EU industrial innovation policy can no longer wait

From policy promise to implementation discipline

More than a year after Mario Draghi delivered his competitiveness report to the European Commission, his central warning still stands. Europe’s competitive position is slipping and the choices taken now will decide whether the continent leads the next industrial wave or cedes ground to faster rivals. Since the start of the new Commission’s mandate, an ambitious slate of initiatives has been launched across the foundations of EU economic growth, from finance to RD&I (research, development and innovation), skills and digital policy. With so many proposals now on the table, the debate is shifting from ideas to delivery. In a context of finite public resources, this is the moment when priorities are being decided.

Against that backdrop, there is now little debate that the EU’s competitiveness rests, in large part, on how effectively it delivers industrial innovation. This is not only a core message of the Draghi report, but it is also echoed by market evidence, as reflected in the 2024 EU Industrial R&D Investment Scoreboard. EU-headquartered firms increased R&D investment by 9.8% in 2023, outpacing the United States at 5.9% and China at 9.6%. Yet the continent still falters at the growth stage, where capital intensity is high for advanced manufacturing and where Europe captures a far smaller share of large late-stage rounds than the US. At the same time, China’s overall R&D efforts, translated into R&D-to-labour productivity, have been expanding much faster than the EU’s, underscoring the pressure to act from economies with long-standing, large-scale investment in innovation and R&D. Moreover, an ECIPE paper published earlier this year adds a policy lesson, finding that the most successful industrial strategies prioritise innovation and R&D over short-term financial assistance.

To this end, Europe has already done a big part of the hard normative work. The European Green Deal has sketched the direction of travel and the EU Emissions Trading System has created a durable carbon price that the rest of the world is now edging towards. Those achievements make the EU both a regulatory first mover and, crucially, a plausible home for scale in clean technologies (incl. advanced manufacturing for low-carbon equipment, high-efficiency machinery, etc.). What has been missing is the delivery cadence that converts first-mover advantage into lower system costs and bankable demand.

That conversion requires knitting markets, infrastructure and finance into a single proposition. And this whole process should start with electricity. An integrated market with uncongested grids is the cheapest route to abundant clean power. Without it, factories will continue to pay a volatility premium that undermines investment cases in advanced manufacturing, as much as in other energy-intensive sectors. Completing the Single Electricity Market and fast-tracking transmission is not an adjunct to climate policy, but its cost discipline. Policy initiatives, such as the Clean Industrial Deal,  should then use that falling system cost to secure demand in key markets – not across the board, but rather where they can really bring high added value. This can be operationalised, for example, through accelerated standardisation or strategic public procurement in sectors where Europe already has credible champions, such as the manufacturing industry. In addition, public-private partnerships, such as the Knowledge and Innovation Communities (KICs) of the European Institute of Innovation and Technology (EIT), can also help turn falling system cost into bankable industrial cost by de-risking first-of-a-kind projects and accelerating cross-border demonstration.

Moreover, trade policy can no longer afford to leave out commercial considerations, such as using targeted reciprocity to secure critical inputs without limiting scale. And skills are the multiplying factor. For example, if programmes to expand grid capacity and scale heat-electrification are not matched by a pipeline of power-systems engineers, controls specialists and data practitioners, Europe will end up importing expertise even as it tries to increase production at home. This is why increased focus needs to fall on initiatives, such as the KIC-led academies, which can align curriculum with deployment targets and place talent closer to market outputs.

Tech competitiveness through tech sovereignty

Competitiveness can ride on rented platforms for a while, but lasting gains require trusted providers, domestic capacity and clear rules that allow European innovators to scale at home and abroad. This is also the case for manufacturing, where improvements in process control and quality assurance compound across entire value chains.

