The sudden chill in the European battery sector reveals a critical weakness in the EU’s green industrial policy.
Although leaders express clear awareness of the significance of national economic strength to ensure geostrategic independence, they still lack the means to achieve their stated goals.
Within the complex web of policies that shape the EU’s industrial strategy, batteries surprisingly stand out as a relative success story.
The European Commission has designated battery projects as “important projects of common European interest,” facilitating a resurgence of battery production through public subsidies.
A number of factories have been opened across the region by both national producers and subsidiaries of Chinese and Korean manufacturers.
Until recently, robust growth in capacity was expected.
However, the news that several European battery projects are either being abandoned or significantly scaled down is a crucial indicator that things are amiss.
This downturn isn’t merely due to familiar but slow-moving obstacles like technology, raw materials, and energy costs.
Instead, the faltering sales of electric vehicles have undermined expectations for market demand for battery capacity that was anticipated to come online.
This situation illustrates a broader issue: a private sector deeply lacking confidence in its political leaders’ ability to turn promises into reality.
These leaders have committed to phasing out new internal combustion engines in the next decade while simultaneously vowing to protect national automotive manufacturers from being overrun by Chinese imports.
If both commitments were credible, European automakers would be investing heavily to meet projections of around 10 million electric vehicles per year.
The reluctance to do so, with repercussions for batteries and other supply chain components, signals a lack of faith that political objectives will be realized.
Nothing Europe currently does appears sufficient to alter the landscape.
Setting goals (even legally binding ones), regulating polluting activities, or subsidizing production are necessary, yet they evidently do not inspire confidence regarding market realization for green technology.
Furthermore, protectionist tariffs alone do little to bolster this confidence.
This trust deficit stifles every aspect, from renewable generation—from worries about whether the grids will handle peak energy loads—to electrolyzers and concerns about the market’s appetite for green hydrogen.
Essentially, policies must instill confidence in the private sector about large-scale demand—a feat China has skillfully managed for some time, further highlighted by the substantial impact of the U.S.’s Inflation Reduction Act on factory construction.
The EU must replicate this, albeit in its distinct way.
It’s not merely about entering a subsidy race; there is a pressing need to leverage fiscal policies, tax design, and credit policies to solidify emerging markets.
When it comes to fiscal policy, the mantra should be to at least “do no harm.” A return to budget consolidation, which has eroded demand over the past decade, would surely hinder private investment plans.
Why expand if no one will purchase your additional production? Any sacrifices required from budget cuts must be counterbalanced with increased EU funding to support long-term green technology demand, such as EV leasing programs, green infrastructure, and home energy storage.
Moreover, tax modifications should favor the new markets being nurtured, with a commitment to keep them viable.
The exemplary uptake of electric vehicles in Norway resulted from hefty tax exemptions for conventional cars and traffic privileges.
The EU could emulate this in areas like the tax treatment of company vehicles.
Renewable energy projects are being scrapped due to financial profiles that once looked attractive now failing to stand the test of rising interest rates.
Nevertheless, central banks possess the tools to prevent the fight against inflation from hindering the transition.
The European Central Bank could craftily ease financial conditions for green investments by adapting its “targeted longer-term refinancing operations.”
This adjustment would align with the ECB’s mandate, allowing it to support overall EU economic policies while maintaining price stability by keeping necessary benchmark rates in check.
There’s no rationale for green investments to bear the brunt of economic cycles.
In truth, there’s no reason why Europe shouldn’t witness a green investment boom.
However, the private sector must be assured that governments are equally committed.
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