The cradle of the Industrial Revolution risks becoming a museum for rich American and Chinese tourists

"FLAMANVILLE, France -- Early this year, a top European Union official made an eye-catching proposal: A 100 billion euro public fund that would curb Europe's reliance on U.S. defense manufacturers, who make nearly two-thirds of Europe's military hardware.

The cash could subsidize European companies to develop and manufacture more weapons at home.

Many officials were skeptical. For decades, the EU had been fighting European governments to limit state support for domestic companies. Now, one of its leaders was calling for taxpayers' money to finance them.

The idea of such large-scale funding for the defense industry is still under discussion. But in March, the bloc unveiled a 1.5 billion euro plan aimed at buying more of its defense equipment domestically. And when European leaders met soon after for a summit in Brussels, a central topic of their talks was how to boost funding further for the defense industry.

The effort is one example of Europe's new willingness to break longstanding taboos to build up domestic businesses. The EU is aiming to keep the continent's industrial base competitive with the U.S. and China, whose governments are lavishing firms with hefty subsidies.

At stake is Europe's manufacturing sector, which is losing ground in the race to build the industries of the future. Chinese electric-car companies are starting to flood Europe with affordable EVs. Europe's share of global semiconductor production, critical for high-tech products including cars, is a fraction of that of the U.S. or China. And the U.S. is expected to surpass Europe in production of batteries by 2030, with China far ahead of both.

Hamstrung by expensive energy, high interest rates and anemic domestic demand, the cradle of the Industrial Revolution risks becoming a museum for rich American and Chinese tourists.

The 100 billion euro defense fund was proposed by the EU's internal market commissioner, Thierry Breton, a former tech CEO, theme park developer and French Finance Minister with a strong belief in the power of the state to shape the economy. 

In recent years, Breton has also helped steer new plans through the EU's slow-moving bureaucracy to allow European governments to match massive U.S. clean-tech subsidies and to earmark billions in public money for the semiconductor industry.

The efforts followed a spike in spending during the pandemic. The bloc's competition authority approved nearly 730 billion euros worth of crisis-related national subsidies during the 15 months ending in June 2023, although all the funds haven't been paid out, according to EU data. In the years before the pandemic, the total reported aid governments granted to businesses was in the range of 100 billion euros to 150 billion euros a year.

"We need now to take our destiny in our hands. There is no other option but to increase our capacity to produce more," Breton said in an interview at a French nuclear power plant.

The push to use public money to juice the economy marks a swerve away from decades of EU policy.

The EU's bureaucracy had kept a tight leash on state aid since the 1980s. The European Commission -- the closest thing the EU has to a government -- with its antitrust powers and strict fiscal rules, has fought economic nationalism in European capitals, ensuring public subsidies didn't distort competition and undermine the interests of half a billion consumers.

But in recent years, China's massive state-backed manufacturers have rapidly ascended the value chain and threatened high-tech European engineering and auto firms. 

The EU's share of global manufacturing shrank to around 16% in 2022, the latest year available, from 24% in 2008, while China's share rose from 14% to 31%, according to World Bank data.

Meanwhile, the U.S. Inflation Reduction Act, which among other things aims to tackle the climate crisis by investing in clean energy manufacturing, is luring international businesses with grants and subsidies worth as much as $1.2 trillion through 2032 -- about half EU manufacturers' entire net annual output.

At home, European manufacturers are being squeezed by high energy prices tied to sanctions on Russia, a costly transition to green energy from power plants that run on natural gas and coal, and endemic labor shortages. The eurozone economy has stalled since mid-2022.

"I think I'm paying probably double the price of what a Chinese [car manufacturer] is paying in energy right now," said Luca de Meo, CEO of French automaker Renault.

Oerlikon, a Swiss company that makes surface coatings for tools and precision components with around 12,000 employees, said it would close its German factory and shift production to Huntersville, N.C. "Europe is one of the most cost-intensive areas in the world," said executive chairman Michael Suess. "The reaction of industries like ours is to look for . . . the best framework conditions."

Across France, Germany and Italy, net foreign direct investment outflows totaled $82 billion in the first half of 2023, up from $53 billion two years earlier, according to OECD data.

Breton, the most vocal proponent in Brussels of pumping billions of dollars of public money into critical European companies and sectors, is a rare EU bureaucrat to have hands-on business experience.

As CEO of Thomson Multimedia in the late 1990s, he turned around the failing French state-controlled consumer electronics business by closing factories in the Midwestern U.S., moving American jobs to Mexico and later China. He went on to lead France Telecom -- now Orange -- and IT services company Atos. He also helped launch the Futuroscope theme park and wrote several science fiction books. As France's finance minister, he oversaw a reduction in France's national debt-to-GDP ratio.

With his corporate experience, he said he knew how attractive new U.S. subsidies would look to boards -- and that Europe needed to prepare a robust response.

Breton built his profile at the European Commission as the Mr. Fix-It of the Covid-19 pandemic. His staff set up a map of production facilities with a role in the vaccine supply chain. He pounded factory floors and spoke to chief executives to try to loosen bottlenecks and keep supplies flowing.

Around the same time, manufacturers across Europe and North America were wrestling with shortages of chips, mostly made in East Asia and critical for goods ranging from cars to appliances.

