The European Commission is set to introduce its Industrial Accelerator Act (IAA) on February 25, 2024, aiming to reverse a significant decline in the European Union’s industrial output. Between 2000 and 2020, the EU’s share of global industrial output decreased from 20.8% to 14.3%, reflecting a shift in capital towards regions with lower production costs, such as China and the American South. This legislative initiative marks a shift towards protectionism, previously unthinkable in Brussels.
The IAA aims to implement mandatory “Made in Europe” requirements for government purchases of green technology, with domestic production targets set between 60% and 80%. This is not merely a suggestion but a market mandate intended to enhance local manufacturing and reduce reliance on imports. For instance, if a local government seeks to procure a battery system, it would need to ensure that it is assembled within the EU within 12 months of the Act taking effect. Within two years, the requirements become even stricter, mandating that battery cells also be produced in Europe.
Despite these ambitious goals, the current landscape poses substantial challenges. China dominates the global market for lithium-ion batteries, producing nearly 75% of the world’s supply. Europe, despite announcing plans for “gigafactories,” continues to depend on imported minerals and components essential for battery production. The push for local sourcing before establishing a robust domestic supply chain could create significant bottlenecks.
The draft legislation introduces stringent conditions on foreign direct investment (FDI) exceeding €100 million in strategic sectors. Such investments would only be approved if they utilized European-made components and local labor. This directive aims to convey a clear message to American and Chinese firms that their capital is welcome only if it benefits the European industrial base directly.
This regulatory shift is partly a response to measures like former U.S. President Donald Trump’s tariffs and the industrial subsidies included in the Inflation Reduction Act. However, the mobility of capital poses a risk, as companies may opt for more favorable conditions in countries like Morocco and Egypt, which are positioning themselves as low-cost industrial hubs with direct access to the European market.
Investments and Energy Transition Challenges
The IAA places considerable emphasis on nuclear power and hydrogen, suggesting that upcoming nuclear plants must prioritize EU-sourced technologies. Yet, the current state of the European nuclear supply chain is fraught with delays and inefficiencies, as seen in projects like France’s Flamanville 3 and Finland’s Olkiluoto 3, both of which faced extensive setbacks due to supply chain issues.
In the hydrogen sector, the Commission argues that resilience depends on sourcing components predominantly from within the EU. However, European electrolyzer manufacturers are currently grappling with high production costs and insufficient orders. Mandating local sourcing before the industry can compete effectively may hinder the very decarbonization efforts the IAA seeks to promote.
The proposed voluntary labeling schemes for “Made in the EU” low-carbon products, particularly in the steel industry, aim to create a premium market for green steel. Yet, with green steel potentially costing 40% more than conventional options, infrastructure projects could see inflated costs, challenging affordability.
Regulatory Revisions and Market Implications
As the IAA prepares to reshape state aid regulations, it may lead to significant imbalances among EU member states. A diplomat noted that member states might not need to notify the European Commission when funding decarbonization projects. This concession could give wealthier nations like Germany and France an advantage, allowing them to support their industries without oversight, while smaller countries may struggle to compete.
The IAA also aims to expedite the permitting process for energy-intensive industries, yet significant local obstacles remain. New chemical plants must navigate a complex web of regulations, local opposition, and infrastructure limitations. Without addressing these underlying challenges, the promise of faster approvals may simply lead to more bureaucratic hurdles.
The draft predicts that steel and cement could contribute to 20% of the EU’s economic output by 2030, requiring an unprecedented pace of innovation and investment in new hydrogen-ready plants. Realistically, achieving this target would demand more green hydrogen than is currently produced globally, raising questions about feasibility.
Ultimately, the European Commission is betting that by mandating demand, supply will follow. Yet, industry requires more than just regulatory mandates; it needs affordable energy, a skilled workforce, and a stable regulatory landscape. The delay of the IAA signals ongoing internal tensions as the Commission strives to balance the urgent need for a green transition with the reality of rising production costs in Europe.
The Industrial Accelerator Act represents a critical juncture for the EU as it seeks to reclaim its industrial strength. However, as global competition intensifies, the Commission must navigate the complexities of maintaining competitiveness while pursuing ambitious environmental goals. Time is of the essence, and the EU faces a challenging path ahead in its quest for industrial revitalization.
