Industrial Policy in Europe: A Single Market Perspective

Andrew Hodge, Roberto Piazza, Fuad Hasanov, Xun Li, Maryam Vaziri, Atticus Weller and Yu Ching Wong

No 2024/249, IMF Working Papers from International Monetary Fund

Abstract: European countries are increasingly turning to industrial policy to address the challenge of geopolitical fragmentation, enhance productivity, and accelerate the green transition. Well-targeted industrial policy has the potential to correct market failures and support production efficiency by exploiting scale effects and internalizing knowledge externalities. But even the most carefully designed unilateral industrial policies risk generating negative production externalities in other countries, and, under certain conditions, may not even be welfare-enhancing for the implementing country. The reason is that negative externalities of unilateral industrial policy can drive European and international production patterns away from underlying comparative advantages, create regional or global over-supply, and result in changes in terms of trade that reduce domestic welfare. This suggests significant benefits from coordination. Structural modeling and case studies show that a coordinated approach within the European Union and with international trading partners on a narrowly defined and carefully designed set of industrial policies could unlock untapped benefits. Closer European integration would facilitate the adjustment of firms and workers to coordinated and well-targeted industrial policies and amplify their benefits.

Keywords: Industrial policy; European Single Market; State Aid; EU aerospace industry export; EU single market; fishery block exemption regulation; State aid expenditure; single market perspective; Comparative advantage; Demand elasticity; Competition; Terms of trade; Europe; Global (search for similar items in EconPapers)
Pages: 37
Date: 2024-12-16
New Economics Papers: this item is included in nep-eec, nep-eur and nep-ind
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