The storytelling of industrial policy in Europe and the United States

There’s a sense that we’re at a turning point in the energy transition: we are now in a position to launch it in earnest and we are collectively trying to make sense of what this means. One of the places that we go to when we are trying to make sense of a situation, a classic and a familiar one, one with a happy ending, is a romance narrative. Looking at the United States, we can draw an ideal template of a romance, as voiced by Ezra Klein in his pieces arguing for a liberalism that builds and supply-side progressivism. This narrative consists of three phases. The first is the inevitable attraction; the second is the moment of tension where everything could go terribly wrong; and the third is the moment of resolution.

The first stage is the one I think almost all of us feel in our bones: the climate problem demands a focus on technology, and that may be horrifying in its implications. It takes us back to things we always ought to have cared about intellectually. We’ve had a sense of the various moments in the past where States had ways of addressing this through mechanisms of planning and uninhibited interventionism. So we think the current climate problem is going to drive us towards that point. But then something shattering happens, which is an act of fate: the moment at which the climate policy issue surfaced to the front of world politics was precisely the moment at which neoliberalism and the market revolution seized control of the policy agenda.

It’s one of the really cosmic coincidences that the first international meeting on climate policy took place on Monday and Tuesday the 6th and 7th of November 1989. Wednesday was a day off in world history and on Thursday, the Berlin Wall fell. This is one of these weird moments, where two ships sail past each other. Out of this example, Klein constructs this story of the 30 year hiatus, which in the American case is driven by neoliberal ideology. Narratively speaking, king Exxon separates the lovers, the New Deal and its green climax. 

The joy of the current moment in American policy is that we’re out of this hiatus. There was a major turn last summer when the democrats passed the Inflation Reduction Act (IRA). In contemporary America, this combination of infrastructure bills and massive investments constitutes something of a New Washington Consensus. This is compounded by other facts as well: there’s more at stake than simply the questions of technical industrial policy and climate. Industrial policy sets forth the promise of resolving the class question.

Americans can’t talk about class in a direct way — but what people do talk about is the middle class, so there is an effort to construct a vision of American politics that centers on the American middle class. An important project, which is very influential in foreign policy thinking, is the foreign policy for the American middle class. This is quite unprecedented. Social Democrats in Europe have never said : «We are going to formulate a foreign policy for the European working class». 

In the US, the green industrial policy is part of the effort to build that constituency-based diplomacy. And what articulates these two elements together is China. It cannot be emphasized strongly enough how central it is to the American international policy imagination, how progressive protectionism can blend industrial policy and the middle class question together. What this does conveniently is to put paper over all the cracks in the wall. That’s what a good narrative does. 

Yet, in terms of volume, it is nowhere near as big as the hype suggests. Broken down over a 10-year period and put in relation to the enormous number that is American gross domestic product, it is one-tenth of a percentage point of American GDP. Even if we take the highest estimates — not the number used to get the bill to pass through Congress, but the one fantasized about, driven by private investment that congressmen estimate at 1.3 trillion dollars, over 10 years. That is 130 billion on a GDP that is currently 20 trillion dollars.

When it comes to its anti-China component, like much anti-China policy right now, it’s just not obvious how we’re going to manage it, given the position the Chinese have established across so many strategic areas — literally, our cell phones and all their successors for the foreseeable future do not exist without China. It is a fair description of the current state of the world, a kind of expressive policy

We come to learn how to criticize the politics of right populists — Meloni and Trump — as expressive. We should also acknowledge that progressives have the same tendency, the same desire: they needed to do something, America needed to pass some kind of green legislation. We needed to feel the force of it: this is the only green legislation they’re ever likely to pass any time soon. They needed to get it done.

Thus we need to be a little less positivist, a little less naive in our reading of what this data and what these numbers are, because they are political in the richest sense. They terrify the Europeans. This was symbolic politics, and the aim of the game was to demonstrate that America is back. The Chinese are watching and they’re amused by the way in which the IRA is energized, supercharged. So much so that it unhinged the European conversation.

EU Past Industrial Policy

This narrative may fit Europe too. We can almost say that the EU is the child of the neoliberal state: it’s pretty obvious how the Europeans had the idea of carbon pricing. It was the Environmental Defense Fund, an American neoliberal think tank, which sold the idea of carbon pricing to the Bush senior administration. It couldn’t get it done in the end under Clinton, but the idea traveled to Brussels. 

It’s also true that the EU, which was founded around industrial policy, adopted massively more stringent State aid rules than the United States. One of the things we always underestimate when we say: «the European response of the IRA blows the unity of Europe apart and increases the disparities», is that the IRAl is doing the same thing inside the United States because the Americans do not have any limitation on what states, cities and counties can subsidize. In the United States, the IRA is a massive polarizer along a variety of very complex lines, all built into the American model.

