Economic stagnation and weak growth across European Union countries, particularly Germany and France, over roughly the past decade have steadily eroded Europe’s global competitiveness. Against this backdrop, the New Industrial Policy that has gained prominence in Europe in recent years has attracted broad support in both academic and political circles. Instead of the neoliberal policies of the past, particularly the austerity measures adopted following the economic crisis, this approach favours a Keynesian policy framework in which the state intervenes more actively in the economy and supports the green transition and industrial development. The aim is to reverse the increasingly evident trend towards deindustrialisation in European economies.
The European Commission presents its new industrial policy primarily as a green transition strategy aimed at achieving net-zero carbon emissions by 2050. Within this framework, digitalisation and the green transition are emphasised as two complementary processes. The wider adoption of digital technologies is expected to improve energy efficiency in industrial production, optimise resource use, and contribute to reducing carbon emissions. Yet environmental sustainability is not the policy’s only underlying objective. The decisive factor is the need to restore European industry’s weakening competitiveness against the United States and China and strengthen its position in the global economy. The green and digital transitions are therefore viewed as strategic instruments for enhancing Europe’s long-term economic competitiveness, extending beyond environmental and technological objectives.
Indeed, in many cases, green transition objectives conflict with efforts to improve the competitiveness of particular sectors, and EU policymakers appear to prioritise economic competitiveness in such situations. One of the clearest examples is the push to roll back the regulation intended effectively to end sales of new petrol and diesel cars from 2035. Following Germany and France’s agreement in October 2026 to relax this regulation, German Chancellor Friedrich Merz’s declaration that the ban was now “a thing of the past” clearly illustrated the shift in Europe’s industrial policy priorities. Although green transition objectives remain important, the principal driving force behind the new industrial policy can therefore be understood as the search for solutions to the structural problems facing European economies and the recovery of lost global competitiveness. Europe’s New Industrial Policy should consequently be assessed primarily within this economic and political context.
Industrial policy is, of course, not a new concept. Governments have a long history of using industrial policies to guide economic development and growth. Their objectives, scope, and instruments vary according to countries’ levels of development and economic circumstances. Nevertheless, they share the underlying belief that the state can influence the economy’s production structure, technological development, and long-term growth performance through various forms of intervention. In developing countries, industrial policies generally refer to strategies intended to close the economic and technological gap with advanced economies. In developed countries, the emphasis is on securing an advantage in global competition by supporting new technologies and strategic sectors.
The European Union’s emerging New Industrial Policy is a contemporary example of the latter approach. It envisages a shift away from the state’s traditional role, largely confined to regulating markets and protecting competition, towards a more active and interventionist position in which it directly guides economic transformation. Within this framework, the EU seeks both to accelerate the green and digital transitions and reduce external dependence in strategic sectors, while strengthening European industry against intense global competition, particularly from the United States and China. National budgets and EU funds, public procurement, investment incentives, state aid, and various regulatory instruments are increasingly being used together to pursue these objectives. Industrial policy is thus evolving beyond interventions designed solely to address market failures into a comprehensive economic strategy intended to reshape Europe’s productive capacity, technological independence, and position in the global economy.
One of the most recent EU examples of these new industrial policies—which evoke Keynesianism through active state intervention and mercantilism through their emphasis on protecting domestic production—is the Industrial Accelerator Act (IAA). Proposed by the European Commission on 4 March 2026, the legislation aims to enhance European industry’s global competitiveness, accelerate the green transition, and increase manufacturing’s share of EU GDP to 20% by 2035. The proposal, which has not yet been enacted, envisages making public procurement, state incentives, and rules governing foreign investment central instruments of industrial policy.
The proposal’s most striking feature is its adoption of a “Made in EU” approach, particularly in strategic sectors such as automotive manufacturing, electric vehicles, steel, cement, aluminium, and clean technologies. The intention is to favour products of European origin and products manufactured with low carbon emissions in public procurement, support for renewable energy investments, and various incentive programmes. By creating demand for technologies developed and manufactured in Europe, the policy aims to strengthen both domestic production capacity and supply chains. Its scope extends further. In strategic areas such as batteries, electric vehicles, solar energy, and critical raw materials, certain investments from outside the EU exceeding €100 million would also face additional requirements. These include sourcing at least 50% of employees from the EU workforce, conducting R&D activities in Europe, contributing to local production, and transferring technology. Digital one-stop application systems and dedicated industrial acceleration zones are also planned to speed up investment processes.
Taken together, these measures signal a significant change in the EU’s approach to industrial policy. Having traditionally prioritised the protection of market competition and limits on state intervention, the European Union is now preparing to use public procurement and state support to develop particular sectors, steer investment, and strengthen European production against international competition. In other words, the state is moving beyond its role as a referee setting the rules of market competition to become an active economic participant influencing which sectors develop and where production takes place. In this respect, the Industrial Accelerator Act provides a concrete example of how the balance between free competition and market efficiency, on the one hand, and economic protectionism and strategic intervention, on the other, is being reshaped in Europe’s new industrial policy.
