FIW Policy Brief No. 23: Why the New Industrial Policy Will Accelerate Deindustrialisation

The sustained productivity advantage in the USA and the increasing competition from emerging economies have triggered an intensive debate on competitiveness issues in Europe since the mid-1990s. The highlight is the European Commission's recent call for reindustrialisation, with the aim of giving industry a 20 percent share of the overall economic value added. Against this background, this article raises the question of whether structural change from manufacturing to services is fundamentally reversible. Although individual economies can increase their share of industry through comparative advantages in international trade, overall deindustrialisation is determined by the below-average growth in demand and higher-than-average productivity growth in manufacturing. A passive, trade-restrictive policy is undesirable and, due to increasing global interdependence, is also becoming increasingly difficult to implement. On the other hand, an active industrial policy that strengthens productivity growth is necessary. Paradoxically, contrary to the European Union's objective, it will not reverse the decline in the share of industry in total income over the long term, but accelerate it.