· 7 min read
One year ago I published the blog “Anatomy of a Fall: Europe’s deindustrialisation”. Since then so much has happened that I feel the urge to come back to this topic. The bad news is that despite passionate speeches and statements from policy makers about the key importance of the manufacturing industry for the economic and security future of Europe, the bleeding hasn’t stopped.
Deindustrialisation across Europe is silently advancing and hollowing out our industrial capacities. The good news is that the new EC seems determined to turn things around with the launch of the Clean Industrial Deal in February this year, followed by the Steel and Metals Plan in March. Is this going to be sufficient? What is required to make this work? What will be the impact of the new US policies? I will dive into these questions below. But let us first look at a snapshot of some recent trends.
No stop to the bleeding yet
As far as I can see, the deindustrialisation in Europe is marching on. The big structural energy price disadvantage for European industry vis-à-vis the US and China still exists and is wreaking havoc, in particular in energy-intensive industries. More and more industrial plants are halted or closing up shop. The graph below shows the dire situation in Germany, Europe’s largest economy and strongest industrial powerhouse, with production still below pre-pandemic levels.
The situation in France is not much different, as witnessed by the stream of news articles in Les Echos. Another worrying trend is that both Germany and France show a declining trend in the economic complexity rankings in the last 20 years. The economic complexity index is an indicator for the knowledge intensity of a country’s exports and for future economic growth. This basically reinforces one of the key messages of the flagship report of Mario Draghi on Europe’s lagging innovation capacity and the lack of new growth engines. It is therefore no surprise that Europe’s inflow of Foreign Direct Investment (FDI) has declined significantly this decade, also relatively to other regions in the world.
What is surprising, however, is how many observers and even policymakers are still agnostic about the decline of industry in Europe. They openly or silently welcome the accompanying fall of carbon emissions and are surprisingly confident that new and cleaner growth engines will magically appear, seamlessly compensating for the loss of jobs and economic activity. In my view, this boils down to a European version of ‘voodoo-economics’. They seriously underestimate how deeply interlinked energy-intensive industries are in existing value chains with downstream industries like construction and automotive industries, but also with clean energy manufacturing and defence. The knock-on effect of disappearing industrial plants will likely be severe.
The clean industrial deal: new momentum
The incoming EC certainly didn’t waste much time in stating that the implementation of the Draghi report would get the highest priority. Basically, the EC agreed with Draghi’s assessment that a vibrant and dynamic manufacturing industry is not only key to Europe’s economic future and sustainability, but also to its strategic autonomy in terms of defence and security. This last element has risen to the top of the political agenda in Europe since last year, for obvious reasons. However, I am still surprised how underappreciated this is in some policy debates.
The new EC kept its word by launching the Clean Industrial Deal already in February 2025. The plan hits several key policy areas that are critical to stop the bleeding and push Europe’s industrial comeback. One of them is the Affordable Energy Action Plan that needs to address the energy price disadvantage by e.g. more Power Purchasing Agreements, lower network tariffs and taxes etc. Others include boosting the demand for clean products, regulatory simplification, faster permitting, energy infrastructure investment and improving private financing of clean tech. The Clean Industrial Deal was swiftly followed by the Steel and Metals Action Plan, promising a sectoral approach to ensuring that Europe will still maintain a critical capacity of steel manufacturing which is so essential for economic security and for defence purposes.
As promising as the EC proposals are, it all depends on whether EU member states will approve the plans and how fast the concrete implementation can be realised. The jury is out on whether this will work out. One hopeful sign is that the brand-new German government coalition managed to ditch the infamous constitutional debt break, unleashing a huge EUR 500bn Special Infrastructure Investment Fund which includes a EUR 100bn Climate Transformation Fund. This will allow for stronger investments in renewables and energy infrastructure, including in low-carbon hydrogen. Many people are unaware how big of a stimulus this will be for many European companies and the EU economy at large. In addition, the new German coalition will reduce power prices by at least 5 cents/kwh and introduce a new industrial electricity price for energy-intensive industries. The new German government thus seems well aware of the urgency of tackling the crisis situation of German industry.
In France, there are also signs of increasing willingness to come to the rescue of the ailing manufacturing industry. There is therefore a good chance that the German-French axis may be revitalised, thus improving the chances that the EU policy-making machinery will accelerate and become more effective through stronger alignment of the German and French industrial policies. Under those circumstances, it’s not unthinkable that we may even see new Airbus-like mega projects on the European horizon in areas like clean tech, mining, electrolysers, batteries, etcetera.
Europe as beacon of stability?
The world has changed dramatically since the new US administration came into office. This affects nearly all policy domains but it is most visible in the areas of energy policy, where clean energy was put on the back burner, and of trade policy, where an open-ended tariff war has been initiated. The US Economic Policy Uncertainty Index jumped from roughly 200 one year ago to over 500 in March 2025 and is still hovering at unprecedented high levels. A discussion has started about the possible implications for the dominant position of the dollar. As a consequence of all this, investors in the clean energy space are even more hesitant than they already were. Where only one year ago global investments in clean energy were flowing towards the US because of the tax incentives in the Inflation Reduction Act (IRA), there are now some signs that flows may be starting to turn toward Europe.
Compared to the incredible policy uncertainty that is created in the US on nearly a daily basis, Europe suddenly appears to be somewhat of an oasis of stability. This potentially powerful narrative hinges, however, on whether the EU and key individual member states do indeed succeed in getting their act together by effectively and swiftly implementing the Clean Industrial Deal and all the related underpinning policies to fuel a European low-carbon and clean energy manufacturing boom.
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Sources
1. illuminem, 9 May 2024.
2. E.g. ‘Manufacturing job losses heighten sense of German industrial decay’, Financial Times, 19
February 2025, p. 9.
3. E.g. ‘Reindustrialisation: anatomie d’une panne’, Les Echos, 14 janvier 2025, p. 16.
4. https://oec.world
5. Ricardo Hausmann et al., The Atlas of Economic Complexity: Mapping Paths to Prosperity, The MIT Press, 2014.
6. Mario Draghi, The future of European competitiveness, Brussels, September 2024.
7. UNCTAD, World Investment Report 2024, https://unctad.org
8. See Coby van der Linde, A game of Jenga with European industry, CIEP, The Hague. February 2025.
9. https://www.bundesregiering.de
10. ‘EDF a une rôle central a jouer pour assurer la souveraineté industrielle et énergétique de la France’, Les Echos, 16/17 May 2025, p. 16; ‘Industrie européenne : recréer des avantages ou disparaitre’, Les Echos, 16/17 May 2025, p. 10.
11. https://fred.stlouisfed.org; see also the ominous op-ed ‘Trump’s world of uncertainty’, Financial Times, 16 May 2025, p. 18.
12. ‘How a dollar crisis would unfold’, The Economist, April 19th-25th, 2025.
13. ‘Amundi Says Clients Are ‘Massively’ Repositioning Into Europe’, Bloomberg, 22 April 2025; ‘Dollar asset selling signals start of longer-term shift, warn investors’, Financial Times, 10/11 May 2025, p.13; ‘KRR says Europe in investment ‘renaissance’’, Financial Times, 1 May 2025, p. 9.
