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.

An Ankara-based delegation led by the European Union’s High Representative for Foreign Affairs and Security Policy, Kaja Kallas, has held talks with Turkish President Recep Tayyip Erdogan.

Kallas conducted the visit as part of a three-member delegation alongside Commissioner for Enlargement Marta Kos and Commissioner for Migration Magnus Brunner.

The closed-door meeting was also attended by Turkish Foreign Minister Hakan Fidan, Presidency Communications Director Burhanettin Duran, and Akif Cagatay Kilic, the Chief Advisor to the President on Foreign Policy and Security.

“Türkiye is a key partner in security, migration, and energy, as well as an EU candidate country. It was positive to speak with President Erdogan today about further strengthening EU-Türkiye relations and the importance of good neighborly relations,” Kallas said. She emphasized that the discussions also covered the war in Ukraine, conflicts in the Middle East, and preparations for the upcoming NATO Summit in Ankara.

Kallas added that Türkiye makes a significant contribution to protecting NATO’s “Eastern Flank,” while Kos remarked, “We have a lot to gain by working closer with Türkiye.”

Ahead of the visit, POLITICO highlighted that the high-level trip aimed to forge deeper ties with Ankara at a time when the wars in Ukraine and the Middle East are reshaping Europe’s security priorities.

A member of Kallas’s team told POLITICO: “Türkiye is an indispensable partner in defense, migration, trade, and regional stability. Tuesday’s [June 30] talks will address the way forward on issues such as Iran, Syria, Gaza, and Russia’s war against Ukraine—areas where Türkiye carries significant weight.”

According to the report, beyond security matters, Brussels is keen to advance plans to reduce trade barriers and develop the so-called “Middle Corridor,” a trade route linking Asia and Europe while bypassing Russia.

Speaking to POLITICO prior to the visit, Kos said: “Closer cooperation between the EU and Türkiye is in all our interests. Together with Türkiye, we want to move toward increasing stability and certainty in the wider region.”

During the visit, Kallas spoke to the Anadolu Agency (AA), pointing to the significance of the upcoming NATO summit in Ankara. “Every summit is called historic, but this time it truly is. Transatlantic relations have recently come under severe pressure. Therefore, delivering a message of unity is extremely important,” she said.

Indicating that Türkiye is a “strategically important partner,” Kallas also drew attention to its role in defense and regional stability, alongside issues such as migration.

Kallas continued: “When we look beyond the Middle East to the Caucasus, we see that Türkiye plays a very important role. That is why it is important to hold these talks and evaluate what we can do together.”

Arguing that Europe does not need a joint army but rather needs to strengthen the European pillar within NATO, the EU foreign policy chief stated that Europe also has much to learn from Ukraine regarding new capabilities.

Reiterating that Türkiye holds a “highly significant position” within NATO, Kallas expressed that the EU and Türkiye must also address the Cyprus issue.

Germany is intensifying efforts to produce American weaponry on German soil in a bid to address its military equipment shortages and secure a continued defense commitment from US President Donald Trump’s administration.

Berlin aims to leverage the defense industry to deepen its strategic relationship with Washington, the Financial Times reported, citing sources familiar with the matter.

One source said that negotiations are already underway to bring German and American defense contractors together for joint weapons production.

Another source stated that every option to strengthen the defense capabilities of both nations is on the table. This includes discussions on the joint production of Tomahawk cruise missiles as well as the advanced PAC-3 missiles used in Patriot air defense systems.

The German Ministry of Defense confirmed that intensive cooperation with the US is ongoing.

As examples of this partnership, the ministry pointed to German defense contractor Rheinmetall manufacturing fuselage sections for American F-35 fighter jets, and the collaborative work on Patriot missiles by MBDA and Raytheon, a joint German-American partnership.

The Financial Times reported that the German federal government is in contact with MBDA and Raytheon regarding potential cooperation on the production of land-launched Tomahawk missiles, which have a range exceeding 2,000 kilometers, though direct negotiations on this specific matter have not yet begun.

The report noted that any decision involving the transfer of critical military technology outside of US borders remains subject to approval by Washington.

Seeking to close the deterrence gap

Berlin’s primary objective is viewed as bridging potential gaps in European deterrence should Washington shift its military priorities toward the Indo-Pacific region.

Within the opposition alliance led by Friedrich Merz, leader of the Christian Democratic Union (CDU), significant concern was triggered by the Pentagon’s decision in May to abandon plans to deploy a battalion equipped with land-launched Tomahawk missiles to Germany.

The deployment had originally been planned during the administration of Joe Biden as a response to Russia stationing missiles and military aircraft in Kaliningrad. Berlin is now reiterating its request to purchase these missiles directly, while also evaluating the Ukrainian-developed Flamingo cruise missile as an alternative option.

However, Bastian Ernst, a member of the Bundestag’s Defense Committee, expressed caution regarding the transfer of sensitive technologies.

“I do not believe the Americans will open their black boxes containing all their intellectual property rights and sensitive technologies to let us look inside,” Ernst said. “Manufacturing F-35 fuselages is simply assembling metal parts; there is no magic to it. The technologies we wish to acquire to close our defense capability gaps are far more sensitive than what they are willing to transfer to us.”

Despite these hurdles, the production capacity of the German defense industry is showing significant growth. Armin Papperger, Chief Executive of Rheinmetall, stated in April that Germany’s traditional ammunition manufacturing capacity has surpassed that of the US.

Papperger noted that his company has increased its medium-caliber ammunition production capacity from 800,000 rounds to more than 4 million, while its artillery ammunition capacity has grown from 70,000 rounds to 1.1 million.

The Wall Street Journal previously reported in an analysis that Germany is transforming into a military production hub as it shifts its industrial weight away from the automotive sector and toward the defense industry.

In early May, the US announced plans to withdraw approximately 5,000 troops from its military presence in Germany, a move the Pentagon described as a reflection of Trump’s dissatisfaction with allied defense spending. Trump subsequently pledged to reduce troop levels further.

In spite of these developments, Berlin continues its efforts to persuade Washington to approve the sale of Tomahawk missiles equipped with Typhon launcher systems to maintain deterrence against Russia.