The U.S. quickly launched a plan, called the Chips Act, to boost semiconductor manufacturing in the U.S. with tens of billions of dollars of subsidies. In response, Breton championed Europe's Chips Act, which took effect in 2023, aiming to double the EU's share of the global microchips market to 20% by channeling public money to the sector, making it easier for companies to access experimental production lines and supporting workforce training.

"We did this in parallel with the U.S.," Breton said in an interview earlier this year. But the program was no match for the $53 billion in direct financial support the U.S. was offering.

Even so, he suggested before the package was introduced it was worth roughly the same as what was on offer in the U.S. The commission said it expected the scheme to help mobilize public and private investments of more than 43 billion euros.

In 2022, America's Inflation Reduction Act, which put billions of dollars of investments in play, caught the attention of clean-tech industry executives in Europe.

Peter Carlsson, CEO of Sweden's Northvolt, the continent's biggest homegrown battery manufacturer, told CNBC in February 2023 that he would soon unveil plans for a U.S. manufacturing plant, endangering Northvolt's earlier pledge to build a factory in Germany.

At a meeting with bureaucrats in Brussels the following month, one executive after another rose to plead for the commission to allow European governments to match the U.S. subsidies dollar for dollar.

Days later, the EU said it would allow governments to match U.S. subsidies across a range of industries.

For Northvolt, the move opened the door to about 900 million euros in public money for its planned factory on Germany's North Sea coast. Northvolt plans to build a first North American factory in Montreal and hasn't decided on further North American factories, a spokesman said.

In March, the European Commission endorsed a plan that was championed by Breton to encourage European governments to move toward buying nearly half their defense equipment domestically.

Initially, the commission wants to set aside 1.5 billion euros to give governments a financial incentive for joint procurement and to offer subsidies to help companies produce more.

Officials have said that much more would be needed to prop up domestic production. To fill that gap, some European leaders have called for joint borrowing modeled on the bloc's roughly 800 billion euro pandemic recovery plan. For that fund, launched in 2021, the European Commission sells common bonds to international investors to finance public investment across the continent.

Most major powers subsidize their defense industries, but a shift to large-scale funding at the EU level would mark a big change for the bloc.

Breton wasn't the first EU leader to call for large-scale funding for defense. But his idea, floated in January, for a 100 billion euro defense fund resonated and helped set the agenda, an aide said. The proposal faces stiff opposition from some countries, including heavyweight Germany.

Breton has over the past year toured ammunition factories and discussed defense funding with political leaders. "He pushes outlandish ideas that might not materialize but that shift the debate," a European diplomat said.

The Frenchman's brash approach and a tendency to favor speed over collaboration have frustrated some peers. Breton "doesn't give a damn about collegiality," one EU official said.

An aide for Breton said he is a team player who works well with colleagues.

The rise of Breton, a confidant of French President Emmanuel Macron, coincides with the broader ascendancy of French economic ideas. Having the government intervene to shape companies and the economy, an approach long sneered at by free-market economists as a Parisian obsession with a poor track record, is back in vogue. Around the globe, countries are bankrolling new industries.

Breton pointed to the futility of defending pure pro-market ideals when governments around the world have taken much more active roles in directing economies. "It's the end of naivete," Breton said. "Was Europe naive toward China? Of course, of course, of course."

China funneled subsidies worth as much as 1.7% of gross domestic product to domestic businesses in 2019, compared with 0.4% of GDP for Germany and the U.S., according to a 2022 report by the Center for Strategic and International Studies, a Washington-based think tank.

"The best is less state intervention. But if other players don't cooperate, you need to shift tactics," said Dirk Schumacher, an economist with French bank Natixis.

Stephanie Yon-Courtin, a French member of the European Parliament from the same political group as Breton said: "Words like industrial policy, resilience, strategic autonomy, are no longer taboo . . . It's definitely a change of paradigm."

Instead of solely focusing on national subsidies, Breton would like the EU to spend more as a bloc. He previously called for a Sovereignty Fund financed by joint borrowing to support the EU's response to the U.S. Inflation Reduction Act.

The Sovereignty Fund is on the back burner for now, slapped down by Germany and other member states. EU leaders continue to debate how much exactly should go into the defense industry, and some of Breton's other efforts to favor European companies have been vetoed during the bloc's internal decision-making process.

Critics say the risk for Europe is that it wastes billions of taxpayer dollars on projects or sectors that don't become self-sustaining or competitive. That would further undermine the continent's costly social-welfare model and leave Europeans poorer, not richer.

For automobiles, one of Europe's top exports, the industry is intertwined with other key sectors such as semiconductors and batteries -- both areas in focus for subsidies. "I'm not saying there aren't benefits from saving parts of Europe's car industry," said Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics. "The question is, at what price?"

Battery producers, meanwhile, are still prioritizing the U.S. over Europe because the money there is on the table and the rules are easy to understand, said Renault's de Meo. 

Only Northvolt has taken advantage of the EU's matching subsidies so far." [1]

 We need to close about WWIII barking doggie Emanuel Macron back into dog house Élysée Palace, make peace with Russia, and reduce twice EU energy prices. Otherwise no subsidies will help us. We will become a museum of dogs.

1. Europe Takes Radical Steps To Boost Production --- State spending to help manufacturers compete with China and the U.S. is up. Fairless, Tom; Kim Mackrael.  Wall Street Journal, Eastern edition; New York, N.Y.. 03 May 2024: A.1.