Lowri Evans & Hans Kribbe in conversation

Shearwater partner Hans Kribbe recently co-authored a Dutch government commissioned report on EU industrial policy, an approach once thought of in Brussels as debunked, protectionist and downright dangerous, but now in the process of making a return under Internal Market Commissioner Thierry Breton. Shearwater senior advisor Lowri Evans was the top European Union civil servant for industrial policy between 2015-2019. They sat down recently to chat about the challenges Europe currently faces. Below is a transcript of that conversation.

Lowri Evans:  You argue industrial policy is back from the dead in Europe. I agree with you, even if I also believe much more remains to be done. What do you think happened to explain this renaissance of industrial policy? 

Hans Kribbe: The short answer is geopolitics happened. Trump happened. Covid, China and Ukraine happened. They made us realise we are economically vulnerable to foreign, and potentially hostile, powers who view supply chains as tools of power to be used for geopolitical goals.

European elites used to believe it didn’t matter where industry and manufacturing was based. They assumed that technology, natural resources – stuff we need in general – would always move freely around the global trading system, and therefore also always end up in Europe.

But it turns out geography and borders matter more than we thought. If you’re overly dependent on foreign businesses for key technologies such as microchips, the state which hosts those businesses might one day make access to those technologies conditional on certain political demands.

For a long time such tactics seemed only a remote possibility, something that would disappear entirely over time. The unstoppable march of globalisation. But the race for Covid vaccines and China’s mask diplomacy showed that this wasn’t just theoretical risk. The war in Ukraine, of course, has crushed any remaining illusions.

LE: I agree. I do think some of those European elites have been on a journey here, and I include myself in this, from a neo-liberal agenda to a more interventionist one. But back to the here and now: how ready do you think Europe is for the disruption caused by the war in Ukraine, in particular in energy?  

HK: We’re not ready at all. I would argue that energy has been a missing component of industrial policy thinking. Not all parts of the Union are critically dependent on Russian gas and oil. But Europe’s biggest economy, Germany, clearly is. For decades Berlin did not regard its energy dependency on Russia as strategically problematic. The biggest risk seemed to stem from the transition of gas through Ukraine, which led to disruptions in 2006 and 2009. This is why Germany invested in gas pipelines under the Baltic Sea that linked it directly to Russia. 

Gas and oil supply blockages seemed an unimaginable scenario. Russia needed the money as badly as Germany needed the gas and oil. But precisely because of geopolitical factors such a scenario has now come to pass, while pipelines and LNG infrastructure for importing non-Russian gas were never built. Ten years ago we could have begun to gradually diversify supplies and kept the cost of this shift in check. Now we’re left with shock therapy, the price of which will be huge.

LE: If that is true, and I think it is, what do you suggest Europe should do to prevent getting trapped in such strategic vulnerabilities in the future?

HK: The EU should try to attract or build the necessary industrial capacity on European soil. And where this isn’t possible or too expensive, it should try to diversify critical supply lines away from exclusive dependency on one foreign state, making its economy more resilient.

Take rare earths as an example. For some such metals Europe is currently almost entirely dependent on China, while they are vital for the climate transition, green technology and electrification, among other things. Geopolitically this is a catastrophic position for the EU to be in.

So it makes sense for politicians to sit down with miners to explore what support they might need to start mining rare earths on a larger scale in Europe itself, or indeed in neighbouring counties. Yes, this may be more costly in purely economic terms than importing strategic minerals from China. But it heads off potentially much bigger costs further down the line. Essentially this is about Europe protecting itself from geopolitical risk, which it didn’t sufficiently do in the case of Russia.

LE: But this isn’t only about energy and minerals is it? We’ve only scratched the surface. What other areas do you think Europe should now focus on?

HK: No, it’s about lots of things, which is why it is important the Commission continues to map out existing and new supply chain vulnerabilities, something you yourself Lowri were very keen on when you were in the Commission, as I understand. Once we have identified where we are strategically vulnerable, it then becomes possible to come forward with initiatives that address the problem in targeted ways. 

One example is European data, which are frequently stored on cloud infrastructure located in the United States. Here too, EU politicians are now asking and encouraging companies to build European-owned and European-controlled cloud capacity. Even if the US is a pretty friendly power, the possibility that a foreign state might one-day throttle or even cut off Europe from its data presents a huge security liability. Under the US Cloud Act, the authorities in Washington can also legally obtain access to strategic and sensitive European data stored in the US. No US government would ever permit the reverse dependency to arise. 