Although this approach can also be viewed as a defensive response to similar protectionist and interventionist policies recently adopted in the United States through the BBA and IRA, and in China through “Made in China”, the EU’s shift in policy thinking began much earlier. The transformation of European industrial policy is not simply a development of the past few years. Since the early 2010s in particular, numerous policies and regulations have been introduced to improve the competitiveness of the European economy. Initially focused largely on ensuring that markets functioned efficiently and improving the investment environment, these policies gradually evolved towards a more interventionist framework involving direct support for particular sectors.
In 2012, steps were taken to accelerate standard-setting processes, develop a common European patent system, and simplify regulations. An action plan for the steel industry followed in 2013. In 2014, the EU introduced Smart Specialisation strategies based on regions’ competitive advantages, new public procurement rules, and the COSME programme to improve the competitiveness of small and medium-sized enterprises. In 2015, the Capital Markets Union initiative and the European Fund for Strategic Investments sought to facilitate investment financing. These were followed by the Digital Single Market Strategy and the European Defence Action Plan in 2016, and the European Defence Fund in 2019. Industry 4.0 and 5.0 initiatives also sought to integrate digital technologies into production processes and accelerate industry’s technological transformation.
The most pronounced shift in industrial policy, however, emerged in the 2020s. The launch of the InvestEU programme in 2021 and the relaxation of state aid rules for Important Projects of Common European Interest (IPCEIs) made it easier to direct public resources towards strategic investments. Following the outbreak of the Russia–Ukraine war in 2022, the REPowerEU plan made energy security and reduced dependence on Russian energy sources important components of industrial policy. The Green Deal Industrial Plan, the European Chips Act, the Critical Raw Materials Act, and the Net-Zero Industry Act, which came to the fore in 2023, marked a new phase in which the state directly supported selected technologies and strategic sectors.
While maintaining the EU’s carbon reduction and green transition objectives, the new proposal moves beyond the traditional regulatory approach towards a more protectionist framework that prioritises European production. In this respect, the Industrial Accelerator Act can be viewed as an attempt to strike a new balance between free trade and open markets, on the one hand, and strategic industrial policy and economic protectionism, on the other.
The central question at this point is how successful protectionist and interventionist industrial policies can be. Historical experience shows that state intervention to support particular sectors or firms can reduce economic efficiency and social welfare rather than improve them. Preferential incentives for selected sectors, or protection for certain economic activities, can divert capital and labour away from uses in which they would be more productive under market conditions towards sectors receiving public support. Output may consequently rise in the supported sectors while resource allocation deteriorates across the economy and social welfare declines.
One of the fundamental problems facing industrial policy is the difficulty governments encounter in predicting which sectors and technologies will succeed. Public authorities often lack the detailed information available to the private sector about firms’ cost structures, productivity, and growth potential. Moreover, public officials do not directly bear the economic costs of misguided investment decisions, while political decision-makers may favour short-term political gains over long-term economic efficiency. Policies described in the economics literature as picking winners can therefore turn into picking losers in practice. Under normal market conditions, firms that lose their competitiveness eventually have to cease operating, whereas inefficient companies receiving state support may survive for many years. This prevents resources from flowing towards more productive firms and weakens creative destruction, one of the fundamental processes of a market economy. Furthermore, shielding companies from competitive pressure through state protection can diminish their incentives to reduce costs, improve productivity, and innovate.
The adverse effects of such interventionist policies can also spread beyond the domestic economy through international trade. State support may shift production towards countries offering larger subsidies rather than those capable of producing more efficiently. Similarly, import restrictions intended to protect domestic production can raise prices for consumers and firms that use imported inputs. Preferential treatment for domestic producers may also encourage other countries to introduce similar subsidies and protectionist measures, triggering a subsidy and protectionism race. Countries may end up spending increasing amounts of public money to support their industries while the economic gains from international specialisation and free trade diminish. Policies pursued by individual countries to strengthen their own industries may thus collectively reduce global economic welfare.
In today’s economies, moreover, the question of which activities industrial policy should support is becoming increasingly contentious. Globalisation, the geographical fragmentation of production, digitalisation, platform economies, outsourcing, and the growing role of services are blurring the traditional boundaries between manufacturing and services. A substantial share of the value added generated by many industrial companies now comes from software, design, R&D, and other service activities rather than physical production. Policies focused solely on increasing manufacturing’s share of national income may therefore fail to capture the changing structure and underlying competitiveness of modern economies.
At this point, it may be useful to reconsider a statement made years ago by Gary Becker, the recipient of the 1992 Nobel Prize in Economics: “The best industrial policy is no industrial policy.” This perspective does not, of course, imply that state intervention can never be justified in the presence of market failures. It does, however, remind us that government intervention can generate economic costs at least as serious as those arising from market failures. Keeping an unproductive car manufacturer afloat through state subsidies, for example, may preserve production and employment in the short term while preventing capital and labour from moving towards more productive sectors.
