The EU’s shift towards economic security and industrial policy. Understanding an evolving landscape and its implications for business  

Economic Security Strategy 

Last month the European Commission published its highly anticipated “Economic Security Strategy” – a first-of-its-kind policy document that provides a comprehensive picture of the economic risks the EU is facing from an increasingly challenging geopolitical environment, from supply chain resilience to economic coercion. Building on international discussions on how to “de-risk” international supply chains, especially in the context of rising tensions with China (which is not mentioned in the text), the strategy announces the upcoming introduction of new security and industry policy tools to deal with the potential leakage of sensitive dual-use technologies including quantum computing, semiconductors, and AI. These notably include a new screening mechanism for outbound investment and the reinforcement of existing tools on export controls and inward FDI screening.  

From strategic autonomy to industrial policy  

Far from emerging out of the blue, the Economic Security Strategy is the latest step in the implementation of the EU’s “strategic autonomy” agenda. Reflecting a growing awareness of the limits of globalisation, strategic autonomy has become a central principle of EU policy making since the COVID pandemic, the war in Ukraine and most recently the US Inflation Reduction Act (IRA). Its stated objectives are to secure the European economy’s resilience by reducing its perceived “strategic dependencies” on international supply chains, and to protect its competitiveness in strategic sectors – especially those considered central to the European industry’s green and digital transitions. Underpinning it all is an increasingly widespread view that Europe needs to learn from past policy mistakes if it is to avoid missing out on the next industrial revolution as it largely did with the original internet and platform economy.   

From the European Chips Acts to the Green Deal Industrial Plan and its various legal texts (Temporary Crisis and Transition Framework for state aid, Net Zero Industry Act (NZIA), Critical Raw Materials Act) to the recently approved Act in Support of Ammunition Production (ASAP), what we are witnessing is a paradigm shift for EU economic regulation: moving away from the EU’s traditional focus on horizontal rule-making, single market integration (including through rigorous state aid control) and open trade, a new industrial policy approach is emerging, whose key tenets include:  

• Local manufacturing targets for specific technologies (e.g. 20% of the global semiconductor market, 40% of the EU’s annual deployment needs for net zero technologies) 
• Market surveillance and emergency intervention mechanisms in crisis and shortage situations, including priority orders  
• Targeted regulatory measures aimed both at accelerating the deployment of strategic technologies, such as fast-track permitting procedures, and at protecting European companies from the perceived dominance of non-EU players. This approach is becoming increasingly central in technologies seen as critical for the EU’s “digital sovereignty”, such as cloud, where new requirements relating to data localisation and immunity from foreign laws are being considered.   
• Dedicated public funding support, in particular through a facilitation of national state aid for strategic technologies 
• New trade protection and investment screening measures foreshadowed in the Economic Security Strategy in addition to the new Foreign Subsidies Regulation that will enter into force this year.    

To be sure, discussions about the need for an “EU industrial strategy” are nothing new, and some elements of protectionism have long been found in EU regulation. But what is fundamentally different this time around is that beyond lofty declarations and despite continued reservations both from certain Member States and within the Commission, the strategic autonomy agenda is really moving the needle of the EU’s overarching economic regulation framework.  

Open questions and uncertainties  

While the direction of travel seems clear, there are still several important open questions, and the policy responses to these questions will shape the scope and impact of the EU’s new industrial policy agenda.   

1. Which technologies should be considered strategic and benefit from specific industrial policy support? This question is at the centre of discussions around the NZIA, most importantly regarding the role of nuclear – demonstrating the competing national interests that immediately come to play when governments zero in on specific industries. Similar debates are likely to emerge in relation to other technologies, from AI to biotechnology. 

2. In the absence of significant central funding mechanisms, how are EU policymakers going to manage the trade-off between a growing use of national state aid and the risk of fragmentation of the EU internal market it entails? For critics, ongoing efforts by big Member States to lure major FDI projects (such as Germany’s unprecedented €10bn subsidy to Intel to France’s attempts to secure a Tesla Gigafactory) demonstrate the risks of an unfair and wasteful subsidy race in which smaller Member States will be unable to compete. The Commission’s state aid control procedures, which such projects will still have to undergo, will need to balance the conflicting objectives of supporting strategic sectors and protecting the single market – until recently seen as the EU’s crown jewel. In the meantime, the Commission’s frustrated ambitions to establish joint EU funding tools for strategic technologies suggest that its industrial agenda will largely have to continue to draw on national budgets for the foreseeable future. Just two weeks ago, in lieu of Ursula von der Leyen’s initial vision of a new “EU Sovereignty Fund”, the Commission unveiled a new Strategic Technologies for Europe Platform (STEP), which essentially consists of reallocated EU funds rather than new money and of a new “sovereignty label” for projects that contribute to the EU’s strategic objectives.  

3. Perhaps most importantly, what will the actual effect of these policies be, especially vis-à-vis the Biden Administration’s Inflation Reduction Act, which is already having a discernible impact on green tech industrial investment in the US? For many observers, the IRA’s investment incentives remain vastly more attractive than their EU equivalents, thanks to a simple, easy-to-use tax credit system that creates a clear business case for green tech investment and to (discriminatory) local content requirements the EU is still steering clear of. By contrast, EU incentives remain scattered across a complex set of national and EU-level tools. The Commission is aware of these shortcomings and is working on ways to match the US system, for example by introducing direct support for hydrogen producers (known as “competitive bidding”) under the EU Innovation Fund – but will this be enough? Finally, as shown by China’s recent decision to curb exports of certain critical materials, the effect of the EU’s actions will also be impacted by the potential retaliation they trigger from other jurisdictions.   

Implications for business  

The answers to these questions will have significant implications for business, both in relation to the overall investment climate in the EU as well as their relationships with public authorities.  

One thing is already clear: investment and deal-making decisions, especially from non-EU companies, are taking place in an increasingly politicised political environment in which they will be monitored, supported or opposed depending on their perceived impact on EU strategic autonomy, economic security and public policy objectives more broadly. And even aside from the politics, a majority of investors will face increasingly burdensome hurdles to clearance which are likely to extend timeframes for deal closure.   

Businesses will need to become adept at navigating the complex web of stakeholders, regulations and support programmes at EU, national and potentially regional levels. They will also need to actively engage regulators and policymakers to demonstrate not only their projects’ economic rationale but their contribution to broader EU public policy objectives – be it decarbonisation, digital sovereignty or resilience – while anticipating the potential impact of public policy changes.  

Writing for the Financial Times, Camilla Cavendish recently argued that “every big business needs its own Chief Political Officer”. As far as the EU is concerned, we couldn’t agree more.  

This blog was written by Benoît Roussel and Francesco De Angelis. Benoît is a Partner at Flint in Brussels, he focuses on EU digital, competition, industrial and health policy. He also teaches EU policy at the Institute of Political Science in Lille (Sciences Po Lille) and is involved in several pro-European initiatives and think tanks. Francesco is a consultant at Flint and advises companies on industrial policy issues, energy and geopolitics. Before joining Flint, he worked in Europe’s political economy team at the European Policy Centre, the Brussels-Based think tank. 

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