So what you see more and more these days is Brussels and national governments trying to steer the supply-side of the economy in particular directions, for data, hydrogen, batteries and space communications technology. You get politicians identifying concrete goals, and then establishing partnerships and alliances with market players – think of Europe’s recent deal with chipmaker Intel – to realise those goals, and yes, this may sometimes involve significant amounts of state aid.

LE: Critics of this would argue the use of state aid in particular is a throwback to the dark days of Colbertism. Are they wrong?

HK: We’re definitely witnessing a paradigm shift in the direction of “vertical” or “sector-specific” industrial policy, a return of government-initiated “grands projets”. But I wouldn’t call this a backwards step. Times have changed, which Commissioner Breton and others rightly recognise. There are reasons why this shift is happening now – and not just in Europe, but also in the United States, the UK and across the world. And surely there are ways to avoid mistakes made with industrial policy in the past and to embed it in the single market.   

For the EU this shift is a real sea change, a Zeitenwende in economic terms. Predictably it meets lots of entrenched and even ideological resistance. For decades the European Commission, and powerful departments such as DG Comp and DG Trade in particular, viewed industrial policy as a taboo subject. Handpicking companies for government handouts was seen as the gravest of all sins against the single market and international trade rules, and often for good reason too. But without falling into the other extreme, this resistance needs to be softened.

LE: And the smaller countries saw the Commission and the single market as a means of protecting themselves against France and Germany. Does this perception still exist?   

HK: Industrial policy has always been a difficult subject for the Union’s smaller, free-trading member states like The Netherlands, Denmark or Sweden. They always understood that entering a subsidy race with Germany and France would work out disastrously for them. So you’ll find plenty of people in those countries who are deeply worried about relaxing state aid rules, for example.

At the same time, those countries start to recognise that, without lifting the political taboo on industrial policy, Europe – themselves included – will eventually get badly beaten by China and other global technology powers. The choice for a country like The Netherlands, betting increasingly on its burgeoning tech sector, has become vastly more complex than before. Say “yes” to a Europe of “grands projets” and run the risk of getting squeezed by Germany and France. But say “no” and get crushed by China instead!

LE: Is there a way out for the Dutch and also for the EU as a whole, in particular if industrial policy involves the increased use of state aids?

HK: The way out of this dilemma is to “Europeanise” industrial policy. This means it should be Brussels, not Paris and Berlin, that ultimately gets to decide whether an industrial ecosystem or supply chain can be targeted for receiving public subsidies by member states or other support. And the Commission should also define a clear framework for, and draw boundaries around, industrial policy, ensuring that when subsidies are put in place, this happens in a controlled and coordinated manner and by a plurality of states willing to make such investments, not just the big countries acting on their own to protect their national champions.

If we are to re-industrialise Europe for geo-strategic reasons, and decide to build new or revitalise particular ecosystems on EU soil, say for hydrogen or microchips, then the bits and parts of that ecosystem should be spread out over a number of member states. It may be that the big member states will attract a bigger slice of the pie, more technology jobs and ultimately higher GDP. But there surely is a way of centrally organising things that gives smaller states – which also possess highly skilled people – ample opportunity to attract high value parts of the supply chain, allowing them to contribute to and benefit directly from Europe’s re-industrialisation.

To me it seems okay, for instance, for Germany to subsidise Intel for building a brand new and for the EU unique “fab” for the production of advanced microchips in Magdeburg. But only as long Berlin recognises that other high value parts of the semicon supply chain will need other EU countries to invest in. What definitely wouldn’t be okay, for example, is for Berlin to offer big hand-outs to Germany-based companies to design and build lithography machines that can mass produce sophisticated semiconductors, which is the technology Eindhoven-based ASML already specialises in.

The Commission’s job is precisely to ensure that this won’t be happening. Rather than compete for knowledge, jobs and wealth, it should get EU members to discuss and agree how public funds can be put to use in a concerted manner that delivers certain national benefits for all, while also boosting the continent’s resilience as a whole. Such coordination may slow things down, but it is the only way forward.

LE: I agree, and as one final remark, I do believe more thinking is required, and thinking in the open that involves industry, researchers and also workers. Ultimately this should not be about bureaucratic initiatives, but things which make a real difference in the real world and also to citizens.