Industrial Policy part 1. The EU and green tech with Simone Tagliapietra

In the first episode of the series on industrial policies, Francesca is joined by Simone Tagliapietra, Senior fellow at Bruegel and Professor of Energy, Climate and Environmental Policy at the Catholic University of Milan and at The Johns Hopkins University - School of Advanced International Studies (SAIS) Europe. In the episode, Simone explains why it is vital for the EU to get the green tech ‘revolution’ right. To do so, the episode addresses the EU’s approach to the green transition, the role of industrial policy and investments in green technologies. Particular attention is paid to the debate on the balance between the EU’s liberal approach and the emerging interventionist trend. 

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SPEAKER_00 0:10

Welcome to Geoeconomic Competition. I'm Francesca Giretti, your host, and in every episode I dive into the intricacies of geoeconomics with other experts. This is the first episode of a series of episodes on industrial policies, and today with me I have Simone Taglia Pietra. Simone is a senior fellow at Bruco as well as a professor of energy, climate and environmental policy at the Catholic University of Milan and the Johns Hopkins University School of Advanced International Studies Europe. Ciao Simone, welcome.

SPEAKER_01 0:40

Thank you.

SPEAKER_00 0:40

Simone, you're a very prolific author, and recently you co-authored a paper titled Green Industrial Policy in Europe, Past, Present, and Prospects. We'll come to this paper later, but right now I would like to concentrate on a shorter piece you wrote for Politico about Europe's competitiveness. Now, Europe's competitiveness is the topic that I try to touch upon in each episode of this podcast. And in the article, you mentioned a couple of things that I would like to repropose here. The first one is the potential role of two forthcoming reports, one by Enrico Letta on the future of the single market, and the other one by Mario Draghi on the future of European competitiveness. These may become pillars of the European Union's economic policy of the future, and hopefully we'll have a chance to discuss them in future episodes. The second point regards the tension within the European Union between what is more of a European traditional economic position, which could be described as a liberal position, open markets, open economy. And the second one is one that a number of member states has traditionally been more comfortable with and could be described as being interventionist. And there is a bit of a resurgence of the second position thanks to the wider presence of stronger industrial policies, the wider support also for industrial policies. Now, Simona, could you share with us where you stand and where do you think the European Union should go?

SPEAKER_01 2:09

So, as you say, Francesca, the uh this debate has become one of the main economic policy debates in Europe over the last years and is today a central debate to the agenda formation of the new European Commission. Uh, both Mario Draghi on the one hand and Ricolette on the other are working on this. And the debate is extremely polarized because uh the way I see it is that basically the European Union has been built on a certain idea of the economy, which was simply based on competition policy, strong competition policy to make sure that basically consumers get the best price for products and services in a well-functioning market, open trade, and focus on comparative advantages. So we should focus on what we are good at, and for all the rest, we trade with the rest of the world. That's fine. So competition policy, open trade, and comparative advantage as the basic scheme of our uh economy. Now we are injecting economic security into this established paradigm after the pandemic, after the energy crisis, after the increasing tensions between the US and China, and also after the IRA, right? So this idea that uh you know Europe needs to equip itself to uh play in the new uh brave uh world out there is a bit uh the what has been changing this paradigm. And the question is how far should we go in uh accommodating this economic security element into the established paradigm? And then you have uh new positions that, as you say, have been pretty established in certain member states, like France, for example, that see the role of the state to be extremely important. So these positions call for more interventionism of the state into the economy with a strong industrial policy. Now, where I stand there is a bit in the middle, to be honest. Very culture in a sense, you know, economists on the one hand, on the other hand. But I think uh it's very important to recognize that yes, we are in the new global context, and uh we do need to uh be more, you know, paying more attention to the economic security uh element, but we need to do that, not dismantling the established system, which has a lot of benefits for Europe. So I think the whole question is about how to accommodate the economic security element in a smart manner into our system, not to enter a very dangerous territory that will unavoidably lead to uh unintended consequences that will be very damaging for Europe both economically and politically, starting with the fragmentation of the single market, because in Europe, whenever you say more interventionism by the state, we need to acknowledge that maybe only a few states can scale up their interventions because they have deep pockets. Others might not be able to do that, and therefore the immediate uh step that you will see is that Germany, France can subsidize a lot their industries, and you know, if allowed, they will do so, while others will not be able, and that will fragment the internal market, which will make us actually weaker vis-a-vis external competitors or trade partners than before. So I think that's the trap we need to avoid, and that's why I think we need to accommodate this new dynamic, but in a smart manner. Otherwise, we are doing really uh self-damage here.

