ADDRESSING THE TRILEMMA OF THE EU’S INDUSTRIAL POLICIES
Interview with Annemie Turtelboom, ECA Member and Dean of the Investment for cohesion, growth and inclusion Audit Chamber
For several long term EU goals — ranging from the Fit for 55 package for decarbonisation, to a stronger Europe in the world — realisation relies on the EU’s industrial capacity. Additionally, with the background of the rapidly changing geopolitical situation of the last years, the EU has launched several initiatives to support EU industry. These have resulted in multiple ECA audits assessing these policies. Annemie Turtelboom, ECA Member and Dean of the audit chamber that conducts many of these assessments, has identified several commonalities in ECA findings, often relating to the dilemmas European and national decision makers face when addressing the goals set. In this interview, she reveals the conundrums the EU must solve regarding its industrial policy actions, and highlights some key findings from the ECA’s work in this area. These issues may come across as inconvenient truths, but are things that need to be said if the EU is to meet its goals.
By Gaston Moonen
Cars production reveals potholes on the road of the EU’s industrial policy
When I speak with Ms Turtelboom, it is a few days after she held a press briefing to present the ECA’s work from several reports related to EU transportation initiatives, focussing on cars, together with fellow ECA Member, Mr Nikolaos Milionis. ‘Cars touch on several aspects related to industrial policy. In our audit work, due to the fact that we have limited time and resources, we work on specific and focused topics, with well scoped questions we want to address in a timely manner. What you see, however, is that several different audit topics are actually interlinked’.
She explains that the ECA also wants to communicate more through key cross cutting messages, as stated in its 2021 2025 strategy. ‘For example, I see that we have more and more special reports touching upon industrial policy issues. Take real world emissions, on which my colleague Petro Russo reported [special report 01/2024], where it was very clear that in all sectors of the economy emissions were down — in industry, in agriculture, the energy sector, waste processing. Apart from one sector, where emissions were going up. And that was transport’.
The ECA has published a report on biofuels. ‘During that audit, we saw that biofuels cannot provide a credible and reliable alternative to combustible engines on a large scale, because of issues with the availability and sustainability of biomass. Then we had our special report 15/2023 on batteries, which drew a lot of attention. With the de facto ban on petrol and diesel cars in 2035, it means that many more electric cars will have to be sold in the EU in the next decade. As for the alternative of hydrogen cars, the fuelling stations infrastructure is not yet there, and there are very few models available — it is a chicken and egg issue. So as of now, this means in practise only electric cars from 2035 onwards’
She explains that the most important element in these cars is the battery. ‘Which can make up to 40 % of the price of the car. This is one of the reasons why we decided to audit the battery value chain since you need them for the green transition’. She compares batteries to microchips in terms of strategic importance. ‘You also need microchips for everything. In every electronic device, microphones, medical equipment, for the Internet of Things. Without microchips there won’t be a green transition’.
Ms Turtelboom explains that substantial amounts of public funds are involved in this transition to battery powered transport. ‘The Commission has invested €1,7 billion in funds. On top of that there is also state aid for battery production. Furthermore, in its 2018 communication on Sustainability for Europe¹ , the Commission said that it wants Europe to be a world leader in the production of batteries’. But the current reality paints a different picture. ‘At the time of our report, 7 % of world battery production was in Europe. Of that 7 %, the vast majority was in the hands of South Korean companies. Which means you are in a position of great dependency, and that brings challenges in terms of economic sovereignty ’.
[regarding battery production the EU is] in a position of great dependency, and that brings challenges in terms of economic sovereignty.
