European industry is navigating a global economy where the notion of a fair playing field is increasingly out of reach, driven by aggressive industrial strategies by third countries and a stagnant multilateral trading system. EU firms face formidable challenges, including China’s state-driven overcapacities and protectionist US tariffs.

While a focus on framework conditions and reliance on market forces once appeared sufficient, it is now increasingly clear that this model no longer delivers. Europe is therefore recalibrating its industrial policy – not just as a reaction to external pressures, but as an opportunity to address its economic security risks while at the same time moving beyond its middle-technology trap.

Our research (Rute et al. 2025) investigates such a recalibrated approach, its goals and key components to drive its success. It is informed by the authors’ practical experience in industrial policy design and implementation since 2020 and draws also on expertise from DG GROW’s fellowship programme.

Objectives of a recalibrated industrial policy

A recalibrated industrial policy should aim to achieve objectives that previous approaches failed to deliver – or overlooked altogether.

It should, first, align climate, competitiveness, and security as mutually reinforcing goals. Historically, this trilemma has been poorly managed (Renda 2024). Europe’s past energy choices prioritised efficiency over security of supply, while cost-driven offshoring weakened resilience in sectors like medical supplies. Industry also warned that decarbonisation timelines outpaced the measures needed to safeguard competitiveness and resilience. 

Industrial policy should recast these apparent tensions as complementarities, prioritising measures that generate co-benefits (Kivimaa 2025). Where full alignment is not possible, policy must manage trade-offs explicitly and prioritise the most urgent needs: acute (economic) security risks may justify short-term losses in efficiency or narrowly targeted deviations from decarbonisation pathways.

Second, it should drive the upgrading of Europe’s industrial base. Traditional strongholds are slipping as Europe underperforms in industries of tomorrow, even for domains it dominated yesterday. The EU’s current lag in transforming the automotive sector toward connected, autonomous and electrified vehicles is a telling example (Garcia-Calvo 2025). Past experiences, such as the collapse of European solar manufacturing and the decline of mass-market shipbuilding in Europe, show how quickly leadership can be lost. Policy should guide capabilities to areas with robust or nascent demand where the EU has the strongest chances of success.

Third, industrial policy should build strategic leverage. Europe has an innovation edge in several critical technologies like renewable energy and advanced manufacturing. It also retains major strengths in commercial production, as the world’s largest exporter. Strategic autonomy is not only about reducing dependencies, but also about using Europe’s strengths to build resilient, mutually beneficial critical value chains with like minded partners. Therefore, industrial policy should do more than plug vulnerabilities: it should leverage industrial leadership and support EU firms in occupying hard-to-replace positions in international supply chains. Japan offers a useful example: its economic security strategy explicitly seeks to foster the indispensability of its firms, for example in semiconductor materials and robotics.

Key components for success

Aligned direction, agile execution

The EU’s industrial policy functions across multiple layers, with crucial elements such as taxation and consumer incentives primarily managed at national or regional levels. Limited alignment can be a major drag (Bertram et al. 2024): each Member State may focus on the segments that fit its immediate interests, leading to duplication and unexploited scale at the European level. 

If the goal is to create competitive European value chains, EU and national industrial policies need to work more in unison rather than in parallel. A practical approach is exemplified by the Important Projects of Common European Interest, where Member States are required to demonstrate EU-added value. This criterion could be strengthened by making EU co-funding dependent on such demonstrated added value, as outlined in the proposed European Competitiveness Fund.

While deeper alignment is key, ineffective industrial policies often do not come from a lack of strategy, but rather poor execution (Rodríguez-Pose 2025). In particular, a reconfigured industrial policy – less reliant on framework conditions and more on active orchestration – requires stronger institutional capacities for industrial policy at both EU and national/regional levels (Karo 2026), with attention to the following three aspects.

• The ability to put in place swift strategic investments and act on early warnings. The EU’s vaccine strategy provides a good example. Conversely, the Commission’s list of critical raw materials, already in place since 2011, only led to more systematic action in 2023 through the Critical Raw Materials Act. 
• The capacity to rapidly scale what works and wind down what does not. The ability to terminate underperforming policies in particular is too often overlooked in Europe. 
• The use of more ‘embedded autonomy’ models that build on co-decision-making between public and private actors, bringing the agility that industrial policy often lacks through real-time feedback loops and empowered programme teams.

Competition and directionality as complementary forces

The Single Market is historically built on a competition-centric logic, with preference for horizontal rules and a belief that internal rivalry, by itself, would drive competitiveness and structural transformation. That model has delivered important gains. But in an international environment shaped by persistent market distortions and in an economy that needs to undergo profound industrial transformation, competition alone is no longer sufficient. In some sectors, particularly those with high fixed costs, strong uncertainty, and winner-takes-all dynamics requiring rapid scaling of infant industries, excessive fragmentation can itself become a handicap. 

China’s approach of sequencing intense domestic competition followed by selective state backing may offer a useful contrast: while firms first compete vigorously at home to show their fitness – largely protected from foreign competition – the most successful ones then receive backing to become global champions.

Europe is also constrained by a persistent ‘picking winners’ taboo, as if public intervention necessarily means backing a single firm or substituting market discipline with political discretion. Europe’s own history shows that well-designed interventions can create new industrial capabilities. Airbus, Galileo and the EU’s vaccine strategy all illustrate how policy can shape markets rather than merely react to them. The lesson is not that governments can identify future champions in advance, but that they can create the conditions under which promising technologies are able to scale. In markets characterised by uncertainty and large upfront costs, waiting for the market to self-organise can mean waiting too long.

