Industrial Policy in Europe: A Single Market Perspective

IMF Working Papers, December 16, 2024

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Authors: Andrew Hodge, Roberto Piazza, Fuad Hasanov, Xun Li, Maryam Vaziri, Atticus Weller, Yu Ching Wong
Published: December 16, 2024
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798400295690.001

European countries are increasingly turning to industrial policy to address the challenge of geopolitical fragmentation, enhance productivity, and accelerate the green transition.
Well-targeted industrial policy has the potential to correct market failures and support production efficiency by exploiting scale effects and internalizing knowledge externalities.
Even carefully designed unilateral industrial policies risk generating negative production externalities in other countries, and, under certain conditions, may not even be welfare-enhancing for the implementing country.
Negative externalities of unilateral industrial policy can:
- drive European and international production patterns away from underlying comparative advantages,
- create regional or global over-supply,
- result in changes in terms of trade that reduce domestic welfare.
These considerations suggest significant benefits from coordination.

A coordinated approach within the European Union and with international trading partners on a narrowly defined and carefully designed set of industrial policies could unlock untapped benefits.
Closer European integration would facilitate the adjustment of firms and workers to coordinated and well-targeted industrial policies and amplify their benefits.

Subject: Comparative advantage, Competition, Demand elasticity, Economic theory, Financial markets, International trade, Terms of trade
Keywords: Comparative advantage, Competition, Demand elasticity, EU aerospace industry export, EU single market, Europe, European Single Market, fishery block exemption regulation, Global, Industrial policy, single market perspective, State Aid, State aid expenditure, Terms of trade