Europe Needs a Coordinated Approach to Industrial Policy

IMF Blog, December 16, 2024

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Title: Europe Needs a Coordinated Approach to Industrial Policy
Authors: Alfred Kammer, Andrew Hodge, Roberto Piazza
Date: December 16, 2024
Central message: The success of government interventions depends not just on how much is spent, but on spending it well—targeting the right priorities and avoiding costly missteps.

European Union state aid spending has tripled in the last decade.
EU state aid spending reached 1.5 percent of GDP.
Major contributors to the surge in state aid: France, Germany, Italy, and Spain.
Historical example cited: the creation of the Airbus venture almost half a century ago.

Industrial policy can deliver tangible economic gains and strengthen economic resilience when focused on addressing market failures (examples: fostering innovation in sectors with knowledge spillovers like green technology; enabling regional clustering).
Poorly designed and targeted industrial policies tend to fail.
Powerful unilateral interventions (subsidies, tax breaks) that expand production and lower costs in one country can have the opposite effect in another, undermining comparative advantages and creating inefficiencies.
Model simulations indicate:
- Unilateral industrial policies are a losing strategy for most EU countries given their openness to trade.
- Unilateral policies risk triggering powerful spillovers and spillbacks across the region that can outweigh their benefits.
Empirical evidence from another IMF working paper: European state aid benefits recipient firms but is often detrimental to others.

Fragmented, country-specific approaches produce worse outcomes than a coordinated, integrated EU approach.
In a scenario where the EU acts as an integrated region and adopts a well-targeted industrial policy:
- Better outcomes are obtained than under fragmented approaches.
- Coordination prevents costly distortions of production patterns and trade prices between EU countries.
- Assuming free movement of workers and firms across the single market, the policy’s benefits can be maximized.
- Coordination can cushion adverse impacts on regions that might otherwise lose out, including through potential use of intra-EU fiscal transfers.

Europe’s industrial policies need a unified, coordinated framework to preserve gains from trade, ensure a level playing field, and make full use of the EU’s single market.
Target policies to address clear market failures (e.g., knowledge spillovers, regional clustering).
Avoid poorly designed unilateral interventions that generate negative cross-border spillovers.
Enhance data sharing and establish unified programs to increase transparency and trust among member states.
Consider a centralized decision-making body to streamline priorities and better allocate resources to areas of mutual benefit.
Strengthen deeper integration to amplify policy effectiveness:
- Build a stronger single market for goods, services, and capital.
- Promote more labor mobility.
- Allow firms to scale up across the single market.
Consider an ambitious EU budget or centralized fiscal capacity to support shared priorities.
Engage with multilateral fora such as the World Trade Organization given global implications of subsidies and trade adjustments.

Europe’s industrial policies have global spillovers; subsidies and trade adjustments affect countries outside the EU.
Coordinated, well-targeted industrial policy can foster growth, innovation, and productivity while avoiding costly pitfalls.

Based on the IMF Working Paper “Industrial Policy in Europe: A Single Market Approach” and related IMF analysis.