In turn, tech sovereignty begins with infrastructure. The systems that underpin Europe’s economy and democracy are increasingly digital, yet too much of the cloud, edge and training compute on which they rely is controlled by firms outside the Union, some of which have shifted from market-first strategies to closer alignment with their own governments. More precisely, the Draghi report notes that “[…] the EU relies on foreign countries for over 80% of digital products, services, infrastructure and intellectual property […]”. Europe needs credible providers and capacity at home. For this purpose, the EU budget and the EIB should use targeted procurement signals and risk-sharing to anchor demand for trusted European solutions. At the same time, foreign investment can and should also contribute, provided effective control of EU critical technologies and critical infrastructures remains in European hands through enforceable safeguards and firm governance.

Strategic autonomy: precision, not protectionism

In reality, the priority is narrow and concrete: safeguard indispensable capabilities where failure would cripple Europe’s industrial base or public security (e.g. semiconductor equipment), rather than spreading efforts across the entire economy. That, in turn, requires better alignment of EU trade and industrial policy. Lead markets can be justified where scale and spillovers are clear, but arbitrary domestic content mandates are a costly detour (e.g. protecting strengths in precision tools and industrial robotics can create spillovers across entire value chains). It is wiser to focus on coordinating public and private R&D, procurement and standards so European firms can specialise and scale, and to build joint value chains with trusted partners to diversify risk.

This disciplined focus should sit within a realistic view of Europe’s external relationships. The transatlantic economy remains the anchor for scale, despite the drastic shift in the US approach since the beginning of the second Trump administration. While the recent EU-US agreement framework is not ideal, it plays its role in terms of safeguarding market access, avoiding a tariff spiral and preserving the mutual foreign investment and affiliate sales, which represent in practice the backbone of the transatlantic relationship. A similarly clear-eyed approach is needed with China. The challenge has shifted from market access to overcapacity in several segments, which calls for targeted instruments that defend fair competition while leaving room for Europe to reach scale at home. Under these circumstances, proportionate trade defence measures where warranted, careful use of reciprocity and screening of foreign direct investment, and openness to cooperation where European interests are served should be the default. For example, power electronics and automation software most often require open markets for inputs, but also targeted trade defence measures against dumping that risks hollowing out European suppliers.

Above all, strategic autonomy should develop gradually and conditionally. In the first instance, Europe should use international partnerships to raise economic resilience, choosing them carefully and with explicit exit ramps so today’s diversification does not become tomorrow’s dependency. Openness should be recalibrated as resilience improves in specific sectors and as geopolitical and market conditions evolve, with policies that are rule-bound, transparent and revisable.

Financing: matching ambition with capital at scale

Draghi’s financing prescription rests on two foundational pillars: a deeper Capital Markets Union and a larger, more flexible and more impact-oriented EU budget. So far, both are moving in the right direction, even if unevenly.

On the budget side, the Commission’s Multiannual Financial Framework package, announced last July, gives a special place to competitiveness by pairing a new European Competitiveness Fund with a redesigned successor to Horizon Europe, carrying a clearer impact logic and an expanded scope. For manufacturing, the test will be whether Horizon’s excellence and scale are protected while its link to the European Competitiveness Fund advances simplification that ultimately shortens time-to-money.

But for all this to become reality, political agreement will have to be forged on the current EU budget proposal. And, for that to be the case, there needs to be a shared sense of ownership across “old” and “new” Member States. In this vein, excellence-oriented instruments, such as the European Competitiveness Fund, should not crowd out SMEs or cohesion goals. They should bring local and regional stakeholders closer to the EU’s policy objectives by empowering delivery at the level closest to citizens, while putting in place tighter mechanisms for supervision. In that sense, there should be caution that the new National Regional Partnership Plans do not reverse progress achieved through cohesion policy to date.

On the market side, the Savings and Investment Union is meant to connect Europe’s savings with productive assets and the proposed Scaleup Europe Fund, targeting more than EUR 10 billion, is intended to anchor sizeable growth rounds. Both would be reinforced by a single, harmonised 28th legal regime for innovative companies, giving founders and investors a predictable corporate framework across the EU. Taken together, these reforms will only succeed if they deliver speed, preserve scientific excellence and give explicit priority to key sectors, such as advanced manufacturing.

Simplification: from legislative intent to delivery discipline

Industrial leadership: from ambition to scale