How much do we actually buy this narrative? Does it really make sense? Because if it is its neoliberal version, there are reasons to be skeptical about the Emissions Trading System too. We can see it as an exercise in symbolism with no tangible effect. Even though it was the most sophisticated carbon pricing mechanism in the world, did it do anything? It didn’t matter. And it clearly wasn’t designed to, not in the fine print.

So it’s a triumph of neoliberalism, a village version of it: it looks good when you have to show to the liberal inspectors that you’re doing it the right way. If you look at prices rates, you may see that they are trivial numbers, they do not make any difference. Everyone has bunches of certificates and is making money, hand over fist, and selling them into this market. It’s a giveaway system, a funny kind of neoliberalism.

With respect to their industrial policy, Europeans sometimes say «we went through this period when we didn’t invest in the industry». It’s a bit weird, because if you get into an airplane, the chances are you’re either sitting in one of two aircrafts, either a Boeing, product of American industrial policy depending on oil, or an Airbus, product of Europe’s largest industrial project. This isn’t an incident, but a consequence of Europe’s investment in defense. Defense was at the center of the European industrial policy conversation until the early nineties. Today, Airbus is a remnant of that era because aerospace is tied to the defense and the military industrial complex. If we look at other areas, for example at the energy sector from an American point of view, Europe’s energy sector doesn’t look as though it had a unified policy that added up to anything. Europe had three energy policies: first, the most advanced and comprehensive nuclear program in the world, which was built in conjunction with the Americans on the basis of licensed American technology; second, the dash for gas, which is an industrial policy decision on the part of a series of European states and major turbine and compressive producers; third Europe’s oil majors, like Total and Shell, were huge players in the new world of global oil in the 1990s, especially in the post-Soviet space that had opened to exploration.

So since Europe’s old imperious energy complex exploded out into the world in a new way, just as high speed rail started to take off thanks to European companies, it sounds a bit strange to say, from an American perspective, that Europe doesn’t have an industrial policy – especially if you think of the agonizing embarrassment of America’s effort to build a single high speed rail line in California.

We may also consider cars. The Europeans are slow in developing electric vehicles relative to the Chinese. There is a fascinating set of data on the adoption of the Prius, the first mass marketed post-internal combustion vehicle. It was made by the Japanese and the Californians – it’s the California market, which drove the Prius and hybrid mobility into reality and into people’s imagination. Tesla didn’t happen by accident: it succeeded by being more attractive than the Prius. Tesla has performance. If you’re a venture capitalist in California, you can’t drive a Prius, it’s a sloppy car. You need a powerful vehicle and that’s what Tesla builds. But this is important to recognize that there was this space in the automotive imagination which the Japanese and the Americans built.

What were the Europeans doing? Where were the Europeans, «who had no industrial policy»? What they were doing was perfecting the turbo charge. This is a huge industrial achievement, to shut the diesel to a 40 mile per gallon, like six liters per 100 kilometers. We now know it’s a dead end, but it used to be huge, pursued with determination and considerable government backing by the entirety of the European automotive industry.

So you can see what I’m trying to do; I’m eroding this narrative, that there was no love between industry and Europe. It wasn’t the clean love that we’re going to end up with, it was messy and ill conceived.

Europe’s deceased energy market, and the rise of China

Did Europe have a green energy policy that worked? Yes, but not the Emissions Trading System but the so-called German model of feed-in tariffs.. The funny thing about the German model narrative is that it totally exaggerates the role of the Germans. They started it, but if you look at the data, by the end of the first decade of the 21st century, Spain and Italy were making very major contributions to this push. It was an industrial policy that was working, and we all know the narrative that is now spun about this industrial policy failure – we let the Chinese take the entire solar business. There is an element of truth to that, yet saying the Chinese killed the European solar industry is a bit like saying that someone who dies of a heart attack just before being hit by a 10-ton truck should watch his diet.

It did not matter how big the Chinese industry was. The Europeans were about to kill their own solar industry, through a combination of subsidy withdrawal and macroeconomic pressures. Funding costs were going to kill the two bits which were the most dynamic — Spain and Italy — because they’re part of the Eurozone periphery. As the Spanish and Italian governments came under pressure, they had to reduce their subsidy schemes: the Europeans killed their own. So industrial policy again: we had the love affair, it was all going well and then somebody made a series of catastrophic decisions with regards to what to invest in the relationship, deciding that maybe they just didn’t have time for it. They were going to dramatically reduce the macroeconomic influence.