SPEAKER_00 6:07

Thank you. Um allow me to challenge you a little bit. Um I agree with you that the risk of European fragmentation is caught the debate. And we all like to say that it is necessary to find a balance between maintaining the liberal approach of the European Union while taking into consideration the economic security challenges and the geopolitical challenges, um, as you rightfully mentioned. But could you elaborate on how that balance looks like?

SPEAKER_01 6:37

Yes, sure. And maybe the best way to elaborate this is by you know making a concrete example. And uh one of the most fascinating uh discussions we have seen in this space recently regards the issue of solar panels. As you know, in Europe we'll freak out because uh we import 90% of our solar panels from China, right? And uh we have taken a decision um more than 10 years ago to let it go because of our established paradigm. So we did try at the start of the green transition when we actually scale up our subsidies for the deployment massively, so Europe was the first major market of solar panels in the world. We did try to get the industrial benefits of that. So Germany and others did have a solar panels manufacturing industry, but uh that industry quickly became uncompetitive vis-a-vis the uh Chinese competition. Now, governments at the time took a decision not to ramp up subsidies for this industry simply because of comparative advantages. We were not good at that. So let the Chinese produce these solar panels at scale at a very low price, we will import them, that will accelerate the green transition in Europe because it will be cheaper, while we focus on something else. Now, with this new economic security paradigm and the idea that we are over-reliant on China on clean technologies like solar panels, as we have been in the past with fossil fuels and Russia. There is uh push to say we need to ramp up subsidies to bring back manufacturing of solar panels in Europe. Now, what we have been saying is that does not make sense if done in a, let's say, indiscriminate manner. There is, we need to acknowledge the economic facts. And the economic fact is that China has built such economies of scale on the current generation of solar panels manufacturing that it will be extremely difficult for Europe to catch up. And also for the United States, the news of a few days ago, there was a wonderful uh article in the Financial Times saying that even for the US, with all the IRA subsidies on that, it's proving to be extremely difficult to push solar panels manufacturing in the country. But of course, because as we recall in our study that we recently published at Bruegel, the very same amount of subsidy provided under the IRA for solar panel manufacturing equals the total cost of production of solar panels in China. So you understand that it's like going against gravity. So what we are saying to be in the middle is not you should just leave it to the Chinese. No, we say we should play on Europe's strengths. Europe is an innovative economy. We do innovate a lot in a number of technologies, including clean tech. So we should subsidize those innovative companies that are trying to invent and develop the technologies at the frontier, so the technologies of the future. So to be very crude and short, if you cannot beat the Chinese on quantities, let's beat them on quality. So that's where we think Europe has a space to go to focus on the innovative sections of the industry to make sure that we trap the next generation of these technologies. And there is plenty of opportunities. We talked solar panels here, but think about batteries, for example. Yes, sure, China has built an entire, you know, uh predominant position on the supply chains of critical raw materials and batteries manufacturing, even if the EU has been developing quite important uh industrial policies with that regard to the last years. But these are lithium batteries that belong to uh, I mean, the current generation that might be very different from what is coming up. And we see, for example, Japan being extremely active on solid state batteries, which might completely redesign the game in this space because solid state batteries are very different animals, will require much more minerals, so also diminishing our import dependency, by the way. And that's the kind of segments in which Japan, like you, might have a role to play, really having a comparative edge vis-a-vis China. So it's about being smart.

