Institut Montaigne : 17/04/2023 Macron's New Quest for European Economic Security Economy AUTHOR Georgina Wright

Institut  Montaigne 

17/04/2023

Macron's New Quest for European Economic Security

Economy

AUTHOR   Georgina Wright

Resident Senior Fellow and Director of the Europe Program

At least some good news for French President Macron, who is facing widespread criticism for his controversial remarks on Taiwan following his state visit to Beijing at the beginning of April: the European Union (EU) is finally getting serious about industrial policy.

For Macron, the EU has no time to lose. The block is facing unprecedented economic competition and there is a fear that critical industries will relocate to countries where energy is cheaper and more abundant, and where government assistance is more readily available. Meanwhile, the Covid-19 pandemic and the war in Ukraine have exposed the EU’s supply-chain vulnerabilities and how these are easily weaponized by hostile countries. Growing geopolitical tension between the US and China is making these challenges more prescient.

During a state visit to the Netherlands on April 12, the French President called for a new doctrine of ‘European economic security’ according to which the EU should remain open for business but have new means to respond to unfair competitive practices.

"Yet, his message seems bolder: the EU can champion free trade but shouldn’t ignore the threats of economic coercion; it can also defend its vital economic interests, without becoming protectionist."

The ideas aren’t necessarily new: Macron wants to build on the European Commission’s recent measures to help ‘skill up’ the EU’s workforce, create jobs and secure the EU's access to critical materials. He wants to strengthen the single market and EU innovation through targeted industrial support and financial and fiscal reforms. Yet, his message seems bolder: the EU can champion free trade but shouldn’t ignore the threats of economic coercion; it can also defend its vital economic interests, without becoming protectionist. For Macron, this framing, or doctrine, should shape the EU’s market choices, free trade agreements and investment.

Macron faces several challenges to implement this doctrine. Member states still disagree on the level of government support required for ‘critical’ industry and how to allocate it. Some are worried that if the EU makes its subsidy rules even more flexible than they are today, then this will disproportionately benefit richer countries with more fiscal capacity to support their industry. Others worry that any changes to the EU’s fiscal rules will lead to more lavish, and imprudent, borrowing and spending. More importantly, France, whose president has angered member states and MEPs, may struggle to galvanize support to embrace the doctrine it has set out.

A wake-up call

For France, the EU’s market has come under threat. Production costs have largely recovered from the shock of the Covid-19 pandemic but supply-chain disruptions continue. Energy costs have sky-rocketed. In response, the EU temporarily relaxed EU subsidy rules – making it much easier for governments to support industry and households. The effects, however, have been unbalanced. While EU countries won approval for €672 billion worth of subsidies, 53% was notified by Germany and 24% notified by France. This has already spurred fears of distortions within the Single Market.

EU industry is also being threatened from the outside. China and the US are increasingly ignoring Word Trade Organization (WTO) trade rules by making government support conditional on local manufacturing rules. Unlike in the EU, applying for state aid in China and the US is relatively straightforward and can be used for research, innovation but also manufacturing and production needs. There is evidence that some EU companies have relocated to the US to benefit from the Inflation Reduction Act subsidy plans. More could follow.

This not only poses a direct threat to the EU’s competitiveness but also to its technological and climate change transitions.

According to European Commission estimates, 50% of CO2  emissions cuts rely on technology that does not exist, or is not widely available yet. Currently, China dominates the clean tech industry but the EU is still hoping it can innovate in some specific technologies and scale up. That will only be possible if the Single Market remains an attractive place to invest in.

"According to European Commission estimates, 50% of CO2  emissions cuts rely on technology that does not exist, or is not widely available yet."

Meanwhile, the multilateral trade system is becoming more fragmented. The WTO’s dispute settlement body is largely stuck and global trade rules are increasingly ignored. The EU looks set to join China and the US in a subsidy race.

To respond to these challenges, Macron believes a new European economic security doctrine is needed. The Single Market must remain open for business but it needs to innovate, resist external interference and make sure its economic choices are consistent with its trade, aid and foreign policies. For example, the EU should assist African countries with their own decarbonization efforts before others, like China, do. The EU must also continue to ensure that companies exporting to the EU comply with the EU’s high environmental, social and production standards.

Difficult choices ahead

The European Commission’s new Green Deal Industrial Plan is an attempt to respond to these challenges – while preventing a subsidy race between the EU and its trading partners, and within the EU itself. Work has also begun to secure and diversify supply-chains. For the past few years, it has already introduced a range of instruments to tackle unfair competition and economic distortion from third countries including the anti-coercion instrument, export controls and new ways to screen investment coming into the EU (the EU is also looking at how to monitor outward investment). The challenge now will be to get EU firms to comply.

"There are those, like Germany and France, that want to stick with the flexible and ‘temporary’ state aid rules adopted in response to the Covid-19 crisis."

But it’s on the industrial policy front that things could become more challenging. There are those, like Germany and France, that want to stick with the flexible and ‘temporary’ state aid rules adopted in response to the Covid-19 crisis (and kept on to deal with the repercussions of the Ukraine war). France would also like to change the way these subsidies are used to include manufacturing needs. This would be a radical departure from state aid regulatory orthodoxy over the past years.

In his speech, Macron also talked about increasing “national” and “federal” (presumably European) subsidies. This may prove particularly complicated with member states such as Ireland and Sweden who fear an internal subsidy race could weaken the single market. It will also displease those member states like Germany and the Netherlands, who want to keep EU borrowing at a minimum.

For France, the EU should also be open to adopting some form of “Made in Europe” conditionality when deciding where and how to allocate subsidies in Europe. International public procurement should remain open to companies located outside the Single Market, but preference should be given to those inside the EU for ‘critical’ projects in key sectors such as clean tech, defense, health and possibly agriculture. The EU must also complete electricity market and financial reforms (Banking Union and Capital Markets Union) to guarantee stable energy prices and financing for new innovative projects.

“We cannot be the last remaining market without an industrial policy” argued Macron in the Netherlands. While this is true, the fact that the EU has been negotiating the Capital Markets Union for the past 15 years shows how complicated it can be to get all 27 countries and the European Parliament to agree.This could also explain why France has continued to invest in bilateral relationships with institutions and member states – if it can agree with a country like the Netherlands, which is traditionally diametrically opposed to France on trade and industrial fronts, surely some form of EU consensus can be found.

Macron needs to gain the EU’s trust

EU industrial policy is entering a new phase – with huge repercussions for EU industry and competition. The Chips Act, and now the new Net Zero Industry Act, show just how central industrial policy has become to the EU’s sovereignty and security. Another win for Macron’s European sovereignty agenda.

But more needs to be done. If Macron’s intention is to get other EU leaders on board, he will need to do more to earn their trust - especially after his ill-timed remarks on Taiwan. This means a radical change in approach: much more consultation with EU partners over ‘strategic autonomy’, European security and global challenges, and more nuance and clarity when talking in the EU’s name. Failing to do so will not only hurt Macron’s agenda but weaken Europe as a whole.

Copyright Image: Ludovic MARIN / AFP

French President Emmanuel Macron delivers a speech to the Nexus Institute in the Amare theatre in The Hague on April 11, 2023 as part of a state visit to the Netherlands.