Europe’s industrial policy: why reindustrialization needs purpose

The world had probably never shown such interest in a Plenum of the Chinese Communist Party as it did last October. As Beijing unveiled the guiding principles for its 2026-30 five-year plan¹, the message was unmistakable: science and technology would take center stage, with the State committing to achieving greater self-reliance in both fields². More significantly, the Party declared its intentions to lead what it sees as a historical technological revolution, accelerate the development of high-quality productive forces, and boost domestic consumption while improving citizens’ welfare.

There are many reasons behind this renewed attention. Five years ago, in the midst of the pandemic, the West had just begun to reassess industrial policy as a valuable tool. For decades, it had been largely dismissed as market-distorting: the inefficient, heavy hand of the State shadowing free market forces. Then came the sharp turn: the CHIPS and Science Act and the Inflation Reduction Act in the United States (both released in August 2022), and the Green Deal in the European Union (approved in January 2020). These represented industrial policy efforts on a scale not seen in generations.

The declared rationales behind these efforts have evolved from economic stimulus to inflation control, from green growth to national security, from reshoring manufacturing to sustaining AI-driven electricity demand. Yet beneath the many covers that policymakers put on these packages, there is one common underlying factor: finding an adequate response to China’s rising power. As commentator Ezra Klein recently stated, “the reemergence of industrial policy in America is 100% about China.”³ And for good reasons: China’s industrial policy led to dominance in key industries – solar panels, electric vehicles, and lithium batteries (collectively known as the “New Three”) – and control over crucial bottlenecks such as critical raw materials.

 

Lessons from China’s industrial dominance

This dominance came at a cost that Chinese media define as “involution”⁴, a term openly addressed by the Chinese leadership itself. It refers to extreme internal competition, price wars, inefficient investments, industrial overcapacity, and a worrying deflationary spiral. Recent research has highlighted that market distortions associated with subsidies and trade or regulatory barriers have reduced China’s total factor productivity by 1.2%⁵.

What China gained from these inefficiencies was national champions that dominate their global value chains. What it lost was economic efficiency and productive dynamism. The next five-year plan will need to address these challenges, with special focus on boosting internal demand.

This outcome reveals something essential about industrial policy: it comes with trade-offs and must be flexible enough to adapt to changing scenarios. The lesson for Western policymakers is clear: industrial policy is not simply a set of policy instruments to be deployed and forgotten. It requires constant recalibration based on outcomes.

 

Why the West’s industrial policy narrative is misleading

However, the perception of a “return” of industrial policy in the West seems more of a narrative than a real shift, and for at least two reasons.

First, some core elements that characterize industrial policy have actually never left. We might simplify and say that industrial policy has three main rationales: internalizing externalities, coordinating economic actors, and allocating resources. Businesses have continued to coordinate and push for the allocation of public resources toward their interests. What disappeared was not these activities but rather the ambition to build common goods out of these efforts – that is, the ultimate purpose of any industrial policy.

The second reason is purely macroeconomic. In today’s economy, as American economist Michael Pettis argues, if a State is not engaging in industrial policy, it is simply subject to that of other countries⁶. When one country expands its manufacturing base beyond what its domestic market can absorb, it relies on exports to offload the surplus. Those exports, however, do not exist in a vacuum: they inevitably displace production and employment elsewhere. Global supply and demand must still balance, which means that one nation's industrial ambition becomes another’s deindustrialization.

 

Europe’s reindustrialization challenge

Deindustrialization lies at the very heart of the Western revival of industrial policy. In the United States, it had already become a defining political issue by 2016. In Europe, we are now striving to revitalise legacy industries while securing leading positions in emerging markets. But one aspect remains troubling: industrial policy cannot be replicated or improvised.

It is not merely a toolkit to reshape markets. At its essence, industrial policy represents a collective endeavour to steer society toward a desired horizon by mobilising its economic forces, both existing and potential.

Focusing on Europe, the absence of a clear and shared vision of this desired horizon remains a major obstacle to revitalising an ambitious EU industrial strategy. Mission-oriented frameworks such as the Green Deal have fallen short of building the necessary consensus, both within EU institutions and across national governments.

A further challenge lies in the limited state capacity: many European administrations are ill-prepared for this task, lacking the specialised expertise and coordination mechanisms across agencies, ministries, and financial institutions that effective industrial policy requires.