SPEAKER_00 11:14

I mean, preaching to the choir. I have a number of questions I want to go through, uh, but you have given so many great inputs for um discussion, such as the risks of creating redundancies, the creation of overcapacity in a global economy that already has China, a major exporter of overcapacity, the issue of not listening to the market. Um, we talked about solar panels, right? But these days, electric vehicles also occupy a large part of the debate, as well as other sectors where the EU faces some big questions. The question that we mentioned, for example, is whether to invest in catching app in some sectors, or as you rightfully said, Simone, investing in future tech, whatever that means, although you brought some great examples. Um, and the choice is not necessarily binary, right? This leads me to the following question, which regards the core topic of your expertise. What is the role of environmental policies and green tech in the future of European competitiveness? You've already touched upon this, but if you could elaborate further, what you think should be Europeans' priorities in this sector?

SPEAKER_01 12:30

You know, many people out there, and I think we will see that very clearly in June at the elections, tend to think that decarbonisation is an expensive uh habit for Europe, that uh we are a bit taking this uh luxury of doing a very expensive uh uh decarbonization project because uh we wanna show off that we are better than others in the world, because it's uh ideology and so on, and this is very costly and all of that. Now, while populist parties will certainly and are, of course, already playing a lot with this, uh I think it would just take very few basic facts to really turn this argument upside down. And the first, in my view, is simply the recognition that Europe is a major importer of fossil fuels. I mean, we need to import more than 90% of the oil and gas we consume. Europe is not the United States of America, is not producing massive amounts of oil and gas at the level of being not only self-sufficient but also an exporter. And therefore, the European import bill for oil and gas is huge. And we have seen over the last few years what it means to be reliant on these imports at a time in which you know some of the uh partners, let's say, might you make use of a geopolitical use of these exports, and we have seen how much it costs to government budgets to buffer the volatility in the prices. So the best insurance policy for Europe against this volatility and against this uh you know uh highly fluctuating, let's say, and very expensive in any case, import bill is to double down on the green transition because whatever we manage to do on renewable energy deployment and energy efficiency, for example, will certainly put us in a better position when it comes to security, first of all, but also to competitiveness. Now, why are uh both uh Professor Mario Draghi and uh Enrico Letta looking, for example, at the single energy market while doing their reports? For the very simple reason that energy cost is a major item when it comes to defining the competitiveness of an economy, namely like Europe. After the energy crisis, uh our gas price, for example, will likely remain three times higher than the gas price in the United States. Used to be two times higher before the crisis, now is slightly more, it's three times, right? And uh our electricity prices are much higher than the electricity prices in the US, but also in China and elsewhere. So, how can we structurally lower our electricity prices is gonna be a defining question for our competitiveness, because as we electrify our economy with the rollout of renewables and decarbonization, this will become more and more important for families and businesses. And for energy-intensive industries, the electricity bill represents a major cost item. So the only way for Europe to slash structurally its electricity bill is to double down on renewables, which will allow to lower the cost of electricity. The problem is that this will come when renewables will really have a higher share into the mix, namely after 2030. So renewables will manage to structurally slash the price of electricity after 2030 in all models. So the question for Europe is how to get from where we are today to then. So it's how do we create this bridge? And that's where it's very important to have an integrated European energy market that really ensures that we have an efficient development of the system. Because otherwise, if we follow a national trajectory where each individual country does its own little investments, we will possibly multiply the cost of the transition. So if we act together, we will manage to be more efficient and to more rapidly reduce the cost of energy, which is a major competitive item for Europe.

SPEAKER_00 16:50

And this message, do you think member states understand it, or are there member states that struggle, that are difficult to be convinced, or simply it is a difficult conversation in general?

