The Commission has laid out an ambitious industrial policy programme for transformational changes in the EU economy, accelerating decarbonisation and innovation and developing the industrial base for an expanding EU defence industry. However, the key obstacle to achieving its ambitious goals is a shortage of funding. Whilst responsible for setting priorities for the Union as a whole, the European Commission’s own financial means are limited. This makes it largely dependent on the state aid resources of member states for funding industrial development projects. While DG Competition controls which state aid gets approved or not, the Commission lacks the ability to reallocate national funding to coordinate and implement priority infrastructure and industrial projects. As a consequence, as little as 12% of approved state aid falls within the scope of the Commission’s strategic priorities.
With only limited financial levers, the Commission must revisit the existing state aid tools to help steer industrial policies in the bloc. A key mechanism is the Important Projects of Common European Interest (IPCEI) framework that facilitates state aid for innovative and large-scale value-chain and infrastructure projects that support EU-wide objectives. Previous iterations have targeted microelectronics, batteries and hydrogen value chains, coordinating a slew of projects across member states incurring total spending of more than €5 billion from 2019 to 2023.
These initiatives have shown some success. For example, the IPCEI on Microelectronics provided some €1.9 billion worth of state aid (2019-2023) to support the development of multiple chip fabrication facilities and pilot lines that have been extended for mass chip production, as well as accelerating the first application of Extreme Ultraviolet (EUV) chip nano-lithography.
In the IPCEIs, we see the contours of a potentially sophisticated funding tool in the service of EU industrial policy, which could prove politically more feasible than increasing central EU spending. In this we are not alone: both Enrico Letta and Mario Draghi praised the instrument in their respective reports on the internal market and competitiveness, while Commission President Ursula von der Leyen has tasked responsible commissioners with reforming the IPCEI framework, expanding its range and rolling projects out faster.
By targeting IPCEIs more towards key EU industrial priorities, simplifying the current procedures for participation, broadening their scope and making them a vehicle for financial pooling, regulatory innovation and simplification, IPCEIs could play a much larger role in EU industrial policy than they currently are able to do. They could alleviate two of the key problems inhibiting effective EU industrial policy: lack of funding and of effective coordination of national industrial policies.
Punching below their weight
The current IPCEI framework limits the role of the Commission to authorising state aid . Whilst the Commission can discuss future priorities through chairing the Joint European Forum for IPCEI since 2023, member states are fully responsible for the initiation, design and development of projects. This lack of central steer means that IPCEIs follow the interests of leading member states, which are not necessarily aligned with EU industrial policy goals.
The current IPCEI framework of state aid decisions is not even strong enough to ensure the full implementation of approved projects. As noted by the European Court of Auditors, state aid decisions approving IPCEIs in fact only provide an authorisation for member states to grant state aid, but do not create any obligation for member states to actually deliver it, let alone provide guidance on implementation and project governance.
A further problem is that the existing procedures required to get an IPCEI up and running are long and complex. Typically, only the largest member states – predominantly Germany and France – are capable of coordinating and steering an IPCEI. Recent research shows that for SMEs and mid-caps, the extensive processes and high administrative burdens of being involved in an IPCEI are too costly, leaving mostly large incumbents to reap the rewards of the projects.
With the largest member states taking leading roles in most of the IPCEIs to date, the projects also fail to curb the subsidies doled out by those with the deepest pockets. This can reduce competition and undermine the integrity of the Single Market. Making it easier for smaller countries, SMEs and midcaps to participate should therefore be a priority for any reform of the tool. A proper review of existing IPCEI schemes is essential, covering principles such as maximum subsidy rates, guidelines on mandatory commitments for disseminating benefits, and offsets for potential market distortions. Lighter rules should apply to SMEs and mid-caps.
Finally, the current conditionalities on state aid approval also severely limit the role the IPCEIs can serve in industrial policy. For aid to be granted, funds can only contribute to initial pre-commercial production of highly innovative projects. But while the EU has no lack of innovative and technologically advanced start-ups, it needs more financing for industrial scale-up and large infrastructure projects, which are not eligible for support under the current IPCEI framework.
Commission President Von der Leyen has acknowledged the need for reform of IPCEIs and has suggested to make them simpler and faster while promising to propose new projects. However, nothing concrete has been suggested so far.
Spearheading financial integration and regulatory reform
To realise the potential of the IPCEI for EU industrial policy, the Commission needs a stronger hand in coordinating their development. This would require a major shift in political perspectives within the Commission, from the current focus placed purely on competition issues towards treating IPCEIs as an important vector of industrial policy. This would require much closer collaboration between the Vice-President for Prosperity and Industrial Policy with the Vice-President for Competition.
To make sure that projects are more aligned with EU industrial policy goals, EU funding should be blended with member state investments in the framework of IPCEIs. Co-financing through a new EU Competitiveness Fund (proposed in the Competitiveness Compass) would provide greater central steer to ensure EU added value and further help to derisk innovative industrial projects.
Moreover, the Commission should identify priority areas for additional IPCEIs, for example in defence industrial supply chains in close cooperation with member states, possibly in the framework of a competitiveness coordination tool proposed in the Competitiveness Compass. On defence, as with other value chains, third countries should be included that can provide value added. This has precedent, with Norway being involved in the hydrogen IPCEI. IPCEIs should include not only projects in pre-commercial production, but industrial development more broadly. Moreover, the Commission should facilitate access of SMEs and mid-caps to IPCEIs by simplifying state aid rules for these companies.
The IPCEIs should become a focal point for closer coordination and pooling of resources of National Promotional Banks and Institutions (NPBIs) and other financial institutions for large-scale European industrial projects. This could be done through a dedicated pan-European IPCEI investment platform where NPBIs and others could pool resources and expertise, if possible, backed by EU budget headroom, helping to make a greater share of NPBI financing activities contribute to EU shared industrial goals. Participation of NPBIs could be incentivised by simplifying administrative requirements and further simplifying and relaxing state aid rules for co-investment under this platform.
Similarly, IPCEIs can become laboratories for regulatory reform in their specific sectors. Being composed of a subset of member states often with particular interest in advancing industrial policy cooperation in a certain field, could make those states more willing to go further on regulatory simplification and harmonisation. The Commission should therefore facilitate coalitions of the willing organised in IPCEIs to simplify reporting and administrative requirements for participating companies.
This could effectively spearhead a 28th regime targeting SMEs, mid-caps and start-ups as proposed by Enrico Letta through an IPCEI-led supranational avant-garde, drawing on Spanish proposals to do something similar for advancing the Capital Markets Union. In the same spirit, participating member states could agree on reducing regulatory barriers for a more level playing field. In strategic areas such as energy, defence and connectivity, where national legislation is still dominant, harmonisation would be particularly beneficial. The likely success of such reforms could then inspire more countries to follow, eventually leading to EU-wide harmonisation.
Such far-reaching reforms to IPCEIs could play a crucial role in mobilising and leveraging public-private financing to help deliver the transformational change urgently needed in the EU economy. While an effective competitiveness fund spurring public-private financing could go a long way, leveraging member state financing through IPCEIs could be a similarly effective way to mobilise significantly more money for the EU’s industrial policy goals. It could also be politically more feasible than large scale EU funding as it would leave more control to member states.
Philipp Lausberg is a Senior Policy Analyst in the Europe's Political Economy programme at the European Policy Centre.
Varg Lukas Folkman is a Policy Analyst in Europe’s Political Economy programme at the European Policy Centre.
Chris Allen is an External Advisor at the European Policy Centre Economy programme.
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