The EU’s Industrial Garden Path

When European Commission president Ursula von der Leyen first unveiled the European Green Deal (EUGD) back in December 2020, some commentators, faced with the difficult task of characterizing a very broad set of proposals, argued that whatever it was, the deal did not deserve to be described as green industrial policy. This argument was mainly based on the fact that the climate targets contained in the EUGD were detached from any transformative measures at either the sectoral or macroeconomic level.

At the time, the European Commission seemed unwilling to actually tackle the issue, aware as it was of the political U-turn needed to implement a proper common industrial policy given the EU’s historical aversion for such concept. Yet three years later, following a series of destabilizing global events, the responses of states, international financial institutions, and global markets have drastically changed political landscape in Europe and around the world.

The COVID pandemic and subsequent recovery strategies adopted in the Global North, the dramatic increase in the level of sovereign debt for developing countries (as a consequence of “business as usual” in global governance), the war in Ukraine that reinforced the energy crisis, and disruptions in global value chains have expanded and deepened what many now refer to as a “polycrisis”. Europe itself is facing rampant inflation and a consequent cost-of-living crisis, largely fuelled by voluntary price hikes on the part of large, market-dominating corporations. While this widespread social crisis revealed the need for Europe to accelerate the transformation of its corporate, fossil fuel-driven economy, it confirmed pre-existing criticisms of the inadequate and unfair nature of the European Green Deal.

More recently, the announcement of the US Inflation Reduction Act (IRA) was widely interpreted as confirmation of a possible policy paradigm shift already observed during the pandemic. This highly protectionist plan is designed to establish the United States as the leading country in the digital and green technology race. It constitutes a concrete signal that the neoliberal era as we know it, characterized by the dominance of the so-called Washington Consensus, could be on the outs.

The EU’s current political choices, by contrast, demonstrate the incoherence and contradictions of a green transition project that claims to be the vanguard of a new socio-ecological model, while refusing to transform the nature of its relationship to capital and private interests. Consequently, the project risks failure at the expense of the climate and social justice in Europe and around the world.

Europe’s Missed Opportunity to Forge an Alternative Model

The European Commission itself is seeks to portray the EUGD as the set of policies that will carry the European Union into the twenty-first century. Indeed, looking at the architecture of the European Green Deal can tell us a lot about how the EU as a whole has so far shaped its transition — financialized, market-driven, and with a lack of concern for the social consequences.

The European Climate Law codifies the EU’s overarching greenhouse gas reduction targets — specifically, reducing emissions by at least 55 percent by 2030 and achieving carbon neutrality by 2050. But beyond reduction targets, it is crucial to look beneath the surface to analyse the socio-economic infrastructure backing up those political commitments.

A closer look at the centrepiece legislation that forms the backbone of the EUGD, the so-called “Fit for 55” package, is instructive in this regard. Its key components include:

• Enlarging and deepening EU carbon markets, with the creation of the second Emission Trading System (ETS 2) incorporating the transport and building sectors into its scope
• Increased renewable energy targets
• The creation of a Carbon Border Adjustment Mechanism (CBAM)

Alongside the Fit for 55 package, member states also adopted the EU Sustainable Finance Taxonomy, which provides incentives to shift financial investments into different economic activities. The inclusion of gas and nuclear energy in the “Green Investment List” (a move strongly backed by Germany for gas and France for nuclear) goes against any climate protection logic and reveals the prioritization of the energy industry’s short-term economic interests of over decarbonization targets. The nature of the taxonomy itself — a price signal aimed at redirecting investments towards low-carbon activities instead of fixed regulatory measures — is a perfect example of the concerted push to financialize the energy transition.

The ETS 2 has also faced withering criticism from left-wing parties and trade unions across Europe for its regressive aspects. By setting up a minimum price for carbon emissions in the building and transport sector, the expected result will be to increase the cost of housing and individual transportation for ordinary households. The most vulnerable will potentially be the impacted by this carbon tax the most.

Finally, the CBAM is the latest market-based instrument designed by the European Commission. This new market mechanism, which adheres to the general principle of carbon markets by putting a price on the carbon emissions, targets foreign industrial production. The development of the CBAM is a corollary of the European internal market (ETS 1 and 2) and is intended as a response to the planned successive reduction of free emitting permits currenly shielding the most polluting industries (formerly 94 percent of EU emissions) from the pricing instruments of such markets.