 

Beyond economics: the missing cultural dimension

But the deeper question is this: why should Europeans accept the trade-offs that reindustrialization demands? The macroeconomic case seems straightforward: our economies are stagnant, anchored to the past, and we need to scale up new markets. But do our aging societies, facing demographic decline and cultural transformation, actually have the collective will to pursue growth-at-all-costs?

Consider Italy, where real salaries have been stagnant for more than thirty years. The welfare state model that has represented the backbone of the country’s social contract is facing an existential crisis. Meanwhile, the white-collar self-realization imperative that has characterized Western societies for decades creates a cultural mismatch with the factory jobs that reindustrialization would entail.

The comparison with China is instructive. Industrial policy there succeeded partly because it aligned with aspirations for social mobility. Factory work and technical jobs represented the path to middle-class life. That is clearly not Europe’s situation today.

Young Europeans face a fundamentally different social contract from their parents, marked by less job security and greater precarity, housing crises that make ownership increasingly unattainable, and mounting anxiety about climate change.

The promise of GDP growth rings hollow when it remains unclear how or whether that growth will address these concerns.

 

A collective vision for Europe’s industrial future

What is truly missing in the European reindustrialization push is not technical capacity or even political will: it is purpose. Playing defensively with industrial policy to maintain our standards of living is one thing. Having a renewed vision of what our societies should look like is another. Failing to appreciate this cultural element will make any attempt to revive our industrial sector fail miserably.

The competitiveness metrics, technological sovereignty goals, and economic security frameworks that dominate Brussels discussions are all valid. But they skip the fundamental question: what kind of society are these policies meant to create? Industrial policy framed purely in terms of GDP growth and strategic autonomy will struggle to win public support precisely because it offers no compelling answer to this question.

In democratic societies, ambitious economic transformation requires popular legitimacy. That legitimacy must be earned through a clear articulation of how industrial renewal serves collective wellbeing, not just abstract national competitiveness. This means rooting industrial policy in a broader conversation about societal goals, placing younger generations, who will bear both the costs and benefits of any industrial renewal, at its center.

The good news is that it is not too late to have this conversation. Europe can still connect its industrial strategy to the actual concerns and aspirations of its citizens. China’s industrial policy succeeded because it promised (and, for millions, delivered) material prosperity and social advancement. America’s industrial revival gains traction because it taps into anxieties about national decline and promises to restore past greatness. Europe needs its own answer, one that speaks to what its citizens actually want from the future.

Without addressing this cultural dimension, Europe’s industrial transformation will struggle to achieve its goals. The question is not whether Europe can reindustrialize. It is whether Europeans can imagine a future worth building.

 

¹ Helen Davidson, "China’s plenum has just finished – here are five key takeaways", (Taipei, The Guardian, October 24 2025), https://www.theguardian.com/world/2025/oct/24/chinas-plenum-has-just-finished-here-are-five-key-takeaways.

² Edward White, Thomas Hale, "China’s leadership vows to step up push for ‘self-reliance’ in tech", (Shanghai, Financial Times, October 23 2025), https://www.ft.com/content/64e2b6dd-1cb9-4a1b-9335-970d94fa9beb?syn-25a6b1a6=1.

³ ChinaTalk, "Ezra Klein, Derek Thompson and Dan Wang on China", (YouTube, 1:07:04, May 9 2025), https://www.youtube.com/watch?v=1XnjU65KpNY&t=1s.

⁴ Hannah Miao, "A New Challenge for China’s Economy: ‘Involution’", (Singapore, The Wall Street Journal, October 18, 2025), https://www.wsj.com/world/china/a-new-challenge-for-chinas-economy-involution-419500f1.

⁵ The Economist, “China’s industrial largesse may cost it $370bn a year in lost output”, (London, The Economist, October 9, 2025), https://www.economist.com/china/2025/10/09/chinas-industrial-largesse-may-cost-it-370bn-a-year-in-lost-output.

⁶ Michael Pettis, "Which country should design U.S. industrial policy?", (Washington, Carnegie Endowment for International Peace, July 16, 2024), https://carnegieendowment.org/china-financial-markets/2024/07/which-country-should-design-us-industrial-policy.