SPEAKER_01 17:01

So this is a difficult conversation to have because energy belongs to the core of uh member states' sovereignty. So the European countries, that's very clear in the Lisbon Treaty, retain sovereignty on the definition of their energy mixes because we have very different approaches to energy around Europe. As we know very well, no need to mention countries here. There are countries that like nuclear, there are countries that don't like nuclear, and so on and so forth. Now, the question is that we now are about to face an unprecedented development, which is a huge green investment wave. So over the next 10 years, Europe will need to basically scale up massively its energy investments. We will basically need to double what we currently invest in the energy systems if we are to meet our targets. That requires huge investments in namely electricity generation, but also transmission and distribution systems. And uh in order to cope with the variability of solar and wind energy, we will need to interconnect our markets as much as possible in order to avoid more investment in storage and flexibility solutions, for example. So the future is very different from what has been the status quo so far. And uh really the existential question is whether we decide to take this endeavor together and therefore be more efficient for all. And by the way, by developing an insurance policy for everybody, because the more interconnected we are, the more we are resilient to external shocks. And let's remember that even in a world that is fully electrified and the green transition world, etc., security risks will be there, cyber attacks, risks, etc., which by the way we already see in a number of countries also coming from Russia, namely. But these will multiply in the future. And if there is one lesson of the energy crisis of the last years, that lesson is only together Europe can deal with these external shocks. If I mean we manage to go through the crisis without one, not only one day, but one hour of shortage for the very simple reason that we invested over the last 10 years in a lot of small interconnect gas interconnection projects around European countries, and we built certain LNG plants in the East, etc., after the uh the gas crisis we had with Russia in 2006 and 2009, and then of course the annexation of Crimea, because we wanted to prepare. And those investments in interconnections were extremely important to deal with the gas shop. Without that level of interconnectivity within Europe, we wouldn't be able to stand Russia as we have done. So I think this is exactly the same for electricity, and more will have to be done here in the coming years.

SPEAKER_00 20:00

And that includes improving the situation even for countries who are often skeptical about further integration. Some of them have been experiencing firsthand why it was useful to have the European Union during the energy crisis. After all, it is to a certain extent the raison d'être of the European Union to protect and strengthen member states. We could talk more about the dependency implications of green technologies and would do so in another episode. But now I want to know specifically, and I'll ask you to be very precise, what are the next steps for the European Union? What is it important to do? What are the homeworks to be done in the next few months, keeping in mind that we have the European elections, but also for the aftermath of the elections?

SPEAKER_01 20:51

Okay, look, when it comes to the green agenda, I think that the key priorities will unavoidably have to be developing a green industrial deal, basically, and a green social deal. So, in a way, we need to develop the deal part of the European Green Deal. Because with uh, I mean, I think really this commission has managed to uh very solidly put Europe on a trajectory to net zero. We have set targets and shrinked into legislation with the European climate law, and we have rolled out a wave of legislation to get there, plus an unprecedented amount of grants from the EU to support implementation at the national level, namely through Next Generation U. So I think the Bundelion Commission will be remembered as the one that really put Europe on the climate neutrality trajectory. But in my view, um the industrial and social side of the transition uh have not been sufficiently developed. Now, the industrial Aside in particular, because we have reacted to the Inflation Reduction Act with an e zero industry act that doesn't tackle the real problems, for the very simple reason that the real problems really belong to what often is seen as a boring agenda, which is the agenda of the single market. So there is no way you can foster investments in these technologies if you don't get the horizontal conditions right. And for the horizontal conditions, I mean a working energy market, as we have discussed. That means a capital market union where companies can find investors for their projects, and so on and so forth. So we need to start from you know revamping that so-called boring agenda. And I think Enricoletta will have plenty of ideas on how to do that. And then we need to go targeted, vertical, in a smart manner to support uh innovative technologies. So that is one element, and that entails very important, building partnerships with third countries, namely in the global south, so-called, when it comes to you know getting the minerals and maybe developing parts of these supply chains in these countries, which is the only way to provide an alternative model to them than uh than the Chinese extractive model. And uh and then the social dimension. For the social dimension, I think the uh the Commission managed to put in place uh what have been the, let's say, textbook recommendations, for example, in terms of carbon dividends. You do carbon markets and at the same time you use the revenues to compensate the most vulnerable. Take, for example, the Just Transition Fund as the first initiative under the European Green Deal for the regional dimension, but then take really the Social Climate Fund that has been created within the ETS 2, so the carbon market covering transport and buildings, that will start in 2026. So we will have the tools, but we will need to make a good use of them. Because otherwise, uh, you know, if we are not able to handle the distribution and implication of climate policy, not only in the most vulnerable, but in the middle class. Because we will ask people to change their cars with an electric car, we will ask people to renovate their house, but this for the middle class means one-year income equivalent to be invested in one of these two items. So this is a massive effort where we will, of course, need to be uh rolling out progressively over time. Let's remember that over the next years, decarbonization in these sectors, bidding and transport, will need to accelerate four times if we are to respect our targets. And that's where climate policy becomes visible to people. So either we put the social agenda straight, you know, at the top, or we really risk a significant political backlash. So I think industry and social are the two items that we have to be, we'll have to be at the core of this agenda moving forward.

