Employing 30 million people and accounting for more than 80 percent of the bloc’s exports, the industrial sector is an economic cornerstone of the European Union (EU). But European industry faces fundamental challenges. The EU’s industrial behemoth was fueled by cheap energy imports, which are no longer available to it. Now, the bloc’s decarbonization mission also relies on imported technologies.
Maintaining economic competitiveness is a pressing issue for Ursula von der Leyen as she begins her second term as president of the European Commission. President von der Leyen has promised to put forward a new Clean Industrial Deal in the first one hundred days of the new mandate to “channel investment in infrastructure and industry, in particular for energy-intensive sectors.” But energy supply challenges and geopolitical hurdles risk undermining plans to restore Europe’s industrial competitiveness.
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The roots of Europe’s industrial crisis
The state of European industry is nuanced, but the trends are increasingly alarming.
The European Union’s share of the global industrial sector, measured by gross value added, decreased from 21 percent in 2000 to 14.5 percent in 2021, numbers similar to the United States’. Manufacturing still accounts for 15 percent of the bloc’s gross domestic product (GDP). But amid the impacts of COVID-19 and the 2022 energy crisis, the EU industrial sector has lost 850,000 jobs since 2019.
Experts question the EU’s preparedness for increasingly strategic industrial activities, such as defense, clean energy technologies, and chips. Moreover, the bloc’s reliance on imported energy commodities and technologies leaves its industrial sector vulnerable to external shocks. This vulnerability was exposed during Russia’s full-scale invasion of Ukraine, as the Kremlin took advantage of the EU’s reliance on Russia for 43 percent of its natural gas imports.
By contrast, the EU’s industrial competitors benefit from cheaper energy. The United States enjoys abundant oil and gas and is producing at world-record levels—a trend that the incoming Trump administration would like to continue—and is witnessing a boom in renewable generation. China continues to use domestic coal while increasing imports of Russia’s price-capped oil.
The International Energy Agency estimates that electricity prices for the European Union’s energy-intensive industries were double those in China and the United States in 2023, making it almost impossible for Europe to compete due to high energy costs in production. Complex regulatory frameworks, lengthy permitting processes, expensive labor, and limited innovation are also weakening the EU’s competitiveness.
How the Clean Industrial Deal can help
The stakes are high for European industry. Europe has been proactive in addressing its energy supply vulnerabilities, developing important initiatives such as the Net Zero Industry Act and Critical Raw Materials Act. Now, the Clean Industrial Deal provides the opportunity to address key energy-related competitiveness challenges.
First, the proposal needs to address vulnerabilities in the energy supply chain. This starts with diversifying the sourcing for critical raw materials needed for domestic clean energy production—many of which Europe is reliant on China for.
Despite low public support for such projects, de-risking supply chains should involve domestic mining and processing—which may happen in Germany, the Czech Republic, and Sweden, as well as in a still-controversial mining project in EU candidate state Serbia. But Europe cannot be fully self-sufficient in critical raw materials, and must also enhance supply chain cooperation with the United States and partners in the Global South. Nevertheless, the lead times required to source sufficient critical raw materials domestically or from like-minded partners are considerable. For now, the majority of EU demand will likely continue to be met by imports from China.
In addition, Europe’s industrial transition requires electrification to reduce energy consumption and thus costs. To do this, the EU needs to strengthen the backbone of its energy system: the power grid. This requires investment, accelerated permitting processes, and dynamic regulation that can reduce uncertainty for grid developers, investors, and operators.
As emphasized by former Italian Prime Minister Enrico Letta in his Much more than a market report issued this spring, the EU’s internal fragmentation also poses a threat to industrial efficiency. Harmonizing regulations across member states and finalizing the EU’s single market are crucial steps toward creating a more predictable business environment, fostering investment, and encouraging innovation. Coordinated public spending at the EU level, particularly on large-scale projects like cross-border energy infrastructure, is essential.
Enhancing existing external strategic partnerships should also be foundational to the EU’s industrial plans. This includes collaboration on protecting energy infrastructure from physical and digital threats, securing access to critical raw materials, and coordinating climate efforts at the multilateral level.
What could go wrong?
The geopolitics of energy will play a significant role in shaping the EU’s industrial revival plan.
On the one hand, the EU’s approach to managing its reliance on China for cleantech needs to assess the costs and benefits of de-risking. Europe’s aspirations to expand its clean manufacturing sector could potentially backfire—if Europe makes progress in developing domestic clean manufacturing it will gradually acquire fewer technologies from China, which might hedge this risk by cutting off access or increasing prices for EU-bound exports. By doing so, China could weaken Europe’s financial capacity for investing in its industrial sector—keeping the continent reliant on imports. China’s 2023 export restrictions on gallium and germanium could be a sign of such a risk.
It is often overlooked that EU exports to China have increased more than sevenfold over the last two decades, and China is the EU’s third-largest external market, after the United States and the United Kingdom. A trade war would be damaging to both sides.
On the other hand, the Clean Industrial Deal comes as US elections have concluded, raising concerns on whether the EU and the United States will pursue a clean industrial partnership or potentially move toward rivalry. The transatlantic partnership plays a crucial role in the EU’s ability to stabilize its exposure to energy commodities, as demonstrated by Europe’s increased US LNG imports since 2022.
For the United States, this cooperation is also of great benefit, not only for fostering exports in LNG, critical raw materials, and nuclear energy technology, but also for finding synergies in research and development and for reinforcing geopolitical stability. However, potential trade barriers, such as the EU’s Carbon Border Adjustment Mechanism (CBAM), may heighten the risk of a trade war. The future of this partnership could significantly influence global economic and security dynamics.
Much depends on what will happen in the new Commission’s first one hundred days—on both sides of the Atlantic.
Andrei Covatariu is a Brussels-based energy expert. He is a senior research associate at Energy Policy Group (EPG) and a research fellow at the Centre on Regulation in Europe (CERRE). This article reflects his personal opinion.
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Image: Ursula von der Leyen (CC-BY-4.0: © European Union 2023– Source: EP) https://commons.wikimedia.org/wiki/File:MEPs_demand_the_EU_boosts_clean_tech_industry_and_fights_human_trafficking_-_52765798041.jpg