A multi faceted dilemma
For Ms Turtelboom, the challenges of the EU’s stance on batteries exemplify various dilemmas that the EU needs to resolve. ‘In our battery report, we saw that meeting the 2035 target of phasing out combustion cars may be difficult. As external auditors, it is not our job to make policy, or to question policy objectives. However, it is our job to look at policy implementation . And from our battery report, it’s clear that as things stand, that target will likely not be met, or it may only be feasible through the import of Chinese cars. The latter can be an option, but we need to be clear about its consequences. Because on the one hand we have the Green Deal — with the Fit for 55 package, hence zero emissions. And the import of EVs from outside the EU can therefore assist in this area. On the other, there’s a conflict with plans to support European industry. You have to remember that more than 3 million people in Europe work in the automotive industry. If you meet the 2035 target by relying on cars coming from third countries, are you willing to risk their jobs? And if you do, can you transfer them to other jobs?’.
…it is not our job to make policy, or to question policy objectives. However, it is our job to look at policy implementation.
She brings up another aspect — affordability. ‘Every transition costs money. And if you have a problem with cost competitiveness, it maybe means that this transition is only affordable for citizens through getting cheaper cars from China’. She refers to an example from the past, the production of photovoltaic material. ‘These panels were more cheaply produced in China, and now by far the largest part of the world production of solar panels comes from China. Where would we stand with our transition to solar energy production without cheap solar panels from China?’
Part of that picture is the EU’s cost competitiveness. ‘The target was for the battery price in Europe to be €90 per kWh by 2022. As of 2020, it was still double that price. So on cost competitiveness, we have a disadvantage. One of the reasons for this is that the Commission takes a different approach to other state actors, by focussing investment efforts mainly into research and development, or by working indirectly, such as by allowing state aid’. She compares this to the US Inflation Reduction Act. ‘Through this Act the US invests in direct subsidies for American made cars, which mostly end up on American roads. Direct subsidies lower the price immediately, on the spot, in your bill’.
From an economic sovereignty point of view, Europe still struggles to secure reliable supplies of the materials necessary to produce batteries. ‘Europe is very reliant on raw materials coming from third countries, and in many cases countries with which we do not have trade agreements, such as Australia. We depend on the Democratic Republic of Congo for 68 % of our cobalt. And 87 % of our lithium comes from outside of the EU’. Many of the source countries also score low on good governance indicators. ‘Hence we are dependent on regimes with a lot of instability, and a lack of rule of law. Regimes you don’t want to be dependent on. Do we want to repeat our experience with Russian gas, with a dependency on raw materials from regimes with low governance indicators ?’
Do we want to repeat our experience with Russian gas, with a dependency on raw materials from regimes with low governance indicators?
For Ms Turtelboom it is this trilemma of goals — the green transition, affordability for EU citizens, and economic sovereignty — ideas drawn from the ECA’s report on batteries. ‘We presented this trilemma, bringing together different angles in our transportation press event. Of course, we do not provide a solution to it. Because, as I said, that is not our task. But we can highlight the choices the EU has to make, and how one goal can perhaps come to detriment of another , whether that be increasing costs for your own industries, or increasing your dependency on third countries . Take for example microchips, see how dependent we are from Taiwan, not only in Europe, but also in the US ’.
…we can highlight the choices the EU has to make, and how one goal can perhaps come to detriment of another…
Ms Turtelboom acknowledges that the task is a difficult one. ‘To be fair, the Commission takes many initiatives, for batteries, for electric charging stations, for microchips, for raw materials. If you are dependent on various external factors, it is not easy to make your policy and regulations work directly, as they are only one part of the whole. In our reports, different policy questions come together, and it is not always clear, based on the findings we have, whether all these policy ambitions speak to each other‘. For her, assessing whether one policy can cause potential collateral damage in another area is an issue that needs to be considered. ‘We can applaud that the Commission, the EU in fact, has this ambition on greening the economy. But you also need to be aware of the potential downsides, and how you can deal with those’.
