Industrial policy boosted by investment in innovation

Europe is at a turning point in its history, facing both internal and external challenges that test its ability to remain competitive on the global stage. In this context, the report presented by former Italian Prime Minister Enrico Letta together with the President of the European Council, Charles Michel, on the integration of the Single Market, takes on an exceptional relevance by outlining a roadmap for the new European political and institutional cycle 2024-2029.

The publication of the Letta Report – which, among other issues, highlights the importance of innovation for the reindustrialisation of Europe – comes as the European Commission prepares the EU’s 10th Framework Programme, from which the budget for the successor to Horizon Europe, the current framework programme of aid for R&D&I projects, should emerge. At Zabala Innovation we are participating in this process, with a Position Paper for the European Commission that we will soon unveil.

In fact, the need to consider the role of innovation in the 10th Framework Programme was also evoked by the Head of Unit of the European Commission’s Directorate-General for Research and Innovation, Massimiliano Esposito. Speaking at the eighth conference of the Norwegian University of Science and Technology on 18 April, Esposito said that “every euro in costs linked to the Horizon 2020 programme [Horizon Europe’s predecessor] will ultimately bring five euros in benefits to EU citizens in 2040, 20% additional job growth and a 30% increase in turnover and total assets of participating companies compared to those that were not selected despite the high quality of applications”.

Strengthening EU competitiveness

In recent years, the EU has demonstrated its ability to resolve unexpected issues, which has highlighted the added value it can offer in crisis situations, thus giving itself greater visibility and relevance compared to previous cycles. The road to competitiveness, however, is not without challenges. The ecological transition, digitalisation and the loss of competitiveness evidenced by the COVID pandemic and the war in Ukraine are just some of the challenges Europe is currently facing.

Against this backdrop, the Letta report seeks to contribute to the EU’s response to these developments, proposing concrete measures to strengthen Europe’s economy and competitiveness, as well as the well-being of its citizens in the Single Market.

One of the central points of the report is the need for effective integration of the Single Market, seeing it as an instrument to address a range of issues affecting the EU beyond purely trade-related ones. Letta calls for the integration of key sectors such as energy, telecommunications, and financial markets, which are essential to ensure Europe’s competitiveness vis-à-vis other global powers such as the United States and China.

In this regard, the report emphasises the importance of a digital, green, and just transition, as well as the strengthening of security and defence. It also stresses the need for more public-private partnerships and public support at European level in terms of funding. Letta proposes limiting and modifying national state aid to avoid fragmentation of the internal market, as well as the creation of a Savings and Investment Union to channel investment into strategic sectors such as telecommunications and finance.

The main objective is to challenge the instruments adopted by other world powers, such as the US Inflation Reduction Act. In the face of strong global competition, the EU must intensify its efforts to develop a competitive industrial strategy.

In the report, the former Italian leader points out that the Important Projects of Common European Interest (IPCEIs) approach could be further developed and generalised into an EU industrial policy. Depending on the specific objective of the latter, state aid could cover Technological Readiness Levels (TRLs) beyond the first industrial development. In this way, coherent governance models tailored to specific policy objectives could be established and adequate monitoring and evaluation of state aid measures ensured.

Another aspect addressed in the report is the reduction of disparities in technical and administrative capacities between Member States and their enterprises as one of the keys to ensuring a level playing field within the Single Market.

The Letta Report and the fifth fundamental freedom

One of the main novelties of the report lies in the proposal for a fifth new fundamental freedom for the Single Market, in addition to the free movement of persons, goods, services and capital. This fifth new pillar is underpinned by research, innovation, and education.

The report highlights several aspects in this area:

• The need for a European industrial policy. For Letta, the road to the fifth freedom of research and innovation involves stimulating innovation, with the aim of creating leading industrial ecosystems capable of producing globally important entities within Europe.
• Common European data spaces. This involves building a new governance model with a collective industrial policy and transcending national boundaries: a European knowledge hub as a centralised digital platform providing access to publicly funded research, datasets, and educational resources, supporting the development of European data spaces in key sectors, such as the European Health Data Space (EHDS).
• Fostering public-private collaboration. To accelerate innovation, address societal challenges and strengthen European competitiveness, the EU should actively encourage public-private partnerships in strategic areas focused on knowledge sharing and innovation uptake, with specific support for SMEs and start-ups.
• The development of technological infrastructures (supercomputers). A key pillar of the fifth freedom is research infrastructures also prioritising the shared network of computational resources and supercomputers to enable researchers and businesses to access critical high-performance computing capabilities.
• EU leadership in the development of artificial intelligence based on ethical standards, and with the creation of an attractive environment for researchers, start-ups, and companies.
• Investment in research and innovation. Both the public and private sectors should align their funding strategies in this field, which is of paramount importance.
• Open science, ensuring accessibility of research and seamless collaboration across disciplines, sectors, and borders.
• Evidence-based policy decisions.

Strengthening the role of business in innovation programmes

In 2004, the EU accounted for almost 26% of world GDP, according to an analysis by the Brussels-based international economics and policy think-tank Bruegel, based on data from the International Monetary Fund. Last year this share stood at 17.6 per cent, a percentage that could be confirmed by 2024. Action is urgently needed.

Industrial policy is not enough without investment in innovation to realise key technologies for Europe’s challenges, which are still in the development phase. Innovation programmes are a key tool to boost and accelerate industrial policy and competitiveness in Europe. So is strengthening industrial participation in them, driving European policy pillars of the Green Deal and energy transition, digitalisation, the development of artificial intelligence based on sound ethical standards, or the reinforcement of security and defence.

Another analysis that will have a significant impact on the European Commission’s future policies is due to be published in June: the Draghi report on EU competitiveness. In the meantime, it remains to be seen whether Letta’s proposed recipes can become a reality in the scenario that will emerge from the European elections. Even so, in any scenario, Europe’s future lies in making industrial policy a reality through a real commitment to innovation that must be reflected in the definition of the 10th Framework Programme and the budget earmarked for the programme that will succeed Horizon Europe.

Industrial policy with a combination of policies that support innovation more broadly can help boost economic growth and help Europe strengthen its strategic autonomy and occupy the desired place on the global stage.