Industrial policy in the EU: new opportunities, old risks?

Prepared by Sam Langfield, Daphne Momferatou and Ralph Setzer Industrial policy can be defined as government intervention that targets the structural transformation of economic activity in pursuit of a public goal.Industrial policy deliberately directs factors of production to specific sectors. Conceptually, this distinguishes industrial policy from macroeconomic stabilisation measures and structural policies that aim to improve the general business environment (Juhász et al., 2024). While structural policies can also have uneven effects – for example, a research and development (R&D) tax credit would favour R&D-intensive industries – the conceptual distinction is useful for identifying policies explicitly designed for sectoral reallocation. While market failures can be the rationale for industrial policy, its selectivity creates efficiency and governance risks.Industrial policy can help address coordination failures, knowledge externalities and vulnerabilities (International Monetary Fund, 2025). However, because interventions selectively promote specific sectors or activities, opportunity costs are implicit. Shifting resources away from potentially more productive uses risks allocative inefficiency owing to the bounded knowledge of policymakers and the potential for rent-seeking behaviour, especially in environments with weak institutional quality. Historically, this has often led governments to support politically influential incumbents rather than address genuine market failures (Grossman and Helpman, 1994). The open question is whether modern industrial policy can overcome informational frictions, resist undue influence from vested interests and avoid institutional inefficiencies in a contemporary European Union (EU) context. Governments implement industrial policy, the macroeconomic effects of which can affect monetary policy transmission.Sector-specific interventions alter relative prices, for example by subsidising factor costs. Other general equilibrium effects emerge from cross-border spillovers, policy responses by other governments and fiscal implications. Effective interventions can raise potential growth or dampen the inflationary impact of price shocks. Poorly designed measures, however, can subsidise capacity-constrained sectors and distort economic decisions. Nationally differentiated industrial policies can also affect cross-country competitiveness and financial fragmentation, with implications for monetary policy transmission. For these reasons, it is important for central banks to assess the design and macroeconomic effects of industrial policy. Industrial policy has re-emerged worldwide in response to geoeconomic fragmentation, rapid technological change and the climate transition.The remainder of this article documents the resurgence of industrial policy, reviews the evidence of its effectiveness and examines the specific opportunities and risks it presents in the EU context. It then identifies key principles for the design of industrial policy in Europe. The use of industrial policy has expanded across major economies.Governments deploy targeted grants, equity and credit support, trade measures and localisation requirements to promote selected sectors. There has been an increase in the number of such measures in the EU and its Member States, with similar patterns in the United States and China (Chart 1, panel a). Researchers have likewise shown renewed interest in industrial policy, with the share of publications referencing industrial policy having more than doubled since 2020 (Chart 1, panel b). Resurgence of industrial policy in practice and research a) Industrial policy measures adopted by the EU and its Member States compared with China and the United States b) Research publications referencing industrial policy as a percentage of publications referencing economic policy Sources: New Industrial Policy Observatory, Evenett et al. (2024, 2025) and Google Scholar.Notes: Panel a) plots the 12-month rolling count of industrial policy measures. The latest observations are for December 2023. Panel b) plots the yearly time series of all research publications referencing “industrial policy” as a percentage of those referencing “economic policy”. Three structural trends – geoeconomic fragmentation, technological progress and climate change – underpin this renewed attention to industrial policy. First, geoeconomic fragmentation exposes supply chain vulnerabilities and raises concerns about resilience.The pandemic and recent conflicts have highlighted the macroeconomic risks associated with external dependencies. The more interventionist trade policy stance in the United States and technological upgrading in China, partly supported by domestic industrial policy, are further reshaping global production networks. While lower import prices improve the terms of trade, reliance on foreign capacity increases exposure to supply disruptions and geoeconomic coercion, motivating policymakers to intervene as insurance against price and quantity shocks. Second, rapid technological change generates discrete outward shifts in potential output.Breakthroughs in general-purpose technologies, including artificial intelligence and robotics, raise the opportunity cost of operating behind the global productivity frontier. Technological dynamism can motivate intervention in specific sectors to stimulate domestic innovation (by addressing knowledge spillovers and financing constraints) or accelerate adoption (by targeting coordination failures and network externalities). Effective implementation of innovation-oriented industrial policy means overcoming informational constraints so that market failures can be targeted precisely. Third, the climate transition requires large-scale investment in physical capital.Carbon pricing is the primary policy used to incentivise necessary capital formation, by correcting the underlying environmental externalities. However, price signals may be weakened by barriers to investment, including coordination failures in infrastructure deployment, network effects in green technologies and financial frictions. This could provide a rationale for climate-motivated industrial policy to complement carbon pricing through sectoral interventions. Stated reasons for intervention broadly align with these structural trends, but the emphasis differs across economies.EU measures are more often climate-related, US measures place greater weight on resilience, and Chinese measures are more often framed around competitiveness.[1] Modern industrial policy draws on an established policy toolkit.Based on Evenett et al. (2024, 2025), this article focuses on sector-specific instruments that can be classified in terms of whether they provide financial support or restrict market access.[2]This classification is necessary because outcomes may diverge from stated policy intentions. Grants:non-repayable grants, tax and social insurance relief, production subsidies, in-kind transfers and price stabilisation measures alter firms’ cost structures. Similar effects can also arise indirectly, for example when public procurement or defence contracts support related civilian technologies or firms. These tools provide immediate support but carry fiscal costs. If deployed without strict conditionality and exit criteria, subsidies are vulnerable to pressures from vested interests, leading to resource misallocation by shielding supported firms from market discipline. Equity and credit:state-sponsored loans, guarantees, interest payment subsidies and equity capital injections transfer risk from private balance sheets to the public sector. These interventions can support targeted sectors by lowering the cost of capital for recipient firms, especially those developing new technologies (see Box 1). Their effectiveness, however, depends on careful design: poorly designed measures can generate fiscal liabilities, crowd out private investment and sustain unproductive firms