The European Union is scrambling not to lag behind in the global cleantech race. One solution? Be a better team player at home. 

Industrial policy and competitiveness have shot up to the top of the EU agenda ahead of the European elections in June, as China and the United States have galloped ahead in their efforts to pioneer the clean energy technologies set to dominate future green economies. 

Although the EU has some of the world’s most ambitious climate policies and speaks with one voice globally when it comes to international trade, having a coordinated industrial strategy is proving a weak spot for Europe. 

Industrial policy remains largely in the hands of its 27 member countries, creating a fragmented system based on 27 different industrial plans that often places countries in internal competition with one another. 

The solution, experts say, is to work to overcome national mentalities in favor of a more coordinated European industrial approach, like more cross-border energy infrastructure, deeper market integration and shared funding for cleantech manufacturing. Such measures could send the investment signals the bloc needs to keep its industry competitive. 

“The system wasn’t designed for an EU cleantech revolution,” said Camille Defard, head of the energy center at the Paris-based Jacques Delors Institute, a think tank.  

“We are never going to get the synergies we need if we only have national instruments,” she said. 

A competitive environment  

A report commissioned by EU leaders published in April found that “the lack of integration in the financial, energy and electronic communications sectors is a primary reason for Europe’s declining competitiveness.” 

The current state of EU cleantech manufacturing is mixed. The bloc is seen as a leader in the production of key wind turbine components and its electrolyzer manufacturing capacity has been growing. It has only a tiny solar manufacturing industry and is also trailing behind in battery production.  

The big concern is the EU won’t be able to keep up with international competition to secure a sizable chunk of the burgeoning cleantech manufacturing pie. Financially, the EU faces an investment gap of over €50 billion by 2030 to scale up the manufacturing of technologies like wind, solar, batteries, heat pumps and electrolyzers, according to the lobby group Cleantech for Europe.  

Meanwhile, China already manufactures most of the world’s electric vehicle and grid storage batteries, solar panels and wind turbine components. The U.S., for its part, is investing heavily in domestic manufacturing through laws like the 2022 Inflation Reduction Act, which offers generous tax credits for companies that make cleantech products within the country.  

“The pace of external challenges has outpaced the pace of European integration,” said Domien Vangenechten, senior policy adviser at environmental think tank E3G, referring to the international competition threatening European industry. 

A unique challenge

The struggle to coordinate a cohesive industrial policy is unique to the architecture of the EU, which has its origins in the European Coal and Steel Community created after World War II. Back then, the organization established free movement of coal and steel products between six nations. By having a common management of these two sectors, no single country could make weapons on their own to turn against each other.  

After decades of integration, the EU now boasts the world’s biggest single market, has open borders between members and a supranational legislative body (the European Parliament), yet maintains national governance in a number of strategic areas, including industry and taxation. 

Overcoming national mindsets is easier said than done. 

“Politicians [of the 27 member countries] are elected at the national level and accountable to national politics and that makes it harder to embrace the European integration narrative,” Defard said. “But that’s the wrong bet.” 

Big and rich member countries have few incentives to work more closely with other members, she added. 

Take state aid. The EU has tight rules for how countries hand out public subsidies to private companies to avoid unfair competition across the bloc. In response to the Inflation Reduction Act, the European Commission temporarily relaxed state aid rules in March 2023 to allow national governments to support projects related to the transition to a net-zero economy.  

It did so uneasily, however, warning about market fragmentation. An analysis of an earlier loosening of the rules after Russia’s invasion of Ukraine in 2022 showed Germany dished out more than half of the approved state aid requests. 

The bloc has also been struggling to agree on harmonizing rules related to capital markets, which would make it easier for money to flow across the bloc to facilitate business investments and strengthen the EU’s economy. It’s a discussion that has been dragging on for almost a decade, with national governments reluctant to give away power to the supranational level.  

Similarly, while the IRA is creating a competitiveness challenge for the EU, it’s not a measure the EU can easily replicate. 

The IRA is giving out a lot of subsidies that would be far more complicated to employ in Europe because each country has their own tax policies, Bas Eickhout, a Dutch member of the European Parliament from the Green Group, said at a recent conference in Brussels.   

“That’s just a luxury we do not have,” he said, voicing his support for a more holistic European approach to industrial policy. 

Better interconnected national electricity markets would help bring down power prices for households and industry, according to the April report for EU leaders. A main barrier: lack of trust. “Each country must trust in its ability to receive energy supplies from its neighbours at any time,” according to the report. 

The 27-member bloc does have some EU-level tools that allow for more coordinated European action, like the European Innovation Fund, through which the Commission recently completed auctions to support renewable hydrogen production. But experts and lobby groups say the bloc needs more mechanisms, such as a coordinated pan-European clean energy fund that would both simplify and oversee access to funds, promote cross-country investments and pull in more public resources. 

A critical moment

The results of the European parliamentary election in early June will help determine what’s next for Europe’s cleantech industry. If the political balance shifts more to the right and becomes more nationalistic, as polls indicate, it won’t make it easier to talk about European integration in the next legislature, said Vangenechten. 

The election results will also shape the formation of the next European Commission, the EU’s executive arm, its architecture, as well as the choice of commissioners. For example, currently, two different commissions manage industry and European Green Deal issues, but calls are growing for one commissioner to oversee both. 

At their last summit in April, EU leaders agreed on language calling for “a new European competitiveness deal.”  

The critical moment for such a deal will be the end of June when leaders are expected to lay out the EU’s strategic goals for the next five years. 

While there is consensus that Europe needs to shake up its industrial playbook, “the question is, what will happen?” Vangenechten asked. 

“Will there be a political push to pool more resources, for more integration, better coordination or not?” he said. “I think it’s very difficult to read that.” 

Editor’s note: Cleantech for Europe is supported by Breakthrough Energy, which also supports Cipher.