Meeting European challenges – with a competitive industry by Bundesverband der Deutschen Industrie e.V.

POLICY PAPER | EUROPEAN POLIY | 2024-2029

Meeting European challenges – with a competitive industry BDI priorities for the EU legislative term 2024-2029

Autumn 2023

Key Messages In the next five years, the EU will need to assert itself on the international stage in an environment of increasing geopolitical turbulence and intensifying global competition to attract business. Europe can only achieve this by pursuing a political agenda that sees economic strength as a prerequisite for resilience, security, digitalisation, and climate and environmental protection. In the next legislative term, the EU institutions should therefore prioritise the following initiatives: The EU must work to diversify its economic relations. This includes strengthening the rules-based multilateral trading order, entering new free trade agreements and expanding other forms of cooperation. It is important to strike a balance here between sustainability criteria and strategic economic interests in order to be able to offer appealing trade, investment and raw materials opportunities, particularly to developing and emerging countries. Europe’s defence capabilities must be resolutely fortified by stepping up the pace of production and joint procurement of defence goods and by providing the defence industry with reliable access to funding. Strengthening the position of the European internal market on the global level must return to the top of the EU’s agenda. Steps needed here include dismantling national barriers, implementing current rules and completing the banking and capital markets union as well as driving forward the upgrade and expansion of the European energy and transport infrastructure. The EU must also resolutely cut red tape. Enterprises, particularly SMEs, expect a competitiveness check to become an integral part of the impact assessments of all EU legislative initiatives, and for EU policymakers to implement an effective one-in-one-out rule. The EU should provide more financing support for strategic investments that pave the way for the green and digital transitions and for security and defence, and accelerate and facilitate relevant funding measures.

Meeting European challenges – with a competitive industry

To help Europe catch up in terms of digitalisation, the EU should not rush to regulate new technologies but rather foster the technological openness of society, invest in competences and the training of skilled workers, improve the framework conditions for data use within Europe and provide targeted support for the development of new and innovative technologies. The EU must finally flesh out the Green Deal with a suitable industrial policy so that it has a chance to keep up with the global competition in green emerging technologies. Now is the time to help industries achieve the green transition, promote the ramp up of net-zero technologies, systematically accelerate authorisation procedures, resolve conflicts of interest, eliminate regulatory contradictions and consistently correct undesirable side effects. The EU also needs to guarantee internationally competitive electricity prices and do everything it can to speedily increase supply on the electricity market.

Meeting European challenges – with a competitive industry

Contents Introduction.......................................................................................................................................... 4 1.

Mitigating the impact of geopolitical crises ............................................................................. 6

Strengthening the EU internal market in response to fiercer global competition.............. 12

Securing the financing of strategic forward-looking investments ....................................... 17

Catching up on digitalisation and closing innovation gaps ................................................. 20

Managing cross-border health risks efficiently ..................................................................... 24

Tackling climate change and environmental risks with technological innovations .......... 27

Overcoming energy scarcity and high energy prices ........................................................... 32

8. Reducing dependencies on critical raw materials to prevent shortages and price explosions .......................................................................................................................................... 34 Publishing information ..................................................................................................................... 36

Meeting European challenges – with a competitive industry

Introduction The pressure on the European Union is growing. In economic terms, Europe is falling ever further behind other regions of the world, not just the emerging markets in Asia but also the United States. Russia’s war of aggression against Ukraine has shown that Europe is not prepared for a large-scale geopolitical conflict and has considerable deficits in the area of security and defence as well as critical dependencies on energy and raw materials imports from geopolitically high-risk countries. However, without a powerful economy and a reliable supply of the energy and critical minerals industry needs for key emerging technologies, the success of major political projects such as the European Green Deal and the EU Digital Strategy is at risk. The continuing economic crisis is constricting Europe’s policy space. Enterprises in Europe, particularly SMEs, are struggling under the constantly increasing costs of excessive regulatory requirements. Furthermore, since the Russian invasion of Ukraine, the energy costs in Europe have surged to exorbitant levels, putting energy-intensive industries, in particular, at a considerable competitive disadvantage as competitors outside of Europe are not facing similar energy price hikes. This situation increases the risk that investments in Europe will be reduced or redirected, cutting down Europe’s participation in global value chains that form the very foundation of its resilience and competitiveness. With the launch of the Green Deal in 2019, the EU has committed itself to pursuing very ambitious climate, social welfare, and environmental protection targets. Other important economic policy issues such as the competitiveness of European industry, free trade, the European internal market, cutting red tape, the financing of strategic forward-looking investments and innovations have been sidelined. While the intensified international competition following the Inflation Reduction Act of the United States has led to some adjustment in the EU’s economic policy course, the EU has yet to adopt an ambitious industrial policy strategy to support the Green Deal. German enterprises increasingly view the EU institutions as removed from economic reality. Policymakers and business leaders risk drifting apart. However, it would be fatal if the business sector lost faith in the European idea, especially as Germany benefits from the European internal market more than almost any other country. Moreover, the major challenges of our time, including the systemic competition with autocracies, climate change and digitalisation, cannot be met by individual countries but only on a European level and with a competitive and innovative industry. The EU institutions must therefore pursue a business-friendly agenda in the upcoming legislative term that puts the global competitiveness of Europe centre-stage in EU policymaking. Europe will only succeed in asserting its position internationally and playing an active role in world politics if EU policy sees economic strength as a prerequisite to achieving resilience, security, successful digitalisation and protecting the climate and the environment. In this policy paper, the BDI identifies eight key challenges relevant to industry that the EU must tackle in the next five years. These are: 1. Mitigating the impact of geopolitical crises 2. Strengthening the EU internal market in response to fiercer global competition 3. Securing the financing of strategic forward-looking investments 4. Catching up on digitalisation and closing innovation gaps 5. Managing cross-border health risks efficiently

Meeting European challenges – with a competitive industry

6. Tackling climate change and environmental risks with technological innovations 7. Overcoming energy scarcity and high energy prices 8. Reducing dependencies on critical raw materials to prevent shortages and price explosions In this policy paper, we take stock of the current legislative term as it draws to an end and offer recommendations on how the EU can overcome the challenges ahead, by means and on behalf of a competitive industry.

Meeting European challenges – with a competitive industry

1. Mitigating the impact of geopolitical crises Globalisation has entered a new phase, marked by rising geopolitical upheavals and a resulting increase in the localisation of production in all key markets. This trend is apparent among European enterprises and globally. Systemic competition with China and the sanctions against Russia following its attack on Ukraine have accelerated this development. Managing the associated risks leads to a greater emphasis on diversifying economic relations and value chains. The EU should endeavour to prevent the fraying of established alliances that are founded on the rules-based global trading order. Necessary action on this front includes the completion of the EU internal market (see Section 2), a more active EU neighbourhood policy, a more extensive expansion of economic and transformation partnerships with developing and emerging countries in the Middle East and Africa, the ASEAN countries and other regions in Asia and Latin America, and closer strategic alignment with democratic market economies such as the United States, