The New Life Of Industrial Policy

After having been reviled, industrial policy is operating its great return on the public agenda. The challenge is enormous for Europe, whose strategy has been based on multilateralism and free competition within the single market. A mantra that has begun to crack with the relaxation of the European regulations on public aid. In 2022, the German government took advantage of this window of opportunity to dedicate no less than 163,000 million euros to subsidies and capital transfers – in large part to its industrial apparatus – more than double that before the pandemic, and four times more than Spain.

The shift responds in part to the disruptive nature of the technological transformations that are going through the productive fabric, particularly at the dawn of artificial intelligence. The urgency of combating climate change is another important consideration. However, the key factor is geopolitical: industrial policy is the backbone of the fight for technological leadership of the main world powers.

Fortunately, Spain has Next Generation funds to face these challenges —resources that make up the main axes of its industrial policy. However, past experience shows that success is not assured. It depends, first of all, on the incorporation of the starting point. Our industry represents slightly more than 13% of the economy, ours being the only one of the large countries that has managed to raise that percentage in relation to the situation prior to the pandemic. Despite this, the industry has a lower weight than in Germany (20.7%) and Italy (16.3%). Therefore, it is convenient to concentrate our efforts in the sectors where our fabric has a comparative advantage.

These sectors are not easy to identify —and that is another lesson of economic history—, especially taking into account the rapidity of the transformations and, therefore, the inherent difficulty in detecting from the State the projects with the most potential. Hence the importance of drawing inspiration from the innovations that are emerging from market forces themselves in priority areas for industrial policy, that is, the digital and green transitions. Specifically, a part of the 84,000 million requested from the EU as part of the recovery plan could be deployed based on the signals provided by private financing, in order to exert leverage and attract new investments in priority sectors. This is an instrument that is also characterized by its agility, since the selection process is determined by the interest of investors. Another crucial factor is the complementarity with the large university centers, as evidenced by the Spanish pharmaceutical industry. The contribution of European funds could therefore be conditioned on the formulation of joint projects between industry and research —something that, on the other hand, would act as an incentive to attract research talent.

Direct grants, even within a competitive bidding process, have the drawback of slow procedures. And they expose themselves to the risk of spurious competition between member countries in their effort to attract investment in key sectors. This is being the case with microchips, with a spiral of aid that could be detrimental both for public coffers and for overall efficiency: in the end, the location that offers the most subsidies could “win” and not necessarily the best positioned for the general interest.

All of this demonstrates the importance of good articulation between industrial policy instruments and European tax and competition rules. Some rules, in force until the pandemic, which were formulated at the time of greatest splendor of globalization and the supremacy of the market as a driver of growth. In the current geopolitical era, however, macroeconomic policy is already inseparable from industrial strategy.

Foreign trade

The good run of foreign trade continues. In the period from January to May, the trade balance (difference between exports and imports of goods) reduced its deficit to 14.8 billion, almost half that of a year earlier. The deficit is mainly explained by purchases of energy products from third countries. Trade with EU countries, however, shows a surplus, which contrasts with the intra-community deficit of Germany, France and Italy. In addition, this surplus does not stop growing (8,600 million this year compared to 6,999 in the past year).