«Once the bottlenecks are cleared, many sectors could start taking off almost automatically»

Article

Ramón Oliver

@mondieta

Europe wants to regain the competitiveness of its industry in the face of China and the United States. To achieve this, the European Commission announced last January a set of shock measures such as the Clean Industrial Deal and a regulatory simplification plan. The availability of more renewable resources (sun, wind and water) places the continent in a favourable starting position in this essential energy transition, with the potential to boost industry thanks to cheaper energy that is less vulnerable to the swings of the international fossil market. As Draghi notes in his report on European competitiveness, it is urgent to reform structures such as electricity taxation, which today penalises a domestic energy source in favour of imported –and still subsidised– fuels, or to facilitate processes such as the coordinated rollout of grids and electricity demand. These are issues that bodies like the International Energy Agency warn could turn this industrial opportunity into a mirage: without regulation that promotes massive grid deployment, or without adequate investment, the momentum could be lost. We spoke with the economist Javier Santacruz —one of the most active voices in this debate— about this situation and about the paths the old continent has to recover lost ground in a turbulent moment marked by geopolitical instability.

The Draghi report warns of Europe’s loss of competitiveness against economies such as the United States or China and proposes a roadmap to reverse this trend. What explains this loss of traction, and what do you consider the essential pillars for Europe to be competitive again on the international stage?

When we speak about regaining competitiveness, we are referring to two key aspects: on the one hand, reducing production costs, and on the other, offering exclusive or high-quality products or services. The technological revolution, driven primarily by the United States and China, has enabled a strong reduction in operational, labour, fiscal and raw-material costs in these two major blocs. However, when it comes to quality or exclusivity, Europe still maintains clear leadership. We are one of the world’s largest exporting economies, with consistent surpluses, thanks to a business fabric that provides high value-added goods and services in sectors such as luxury, pharmaceuticals, tourism and civil engineering. Europe now needs to focus on regaining competitiveness in production costs, which is where its main challenge lies.

“Renewables play a fundamental role: they reduce costs and ensure a minimum level of strategic independence.”

For years, Europe offshored part of its industrial base in search of lower production costs. Today, however, green reindustrialisation is being discussed as a way to recover autonomy and competitiveness. What role do this process and strategies such as the Clean Industrial Deal play on the path to a more competitive Europe?

Indeed, for decades, Europe chose to move part of its production to countries with lower labour or raw-material costs, but this strategy has shown its limits. The Clean Industrial Deal is based on the same logic of improving competitiveness by reducing costs, but it seeks to do so within Europe. At this point, the continent benefits from advantages such as its geographical position and favourable climate conditions. It is essential to highlight the role of renewable energy for two fundamental reasons. The first, intimately linked to competitiveness, is the reduction of energy costs. And the second is ensuring a minimum degree of strategic independence that allows us to continue producing in tense geopolitical contexts —in addition to having access to certain strategic mineral resources that could be key to driving a green and autonomous reindustrialisation.

As you mention, one of the key aspects of attracting industry is the price of energy. Where do we stand compared with other regions? What can we do to ensure that our energy model supports reindustrialisation and, with it, continental competitiveness?

Reducing energy costs is crucial, and this means making the most of non-emitting energy sources such as renewables (solar and wind), nuclear power and renewable gases like green hydrogen (for industrial processes where direct electrification is not possible). Solar and wind power are not only clean sources but also domestic and highly competitive, complemented by large pumped-hydro storage facilities and nuclear energy.

The problem is that Europe currently faces major bottlenecks that prevent the full potential of the energy transition from reaching European industry. There are a number of structural blockages —such as excessive bureaucracy or the burden of excessive permits for launching industrial projects— that prevent results from being seen.

Other factors slowing the process include insufficient electricity infrastructure to transport and distribute all this clean, domestic energy efficiently; the absence of energy-storage systems, which are essential to ensure system stability (synchronous generation capable of controlling oscillations and preventing blackouts) and to make the most of renewables; and an unfavourable tax structure that continues to subsidise imported fuels over domestic clean energy. This is why the simplification package, together with the push for clean industry, is so important to overcome these obstacles.

Geographically speaking, which European regions or countries are best positioned to seize the opportunities of a reindustrialisation based on clean energy? How much room does Spain have to become an industrial hub at European level?

The countries of the Mediterranean basin have the greatest advantages when it comes to capitalising on a clean-energy-based reindustrialisation. France, for example, has managed to keep its industry afloat even in times of crisis thanks to cheaper energy from nuclear power and, in recent years, from strong investment in renewables such as wind.

