What Biden can learn from Europe’s industrial policy

The Biden administration has thrown out supply-side economic policies introduced four decades ago by then-U.S. President Ronald Reagan. This approach precluded the government from having any role in shaping the economy through industrial policy. Instead, it was thought, lower taxes and less red tape would give companies and markets more room to generate investment and increase employment. The resulting prosperity would automatically trickle down and strengthen the middle class.

U.S. President Joe Biden has come to the conclusion that this approach has not worked. To the contrary, the rapid technological rise of China and its clearly expressed wish to dominate key technological sectors have led to a more active attitude in Washington. In a rare bipartisan initiative, the U.S. Senate voted in favor of a $250 billion package to boost technological and industrial innovation in chip technology, artificial intelligence, quantum computing, robotics, and other technologies. Under Biden, the federal government is seen as having an important role in promoting research, development, and vocational training.

The U.S. government has, of course, never been totally absent. As Antoine van Agtmael and I describe in our book, The Smartest Places on Earth: Why Rustbelts Are the Emerging Hotspots of Global Innovation, many parts of the U.S. Rust Belt are textbook examples of successful revitalization with the government's help. With financial support from local and state governments, cities like Akron, Ohio; Albany, New York; and Pittsburgh, Pennsylvania experienced an impressive economic revival. Cooperation among local governments, companies, universities, and start-ups—which pooled money and knowhow—was the engine behind this success. Sharing brainpower changed the Rust Belts into brain belts.

But how is Washington, after 40 years of minimal industrial policy initiatives, going to embrace its role as initiator? Today, the Biden team can learn from the way Europe addresses industrial policy. The European Commission in Brussels, for example, stimulates the construction and growth of new technological and industrial ecosystems that bring together established companies, new start-ups, research institutions, training facilities, and local governments. Sharing brainpower and empowering networks are the cornerstones of European industrial policy.

Brussels is no longer focused only on coddling farmers with subsidies. The European Union's $891 billion COVID-19 recovery plan funds technological innovation, digitalization, and a greener Europe. In addition, more than $1.2 trillion are available for innovative investments under the framework of the European Green Deal, a set of initiatives that aim to make Europe carbon neutral by 2050. The EU has also announced two major technology initiatives: the European Battery Alliance and the European Clean Hydrogen Alliance. The aim is to turn Europe from a laggard in battery and green-fuel technology to the global front-runner.

To help build the shared brainpower model, the European Commission has also asked the European Union's 27 member states to submit proposals for digital innovation hubs. Every country—including Malta, Cyprus, and Luxembourg—will be asked to dedicate one hub to artificial intelligence. For some member states, this is often the first time they will work on these concepts. But in many countries, Brussels can count on existing, powerful networks centered on applied research institutes, such as Germany's Fraunhofer Institutes and the Netherlands's Organisation for Applied Scientific Research. They function as bridge builders and network nodes connecting universities, government research institutes, companies, and start-ups.

In 2017, Brussels recognized the electric car's arrival would dramatically increase the need for batteries. Europe does not have large-scale battery production and is dependent on Asia, which produces more than 85 percent of the world's batteries. Under the European Battery Alliance (EBA), entrepreneurs, researchers, local politicians, start-ups, and funders will be asked to build new networks to push technological capabilities and build manufacturing capacity. The European Commission has allocated around $11.9 billion to the EBA between 2020 and 2030.

The whole chain of raw materials, research, start-ups, suppliers, producers, customers, and recycling has to be built from scratch. The European Commission has taken on the responsibility of developing standards, which non-European battery technology suppliers will also have to meet. Seven countries—Belgium, Finland, France, Germany, Italy, Poland, and Sweden—are joining the alliance, which expects to involve 500 industrial companies, start-ups, and knowledge institutes.

With money and encouragement from the European Commission, companies and knowledge institutes will be encouraged to create a new ecosystem, working together and carrying out joint research. They will look at raw materials, cell technology, battery systems, and recycling. Participants include Germany's BMW and BASF, Poland's Eneris, Belgium's Umicore, France's Peugeot, and the Swedish Electric Transport Laboratory (SEEL).

