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How a smarter industrial policy can succeed even without subsidies

After a long period of preparation, US President Biden signed the Inflation Reduction Act (IRA) last August.

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How a smarter industrial policy can succeed even without subsidies

After a long period of preparation, US President Biden signed the Inflation Reduction Act (IRA) last August. This allows the US government to spend 391 billion US dollars on energy and climate protection. The funds are intended to support the development and production of green technologies in the United States.

Although German and European companies will also benefit from this subsidy pot, the IRA has recently dominated the public debate. It is feared that Europe will fall behind as innovative companies prefer to invest in the USA in the face of the subsidy fireworks.

Since then, the call for a more active industrial policy has not stopped. The tip of the iceberg is the EU's Green Deal industrial plan by Commission President Ursula von der Leyen. Among other things, companies that receive state aid from a third country should be able to receive European subsidies in the same amount.

Even if the discussion about a more active industrial policy has been wafting through the economic policy debate for a long time, the current pressure to act reveals a reactive and reflexive self-image of our economic policy. Startled by other players on the world stage, large parts of politics feel compelled to further heat up the subsidy race. Long-term thinking in scenarios could help to resolve this supposed compulsion to act. What are the scenarios?

A first scenario – let's call it the subsidy scenario – pursues the vision that even more government funding guarantees a technological lead, accelerated climate protection and the preservation of industrial jobs. The supporters of subsidies are inspired by the idea that the global transformation race will intensify with the help of subsidies and that Europe will position itself as a pioneer.

The state is trying to become entrepreneurial in the hope of founding more biontechs. They then export the subsidized green tech products in order to promote global climate protection. This is how the high European standards prevail worldwide.

Long-term thinkers would counter this scenario with some alternatives. Three alternative scenarios are described below: the Free Rider Scenario, the Complementary Scenario and the Enablement Scenario.

The free-rider scenario is well known to us, although we seem to dismiss its merits: we simply benefit from other people's subsidies!

We've enjoyed these benefits for decades, and not just in the form of cheap Chinese toys. China's subsidy-driven export policy has also promoted our mechanical engineering through high investments in equipment. And the new Chinese middle class wants to drive German cars.

In many other areas, too, we accept foreign subsidies with approval in order to give us a lead in transformation and innovation. One example is the rare earths from China, which are required for many green technologies and come to us in Europe at a much lower price thanks to government subsidies.

In this scenario, which goes beyond pure free-riding – let's call it the complementary scenario – Germany or Europe would not dominate the mass production of solar cells and wind turbines as they do today. However, complementary markets for green technologies would arise in which completely new products and services would be in demand.

Our small and medium-sized companies would occupy these market niches and become market leaders there. Thanks to their inventiveness and agility, SMEs would emerge stronger from this scenario and at least partially compensate for the technological lead of the Americans. In addition, we would prevent a trend towards corporatism, in which the lobbyists of the big corporations in Berlin vie for subsidies.

In this scenario, however, a clever policy and forward-looking corporate risk management must limit the risk of fatal dependencies. We must be prepared for a variant of the scenario in which China invades Taiwan or re-elected President Trump erects new trade barriers.

To do this, we must strengthen our own resilience, for example by diversifying supply chains. We could skim off foreign subsidies in a targeted manner in order to leverage unused potential savings from cheap input factors – such as Russian gas before.

In a further scenario - the empowerment scenario - the subsidy billions saved in the previous scenario are invested in the empowerment of our location: infrastructure, education, research. For the scope of the IRA package, we could, for example, increase public spending on education across the EU from the current five percent of gross domestic product to over seven percent. We are thus investing in the production potential of tomorrow.

An overall restrained subsidy policy would reduce excesses that fuel the price spiral unnecessarily. Windfall effects such as chip factories that open today with subsidies and close again tomorrow after the subsidies expire are reduced. Misallocations such as the Concorde development are less common.

All of these future scenarios are plausible. Still, we have endless debates about the pros and cons of the subsidy scenario in response to the IRA. Long-term thinkers, on the other hand, would design policies that consider all scenarios and their long-term implications, and make wise decisions based on their own vision of the future. Perhaps they would come to the conclusion that what we need is not subsidy policies, but empowerment and resilience policies.

dr Jochen Andritzky is director of Zukunft-Fabrik.2050, an initiative for long-term thinking and action in business, politics and society.

"Everything on shares" is the daily stock exchange shot from the WELT business editorial team. Every morning from 7 a.m. with the financial journalists from WELT. For stock market experts and beginners. Subscribe to the podcast on Spotify, Apple Podcast, Amazon Music and Deezer. Or directly via RSS feed.

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