Industrial policy is making a comeback, yet it remains tentative. The EU’s twin transformation requires a careful balance between climate action, digitalisation, and social fairness. A progressive agenda, built on six key pillars, can drive this change – and will increase the EU’s resilience in the face of global protectionist headwinds.
Werner Raza, Austrian Foundation for Development Research (ÖFSE)
The tentative return of industrial policy
After decades of marginalisation, industrial policy has reappeared on the political agenda. Nonetheless, fundamental questions persist: What objectives should it pursue? How can the ensuing change be managed equitably? What are the respective roles of the state and the private sector? An ÖFSE research project, undertaken in cooperation with the Vienna Chamber of Labour, delves into these critical issues.
While the primary motivations for renewed EU industrial policy – combating the climate crisis and navigating the digital transformation – are evident, rampant protectionism as propagated by the Trump administration requires a strategy to both increase the EU’s economic resilience and promote domestic economic development. Initiatives such as the EU’s Competition Compass and Clean Industrial Deal aim to secure Europe’s future competitiveness. However, their pronounced focus on competitiveness and deregulation carries the risk of undermining progress achieved under the Green Deal, particularly concerning climate protection and human rights due diligence. Financing remains uncertain, and prevailing austerity policies could dampen necessary economic stimulus. The prospect looms of five lost years for the green transition, accompanied by welfare cuts and further democratic erosion – factors that could fuel the populist right.
A progressive EU agenda for the twin transformation
Successfully implementing the twin transformation – encompassing both green and digital shifts – is fundamentally a political undertaking. Although technological solutions such as solar power, wind energy, batteries, and heat pumps exist, their deployment is threatened by economic, social, and political risks. Some risks, like geopolitical conflicts, lie beyond the EU’s direct control. Others, including social resistance or funding shortfalls, demand decisive political intervention.
The long-term success of this transformation hinges on maintaining legitimacy over the next quarter-century. In today’s environment, marked by multiple crises, rebuilding public confidence is paramount. The immediate challenge for the next five years is demonstrating to businesses and citizens alike that the European Green Deal will not only persist, but accelerate.
This places significant demands on EU institutions and national governments, requiring them to balance long-term strategic planning with immediate crisis management. Enhanced institutional capacities are essential, yet no government can manage this transition in isolation; broad societal cooperation is crucial. Legitimacy rests upon three foundations: (i) greater political participation, (ii) equitable sharing of burdens and benefits, and (iii) effective implementation.
A transformation vision grounded in solidarity must guarantee a stable social safety net through to 2050, reinforced by a pan-European public services agenda. This foundation underpins six key policy pillars for a progressive transformation agenda.
Six Pillars for a progressive EU Twin Transformation agenda
Pillar 1: Enhancing spaces of participation
Deliberative democracy must be strengthened, granting civil society and citizens an active role in shaping the transformation. European Citizens’ Councils should be empowered to develop proposals on key issues, which would then inform the work of newly established Twin Transformation Councils (TTCs) at both national and EU levels. Comprising representatives from EU institutions, national governments, business, trade unions, NGOs, and academia, these TTCs would aim to: (i) improve policy coordination, (ii) adjust policies and establish priorities, and (iii) assess progress and address implementation deficits.
Pillar 2: Ensuring a fair distribution of benefits and costs
Structural transformation inevitably creates winners and losers among workers, companies, and regions. The existing EU Just Transition Mechanism (JTM) is insufficient to mitigate adverse regional impacts and is scheduled to be phased out by 2026. To prevent exacerbating rural discontent, sustained long-term support is necessary. Furthermore, stronger public implementation capacities are required at national and regional levels. Solutions include: (i) establishing the JTM on a permanent footing, (ii) expanding cohesion and social climate funds, and (iii) strengthening public implementation capacities nationally and regionally.
Pillar 3: Doubling-down on the twin transformation agenda
With the EU at risk of missing numerous climate and environmental targets, urgent action is required across six critical areas:
(i) A stronger focus on reducing energy and material consumption through promoting energy efficiency and accelerating the transition to a circular economy.
(ii) A significantly increased EU investment programme for renewable energies, prioritising solar, wind, geothermal energy, and green hydrogen.
(iii) An EU mobility strategy centred on massive investment in rail infrastructure, support for electrified public transport across all regions, and measures to reduce private vehicle use, such as promoting car sharing.
(iv) A strategic EU industrial strategy identifying productive activities requiring special attention regarding (a) security of supply, including disaster preparedness, and (b) closing innovation gaps in high-technology sectors.
(v) An EU strategy for digital sovereignty that ensures democratic control over the digital sphere via stringent regulation and proactively promotes public digital infrastructure.
(vi) A transformation agenda for the European food industry focusing on (a) stricter regulation of unfair competitive practices, including pricing and contractual conditions, and (b) intensified promotion of organic farming.
Pillar 4: Promoting a governance framework with capacities & capabilities
Public institutions often lack the capacity to effectively steer the transformation process. EU innovation agencies grapple with (i) administrative overload, (ii) risk aversion that hinders radical innovation, and (iii) an excessive focus on technology at the expense of broader transformative innovation. To enhance governance, the EU should (i) ensure diverse stakeholder representation in decision-making processes, (ii) improve coordination among its innovation agencies, and (iii) demonstrate greater tolerance for risk in pursuit of breakthrough innovations.
Pillar 5: Pushing for an IP-conductive macro-financial framework
The Twin Transformation necessitates additional public investment estimated at €180–400 billion annually. Rather than solely prioritising de-risking private investment through a European Capital Markets Union, a more effective approach involves: (i) establishing an EU Transformation Fund (equivalent to one percent of GDP over 10 years, financed via common borrowing), (ii) expanding the EU budget for 2028 onwards (funded by Emissions Trading System revenues and new EU taxes), and (iii) utilising European Central Bank monetary financing mechanisms, such as green bond purchases.
Pillar 6: Cooperating with partners on Global Twin Transformation
Given the EU’s significant external dependencies, a new approach to cooperation with partner countries, particularly in the Global South, is essential for a global Twin Transformation. Shifting global political power dynamics and a relatively weakened EU position necessitate basing external relations on principles of equal partnership and mutual benefit-sharing. This includes: (i) applying strict Environmental, Social, and Governance (ESG) standards to mining and infrastructure projects; (ii) facilitating EU-backed technology transfer and local industry development; and (iii) ensuring fair benefit-sharing in resource contracts and pricing policies.
Furthermore, based on a realistic assessment of the importance of Chinese green technology for the timely implementation of the green transition, maintaining cooperative bilateral relations with China will be pivotal.
Either change by design or change by disaster
The European Union stands at a critical juncture, challenged by internal populism and external geopolitical pressures. Industrial policy offers a means to enhance economic sovereignty while respecting ecological limits. The fundamental issue is not a lack of financial resources or competitiveness – Europe possesses both. Rather, what is missing is the political courage to decisively address the twin transformation through a socially inclusive and proactive entrepreneurial state (© Mariana Mazzucato). Progressive political forces, including trade unions, civil society organisations, and academia, must advocate forcefully for this approach.
Werner Raza is director of the Austrian Foundation for Development Research (ÖFSE) in Vienna.