EBA member SEEL is a perfect example of how European-styled industrial policy ecosystems work. In 2017, the Swedish government invested almost $119 million in transport electrification research in Gothenburg, Sweden. As part of this effort, SEEL was set up by Chalmers University of Technology and the Research Institutes of Sweden. SEEL's projects not only tie in researchers from established manufacturers, such as Scania and Volvo—subsidiaries of Volkswagen and Geely, respectively—but also include start-ups like Northvolt, which plans to set up electric car battery production in Sweden using a $59 million start-up loan from the European Investment Bank. With Chalmers University of Technology, Northvolt is also doing research into recycling highly toxic batteries—a major obstacle toward sustainable transport electrification. If initial tests are successful, Northvolt will scale up to a larger recycling facility in northern Sweden as part of a joint venture with Hydro, a Norwegian energy and aluminum company. Similar battery technology networks combining the public and private sector are fast emerging in other EU member states as well—for instance, in automotive powerhouse Germany. It's these networks that are typical for Europe—and allow the EBA and other initiatives like it to build on.

In the summer of 2020, Brussels called on member-state governments, knowledge institutes, companies, and start-ups to set up the European Clean Hydrogen Alliance. In this way, the European Commission responded to a growing group of European industrial companies that saw hydrogen as a necessary replacement for fossil fuels. Unlike battery manufacturing, hydrogen technology is still in its infancy—so a Europe-wide industrial policy is even more important to push it forward.

Brussels has big ambitions. Europe currently only has the capacity to produce the equivalent of 20 megawatts of hydrogen per year, but the European Commission wants to ramp this up to 6 gigawatts by 2024 and 20 gigawatts by 2030.

The commission has called for companies and research institutions to join the hydrogen alliance, and more than 600 companies have already done so. In addition, a board has been set up to define major investment projects, identify obstacles, and stimulate the ecosystem of research, development, and implementation among governments, research institutions, and companies. Royal Dutch Shell CEO Ben van Beurden and former Siemens CEO Joe Kaeser represent European industry interests on the board.

Siemens, which produces wind turbines and hydrogen electrolysis facilities, wants to integrate the two machines to produce green hydrogen by 2026. Royal Dutch Shell wants to build a 4 gigawatt hydrogen electrolysis facility near the North Sea coast by 2030. The electricity will come from an offshore wind park that has yet to be built. It plans to scale up to 10 gigawatts by 2040. Once such major projects and their financing needs are defined, the European Commission and national governments can step in with large-scale subsidies and regulatory support.

Royal Dutch Shell—together with BP, ExxonMobil, Uniper, and Gasunie—is also working on a so-called blue hydrogen project using residual gas from a huge oil refinery in Rotterdam, Netherlands, as an energy source. The project plans for carbon emissions to be captured and stored in empty gas fields under the North Sea. The Dutch government is supporting the project with a subsidy of almost $2.4 billion. In the south of France, a hydrogen project using solar energy is planned to come online in 2023—subject to subsidies being granted by Brussels and Paris.

Few European policymakers believed in the trickle-down, supply-side policies promoted by Reagan. Instead, European countries and the European Commission have opted for industrial policies that make the supply side of the economy more flexible and build on what private companies and public institutions have already created in recent years.

The core of European industrial policy—something the United States can learn from—is building ecosystems that share brainpower. After 40 years of Reaganomics, the United States deserves a smart federal government that facilitates a bottom-up process that strengthens existing networks and invites companies, state and local governments, established companies, start-ups, and institutions of knowledge and training to form new alliances.

As Europe has shown, industrial policy is not about the amount of money you pump into the economy—that's the old Keynesian way of thinking. What matters much more is where that money goes, such as the energy, digital, and climate transitions that are underway. Learning these lessons is the smart way for Biden to keep the U.S. economy ahead of global competition.

Fred Bakker is a former editor in chief of Het Financieele Dagblad and the co-author of The Smartest Places on Earth: Why Rustbelts Are the Emerging Hotspots of Global Innovation.

Disclaimer: This article first appeared on foreignpolicy.com and is published under a special syndication arrangement