A subsidy race Europe should refuse to run

The Green Deal Industrial Plan, presented by the Commission on 1 February, puts Europe's clean-technology industry at the centre of a wider competitiveness response. It combines regulatory, financing, skills and trade considerations. [1] The political pressure behind the initiative is understandable: governments do not want the energy transition to leave European firms buying all of their critical equipment from elsewhere.

But industrial anxiety can produce the wrong competition. If success is defined as matching the largest subsidy offered by another economy, Europe risks spending heavily without correcting the reasons investment is difficult at home. The more useful contest concerns productive capacity: projects that can obtain power, permits, workers, customers and finance on a credible timetable.

Follow the factory, not the announcement

Take a hypothetical company considering a clean-technology factory. A generous grant improves its calculation, but the company also needs a grid connection, suitable land, a stable order book and confidence about operating costs. If those elements remain uncertain, the grant may compensate the investor for delay rather than make the investment fundamentally productive.

Now suppose another location offers less direct support but a dependable connection date and an established customer base. It could still be the better commercial choice. This illustrates why Europe should not evaluate industrial policy through the size of the transfer alone. Public money creates durable value when it resolves a constraint or purchases a public benefit that the private decision would otherwise neglect.

The factory's suppliers matter as well. A final assembly plant may be politically visible while relying on components and technical services that remain difficult to obtain. Counting the headline investment without examining those relationships can exaggerate the strategic benefit. An industrial project should be assessed as part of a productive network, not as a photograph of a new building.

A single market under strain

National subsidies are politically attractive because their benefits can be associated with a particular government and location. Inside a common market, however, fiscal capacity differs. If the response to external competition is primarily a race among national treasuries, richer member states may attract activity away from their neighbours rather than create additional European capacity.

That outcome would weaken one of Europe's strongest assets: a large market operating under common rules. A firm may choose a location because of its subsidy rather than its underlying efficiency, while taxpayers across the Union finance competition for a project that would have been built somewhere in Europe anyway.

A common instrument should therefore concentrate on genuinely additional benefits. These could include an important new capability, a demonstrable learning effect or infrastructure that serves several firms and countries. The burden of proof should be higher where public support merely changes a plant's location within the Union. National employment gains are politically important, but they are not automatically a European strategic gain.

Buying a result

Support contracts should specify what the public receives: a production milestone, training provision, infrastructure access or another measurable outcome. If the promised result does not materialise, the contract should explain what happens. Clawback provisions and staged payments can make support more credible without pretending that every industrial investment is certain to succeed.

Officials should also distinguish between taking a justified risk and protecting a firm from all risk. Public institutions may reasonably support an early technology or a strategic capability with uncertain commercial returns. They should not quietly guarantee private profits while leaving taxpayers exposed to every adverse development. The allocation of upside and downside deserves the same attention as the initial grant.

For an illustrative project, support might be released after construction, technical commissioning and verified delivery rather than all at once. The exact sequence would vary by sector. The principle is that payment follows progress that can be assessed independently, while the investor retains a meaningful reason to control cost and deliver.

The inputs that decide competitiveness

Training is often placed in the supporting pages of an industrial strategy. It can be a decisive constraint. Several subsidised projects drawing on the same limited pool of technicians can increase labour costs without expanding the total workforce quickly enough. Governments need to ask who will do the work, not merely which firms have promised to invest.

Training arrangements should connect companies, educational institutions and workers. A subsidy that creates specialised skills useful only to one employer can leave workers vulnerable if the project changes. Transferable qualifications and cooperation across firms can turn industrial support into a wider regional asset. This also improves the public case for spending beyond the balance sheet of an individual company.

Electricity requires similar attention. Clean manufacturing and electrification depend on affordable, dependable power and timely connections. An industrial grant cannot indefinitely offset a poor energy system. Coordination between industrial and network planning is therefore essential. It is unhelpful to announce factories whose expected demand has not been incorporated into credible infrastructure decisions.

Openness is still an asset

Industrial security should not be confused with producing everything domestically. Imported equipment can accelerate decarbonisation and support European downstream firms. Foreign investment can contribute capital and expertise. The policy question is which dependencies could become difficult to substitute under pressure and which commercial relationships remain mutually beneficial.

A disciplined strategy would use different tools for different risks. A concentrated supply of an indispensable component might justify diversification or reserves. An immature technology with a plausible learning effect might justify temporary support. Ordinary competitive pressure from a more efficient producer does not by itself establish a security emergency.

Europe should explain that distinction to partners. If every trade disadvantage is labelled strategic, other governments will have little reason to believe that European restrictions are limited or principled. Cooperation on standards, skills and supply diversification may secure more useful capacity than a contest in excluding one another's products.

The uncomfortable trade-off

There is a powerful objection: other economies may subsidise aggressively regardless of Europe's preferences. Refusing to compete could allow valuable capabilities to move abroad, and rebuilding them later might be expensive. This concern cannot be dismissed by invoking an ideal market that does not exist.

A workable route is selective competition under an explicit test. Europe should identify which capabilities are genuinely important, why market adjustment is insufficient and what support can plausibly achieve. It may then decide to compete for a project. The decision should rest on a strategic and economic case, rather than on the fear of losing any investment reported in a newspaper.

There must also be a stopping rule. If a supported capability cannot move towards a defensible long-term position, officials should be able to reassess it. Temporary support without a credible route to revision can turn industrial policy into a permanent claim on the budget. A government's ability to stop a weak programme is as important as its willingness to start a promising one.

A capacity test

Evaluation should distinguish announced investment from construction, commissioning and actual production. It should examine spillovers to suppliers, the quality of employment and whether the project reduces a relevant dependency. Gross job claims should not obscure displacement elsewhere or the opportunity cost of the public funds.

This requires a comparison with what would probably have happened without support. Such comparisons are imperfect, but avoiding them entirely rewards the best negotiators rather than the projects with the greatest public value. Independent evaluation can use ranges and acknowledge uncertainty while still testing whether the original justification remains persuasive.

Local communities should also have a role in evaluating the bargain. A nationally celebrated project can impose local pressure on housing, water, transport or public services. If those costs are left unaddressed, opposition may delay precisely the capacity the strategy seeks to create. Early consultation and a fair contribution to supporting infrastructure are therefore practical components of delivery, not decorative additions after the investment decision.

One useful distinction is between support for a shared input and support for a single firm's output. A training centre open to several employers or an accessible testing facility can improve a whole cluster's productive options. A grant to one factory may be appropriate, but its wider benefits need separate demonstration. The first kind of investment may attract less political attention while producing a more durable competitive base.

Programme design should therefore reserve space for such common inputs instead of allocating all available funds to the largest individual applicants. Access conditions, pricing and governance would need to be clear. Otherwise supposedly shared infrastructure can become an exclusive benefit for the organisation best placed to influence its design.

The Commission's plan offers an opportunity to connect industrial ambition with the conditions that make investment work. Europe should use it to build a coherent market for clean production, not a collection of competing subsidy packages. Its strongest answer to an international subsidy race would be an economy in which strategically useful projects can be completed efficiently—and in which public money buys something more lasting than a temporarily favourable location decision.