Thus it’s not so much that Europe was ruled by a coherent powerful neoliberal regime, but that it was witnessing an incoherent strategy. It was in the grips of an inconsistent set of imperatives that were pushing in different directions. There was a neoliberal architecture, functioning in the form of the ETS. But for the first phase of its life – the first decade – it was something like a facade for corporate industrial interests to pursue independent strategies. The policies were there, yet they were not coordinated. So at this point, the narrative created an impasse. This so-called neoliberalism paradigm attracted contradictions. At some point, it came apart. The ban on the Alstom/Siemens merger in February 2019 was the final straw.

Yet for a decision like that to be a final straw, there’s a variety of other reasons to take into account. The February 2019 decision was cataclysmic, because it was taken against the backdrop of Trump fear and China fear, that had been built up over the previous years.It was then further catalyzed by the unprecedented Covid pandemic, which I think taught two lessons. One was that it took a coherent industrial policy to make industrial policies: everything harked on the success of the vaccines. We were confronted with the fact that macroeconomic destiny came to hinge on highly structured medical trials. In California, everything began to binge on that and the collaboration between laboratories was essential to the whole world.

The other imperative was simply this one: Berlin and Paris had to come up with some kind of rationale for the large-scale recovery plan. At that point, ecological neutrality in the broader sense of the word went out the window: you don’t just simply say we need an investment package, you say we need an investment package in digitization and green. Once you’ve done that, you can swing Angela Merkel’s modernized CDU beyond the decision and you’re off to the race. This was a critical shift. 

Will it be fast or effective enough, whatever industrial policy emerges from the plan? We constantly need to be critically aware of the gap that can open up between discourse and the formulation of policy. And how do we pay for this green industrial policy? How do we ensure profit sharing as well as risk sharing? How, to avoid being irrelevant, do we help foster a global version of these policies?

We know what’s happened since Russia’s war on Ukraine. The Biden administration confirmed that the Americans may be back, but that they were not the same old Americans. These are new Americans and their new rules change the terms; that decision launched a mutiny from national governments across Europe.

The cost of decarbonization

The transition toward a carbon-free economy will necessitate huge investments. To do some stabilization of the climate over the next 20 to 30 years, we are talking about trillions of dollars per year for the next 30 years. Four trillion is a kind of consensual number – 4 to 5% of the global GDP. That’s the amount of defense spendings during the Cold War. The Federal Republic of Germany did 3% annually without flinching in the seventies and eighties. We need to get there, and we are consistently falling short, not by an order of magnitude, but by multiples – we are way off. 

Could we do this? Is this sustainable? Let me introduce one of the great narrativizers of the capitalist world: Mckinsey made an estimate of the viability of decarbonising Europe two years ago and according to their figures, a carbon price would be enough to pay for it. Breaking it by sector (business, building, power), a carbon price of 100 euros per ton would cover the amount of all of the investment in Europe.

Geoeconomics of decarbonization

Let’s begin to explore the uneven and combined impact of this kind of price and energy shock on the global energy economy and on the world economy at large. Imagine if we are in this world where the case for a massive shift to renewables is becoming very hard to argue against in places of proper carbon pricing like Europe – and let’s just say, for the sake of arguing, in China – what would happen?

If you’re China and Europe, the case against green shift is pretty undefendable: it will be cheaper and it gives you better energy security. So China, Asia, the Eurasian bloc begins to decarbonize. The consequence of that is that demand decreases in the longer terms for fossil fuels. Fossil fuel produces a spike for the remaining demand. Yet the carbon pricing in Europe and China prevents the rebound effect from happening and you don’t get a surge in demand for the cheap fossil fuels available.

But the consequence of a scenario where the global demand for fossil fuels is shrinking is well-known. The last producers stand on their own and influence prices — Saudi Arabia, for instance. This leads to a lateral damage, a bunch of high cost fossil fuel producers. A group of researchers simulated the accumulated macroeconomic gains and losses by country. Europe and China would make huge gains from this shift – whereas the United States would incur losses. This is not bankruptcy, we’re talking about a 2 to $4 trillions loss over a matter of decades, the American economy is 20 trillion. So what we’re talking about is concentrated losses for key interest groups. Another paper the same group published last year spelled out the stranded asset losses. Anglo-American fossil capital is severely hit by this process. The analogy here would be to the grain price shock in European agriculture in the 1870s and 1880s. What you got out of that is a segmentation of agricultural markets By the 1930s, essentially the agricultural markets of the world were pulled apart into self contained lots which persist to this very day.

A global energy transition within the Eurasian system would require banks to offset the cost, but we can usually imagine that emerging in America. It’s a little known fact, but in the fifties and the sixties — in fact, from the thirties onwards — oil imports to the United States were banned, because at the time American oil producers out of Texas, Oklahoma and Pennsylvania were high cost producers. We think of America as being a low oil cost country. That’s only because they don’t charge any tax. The Europeans and the Japanese were getting the truly cheap oil, but they were lending huge amounts of tax on top of it. So America, between the 30s and the 60s, operated a high cost closed protectionist oil economy – its multinationals of course operated both sides of the fence. One could imagine some kind of scenario like that as a potential future. It implies conflict.

