A “true” industrial policy for Europe is a technology and innovation policy

Since the Global Financial Crisis of 2008, the “core” European countries have been losing their competitive edge in global markets for sophisticated products such as electronics and green transportation and power technologies, while also missing out on the earlier revolution in information and communication technology (ICT). Meanwhile, the “periphery” European countries have been slowing down and, in pre-crisis years, have mostly channelled their investment into non-tradable industries, concentrating their resources in relatively lower productivity and lower skill activities. The slowdown in growth and convergence highlights the need to reignite productivity and economic dynamism. Lessons from the Asian economic miracles and Europe’s own growth experience suggest the importance of developing sophisticated sectors. The development of these sectors is riddled with both government and market failures, requiring adequate policies to tackle them. We argue that a “true” industrial policy for Europe is a technology and innovation policy (TIP) that focuses on correcting market failures to spur innovation, scale up, and support production networks in sophisticated industries across Europe while reorienting the engines of growth of “periphery” economies toward sophisticated sectors and their complex value chains. TIP’s guiding principles are a focus on global markets, competition, and a strict accountability framework, where the “hard” tools such as tariffs and subsidies may not be necessary and may be potentially counterproductive.