The European Union (EU) is taking decisive action to address a significant decline in its industrial output, dropping from a share of 20.8% in 2000 to 14.3% by 2020. In response, the European Commission is advancing the Industrial Accelerator Act (IAA), a proposed legislation aimed at reshaping the continent’s manufacturing landscape. Originally set for release earlier, the IAA has been delayed until February 25, 2024, reflecting the urgency surrounding this issue.
The IAA represents a marked shift towards protectionism, a concept that would have seemed unlikely in Brussels a decade ago. The draft legislation emphasizes the need for strategic action to ensure that the climate transition serves as an engine for industrial growth, rather than leading to further de-industrialisation. Central to the IAA is a robust restructuring of public procurement processes, with plans to introduce mandatory “Made in Europe” requirements for government purchases of green technology. Expected domestic production targets range from 60% to 80%, marking a significant move to prioritize local industry over foreign competition.
Under this new mandate, if a local government intends to procure a battery system, it must be assembled within the EU within one year of the Act’s implementation. Within two years, the requirements will become even stricter, necessitating that battery cells also be produced in Europe. The Commission argues that increasing the share of EU-made, low-carbon products will enhance domestic demand. Yet, the reality remains that the battery supply chain is predominantly based in China, which currently produces nearly 75% of the world’s lithium-ion batteries. Despite announcements regarding “gigafactories,” Europe still relies heavily on imported processed minerals and specialized components.
Moreover, the IAA introduces new regulations governing foreign direct investment (FDI), stipulating that any investment exceeding €100 million in strategic sectors must adhere to strict criteria. These investments will only be approved if they utilize European-made components and local labor, signaling a clear message to global capital. This shift is a direct response to U.S. tariffs and the extensive industrial subsidies outlined in the Inflation Reduction Act.
As the EU implements these regulations, concerns arise regarding its competitive stance. Countries like Morocco and Egypt are positioning themselves as attractive alternatives for industries seeking lower costs and easier access to the European market. The Commission’s strategy, while aiming to bolster local industry, risks alienating potential investors who may find better conditions elsewhere.
The draft also places significant emphasis on advancing nuclear power and hydrogen technologies. It suggests that both large-scale and small modular reactors (SMRs) should prioritize EU-sourced technologies to foster long-term sovereignty. Yet, the European nuclear supply chain has faced challenges, with notable delays in projects like France’s Flamanville 3 and Finland’s Olkiluoto 3 due to supply chain issues. Ignoring the current leadership of U.S. firms in reactor design could hinder progress.
The IAA also seeks to establish voluntary labeling schemes for “Made in the EU” low-carbon products, particularly targeting the steel industry. The proposal aims to enable “green” European steel to command a premium over “brown” imports. However, the higher costs associated with producing green steel could inflate infrastructure project expenses significantly. Countries such as Sweden are advancing organic steel production, but warnings from the Swedish and Czech governments suggest that local procurement rules could drive up prices and diminish competitiveness across the bloc.
Additionally, the IAA threatens to alter the way state aid is handled within the EU. An EU diplomat noted that member states might be exempt from notifying the European Commission regarding funding for decarbonization projects, potentially compromising the level playing field that the Single Market was designed to protect. Wealthier nations could invest billions into their own industries without oversight, leaving smaller member states at a disadvantage.
The draft also promises to expedite permitting for energy-intensive industries, a recurring theme in Brussels. However, the complexities of local regulations and environmental concerns pose significant challenges. For instance, establishing a new chemical plant in the EU often involves navigating intricate REACH regulations and local protests, which can significantly delay progress compared to the rapid timelines seen in countries like China.
Despite ambitious projections that steel and cement will contribute 20% to the EU’s economic output by 2030, the feasibility of such goals remains uncertain. Achieving this target would require a rapid replacement of aging infrastructure with hydrogen-ready plants, necessitating a quantity of green hydrogen that currently exceeds global production capabilities.
The European Commission’s strategy hinges on the belief that mandating demand will stimulate supply. Yet, successful industrial growth requires more than legislation; it demands affordable energy, a skilled workforce, and a stable regulatory environment. The delay of the IAA suggests ongoing internal friction within the EU as policymakers grapple with reconciling the need for a green transition with the realities of high production costs in Europe.
Ultimately, the Industrial Accelerator Act represents a pivotal moment for the EU as it seeks to reclaim its position in the global market. With time becoming a crucial commodity, the Commission must balance the desire for sovereignty with the risk of inflationary pressures on industries and consumers alike.
