Let this time be different!

Europe needs a green industrial recovery strategy to exit the pandemic.

With its €130 billion recovery plan, Germany has not only enacted its largest stimulus in post-war history but has also signalled a fundamental realignment of its fiscal and industrial policy, in view of the impending ‘great transformation’—the decarbonisation of society. About €50 billion are focused on climate-friendly technologies and infrastructures, such as renewable energies, electric charging, energy-efficient refurbishment, public transport and reducing emissions in energy-intensive industries, as well as developing a new economic sector—the green hydrogen economy. More than €200 billion of new debt will have to be taken on this year. The sacred principle of ‘no net debt’ (schwarze Null) has been abandoned—at least for the time being.

That Germany is finally investing more in its modernisation is good news for the whole of Europe, to counter the recession and help alleviate eurozone imbalances. Other countries such as France, Luxembourg and Sweden have similarly adapted their recovery packages to environmental objectives. It is astonishing that climate protection is becoming broadly accepted as a main principle of post-coronavirus recovery.

Nevertheless, there is still considerable need for action if not only individual countries but all of Europe is to experience a sustainability boost. In particular the industrial sectors—hard-hit by the Covid-19 crisis—need a pan-European response, as supply chains are European and many measures to minimise greenhouse-gas (GHG) emissions only make sense in a European context. This presents Germany, taking over the EU Council presidency on July 1st, with a momentous responsibility and the opportunity to ‘Europeanise’ its national strategy, providing an impetus for a pan-European green recovery.

Intensified imbalances

The financial and currency crises of 2008 and 2011 showed that crises tend to develop increasingly asymmetrically. National economic conditions, as well as the political ramifications of combating the crisis, enable some countries to recover much faster—particularly in manufacturing. Some, such as Germany, have just been through one of their strongest economic decades ever, whereas southern-European countries in particular have experienced overall industrial stagnation or even decline (Figure 1). Hundreds of thousands of industrial jobs have thus been lost; shortages of skilled workers, a lack of education and training structures, low investment in modernising production and stagnating productivity still hamper their industrial revival. Economic imbalances within the EU have intensified and very little of the ‘green growth policy’ widely discussed after the financial crisis has been realised. 

Figure 1: industrial production in EU countries, 2010-17 (2010=100)

However, crisis not only affects ‘internal’ imbalances but also ‘external’, geostrategic competitiveness. European industry has increasingly become the target of acquisitions and ‘partnerships’ involving companies from abroad, especially China. Practically the entire solar-cell sector has emigrated to China since 2012 and, with takeovers such as of the German robot manufacturer Kuka (2012) and the Swedish car manufacturer Volvo (2010), China has established itself as an important player in the European industrial landscape. Deals involving Chinese companies in German industry increased from 39 to 56 between 2018 and 2019. Other Chinese policy initiatives involving eastern-, southern- and central-European countries, such as ‘Belt and Road’ and ‘16+1’, have similarly become vehicles for its technological updating.

China’s impressive industrial build-up in the past decade can be explained not only by domestic market developments but also by its crisis policy and focus on acquiring key foreign companies and technologies in the aftermath of the financial crisis. Now back in Europe with investments and acquisitions, China will once again deploy its enormous box of industrial-policy instruments to strengthen its strategic position after the crisis.

Europe is therefore confronted with the challenge of not only supporting individual member states or climate-friendly technologies through disparate national programmes but managing the Covid-19 crisis so that capacity in key sectors is maintained and developed throughout Europe. This is imperative if the EU wants to remain at the forefront of global technology in five, ten and 15 years’ time. It is essential to prevent the crisis once again swelling into a long-term ‘asymmetric shock’, with the loss of precisely the strategic value chains and key production systems we need to decarbonise Europe successfully.

Green industrial recovery

With the European Green Deal, innovation fund, industrial and hydrogen strategies and the recovery plan, Europe is already taking steps towards sustainable restructuring. But many of these policies remain vague while the industrial-economic situation is acute. Industrial production fell by a 12-month average of 27 per cent in April and Germany, Spain, France and Italy saw a 30-40 per cent decline. Many supply chains have been shut down or (partially) destroyed, the medium-term market prospects are unclear and companies are putting off investments and research-and-development projects.

