‘open strategic autonomy’ as the desire to reinforce European industries, while reflecting the EU’s continued commitment to openness and free trade. 

For the Global South, this shift in both thinking and tools can play out in different ways. On the one hand, developing countries are seen as critical suppliers, the only way for Europe to diversify away from China, and partners for a new and more secure industrial geography. From this standpoint, Europe’s economic and security objectives finally align with the longstanding industrialisation objectives of countries in the Global South. 

On the other hand, emerging and developing economies risk new forms of instrumentalisation and exclusion, as the EU seeks to save jobs domestically, shield its market from cheaper and more carbon-intensive imports, and manage its relations with the US, China, India and other major players. Indeed, Europe’s international political interests can collide with the realities of domestic commercial interests, with EU promises of external partnership coming into a strange collision with industry calls for protection. 

For example, European Commission president Ursula von der Leyen recently suggested that the EU should import green steel from Mauritania, rather than simply green hydrogen, as part of a wider political and economic partnership with the country that also covers issues such as migration, security and stability. At the same time, ailing German steel industries called for a continuation of protective measures against foreign imports and subsidies to support decarbonisation. They warned that failing to do so could result in job losses.

From Antwerp Declaration to a European IRA

Notable recent calls for a new industrial deal include the Antwerp Declaration for a New Industrial Deal and a report from Italian politician Enrico Letta on the future of the EU single market. Similarly, in his Sorbonne speech on 25 April, French president Emmanuel Macron called for Europe to double its financial capacity and strengthen its capital markets so as to become a leader in five new industries: artificial intelligence, quantum computing, the space industry, biotechnology, and new forms of clean energy.

There are several drivers behind these calls for a more aggressive industrial strategy:

1. A realisation of the weakness of Europe’s ailing industrial base and the political costs of further deindustrialisation.
2. A rough awakening to critical dependencies in energy and the inputs for green transition, digital transformation and the revival of a European defence-industrial complex.
3. A need to conceptualise the next phase of the European Green Deal, reformulating it in a way that appeals to a broader share of the population.

These developments mark an effort to move away from the climate framing of the Green Deal, which many on the right perceive as overly restrictive for European business. Instead, there is a growing focus on a fundamental ‘modernisation’ strategy, which is rooted in supporting European industrialisation, while integrating green economy concerns alongside a focus on technology and defence sovereignty. 

This is not only a way to address right-wing fatigue with the costs of a green transition, but also responds to the challenges of the next stage of the EU’s economic transformation. This includes accelerating the deployment of renewables and clean technology, establishing a genuine made-in-Europe basis in critical green and digital technologies, and renewing and resupplying military equipment. 

What is happening thus far is however relatively piecemeal. Council Conclusions from April 2024 called for a “new European competitiveness deal", but they fall short on real action. Yet, the discussion is likely to evolve in the next EU political cycle, given the strong focus on “defending strategically important European sectors against unfair practices”, which notably appears in the manifesto of the European People’s Party (EPP) ahead of the European elections, and the call for a made-in-Europe strategy by both the EPP and the Socialists and Democrats. 

A new industrial deal with developing countries

The challenge for the new EU leadership will be to move beyond its protectionist tendencies and create conditions for a new industrial deal with emerging and developing economies. This will be essential not only to guarantee supply chains, but also to build future markets and safeguard political goals. It includes building meaningful multilateral alliances – a topic of key concern to the EU, particularly in light of Russia’s invasion of Ukraine. This approach must start with the EU’s closest neighbours in the Western Balkans, the Southern Mediterranean and Eastern Europe, but will also need to integrate key players in Africa, Latin America and Central and South-Eastern Asia. 

With its Global Gateway strategy, the EU is already trying to shift its model of cooperation with countries in the Global South. The strong focus on investments in connectivity and some initial investments in manufacturing (vaccines in Africa for instance) could be the first step towards building a more comprehensive approach to industrial policy with a strong international dimension. Yet, the Global Gateway is still too much of a scattered array of projects with insufficient linkages to Europe’s evolving domestic industrial strategy. 

There is a need to select a few countries with which to develop stronger industrial partnerships. Firstly, as the EU greens its industries, it will increasingly need its (Southern) neighbours, not only to supply materials and energy, but also to thrive in an interconnected industrial geography and demonstrate the viability of a European green industrial transition. Secondly, as the EU looks to rebuild and strengthen key industries in the technology, defence and health sectors, this interdependence will be crucial to achieve scale and compete globally on costs. 

This will not be easy to achieve. It requires the EU to better define its model of an interconnected industrial policy and what sets it apart from the US ‘spend and shield’ approach. The EU will also need to roll out meaningful investments, pairing infrastructure with industrial investments by European companies. This requires a strategic analysis of how European neighbours can be better integrated into various industrial value chains, and how to balance long-term benefits with short-term domestic trade-offs. Such an approach should be based on a true political dialogue with key partners, replacing the current chaotic approach to economic partnerships with a more integrated European industrial diplomacy. 

Von der Leyen’s comments about producing green steel with hydrogen in Mauritania could provide one interesting example, while developing partnerships with countries like Morocco and Egypt should be the beginning of much deeper green industrial partnerships. Yet, going forward, the EU should deploy the whole range of economic and diplomatic firepower to ensure these partnerships deliver meaningful industrial development and job creation, and ultimately closer economic and political ties with the EU. 

The views are those of the authors and not necessarily those of ECDPM.