IMF Working Papers

Industrial Policy in Europe: A Single Market Perspective

By Andrew Hodge, Roberto Piazza, Fuad Hasanov, Xin Li, Maryam Vaziri, Atticus Weller, Yu Ching Wong

December 16, 2024

Download PDF More Formats on IMF eLibrary Order a Print Copy
More formats on IMF eLibrary Order a Print Copy

Preview Citation

Format: Chicago

Andrew Hodge, Roberto Piazza, Fuad Hasanov, Xin Li, Maryam Vaziri, Atticus Weller, and Yu Ching Wong. "Industrial Policy in Europe: A Single Market Perspective", IMF Working Papers 2024, 249 (2024), accessed December 16, 2024, https://doi.org/10.5089/9798400295690.001

Export Citation

  • ProCite
  • RefWorks
  • Reference Manager
  • BibTex
  • Zotero
  • EndNote

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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: European Single Market, Industrial policy, State Aid

Publication Details