In this regard, the reduction of those exemptions could potentially disadvantage EU industries and manufactured goods, making them uncompetitive compared to foreign products and thereby further incentivizing the relocation of said production — a dynamic known as “carbon leakage”. But as a direct consequence of the efforts to avoid such leakages, the CBAM has the potential to discriminate against developing and least-developed countries, thereby violating the guiding principles of equity and common but differentiated responsibility established in the Paris Agreement.

One of the rare examples of a specifically dedicated social measure emerging from the EUGD, the Social Climate Fund, is little more than a band-aid on a gaping wound. This new funding mechanism was proposed to compensate for the effects of the ETS 2 on European citizens, yet saw its funding reduced to 86.7 billion euro to be distributed from 2026 to 2032 .The final allocation of only 40 percent of the total funds for direct support to households is again another sign that the political choice to rely heavily on carbon markets is bringing the continent further away from a just transition.

While the interests of the EU’s polluting industries and fossil fuel companies are often shielded from taxation and strict regulations to prevent them from taking any historical responsibility for climate change, the few social measures implemented are glaringly insufficient to ensure that a large part of European citizens and especially the most deprived will not pay the price of the decarbonization of the European economy.

This disparity between the treatment of private capital and European public also helps to explain the alarming success with which right-wing, far-right, and sometimes even liberal parties have mobilized against measures that Brussels hails as meaningful climate progress. The phase-out of the combustion engine in Europe by 2035 and the ongoing discussions over the ban of gas boilers in households by 2029 are concrete examples of how right-wing forces — pandering to a mix of fear, economic anxiety, frustration, and a distorted concept of freedom — have succeeded in gaining ground among certain segments of the population by rejecting the very idea of a transition.

The Green Industrial Plan’s False Promises

The recently announced Green Deal Industrial Plan (GDIP) was introduced by the EU as a comprehensive industrial strategy designed to fill the glaring hole left by the EUGD in the area of industrial planning. But here once again, the European Commission is using seemingly progressive and ambitious labels to hide its failure to move beyond the political and economic status quo.

In fact, the Net-Zero Industry Act (NZIA, the main legislative proposal) largely focuses on facilitating the allocation of private capital into a handful of sectors such as hydrogen, energy storage, and batteries, regarded as key sectors for the EU to develop and assert as comparative advantages for the region in the global green economy. The blatant lack of a new public investment scheme together with the multiplication of tools aimed at securing financial returns on investments and the deregulation of permit granting is deepening a European macro-economic model that economist Daniela Gabor recently dubbed the “(European) derisking state”, which, she argues, “emerges gradually from political choices made by state managers to both facilitate capital accumulation and to rationalize financial capitalism”.

She describes the GDIP as a new form of the state-finance capital relationship inscribed into the EU’s macrofinancial architecture, characterized by a structural lack of shared fiscal capacity. Gabor demonstrates that the substantial state aid for member states included in the NZIA — itself something of a historical first — is in fact merely directed towards providing better incentives in the form of public guarantees for private capital to invest in clean technologies.

Recent examples of the failure of such reductions in state and public capacity in favour of global financial actors to meet intended outcomes are legion. The impossibility of delivering the amount of private finance needed, the volatility of capital flows guided by the need for short-term profitability, and the extreme inefficiency of the use of public funds are among the main reasons behind those failures.

Losing the Green Growth Race

The EU’s plans are not unfolding with a global vacuum, of course, as other world powers have been developing their own plans for competing in the race for a digital and green transformation. Indeed, the GDIP has been described as a direct and hasty response to the Biden administration’s Inflation Reduction Act, which in turn appeared to be a reaction to Beijing’s “Made in China 2025” strategy initiated in 2015.

The IRA’s 370 billion US dollars of public investments over the next ten years, with some estimates putting the actual figure at around 900 billion dollars, is projected to cut US greenhouse gas emissions by over 40 percent by 2030. The plan signals a pivot away from neoliberal orthodoxy by enshrining the state as a key driver in the transition to a green economy. The plan grants tax exemptions and provides important loans and grants to a large swathe of sectors such as clean energy, transport, and infrastructure. The inclusion of labour and wage standards as preconditions for the granting of public funds and tax exemptions stand in stark contrast to the absence of any concrete regulations for a just transition within the GDIP.

The IRA also replicates the Chinese goal of onshoring large parts of the manufacturing process through tax incentives. China’s concerted efforts will certainly boost the country’s leading position in global clean energy manufacturing. US industry comes in a close second, dimming prospects for the EU to establish domestic value chains, along with the job creation attached to them.