A reconfigured EU industrial policy should therefore combine bottom-up competition with greater directionality. The aim is not to replace markets, but to use public policy more deliberately where markets underdeliver. That means preserving competitive pressure, while steering industries toward clearly defined strategic priorities. Directionality can be made credible through enforceable conditions that tie public support to verifiable EU objectives. It is therefore not the opposite of competition but a framework that allows competition to serve Europe’s strategic interests and help European firms reach global scale.

The Single Market as Europe’s home turf for industrial scaling

The Single Market should serve as a more robust ‘home base’ where EU firms can become indispensable global players. To achieve this, the Single Market needs to evolve in several ways.

First, it should better protect infant industries and enable them to scale in Europe rather than abroad. Today, Europe is often more of a shopping floor than a launchpad for its most promising innovators. Successful industrial policies typically include stronger infant-industry protection than Europe currently exhibits. Temporary protection for strategic sectors coupled with performance discipline can provide the space for firms to accumulate capabilities – Korea’s industrial policy in the 1960s–1980s is a classic example. 

In addition, research and innovation policies must do more to bring innovations into markets. While EU and national programmes generate strong scientific output, their commercial outcomes often remain untapped. Programmes can also be risk-averse and success-driven, while breakthroughs require bold bets and tolerance for failure (Fuest et al. 2024). The proposed new Horizon Europe programme aims to address this, including through moon-shot projects that aim to boost the EU’s strategic autonomy with projects going from research to deployment in areas like fusion energy, automated transport, and quantum.

Second, the Single Market should provide greater demand certainty for EU firms to create a strong business case, addressing a long-standing bottleneck in critical sectors such as cleantech. Supply-side measures alone such as subsidies are insufficient; firms also need credible early demand to amortise large upfront costs and attract investors (Criscuolo 2024). Government-led demand can give a first-mover advantage; yet, the EU has historically lagged behind China and the US in using public procurement and large-scale programmes to stimulate early demand in strategic sectors. The proposed Industrial Accelerator Act marks a step forward, introducing targeted and proportionate ‘Made in EU’ and low-carbon requirements in public procurement and support schemes to boost demand in energy-intensive industries, the automotive value chain, and cleantech.

Third, the Single Market should regain its attractiveness for foreign direct investment (FDI), while ensuring greater value added of foreign investments. Europe has in recent years lost ground to the US as the leading destination for FDI, propelled by much larger and more predictable industrial incentives. It is crucial, however, that FDI contributes meaningfully to upgrading the EU economy rather than merely satisfying European demand. The proposed Industrial Accelerator Act introduces conditions for large investments in sectors such as batteries and critical raw materials, to ensure that FDI strengthens EU supply chains, promotes technology transfer, and supports quality job creation.

Finally, the Single Market needs to be underpinned by a financing framework to nurture infant industries and position EU firms in strategic value chains. This framework should adopt a full-cycle approach, from R&D to scaling up and, ultimately, global leadership. To achieve this, Europe needs to make better use of its deep pools of private savings and large banking and insurance sectors to finance strategic industries. 

In addition, existing EU funding instruments are criticised for being fragmented, rigid, and insufficiently focused on strategic priorities. An effective industrial funding model pools investment at scale, focuses on strategic priorities, supports the full innovation lifecycle, and operates under a single rulebook. The Commission proposal for a European Competitiveness Fund embodies many of these principles.

Conclusion

There is growing recognition of the potential role of industrial policy in economic transformation (Juhász et al. 2023). Our research points to the need for Europe to increasingly rely on more directional and centrally designed strategies that enable more decisive action in strategic areas (Figure 1).

Figure 1 Europe’s current industrial policy landscape

Source: Authors’ elaborations.

Recalibration does not mean abandoning the strengths of the old model. Europe should continue to leverage its decentralised strengths, where grassroots competition and bottom-up innovation fuel much of the Single Market’s vitality. Rather, it calls for a more coherent policy framework – one that combines stronger ‘Team Europe’ directionality in strategic areas with competitive, well-functioning markets and complementary national and regional strategies anchored in local strengths.

Authors’ note: The opinions expressed are those of the authors only and should not be considered as representative of the European Commission’s official position.

References

Bertram, L, J Hafele, S Kiecker, and L Korinek (2024), “A unified industrial strategy for the EU”, Foundation for European Progressive Studies, Policy Study.

Criscuolo, C, A Dechezleprêtre, and G Lalanne (2024), “Industrial strategies for Europe’s green transition”, in S Tagliapietra and R Veugelers (eds.), Sparking Europe’s New Industrial Revolution A policy for net zero, growth and resilience, Bruegel Blueprint Series.

Fuest, C, D Gros, P-L Mengel, G Presidente, and J Tirole (2024), “Innovation policy – How to escape the middle technology trap”, EconPol Policy Report, ifo Institute.

Garcia-Calvo, A (2025), “Does the transition to battery electric, software-defined vehicles create opportunities for Europe?”, DG GROW Single Market Economics Papers.

Juhász, R, N Lane, and D Rodrik (2023), “The new economics of industrial policy”, Annual Review of Economics 16: 213-42.

Karo, E (2026), “Improving robustness and resilience of Europe’s green industrial policy making”, DG GROW Single Market Economics Briefs.

Kivimaa, P (2025), “The new Clean Industrial Deal – How can new EU industrial policy support sustainability transitions, competitiveness and resilience?”, DG GROW Single Market Economics Briefs.

Renda, A (2024), “What ‘North star’ for future EU industrial policy?”, DG GROW Single Market Economics Papers.

Rodríguez-Pose, A (2025), “Institutions at the helm: Institutional change and the returns to investment in the regions of Europe”, presentation at the Banco de España-CEMFI-UIMP Conference on the Spanish Economy, 4 July.

Rute, M, F Vandermeeren, and A Dumitrescu (2025), “How Europe could get both, the Green and the Deal”, DG GROW Single Market Economics Briefs.