SPEAKER_00 25:02

Thank you. Funnily enough, I was in a meeting a few days ago where I got a question about how to increase Europe's competitiveness. And on top of other things that we have mentioned, another more that we could mention, the core answer is always to complete the single market. It may be boring, but it is true. Before I sum up everything, um, I want to ask you whether do you think that if the European Union does what we've been talking about so far, it will become a more competitive global actor. And do you think that what it has already done up to this point has made it a more competitive global actor?

SPEAKER_01 25:44

So, you know, measuring uh really competitiveness is very tricky, first of all.

SPEAKER_00 25:50

Especially for an economist, right?

SPEAKER_01 25:51

We we tend to be yeah, it's easy for exactly we tend to apply to uh to countries what we usually apply to companies, right? Which is not necessarily the uh the most easy way forward. But uh I think it's crystal clear, looking really from a very high-level perspective, that uh Europe has uh not managed to really develop uh uh the industrial opportunity of digital technologies. So baseline, we have two digital, we have two industrial revolutions ongoing, one is digital, one is green. Um, Europe clearly didn't manage to really yield the industrial uh opportunities in the digital transformation, because the US on the one hand and Asia on the other, maybe China and others, managed to be uh you know quicker and develop the economies of scale, etc. So my point is we cannot allow ourselves to lose also the green technology uh train for one very simple reason: that Europe is a continent, is an economy that is heavily reliant on carbon-intensive industries. And uh um if we don't replace these jobs, that will be inevitably phased out because of technological developments, not because of policy news, etc. No, it's by now it's a technological evolution or revolution. So it's really something that you cannot stop. Take electric vehicles, for example. So if we don't manage to build the new factories, the new jobs, uh, while we lose the old ones, I mean, Europe will enter in a matter of uh the next 10 years in a very difficult situation. Uh, and I think that's that's a mandatory task for the for the next years to really make sure that we are part of this. Now we are well placed, we do have uh, think about the automotive sector, uh, a number of strengths in the continent, but we need to play it smart because otherwise uh the risk, I mean, we cannot replicate, to be very clear. For elect for cars, what we have seen for solar panels and other technologies, right? And I think we really need to think very carefully about uh how can we partner with emerging uh players? And you see increasing Chinese investments in batteries manufacturing and electric vehicle manufacturing in Europe. Yes, and that could be uh uh I think it will be a very important avenue for the future. Uh, I'm not I think we will need to then disentangle ownership and location. Are we happy if the Chinese make investments in Europe or are we not happy because these are Chinese investments? So these kind of questions will be on government to answer. I think uh ultimately everything will be very transactional. So uh as long as jobs will be created and uh uh you know economic uh growth will be uh contributed to these investments will be welcome, and I think that's right. Uh but yeah, this is the new the new world we are in. And uh I think that whether or not we will manage to be competitive will really much depend on how far we will go in striking the right balancing act between the two elements we've discussed at the beginning. So we should not go too far because if we close down our market, let's remember that Europe is an export-driven economy. That will be really detrimental for our own uh own interest, economic and political interest as well.

SPEAKER_00 29:31

Well, Simone, thank you for closing the circle. We started with the tension between liberalism and interventionism, and we close with that too. Now, a few takeaways from our conversation, if possible. The first one is to invest in innovation. Then do not join the subsidy raise for the sake of the subsidy raise. If you subsidize, be smart about it. And we're not just saying this, you brought some very good examples on how to be smart about it. Let's have a conversation about when our Chinese greenfield uh investments are potentially positive for the European economy, have a few opinions on this, maybe for another time, and especially and most importantly, perhaps invest in decarbonization if you want a stable and prosperous European Union. In that sense, of course, linked to this latter point, your suggestion to develop the green, any green industrial and social deal. And finally, think about implementation. We have nice policies and strategies, but we must sit down and get implementation right. That said, Simone, it has been an amazing episode. Thank you so much.

SPEAKER_01 30:51

Thank you, Vincent.