No Transformation under Austerity

As if Europe’s green industry efforts weren’t already incoherent and riven by conflicting interests to begin with, member states and European citizens are already facing pressure to return to the era of constrained public spending and restrictive fiscal rules — in other words, the era of austerity.

Although some of the core principles of the European Stability and Growth Pact were suspended during the COVID crisis and subsequently extended in response to the fallout of the war in Ukraine, this state of exception will soon come to an end. The Commission has now come up with a proposal for a new economic governance framework that does not move beyond the principle of debt control nor provide the necessary monetary framework for a shift of public spending.

As Gabor points out in her paper, the retainment of those macroeconomic principles and the impossibility of fostering fiscal and budgetary solidarity coupled with the relaxation of state aid creates the risk of deepening disparities within and between member states. Currently, the gap between those member states able, at least to an extent, to raise funds through global financial markets (Germany and France) and those who faced with a lack of sustainable financing options (especially Eastern Europe) is growing.

The situation is made worse by the German government’s plans — in line with governmental orthodoxy in Berlin — to push for a further retightening of fiscal and debt rules at the European level. These calls for a return to an EU-wide austerity regime appear particularly hypocritical given that they are being made in the wake of the German state’s unilateral deployment of a massive national plan aimed at supporting national industry and bailing out private energy companies that risked falling into bankruptcy less than two years ago.

Charting a Left Alternative

Contrary to Ursula von der Leyen’s ambitious rhetoric, the European Union has thus far decided to conduct its green transition within a neoliberal framework. Under the banner of the EUGD and GDIP, the European transition to a green economy aligns with the interests of large polluting industries and fossil fuel companies together with an acceleration and intensification of the financialization of the economy at the expense of global ecological and social justice.

Reinforcing the direction taken by the EUGD, the NZIA exhibits a strong focus on securing strategic access to minerals needed for green technologies. This global vision, articulated in the Commission’s Critical Raw Material Act, is based on securing strategic partnerships with resource-rich countries and ensuring that 40 percent of the minerals are refined within EU territories. This approach will ensure the continuation and expansion of a predatory extractive economy sustained by unfair free trade agreements and increased destruction of nature and communities in the Global South, while maintaining the economic, political, and material conditions of unequal development.

In the short term, however, progressive actors and left-wing forces should latch on to the apparent breaks with neoliberal orthodoxy (primarily the recognition of the need for state intervention revealed by the further loosening of state aid rules) and use them as entry points for building a radically different economic approach. A left-wing industrial policy cannot look at market shares or increases in GDP as benchmarks for success.

This means supporting the development of public services and infrastructure, while reducing polluting and unnecessary production chains (such as plastic and other petrochemicals) or removing the EU energy market tailored to fossil fuel corporations and financial speculators. A specific focus on developing universal access to modern healthcare systems and developing mass sustainable and affordable housing solutions should be primary targets when developing Europe’s green industrial framework. The restructuring and decarbonization of Europe’s food system, which accounts for 31 percent of total emissions on the continent, should not only be seen as a climate and environmental priority, but also as a rare opportunity to create new value chains and well-paying jobs.

Moreover, a renewed EU industrial approach should simultaneously aim at alleviating regional imbalances within the EU while initiating a shift towards the public management of resource-intensive sectors (chemical and cement industries, transport, and power generation) and facilitating an ecologically necessary shrinking of some of those sectors by reducing their exposure to profits and financial logics.

Generally, instead of looking to merely incentivize private capital to invest in some narrow sectors of the economy, a socialist industrial policy should prioritize the strengthening of public capacity as a powerful tool to effect a timely decarbonization of the economy while ensuring improved living conditions for the majority of the people.

As it stands today, the institutional capture of the concept and practical implementation of the so-called “green transition” in Europe by political elites supporting the neoliberal consensus reinforces two mutually reinforcing global threats. The first is the aggravation of the climate and environmental crisis and ongoing exploitation of natural resources, while reinforcing global inequalities between and within the societies of the North and South. The second threat concerns the future of democracies in Europe. The rise of far-right parties by exploiting the effects of the climate crisis and the profit-driven green transition is already a deeply alarming phenomenon. Should this trend continue, popular support for eco-fascist and other extreme right-wing worldviews could prove hard to reverse.

Against this backdrop, the Left in Europe must continue to oppose the principles and logics driving the EU’s current industrial policies, while developing concrete and policy-driven approaches to a publicly coordinated industrial transformation where the allocation of resources and goods is part of a democratic process allowing people and societies all over the planet access to a decent and just future. Such a vision is ultimately the only way to ensure that our societies are not forced to choose between climate protection or social welfare in the decades to come.