A strategic, green, industrial recovery plan must combine three main approaches: maintain existing capacity, support companies’ medium-term modernisation and establish long-term market prospects for key green technologies.

Short term: The focus of EU institutions has been on securing state, company and household liquidity through generous credit lines, R&D and investment support, the SURE-programme for furlough pay, temporary abolition of the debt brake, strengthening ‘just transition’ and simplifying state-aid regulations. These help protect production structures, retain workers and create purchasing incentives—all contributing to a speedier recovery.

As fossil fuel-based sectors might also receive support, however, this unavoidably leads to rising emissions during the upturn. Many if not most of the necessary low-GHG technologies still need time to establish themselves on the market and some are only in the early stages and will need (at least) another decade of development and testing. The priority must therefore be to help companies survive for the time being: only by preserving existing—partly fossil fuel-based—production structures does a more forward-looking industrial modernisation become possible.

Short to medium term: At the same time, financial, physical and political infrastructure must be provided to ensure industry does not lose momentum in its transition to carbon neutrality. Since, for example, it is not yet possible to produce carbon-free basic chemicals, steel and cement on a large scale and the renewables-based infrastructure for sector integration (electric cars, for instance) is still largely lacking, medium-term R&D and investment policies are needed to prepare and accelerate the ecological modernisation of production plants in upcoming investment cycles.

This requires a faster expansion of renewable energies, electricity grids, rail transport and electric-charging infrastructure, as well as the promotion of test plants, low-carbon breakthrough technologies (LCBTs) and green-investment incentives for small and medium-sized companies. Some of these measures contribute immediately to a positive economic (and employment) upturn but have only a medium- and long-term effect on emissions. The aim is to prevent the crisis from leading to yet another lost decade for industrial restructuring and to eliminate deficits in basic infrastructure evident before the pandemic—in transport and housing, in digitalisation and in integrating renewable energies and networks across Europe.

Medium and long term: A credible, long-term market-creation strategy for green technologies is at least as important as short- and medium-term measures. If companies are to embark on costly and risky (green) technological adventures amid the coronavirus shock, they need a tangible market perspective, not just R&D incentives. Otherwise, many green investments will not be economically viable and will not take place or be too retarded.  

Completely different political mechanisms are required here. The system for long-term protection for energy-intensive industries against ‘carbon leakage’ (offshoring to more lax regimes) needs to be clarified soon—the European Commission’s focus on a border-adjustment mechanism is too narrow. Internal-market options, such as fixed industrial electricity prices, should also be reconsidered. A renewables-based power supply for industry is necessary, as is a stable pricing strategy, taking in the availability, price and import requirements for low-carbon hydrogen. Transnational initiatives are needed for key technologies such as battery production, electrolysers or in the entire photovoltaic value chain, as well as strategies for Europe-wide sector integration through carbon capture and usage (CCU) and carbon capture and storage (CCS).

These measures aim at market development for nascent technologies and are necessary to increase the attractiveness of risky industrial investments. Although they often have little direct economic impact and will only reduce greenhouse gases in a decade or two, they are nevertheless essential to a post-coronavirus strategy, as the short- and medium-term policies will be only partially effective without these long-term measures.

Fit for the future

Many European industries had only just recovered from the last crisis when they were overrun by the pandemic. Given that Europe—including Germany—has lost important parts of strategic value chains in key green sectors in the last decade, we must not make the same mistake again and hope that economies somehow will pull themselves out of the crisis individually. Instead, we should take the opportunity to make pan-European industry and its interlinked value chains—a precondition of European competitiveness—fit for the future.

This means considering economic recovery, climate, industrial and trade policy measures in combination. The aim is to strengthen short-term industrial capacity, support medium-term R&D and establish long-term market prospects for renewable technologies. Obviously, many difficult questions remain, including the prioritisation and financing of projects. Germany must use the next six months to put its weight behind an effective, pan-European, green recovery and industrial-development regime.

Only through a co-ordinated, ambitious approach can we ensure that, with every crisis, Europe does not lose a bit of the industrial capacity needed for a successful ecological transformation. And only thus is it possible to make our economies and industries both crisis- and future-proof.