The Costs of Conditionality. IPCEIs and the Constrained Politics of EU Industrial Policy
FORWIT – Austrian Council for Sciences, Technology, and Innovation, Feb 7, 2025
Timo Seidl (University of Vienna)
www.timoseidl.com
The Return of the Policy that Shall not be Named
The Return of Industrial Policy in the EU
For decades, the EU’s chief industrial policy was creating and completing the single market. Yet recently, the literature has observed that EU industrial policy has rediscovered ‘market activism’ (McNamara 2024), undergone a ‘geo-dirigste turn’ (Seidl and Schmitz 2024), and begun to behave more like a ‘developmental network state’ (Di Carlo and Schmitz 2023).
However, lacking significant fiscal capacities of its own, the EU’s chief instrument for market-directing industrial policies is its state aid regime. The Treaty generally prohibits state aid due to its distortive effects on the single market, but also provides various exceptions. Since the Commission enjoys considerable discretion in interpreting these exceptions, it can use state aid rules as a tool of ‘regulatory statecraft’ (Bulfone, Di Carlo, and Seidl 2024).
What are IPCEIs?
IPCEIs have recently become the ‘poster child’ of EU industrial policy. Their peculiar name derives from a Treaty clause that goes back to the Treaty of Rome but has only been ‘activated’ in 2014, when the Commission issued a standalone communication that consolidated, formalized, and replaced existing guidance on the interpretation of Article 107(3)(b) TFEU (for details, see Seidl and Lopes-Valença 2024).
IPCEIs allow for greater aid intensity rates and funding for projects closer to commercialization, but also come with a number of ‘strings attached’: demanding eligibility and compatibility criteria which projects need to clear before they are approved by DG COMP.
Example: The IPCEI ME/CT
The Costs & Benefits of Conditionality
The literature defines conditionality as ‘an incentive instrument in the relationship between two actors, in which one actor aims at changing the behavior of the other by setting up conditions for the relationship and by manipulating its cost–benefit calculation by using (positive and negative) material incentives’ (Koch 2015, 99).
Conditionalities are generally viewed as a crucial incentive instrument used by public actors to ‘align corporate behavior with the fulfillment of broad public policy goals beyond profit maximization’ (Bulfone, Ergen, and Maggor 2024, 2).
However, it is important to keep in mind that conditionalities
- also have costs as they involve, for example, breaking down abstract goals into measurable and/or legally viable indicators, demonstrating and assessing compliance, often by making informed assumptions about counterfactual scenarios, and reconciling the rigidities required by a credible instrument with the equally necessary flexibilities demanded by an uncertain and fast-changing world;
- are not introducted and enforced in a political vacuum but against the background of specific ‘ideational, institutional and coalitional configurations’ (Bulfone, Ergen, and Maggor 2024, 2) which shapes their design and effects.
IPCEI Conditionalities
The conditionalities attached to IPCEIs are fundamentally informed by the principles of an efficiency-oriented industrial policy which inform the EU’s approach to state aid regulation more broadly (Piechucka, Saurí-Romero, and Smulders 2023):
- necessity and incentive effect -> counterfactual scenario
- appropriateness -> IPCEI right instrument?
- proportionality -> funding gap analysis
- balancing of positive effects with negative effects in terms of distortion of competition -> balancing test
In addition, there are IPCEI-specific criteria that extend and are directly informed by the above principles:
- Addresses important market failure and provides spillover effects -> market failure as sense-making idea
- Major innovative nature in the light of the global state of the art in the sector -> incentives only to new activities
- Support up to first industrial deployment but not mass production -> distortion risk lower for projects closer to R&D&I
- Concrete, clear and identifiable contribution to the Union’s objectives and strategies -> ties IPCEIs to broader EU agenda (geopoliticization of IPCEIs?)
- multi-member state requirement -> creation of industrial ecosystems and collabortive structures (more than money)
The Costs of IPCEI Conditionalities
Perverse Outcomes
Adverse Selection
Workarounds
Perverse Outcomes
- While well-intentioned, the IPCEIs innovativeness criterion are applied very restrictively, which has kept the very companies from participating in IPCEIs that the EU wants to attract:
‘If TSMC were to be part of an IPCEI, its project in Europe would have to be innovative beyond what it is doing in Taiwan to be eligible for funding. This would mean, in this case, that it would have to do a project making chips at less than 2nm, say at 1nm’ (Interview 6).
More broadly, the complex (pre-)notification process means that it takes too much time from emergence to approval and disbursement of funds, which—in a fast-moving technological landscape—undercuts the very goal of innovativeness.
Operationalizing the boundary between first industrial deployment and mass production is both somewhat arbitrary and creates absurd incentives (e.g., the same machine can often be used for R&D, FID, or mass production).
‘You are allowed to send samples to the customers and you will have some minor sales because samples are not for free. And then when customers like the sample and want more of these products, your sales increase. (…) Once the number of sales gets too high, this is considered mass production and this is where funding ends’ (Interview 8).
Adverse Selection
- The stringent requirements create a complex application process, which in turn creates significant administrative burdens. On the part of companies, the administrative load is considerable.
The application process ’costs €700,000 to €800,000. The administration is crazy, horrible. We had one person fully working on it for one and a half years. We also hired a consultancy’ (Interview 7).
- This makes especially smaller and medium-sized companies hesitant to participate in IPCEIs.
We ‘dropped out of IPCEI because of the bureaucracy. We had to do extra reports, go to meetings, make sure there are spillovers. We would have had to hire two people for all of this. Large companies can handle this, but for a small player like us it is disproportionate’ (Interview 13).
- On the part of member states, only large ones have so far taken on the coordinator role, and many countries outsource administrative tasks to consultancies, creating a market for specialized conditionality consulting and an additional layer of private intermediation. More broadly, the administrative capacities required to manage an IPCEI—even without being the Coordinator—are unevenly distributed among member states, which reinforces regional differences in IPCEI participation that result from member states differential fiscal capacities.
Member State Differences
Company Differences
Workarounds
The relatively slow and complex approval process creates strains that actors will seek to circumvent, either by looking for internal fixes or by prioritizing other instruments in Europe and beyond.
One example is the early start mechanism, which has become essential for IPCEIs but also raises questions about the necessity and incentive effect of aid.
‘Without the ESM, the IPCEI investment projects would be dead’ (Interview 11).
- Many companies prefer other European funding instruments with easier approval processes but perhaps also with fewer good conditionalities.
Hydrogen companies ‘message’ to the Commission is that ‘businesses prefer schemes like IRA (…) because then the market actually dictates which projects will be run [instead of] bureaucrats’ (Volldal 2022)
Recommendations
- Shift from Ex-Ante to Ex-Post Conditionality
- Streamline administrative procedures (e.g. simplified cost options), focusing on high-risk projects, while enhancing subsidy recovery through increased use of clawbacks as a deterrent.
- Broaden Innovativeness Criterion
- Don’t focus too narrowly on ‘world-class’ innovation but reinforce strategic indispensability and be guided by politically-agreed on priorities.
- Rethink conditionalities
- Conditionalities can be broader than just those tied to the principles of an efficiency-oriented policy (e.g. social partner provision, share buyback provisions, etc.).
- Integrate IPCEIs and Other Policy Instruments
- Continue efforts to coordinate funding instruments and establish a ‘Competitiveness Coordination Framework’ (Draghi Report) to coordinate activities (JEF-IPCEI could serve as a blueprint or organizational nucleus).
Thank you very much for your attention!