We can already see the argument beginning, or rather the efforts to defuse the argument between the European and the Americans. The White House wants to communicate that Europe and the United States declared peace in the Green Energy War, so they want to begin negotiations on a critical Minerals Agreement. They want a clean energy incentives dialogue to achieve incentive alignment — a euphemism for «defusing the IRA». The Trade and Technology Council should coordinate EU and US actions against China; a global arrangement on steel and aluminum, that was first noted at COP 26 in Glasgow, should be concluded this year.

Then, the US is looking globally. They want to do a global partnership on infrastructure investment. This is Europe and America’s answer to «One belt, One road». It is a classic: lots of talk and virtually no money.

Is the US a reliable partner? 

The rivalry with China 

The question that Europe needs to ask is the reliability and cost of this potential deal. If you look at the losses already out there in the American portfolio, in terms of stranded assets, if you look at the scenario for decarbonisation and its impact, should anyone in their right mind trust the Americans as a partner in decarbonisation?

The answer is on the basis of the underlying structures of the situation: the world’s largest exporter of fossil fuels – which is what the Americans are – is an unlikely partner for Europe in the long term. The liberal Americans know this too and are working really hard to make up for this. European realists should look at this and see what’s being sold to them. The other element that a European realist really has to oversee is the China factor. If you look at every single one of those proposals – the raw material proposal, the Trade and Technology Council, the aluminum and steel agreement, the G7 initiative on infrastructure, the shift in the World Bank leadership, they are all part of the American grand strategy of trying to find allies into a containment strategy of China.

It’s a completely explicit strategy on their part. For Europe that poses quite fundamental dilemmas. Many organizers of the continent have from their position a pessimistic sense of Europe caught between a rock and a hard place. Europe has quite a lot of agency here, and needs to think about what its options are and center those options in relation to the scale of the problem.

This is where how you define the problem comes onto the stage again, because if you start from the position of a European employment policy, or an industrial future for Europe, or from the point of view of European integration as your key object of interest, you are headed down in one direction where China appears obviously as the major threat to the survival of what’s left of the industry in Europe.

The fight against climate change 

If we look from a climate perspective, the whole problem is that it’s rather different. If we’re neutral as to how Europeans are going to earn their living: in the end, it doesn’t really matter where the steel is made, as long as it comes in when we buy it. If we adopt that position, it’s contentious, looking at this from the point of where the action in the energy transition is. The answer is unambiguous.

According to Bloomberg data of the investment in renewable energy last year, it amounts to 1.1 trillion globally — more than twice the investment in fossil fuels. That’s the good news. But half of that investment is in China. It’s even more dramatic when you look not at the total output and the total investment, but the upstream investment in the battery factories: 90% was in China over the last five years.

They’re completely predominant in sector after sector, batteries, solar panels, electrolyzers. Surely these markets are going to hugely expand in other countries, but we have to recognize China’s existing position and its implications. There’s a climate consequence: you just have to look at the global pattern of emissions today as opposed to in 1990 to understand the reality of it: China by itself is responsible for more emissions than the entire G7 put together. And the other growth from 1990 to today is in the G20 – Indonesia, Pakistan, Turkey and the Middle Eastern States.

I’m not saying this from the point of view of a climate justice argument. I’m saying this from the point of view of political pragmatism: «where can you actually solve this problem and what if you have a broader and Western understanding of where we stand in the world?»

Right now we are waiting for the moment when Chinese GDP will overtake that of the United States. We ask ourselves whether China will ever catch up with the United States in terms of military power, meanwhile China’s emissions overtook those of the United States in 2004. The Kyoto Protocol actually sort of knew that this was going to happen, and they understood the way the balance was going to shift. China pulled more concrete in three years in the early 2010’s than the United States in the entirety of the 20th century.

This is not balanced by Western industry; it’s a trivial additional element to a story, which is Asian-centered, driven by one of the most epic developments of urban civilization in history. We should credit the Chinese for what they’ve done. 600 million people moved into cities in the space of 25 years. It’s like every American industrial revolution rolled into a single generation at our current level of technology.

That’s what drives the balance in a fundamentally different way. And the fundamental point is that we no longer control our own destiny — by «we», I mean Europe and the United States. Consider for instance a warming world. With a gain of 4 to 5 degrees, all the tipping points are activated. In the sort of scenarios that we’re headed towards, with all the difficult choices with regard to decarbonisation, to adaptation, to loss and damages, these choices will fundamentally be made in Asia — at this point, they are driving the whole process. 

Europe and the United States should realize that they are not free riders, but passengers on a train being driven by others.