Interview with Sebastian Mang, Senior Policy and Advocacy Officer, New Economics Foundation (NEF), for ENA’s Sustainable Development Observatory special feature “Economic challenges of the green transition”.

* Interview conducted by Yannis Eustathopoulos, Co-ordinator, ENA’s Sustainable Development Observatory & Antigoni Voulgaraki, ENA’s Research Associate

The Green Deal Industrial plan is the EU’s response to the US ‘Inflation Reduction Act’ (IRA). How substantial are the differences between the two plans?

Traditionally, EU policy makers have been resistant to the idea of industrial policy due to conflicts arising with the EU’s Single Market. National industrial policies and different levels of public support for industries create an uneven playing field for businesses located in different member states, which in turn goes against the principles of fair competition within the Single Market. Moreover, the limited size of the EU budget means a lack of EU-level funds to support industrial policies, particularly of those with less fiscal firepower.

The EU, especially since the implementation of the Green Deal, has made progress, albeit too slowly, in advancing the transition towards a greener future. Measures such as the emission trading system and renewable energy targets have played a crucial role in facilitating this transition and fostering the development of green technologies. The EU’s approach, however, was focused on the least price of goods, rather than where goods were produced. This has led to sectors – particularly solar – which were developed and pioneered in Europe, relocating to countries with lower costs, particularly China.

The USA, although late to the game of climate action, is now through the Inflation Reduction Act and the Chips and Science (CHIPS) Act, pursuing an industrial policy. While addressing climate concerns is one of the key objectives, these policies also reflect a recognition that markets alone do not always efficiently allocate capital and that governments should instead actively invest in strengthen their economies, while upholding high standards for workers and the environment. Although there is still much progress to be made in the US, its industrial approach marks a notable departure from the traditional market-oriented perspective.

There are two big differences in the EU’s and the US’s approach to industrial policy. Firstly, the structure of the European macroeconomic system requires member states to agree on significant changes to its economic approach, particularly around state aid, fiscal rules or the creation of EU common borrowing. What has happened is that the Commission has introduced new rules on state aid, which means richer and less indebted countries will be able to increase the amount of spending on green industrial policies. However, rules on spending and borrowing remain relatively strict, which means those governments who are less affluent or have a higher debt challenge will need to cut spending elsewhere or raise taxes if they are to develop a solid industrial policy approach. This means the EU’s industrial policy approach as currently designed is unequal and will result in increased economic divergence.

The second big difference is that there is no consideration of recognising the transformative power of government. In the US the IRA includes conditions for companies supported by public investments (for example conditions to provide good jobs or apprenticeships), while the CHIPS act includes a condition that requires excess profits to be shared with the government.

The central philosophy of the European approach is to de-risk private investment. Is it an effective and socially just policy?

The approach of de-risking assumes that private companies are the most efficient at allocating capital and the aim is to reduce the risks associated with private sector investments in industrial activities such as through subsidies and regulation. The main objective is to create opportunities to attract private investors into the market. But under this approach, the state bears a significant portion of the risk by providing financial support to private companies but is unable to steer companies through conditions reflecting public policy goals or share in the profits through equity stakes or other mechanisms.

The Commission’s approach of de-risking is unlikely to facilitate the fundamental structural changes necessary to achieve greater societal inclusion, environmental sustainability, and widespread prosperity. In fact, it tends to underestimate the pivotal role that governments play in creating and shaping a resilient and equitable economy.

The proposals lack measures to prevent public support benefiting (polluting) companies with existing access to private financing. For example, Volkswagen’s 2022 profits increased 13% from the previous year to €22.5bn but has been requesting state aid from Eastern European governments to fund battery giga factories. Without conditions and profit sharing, a derisking an approach can led to socialising costs and privatising profits, potentially leading to public funds supporting private companies profit margins.

What alternative/complementary tools could European green industrial policy use to make it more effective and fair?

We suggest four main ways to move the industrial policy forward: a) We need to be intentional, which means setting clear goals and objectives about what we want to achieve. In its proposals the Commission does not foresee green industrial policy speeding up the transition. Moreover, we should focus more on a workers’ agenda as across Europe there are significant inequalities and industrial policy has the potential to create good quality and well-paid jobs which could alleviate some of these pressures, particularly in regions in economic decline; b) Social and environmental conditions are crucial when it comes to public spending supporting private companies. Rules and conditions apply to many that receive support from the government, this should be no different for private companies in receipt of large sums of tax-payers money. Particularly, as this support should support public policy goals. c) Similarly, governments should maintain equity stakes in companies. This would recognise the role of government in creating and shaping economic progress and help ensure that public policy goals are met. d) We need European and national strategic planning for industrial policy. By assessing the situation of industrial sectors and considering realistic objectives for the development of established or the creation of new green and digital industries, governments can plan to create and shape these sectors with the objectives of speeding up climate action, creating high quality jobs and development.

Can Member States today assume this role given the weakening of public intervention in recent decades in favour of the self-regulation of markets?

It has been increasingly evident during the covid-19 pandemic that globalisation exposed critical shortages of certain supplies like masks, medical gloves and semiconductors. This had an impact on various industries from on health workers to car makers that depend on the global supply chains. As climate change become worse, these supply chain will become increasingly fragile. This points to the need to encourage home-grown green tech industries across the continent.

