Climate, conflict, energy security – how should EU industrial policy change to face this polylysis?

Industrial policy has returned. It is currently at the heart of both the EU and the UK agenda. This revival lies among the multi-hazards characterized by climate collapse, social inequality, energy instability and geopolitical instability. And it reflects wider changes. Governments in the G20 countries are stepping in more aggressively to shape their economies and are moving away from the idea that markets should be left to run themselves.

This is an important development. However, the current framework for industrial policy risks deepens the crisis they intend to resolve.

A study with Sebastian Mang of the New Economics Foundation found that the industrial policy framework is full of contradictions in the case of the EU.

It calls for resilience, but it cannot strengthen the critical public services that underpin stability. It is intended for strategic autonomy, but also strengthens resource dependencies. And while it gestures towards sustainability, it remains connected to a private sector strategy that delays phase-out of harmful industries.

Eroded foundations

The EU Industrial Policy aims to strengthen the bloc’s single market resilience by preventing supply chain disruption. It correctly views Europe’s economy as an interconnected ecosystem. There, the impact of one sector spreads to another. However, we cannot prioritize the basic sectors that maintain daily life. These include important services such as food, utilities, housing, healthcare and public transport.

Two core issues drive this failure. First, single market deregulation has often been extended to critical services, with providers operating like private companies. For example, liberalization of the energy sector has contributed to unstable prices and energy poverty. EU competition law and state aid regulations have historically constrained social housing provisions.

But social resilience, the ability of communities to withstand and recover from the crisis – and even more, market resilience relies on these critical services. But the energy of affordable housing, universal health care, and affordable households is often not prioritized.

Second, EU industrial policy does not have a clear definition of which sectors are “critical” and why. This creates an inconsistent list of priority industries and technologies, but fundamental sectors such as energy and housing are often left to be overlooked.

There are real consequences for these blind spots. Approximately 40% of the European workforce is employed in the basic sector. These sectors are where low-income households spend about two-thirds of their income. However, they are often unstable and undervalued, which puts Europe under economic shock.

To build true resilience, industrial policy must reaffirm the control of the public over essential services and recognize them as priorities. This means redefine what counts as “critical,” supporting the work of the basic department and accelerating public investment. This investment could be made through measures such as reforming fiscal rules and joint borrowing by member states.

Scrambling resources

Europe promotes strategic autonomy (the bloc’s ability to act in strategically important areas without relying on non-member countries). The aim is to reduce the reliance on imports of major industries such as green technology.

However, to achieve this, the EU should reduce its demand for resources and energy at the heart of its industrial policy. Instead, its key raw materials methods foresee the surge in consumption of rare earths, lithium and other inputs.

This strategy is self-destructive. It raises the possibility of European attacks on other parts of the world, ultimately threatening long-term security and peace for everyone. These tensions have already emerged. Export restrictions on nickel, cobalt, rare earth minerals and more are increasing. In an era of geopolitical rupture, these trends may be strengthened.

At the same time, resource competition is escalating in Europe itself. Tensions are rising in countries including lithium and copper, such as Serbia, Portugal and Greece, and there is an environmental and social cost of mining them. And indigenous communities such as Sami in Northern Europe face threats to their land and rights.

This is not against increasing extraction of raw materials within Europe. However, these contradictions deepen without an absolute reduction in energy and material use. To avoid these issues, the EU must focus on industrial policies to reduce unnecessary demand. Some key moves include investments in public transport, prioritizing renovations to new buildings, ending obsolescence and supporting agroecology for industrial agriculture, instead of subsidizing cars.

Research shows that this type of strategy can significantly reduce energy usage in Europe. It also significantly reduces dependence on important imports and may contribute to achieving energy independence by 2050. All this is without compromising the basic quality of life.

If Europe wants peace and security, demand reduction is a reasonable approach that must be at the heart of the EU’s industrial strategy. This should be adopted with greater cooperation and integration with Eurasia and the Global South, rather than strengthening hostilities towards these neighbors.

Green transition

The EU’s vision of “competitive sustainability” is based on market incentives and the belief that the private sector can promote green transitions. However, despite decades of improvement in efficiency, high-income countries have not separated material use and emissions from economic growth at the required speed and scale.

The EU continues to rely on demolition to make green investment attractive to private finance, using public subsidies, guarantees and loose regulations. However, this approach delays the phase-out of harmful industries as it leaves both the pace and direction of change into private capital.

What is missing is a more effective economic plan to restore public control over decarbonization. Achieving this means building on existing mechanisms that can provide change, such as public credit guidance. This sets rules that limit the flow of fiscal flow from commercial banks to the loss sector, while dictating investment in sustainables.

China offers examples of central banks using public credit guidance to shift their finances to a cleaner sector. The European Central Bank experimented with credit guidance between 2022 and 2023 and introduced corporate climate scores. Postwar France used credits planned to modernize its infrastructure for 20 years.

Europe and the UK are reviving, climate shocks are intensifying, and global power dynamics are changing. At this moment, a new industrial strategy is needed. This prioritizes the basic sector and creates financial space to build resilience. Reducing demand must be a prerequisite for security, peace and strategic autonomy. Additionally, reviving economic planning tools such as public credit guidance can accelerate green transitions.

Without these changes, Europe and the UK are facing an increasingly unstable future. Industrial policy must change because interests are existential.

This article will be republished from the conversation under a Creative Commons license. Please read the original article.