The year 2026 is written into the CO2 regulation as the point for the Commission to make a reassessment. ‘That is a pivotal moment, to ask whether to “stick to the targets set”, or whether there is a need to adjust. This can affect many issues, ranging from the internal combustion engine ban to the 3 billion trees to be planted, or the availability of charging points for cars’. For her, this is a window for policymakers to consider again what type of Europe they want, and how different aspects can be weighted and targeted through policy initiatives. ‘Which different aspects can be combined. What needs to be given up? Because it is not only about the bigger goals but also whether you in fact can meet them ’.
…it is not only about the bigger goals but also whether you in fact can meet them.
Assessing the how, not the why
Ms Turtelboom points to the many variables that come into play when trying to reach these policy objectives, one of them being human behaviour. ‘For example, there were plans to build battery production in Hungary, but it led to many protests because of the high impact on the biodiversity. The same regarding the mining of critical raw materials in Portugal’. One therefore needs to assess the whole value chain. She thinks such assessment is necessary also to avoid, as she puts it, ‘ending up with an electric car with a dirty battery’.
Overall, the road to realising a certain policy, the how, is what the ECA’s work touches upon. ‘Because we look at implementation. We only look at policy goals by assessing whether the goal is achievable, by reviewing how the implementation is organised. Or whether the correct information is used. For example, for batteries, in 2023 they were still working with data from 2016. Or take the mining of lithium and other critical raw materials in Europe. Getting this out of the ground, from discovery, takes between 12 to 16 years. So if you find lithium now, you are looking at 2040 before it actually available . What do you do until then? Consequently, as auditor you end up at looking at the how ’.
…as auditor you end up at looking at the how.
She explains that scaling up innovation in Europe, carrying it all the way to marketed products, is another example. ‘If there is funding available, it can sometimes take up to three or four years before you obtain it. That may be too late for the objectives you have set. As our President Tony Murphy said, we are at a crossroad for the future of the finances of the EU, after the 2027 period. And this is one of the many aspects on the table’. She points out that her audit chamber has identified a number of audits clustered around industrial policy, ranging from circular economies to batteries, and the currently ongoing audits on microchips, hydrogen, and state aid. The ECA has also recently published a special report 08/2024 on artificial intelligence. She also refers to ECA’s special report 03/2022, regarding the rollout of 5G in the EU, where there were very different approaches in the EU, or the ECA review 03/2020 on the EU’s response to China’s investment strategy. ‘These reports bring together a number of points critical to addressing a world in transition, from competitiveness to greening, and strategic autonomy’.
While EU industrial policy initiatives are funded from various EU budget headings, including the Recovery and Resilience Facility (RRF), Ms Turtelboom notes that cohesion is a key one. ‘It is one of the biggest EU policy instruments, making up over 40 % of the EU budget’. In this sense cohesion policy addresses its role as a transition enabler. ‘There is a big correlation between EU initiatives regarding circular economies, batteries, hydrogen and so on, and cohesion related financial sources ’. She explains that this is why the ECA is preparing a report on smart specialisation strategies. ‘With this a region can choose what will be its strategic option to uplift the region, making it a trailblazer in a certain domain’.
There is a big correlation between EU initiatives regarding circular economies, batteries, hydrogen and so on, and cohesion‑related financial sources.
Mapping vulnerabilities and… addressing them
For Ms Turtelboom, it is clear that since the pandemic, but also with the war in Ukraine, strategic autonomy has become a very serious policy consideration. ‘You need to map your vulnerabilities. With the war in Ukraine we have seen that prices went up, ranging from energy to food. With the pandemic we saw that all our protective masks came from China. So you need to think about stocks. And you need to think about the ingredients to make products, ranging from batteries to pharmaceuticals’. She refers to audits her colleagues in other audit chambers are currently working on, for example relating to the supply of pharmaceutical products in the EU. ‘Also, an issue such as access to critical raw materials is essential for many areas, not only batteries, but also to produce military equipment’.