Nonetheless, it is important to note that green industrial policy can also be designed with a focus on maximising social outcomes. Relying solely on market forces can contribute to the widening economic inequality, as the benefits are often disproportionately enjoyed by a small group of wealthy individuals within society.

The notion that markets do not always efficiently allocate capital or produce optimal outcomes is gaining recognition on both sides of the Atlantic. An example of this perspective is reflected in the stance of National Security Advisor to the Biden Administration, Sullivan, who emphasises the broken promises of trade liberalization that led to job losses and the erosion of economic capacity in the United States. Sullivan advocates for government investments in economic and technological strength, resilient supply chains, high labor, environmental, technological, and governance standards, as well as capital deployment towards public goods such as climate action and healthcare. Although the United States still has a considerable journey ahead, this shift in economic thinking marks a significant change.

So, green industrial policy can create and shape the resilient and sustainable economy we want, to think differently about how value is distributed between workers, communities and those who invest in companies as well as pushing companies to redesign business model.

Is green industrial policy an appropriate tool to strengthen SMEs and contribute to economic democracy in Europe?

Let me start with a quote by President Biden: “Capitalism without competition isn’t capitalism, its exploitation”. The IMF recently released a study showing that corporate power has concentrated significantly and that profitability of multinational companies has doubled. We have seen a trend towards much more concentration of corporate power. Green industrial policy can be designed in a way to continue this trend of market concentration or to counter it. Many politicians in the EU talk about supporting creation of European champions to compete on global markets. While some of these companies have a role to play, should relatively scarce public funds be used to bolster these companies, when they are perfectly able to access private finance? Industrial policy and particularly public support instead should focus on SME’s, micro companies, cooperatives and projects unable to access private finance.

You mention in your report the necessity of imposing climate, environmental and social conditionalities on companies receiving public financial support. Can you give us some examples?

We have three categories of conditions that we propose governments attach to public investments in our report. The first are climate and environmental conditions. These could include conditions to decarbonise their supply chain and promote an efficient use of resources. For example, in the car industry, companies should be encouraged to produce smaller and lighter cars instead of SUVs to reduce their energy and material footprint.

The second category of conditions consist of social conditions, this could mean creating good meaningful jobs, having apprenticeship programs or promoting collective bargaining so that workers have a stronger voice.

The third group includes conditions around value creation and profitability. According to a recent study, European companies now buy back shares worth more of their market capitalisation than their US counterparts, announcing plans to repurchase shares worth around $350bn, up from $218bn the year before. Executive pay, of for example, big electricity companies increased significantly during the recent energy crisis. So, to ensure private companies prioritise investments, rather than stock-buy backs, higher dividend payouts and executive pay, public support should include limits on dividend pay-outs, stock buybacks, and bonus payments during receipt of state aid.

Does the new green industrial policy framework ensure equal participation of all EU Member States in the green transition given their very uneven fiscal and other capacities?

The second part of our recent report highlights contradictions between green industrial policy ambitions and fiscal rules. We compare the EU’s green spending needs with proposed fiscal rules, and we find that 13 countries, including Greece would not be able to invest enough to achieve even the EU’s own limited climate targets without breaking debt or deficit limits.  Moreover, only four countries would be able to increase spending enough to meet a higher climate target that will give us a much higher chance of staying below the 1.5C target, set out in the Paris climate agreement.

Besides limiting EU’s climate action, the EU’s fiscal rules exacerbate economic disparities between member states, particularly affecting less affluent and more indebted countries. This perpetuates a pattern of economic divergence between the northern and southern regions.

We need therefore to reexamine our macroeconomic framework. Maintaining fiscal rules that allow some countries to spend much more than others is a problem that can be overcome in two ways. The first is allowing countries to have higher deficit spending for green investment by excluding certain green spending from deficit rules. The second is to have more European funding available to support countries who are more indebted to carry out green industrial policies.

To sum up, can the European green industrial policy, instead of being another driver of intra-EU divergence, become instead a driver of convergence by enhancing the productive potential of less-industrialised member states?

To maximise the potential of green industrial policy for climate and for society at large, a bigger reevaluation of economics is necessary. Designing green industrial policy but failing to recognise the role of government in creating and shaping the economy, could lead to public funds supporting already profitable companies, instead of leading to additional investments. Furthermore, adhering to strict and arbitrary fiscal rules is putting a limit on climate action and is likely to exacerbate disparities within Europe.

In addition to these broader reevaluations, both European and national-level planning can serve as crucial tools for governments to shape and cultivate desired industries. One way this can be accomplished is through the inclusion of industrial objectives within national energy and climate plans. These plans could involve a comprehensive assessment of a country’s current position in terms of green technology production, as well as the desired position in the next five or ten years.

To ensure a holistic approach, relevant stakeholders from national and local governments, businesses, trade unions, and civil society should be actively engaged in this process. It’s possible that certain countries may initially lack the productive capacity to manufacture cutting-edge batteries or solar panels. However, by setting clear objectives, making smart investments, fostering skills and innovation, and strategically planning towards these objectives, the situation can be transformed over time.