EU divisions deepen over industrial policy rescue plan as Volkswagen crisis intensifies

The European Union and its member states remain deadlocked over how to halt the decline of the Continent’s industrial base, exposing deep divisions over economic strategy as pressure mounts from global competitors.

The depth of the industrial crisis Brussels is seeking to avert was underscored by Volkswagen’s plans to lay off 100,000 workers and close four factories in Germany.

In response to such challenges, European leaders aim to finalize negotiations by the end of this year on the landmark Industry Accelerator Act (IAA). The legislation is designed to channel billions of euros in public procurement spending toward European firms, helping them withstand a surge of cheap exports from China.

“The latest news from Germany shows how urgent it is to act decisively to protect our markets from the unfair practices of our global competitors,” EU Industry Commissioner Stéphane Séjourné told POLITICO, describing the IAA as a “decisive” tool.

At the center of the legislative proposal is the “Made in Europe” preference provision, which is designed to prioritize locally manufactured goods.

While proponents argue that the time has come for the EU to defend its industrial sector, others view the provision as protectionist and are calling for the brakes to be pulled. Critics warn that the proposal risks creating a “legal labyrinth” for businesses, driving up the cost of European-made products, and potentially shut out close trading partners such as Canada, the UK, or Japan.

“What is happening at Volkswagen is worrying, but it is not an isolated case,” said Christophe Grudler, a French liberal Member of the European Parliament (MEP). “It is the result of years of European naivety, while our global competitors have pursued clear and aggressive industrial strategies.”

Negotiations between EU member states and MEPs are only now beginning, following a three-month delay by the European Commission in presenting its proposal in March. Officials acknowledge that time is running out to reach a compromise by the end of the year, a deadline set under the EU’s “Single Market” roadmap.

A primary obstacle in the negotiations is reaching an agreement on which countries should be included on a list of “trusted partners.” Products from these designated countries would be treated as equivalent to European goods in certain public procurement and funding areas.

The debate largely pits free-trade opponents, led by France, against export-oriented economies led by Germany, alongside the Netherlands and the Nordic countries.

“If we had ‘Made in Europe’ and a strong IAA, we could have cushioned this shock for Volkswagen and its employees,” Pierre Jouvet, a prominent Socialist MEP, told POLITICO. Jouvet favors establishing a restricted list of trusted partners chosen through a carefully vetted “opt-in” mechanism.

Such proposals have met with strong resistance from the European Commission’s powerful trade department, where chief negotiator Maroš Šefčovič has focused efforts on expanding, rather than restricting, the bloc’s trade relationships.

Séjourné’s industrial policy initiative is driven by the belief that the EU’s historic commitment to free trade has failed. Brussels continues to search for a coherent response to the challenge posed by China’s bilateral trade surplus with the EU, which now reaches €1 billion per day.

“We must not only think about new tools, but we must also immediately use all our existing trade instruments,” Séjourné said.

Additional measures under consideration include forcing companies to diversify their supply chains for critical inputs away from China, alongside potential trade investigations into plug-in hybrid vehicles, chemicals, and machine tools.

However, new defensive trade mechanisms may prove ineffective if member governments remain reluctant to deploy them. For example, the EU’s Anti-Coercion Instrument (ACI)—frequently described as the bloc’s trade “bazooka” for responding to economic bullying—has never been used.

“The IAA is only one side of the coin,” said Kathleen Van Brempt, a Belgian Socialist MEP and a lead lawmaker on the trade committee. “The Commission must also act to protect the European market with a stronger and more effective trade defense strategy.”

As the legislative process continues, questions remain over whether the IAA, despite its broad objectives, will deliver a decisive impact once enacted.

While the business community has broadly welcomed the “Made in Europe” concept, many industry representatives argue that its proposed application is too narrow to prevent entire supply chains from leaving the Continent.

“Overall, the approach presented by the European Commission does not appear sufficient to address the challenges facing European industry,” the leading Italian business lobby Confindustria wrote in a position paper. The group criticized the bill’s narrow focus on greening industry and its “trusted partners” list, which it argued remains too broad.

According to the Bruegel think tank, the IAA’s rules of origin could also backfire on major manufacturers like Volkswagen.

“Protecting the upstream aluminum sector from import competition will increase input costs for European carmakers, who rely on competitively priced, low-carbon aluminum to maintain global competitiveness in electric vehicles,” the think tank noted.

Before the legislation can take effect, a compromise must be brokered among the EU’s three co-legislative bodies: the European Parliament, the Council of the European Union, and the European Commission. Currently, prospects for meeting the year-end deadline appear weak.

With three separate parliamentary committees reviewing the IAA, at least 150 MEPs are expected to submit formal opinions on the draft.

Furthermore, during its presidency of the Council in the first half of the year, Cyprus managed to draft compromise texts for only portions of the 100-page bill. It deferred negotiations on the highly contentious “Made in Europe” provision to the incoming Irish presidency, which begins on Wednesday.