Aid and Abet? The role of state aid in shaping EU industrial policy (and its limits)

Recently, the industrial policy of the European Union has experienced a renaissance. The EU, faced with geopolitical uncertainty, increased global competition and the urgency of the “twin transformations” (digital & green), has identified the pressing need to boost strategic sectors, accelerate innovations, and ensure resilience in the internal market. The Letta

, and Draghi reports can attest to that.At this same time, state aid control, an important cornerstone of EU Competition Policy, has also undergone a remarkable change. The EU’s State Aid regime, which was traditionally designed to prevent market distortions by means of Member State subsidies has evolved from a rigid prohibition model to a more flexibility compatibility model. This change has allowed State Aid to be adapted to the EU’s industrial policy ambitions. The European Commission is now able to direct national subsidies in areas of strategic importance by leveraging compatibility tools such as the General Block Exemption Regulation

, Important Projects of Common European Interest and a series of temporary crisis frameworks. This shift reveals how State aid rules are evolving into a deliberate coordination framework for industrial policy priorities, even as it raises questions about market fairness, the balance of power between the EU and Member States, and the practical and legal limits of the EU’s approach.Below is an overview of this evolution, focusing on what industrial policy entails at the European level, how State aid law has shifted toward an “authorization model,” and what the implications are for market integrity, national autonomy, and the future of EU industrial strategy. More in-depth analysis can be found in a working paper (here

).

EU Industrial Policy: where to start and where to close?

Within the EU, industrial policy straddles a difficult line between supranational and national competences. The EU has had a long-standing industrial policy, dating back to the Colonna Memorandum

. The inclusion of the industrial policy title into the Treaty of Maastricht codified the EU role. But real momentum was gained with the 2005 Communication “Implementing the Community Lisbon Programme,” the Europe 2020 Strategy and more recent frameworks such as the 2020 “New Industrial Strategy for Europe“, and its updates. These policy papers consistently stress the importance of, e.g., environmental and energy transitions, digital transformation, R&D&I, or strategic autonomy and resilience.Despite these aims, EU industrial policy remains somewhat fragmented, consisting of multiple overlapping instruments and communications rather than a single, unified strategy. Currently, there is no single, legally-binding framework for industrial policy. Article 173 of the TFEU would serve as a legal basis to create a common industrial strategy, which aims to accelerate structural adjustments, encourage innovation, and increase competitiveness amongst Member States. It also makes it clear that any EU-level policy on industrial affairs should not introduce measures which unduly distort the competition. How the transformation of EU state aid control led to the inclusion of industrial policy goals

Since the inception of State aid law and policies, they have changed considerably. The EU courts have consistently applied a functional and wide-ranging interpretation to what counts as “aid”. A shift in the assessment of compatibility of aid coincides with this development. State aid policy is geared towards allowing certain types of assistance in pursuit of EU priorities or broader objectives. The State Aid Treaty compatibility criteria is often viewed via secondary legislation and “soft laws” instruments. The Commission can define “good aid” by using these instruments that align with broader EU objectives. In this sense, state aid compatibility controls are increasingly used as a quasi industrial policy tool to direct national subsidies towards EU priorities in the absence of proper industrial policy measures. By identifying which types qualify for simplified or preapproved procedures, the Commission effectively encourages Member States’ industrial-policy funds to be directed towards those areas deemed priority at the EU level. IPCEIs are a perfect example of this dynamic. IPCEIs are large-scale projects that require at least four Member States. They address strategic areas, such as batteries, hydrogen and semiconductors, where investments can be risky, expensive, and require cross-border cooperation. The IPCEI Communication of the Commission sets out criteria to ensure that any subsidies granted bring benefits that extend beyond national borders when such projects align with shared priorities. While they distort competition to some degree, the Commission balances this distortion against the broader economic, technological, and societal gains.

Up and downsides of such an approach

Obviously, some advantages come with doing industrial policy via the State aid tool. State aids are a key part of EU industrial policy because the Union has limited budgetary power. While programs like Horizon Europe and InvestEU offer important funding, their scale cannot match that of national spending. Member States, however, can deploy significant resources. In 2023 alone, compatible or exempted aid represented about 1.4% of the EU’s GDP–substantially surpassing the direct EU budget for similar goals. The State Aid framework allows the Commission to direct national spending towards shared EU goals. By structuring the conditions that allow subsidies, the Commission creates “soft coordination”, which ties national budgets to a larger EU-level effort. The State Aid framework also encourages private cofinancing to ensure that EU industrial policies are not solely dependent upon public funds. The EU can also align national efforts via State Aid policy to contribute to a common EU strategy, while still allowing Member States to have flexibility in their actual implementation. On the one hand, there are the positive outcomes, such as fostering innovation, boosting sectors strategically, or accelerating green technology. On the other hand, there are negative effects on the competition, member state imbalances, and possible fragmentation of Internal Market. It is important to not underestimate this side of the coin when using State Aid policy for industrial strategy. It is important to remember the purpose of State Aid policy: level playing fields and undistorted competition in the internal market. Let’s not forget that Article 173 TFEU expressly prohibits measures which distort the competition. The use of state aids as a primary tool in the industrial strategies could lead to unequal subsidy capacity (i.e. wealthier Member States that can afford higher subsidies, as shown by COVID-19 subsidy race

), and fragmentation of the market. To avoid distortions, the Commission could consider tighter ex ante coordination of large aid projects, more rigorous evaluations ex post of outcomes, or even a cap on State aid. Formalizing strong oversight mechanisms will ensure that Member States are deploying subsidies in a way that complements, not competes, with each other. The objective is to preserve the Internal Market’s integrity while pursuing pressing socio-economic transformations.

Second of all: there should be a proper own EU industrial policy. State aid is a useful tool to support industrial policy but it shouldn’t be the only one. To ensure that industrial policies are not solely dependent on Member States’ subsidies, a stronger EU fiscal capability is required (e.g. through a permanent EU Industrial Policy Fund). EU industrial policy must go beyond simple strategy communications. The EU should create a dedicated EU Industrial Policy Framework that integrates State Aid Control with broader economic governance.

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