EU industrial policy forgets one important detail: people

When Dutch prime minister Mark Rutte exited the council building at 3 AM on Friday, he sounded cheerful. Others seemingly rallied behind his message that government support should be "temporary, targeted and focused on innovation."

But none of the major disagreements between the members over funding were tackled, leaving the EU Commission the difficult task of creating a cohesive policy out of diverse and conflicting views.

Skills skills skills

The leaders’ focus on industry, innovation and preoccupation with French, and especially German, industrial dominance, precluded a deeper conversation on something the EU Commission itself has repeatedly said is central to the green transformation: people.

The re-skilling of workers is the third of four central ‘pillars’, but it was only mentioned briefly by leaders in a short paragraph at the end. "Access to the right talent is really a struggle," said Céline Domecq, director of public affairs at Volvo. "The language of re-skilling needs a lot of work."

According to a Boston Consulting Group study, hundreds of thousands of workers in the automotive industry alone will have to shift away from grease and loose parts towards battery manufacturing and software maintenance.

"The lack of skilled workers is probably the number one challenge for the transition, even more so than finance and permitting rules," said Jude Kirton Darling, deputy general secretary of IndustriAll Europe, a pan-European labour union representing over seven million manufacturing workers.

Frans Timmermans, the commissioner in charge of the Green Deal, knows this and in an effort to get the labour unions behind the Green Deal in 2020, pledged to re-skill six million workers before 2030. But the pledge lacked a clear strategy.

With the Chips Act and the Battery Alliance, the EU set up a model to develop a specialised workforce, but the EU’s Green Industrial Plan seemingly takes a step back. "It’s the same old, same old," Kirton Darling said.

The ‘market fairy’

EU policymakers are not used to supporting industries like the US, explained Tom Krebs, a professor of economics at the Mannheim University in Germany.

"Europeans believe the ‘market-fairy’ and prices magically ensure a smooth and costless transition to a green economy," he said. "But relying on taxes and carbon pricing neglects the complexity of the transformation. It assumes people can adjust smoothly to changing economic conditions."

To prevent skills and workers from being relegated to the last paragraph, new impetus should be given to "the concept of conditionality," he said. In a recent working paper, he outlined a worker-friendly green industrial policy that "offers prosperity to all people."

Here the IRA offers guidance: for US producers to be eligible for subsidies and tax breaks, at least 15 percent of the work has to be done by apprentices.

"This plan could be copied directly by the commission," said Kirton Darling.

"The link to apprenticeship is right and should be included in EU plans," Krebs agrees. "European countries should embrace the general US approach to climate policy and develop their own, improved version based on their individual and institutional strengths."

Unlike the US, most European countries have relatively strong labour unions with long-standing traditions of collective bargaining. By linking clean subsidies to existing EU directives on minimum wage, collective bargaining and adding conditionality for apprenticeships, the EU can improve on the US example.

And it plays its part in dampening the impact for older workers and roping in new ones, Krebs suggests. "I think it will make a big difference."

Green austerity

There is another reason to add conditionality to green subsidies: "We shouldn’t just give blank checks to industry," said Kirton Darling. "We’ve seen that subsidies often flow back to shareholders as stock buyback schemes."

The global dividend index shows Europeans increased pay-outs to shareholders by 28.7 percent in 2022 compared to the year before. Oil majors and gas companies like Norse Equinox have reported record-smashing gains, and European Central Bank (ECB) figures show business profits have become the dominant driver of inflation—cutting into workers’ standard of living.

Clawing it back has become a clarion call on some parts of the left. And Krebs argues the green transformation requires "permanent expansion of public investment in people." But business leaders—the average CEO in 2022 earned a record 278 times the average worker’s wage — have started to push for wage moderation.

Some of the so-called ‘frugal’ EU leaders have begun calling on governments to reign in spending. "There’s so much money in the system at this moment," said Rutte after a January meeting with commission president Ursula von der Leyen. "All that money cannot be spent on innovation and green tech."

It’s a narrative Kirton Darling worries could turn into a new push for austerity measures, where clean-tech investment becomes an argument for "squeezing" the public sector.

"There is a lot of attention for faster permitting of renewables, but to do that, you need a well-resourced public sector," she said. "We cannot take care of industry without investment in our workers."

EU commissioner for competition Margrethe Vestager described subsidies as a "transfer from taxpayers to shareholders." But a successful match between worker and firm creates surplus value if gains are distributed "appropriately" between capital and worker, Krebs writes.

Here we arrive at the economic rationale of designing a policy that helps people adapt: it reduces the so-called "adjustment costs." People are less likely to become reliant on hand-outs, worker shortages are less likely to slow down the transition, and the availability of well-paying green jobs helps gain support for the transition.

EU funds

Ahead of last week’s summit, von der Leyen had pushed for new EU-wide funds to help cash-strapped countries like Italy catch up with the subsidy spending of France and Germany. But Rutte had stressed pension reform as a way to balance government spending.

Although traditionally resentful of the northern push to impose austerity, Italy and Spain last week aligned behind Rutte’s frugal message to counter the German and French industrial subsidies.

"It is becoming clearer by the day that this European Sovereignty Fund will be too small and will come too late, if at all," Shahin Vallée, a senior research fellow in the German Council on Foreign Relations (DGAP) concluded last week, and argued against the loosening of state-aid rules.

"State aid is not capped for each member state. This tit-for-tat, encouraged by intense corporate lobbying, is dangerous," he wrote.

"I don’t think loosening state-aid rules is a problem. I see it as essentially a good thing," said Krebs. "But it will tear apart the union if they don’t take care of the funds."

Krebs suggests market-liberal leaders like Rutte—who is facing an election in March and has been playing his base in national media, accusing the EU of overspending—may come to see the need for an EU fund.

"I cannot predict it. I can only hope. The EU sovereignty fund—or whatever they end up calling it—will be the sticking point," he said. "If you want to support local industries, you have to design it so all member states can join."

European leaders will continue the debate at the next summit on 23 and 24 March. The commission will work out a more detailed plan before then.