To the EU’s advantage, it has a market of 450 million inhabitants. ‘The EU knows this but has not always used its leverage in the past. In our review regarding EU’s policy towards China we said that we don’t really have 27 players on one team, but we have 27 teams. For example, we found that the Commission had no access to the bilateral agreements member states had made with China, because they were confidential. This limits the EU’s ability to utilise its full size for leverage‘. This review came out four years ago, and ‘Things have improved. But to rectify your dependencies takes time, also because the environmental and social standards we use in Europe are higher than in most other regions. On top of that, we are not a large state subsidised economy but mainly market driven’.
In this context she refers to the EU’s Carbon Border Adjustment Mechanism (CBAM). ‘I understood this will require EU importers, as of 2026, to purchase certificates equivalent to the weekly EU carbon price, thereby preventing “carbon leakage” to production outside the EU’. CBAM serves to create a level playing field, including with non EU producers, but Ms Turtelboom also has concerns about level playing field within Europe. ‘I found it remarkable that one of the findings in our report on batteries was that 83 % of state aid for batteries comes from three member states — Germany, France and Italy. And that has effects on the wider European scale. You need to be careful that it does not come to the detriment of a similar industry in smaller member states, which may be less able to support the industry’. She explains that more and more big companies go shopping for supports in order to determine locations, including in the EU: ‘Leading to a subsidy competition, which is not always in the taxpayers’ interests’
…83 % of state aid for batteries comes from three member states…
In this respect she mentions the recent report of Enrico Letta on the single market. ‘While it is clear that the issues he raises cannot be addressed by quick fixes and easy solutions, it is important to highlight them and spell out where single market is not yet fully operational, or not even at all operational. Because if properly worked on, frameworks and blueprints have their effects, as the banking union and energy union show ’. However, in her view there are still enough issues to tackle. ‘You cannot say there is a single digital market in 2024. There is always room for improvement. For example, the ECA recently published special report 03/2023 on the internal electricity market integration. It highlighted progress, but noted a lack of it in certain market segments and regions. And also our special report 28/2023 on public procurement in the EU, which Letta refers to in his report, shows there are significant differences between the member states’.
…if properly worked on, frameworks and blueprints have their effects, as the banking union and energy union show
Crisis creates an opening for solutions…which require coordination
The Letta report pushes for a single market for financial services, which has been on the table for some time. As to why now is the right time for progress in this area, Ms Turtelboom smiles. ‘Never waste a good crisis! You can say that Europe often grows through crises. The world of five years ago is no longer comparable with the world of today. This will trigger reforms because if you want to be a geopolitical player collectively, you will have to work together . In certain policy areas you might have to come closer to each other to make full use of your potential’.
…to be a geopolitical player collectively, you will have to work “ together.
Making use of this potential does not necessarily mean throwing EU money at a problem. The ECA Member is not convinced that subsidies will always help to bring EU industries further. ‘In our batteries report, we have seen that €1,7 billion of subsidies did not make the European battery industry competitive. It is not a magical solution ’. For her a big take away from several ECA reports touching upon industrial policy issues is that coordination between the EU and member states, in terms of regulation, infrastructure, and finance,
…€1,7 billion of subsidies did not make the European battery industry competitive. “ It is not a magical solution.
is crucial. ‘And solutions may need to be tailor made. ‘Industrial policy often starts at the member state level because they know their specific circumstances. Each will have different industrial specialisations, and the contacts and knowledge of that industry. For example, the largest port of Europe is in Rotterdam, the second largest petro chemical cluster in the world is based in Antwerp, the car industry in Germany, and so on’.
Ms Turtelboom is looking forward to the findings of the ECA’s upcoming audit on state aid, to be published later this year, with the cross cutting approach set to continue in the ECA’s future work. ‘This one will most likely help us join the dots between various ECA audit findings, and underline some of the cross cutting messages, as we did in our cars press event’. And no doubt more ECA work will follow, highlighting the different policy dilemmas EU policymakers have to address, and how far the EU has gotten in reaching its multi faceted policy goals. ‘Balancing and advancing these goals is, I can say from experience, no easy task’.
