Can Europe Find Its Way Back to the Top?

Europe’s share of global manufacturing has been dropping for several years in a row. It is now estimated to be as low as just 14.3% of the EU’s GDP. We are currently in a race where the rules have changed. The Industrial Accelerator Act is the EU’s high-stakes bet to jump-start one of the most important components of the economy, with a bold target. The Act seeks to reach a figure of 20% of EU GDP from manufacturing by 2035.

Industrial Accelerator Beyond the Buzzwords

The Act, proposed by the European Commission on 4 March, is about money and speed. For the first time, a European regulation proposes a single digital portal for all industrial permits. The proposal establishes a hard 18-month deadline for permit approvals. In practice, this will mean that the waiting time for permits to build, for example, a battery plant, will be reduced, and it will not take several years as it can happen under current rules. Other than that, the proposal envisions the so-called “industrial acceleration areas”, which would be designated fast-track zones where projects could get priority access to energy and infrastructure.

Defining “European”

The Act introduces strict “Made in EU” quotas for public funding. In order to be eligible to win a government contract or a subsidy, a product must meet new thresholds:

• Electric vehicles: 70% of non-battery components must be EU-made.
• Aluminium: A minimum of 25% should be of EU origin.
• Batteries: A phased approach requiring EU-made cells and management systems.

Filtering the Foreign Direct Investments

The EU remains an open market, but the IAA introduces a value-added test for large foreign investments (defined as investments exceeding 100 million euros). This restriction gets triggered if a single country holds more than 40% of the global manufacturing capacity. In case a company from a dominant global supplier (such as China in the solar energy industry) wants to build in Europe, it must now guarantee at least 50% European employment, share technology and intellectual property with a local partner, and commit to local R&D spending. The idea behind this is to make global players help the European industry if they want to participate in it as market actors.

What Does This Mean?

We expect a huge demand for locally made and “clean” products. If a company produces low-carbon steel or EU-made heat pumps, the government can be considered one of the biggest guaranteed customers. That being said, the companies will need evidence in the form of environmental product declarations to prove their carbon and origin claims. Compliance with these rules will play a big part in the corporation’s competitive advantage.

Made in EU or Made with EU?

Behind the scenes, drafting the Regulation was not a smooth process. Two main points of view regarding how strict the “Made in EU” definition should be were expressed. One cohort of stakeholders was arguing that the definition should refer strictly to the 27 Member States. Conversely, others argued for a more flexible definition that would include trusted partners, such as the UK and Japan, in order to keep costs down and prevent supply chain shocks.

The result is a compromise where, alongside the Member States, the European Economic Area parties will be included. This means that products made in Norway, Iceland and Liechtenstein will also be considered “domestic”. However, the door has been closed to other strategic partners of the EU, although they might still be able to participate if specific reciprocity agreements are signed.

The Bottom Line

The Industrial Accelerator Act is an attempt to shift from a Europe that consumes the products of others to a Europe that is competitive in producing them. It goes along with the main ideas and messages from Draghi’s report and acknowledges that economic security should be treated as seriously as military security of the Union.

The European Commission’s primary task is to build the ability for the EU to be independent through this and similar initiatives. Still, there is a long way to go, since the ball is now in the park of the Parliament and the Council, which need to agree on the final version of the text and ultimately accept it.