“There are factors slowing the energy transition of industry, such as the lack of sufficient electricity infrastructure to transport and distribute all this clean energy.”

Spain is further behind in the price-competitiveness ratio, but that gives it more room for improvement. Where there has been technological innovation, market integration, a suitable institutional framework and outward engagement, the results have been positive. In our country, sectors such as agri-food, pharmaceuticals and automotive components have managed to remain competitive —despite high energy and tax costs— because they are based on captive demand. If Spain manages to reduce energy, labour and tax costs (thanks to the energy transition), it has a major opportunity to compete with the United States and China without the need for subsidies, as has been the case until now in sectors such as steel, aluminium or agri-food.

Speaking of productive sectors, which ones do you see best prepared to lead this industrial transformation? What specific challenges do they face, and what opportunities can they seize in a scenario of accelerated energy transition?

One of the sectors best positioned to lead this transformation is automotive, both in components and complete manufacturing. With the recent agreement with the United States, this sector has been particularly sensitive, especially for countries such as Germany and France. Another key sector is aerospace, in which Spain participates actively and with good results. Airbus, along with its many contractors and associated subsectors, forms a core industrial hub in Europe. The European textile sector also remains relevant despite fierce competition from China and other Asian giants. Although many stages of production are offshored, companies operating in Europe do so with high value-added —Inditex is a good example. Another fundamental sector with a long tradition in Europe is chemicals. Many of these sectors are already generating surpluses and playing a leading role, while others could become industrial powerhouses in the coming years if the right conditions are in place.

A large-scale transformation requires massive mobilisation of resources. How can we design an effective financing model that combines public investment —at both European and national levels— with private initiative? What conditions are needed to attract long-term capital to this kind of industrial project?

One key element for financing a large-scale industrial transformation is the creation of a single European capital market. Such a union would give the European market greater scale, making it more attractive and less vulnerable to competitors such as the sovereign wealth funds of countries that do not abide by fair-competition rules. Today, investing in Europe still means investing in individual countries (France, Germany, Spain), which fragments and reduces the size of the market. This lack of scale not only hampers foreign investment but also limits the mobilisation of internal European savings, a large share of which —70% to 80%— ends up flowing to the US due to its size and market capitalisation. Another structural problem is the excessive weight of bank financing in Europe, compared with the US model, where 70% of corporate capital comes from markets. European banks are also subject to strict regulations such as Basel III, which limits their capacity to finance emerging sectors.

What should we pay attention to in order not to repeat —or commit new— mistakes in this reindustrialisation process?

I think we are entering a learning phase; we are still identifying the obstacles that have held us back and continue to do so —those bottlenecks that are now evident and that perhaps we only sensed before. And that is a problem because it leaves us less time to think and act effectively.

“Companies must stop seeing sustainability solely as a cost and start recognising its benefits.”

To mention a few examples: the delay in taking advantage of the Next Generation funds, which offered a unique opportunity for cheap, simple and long-term financing. I fear we are already too late and will not be able to do in a year and a half what we have not done in four. That opportunity has largely been wasted. Another is Germany’s nuclear phase-out, which led to an absolute dependence on Russian gas, with disastrous consequences for its economy.

For a new industrialisation, I believe it is essential to identify and resolve all bottlenecks as soon as possible. If we achieve this, many sectors will begin to take off almost automatically, gaining competitiveness both in costs and in the quality and exclusivity of their products and services.

What does the tariff agreement signed by the European Union with the United States entail? To what extent could it affect Europe’s aspirations to regain competitiveness?

The agreement has certainly been a strong reality check for Europe in our most important trade relationship: the United States. In principle, a 15% tariff should not be enough to lose a market, although it may reduce part of our competitive advantage. It also opens the door to the risk that in the future, domestic US competitors might emerge that match European products in quality. Another potential issue arises from the second part of the agreement: Trump’s demand that Europe invest €600 billion in the United States —which seems incompatible with the Union’s current needs, given that what Europe needs now is to focus more on European savings and less on external investment.

Finally, what message would you send to business leaders and policymakers who still see sustainability as an obstacle rather than a lever for growth?

They should stop viewing sustainability solely as a cost and start recognising its benefits. If you only look at the costs, you become negatively predisposed. Renewable energy, reducing environmental footprints or responsible use of raw materials all generate savings and growth that directly impact the bottom line. And that part is not being properly acknowledged.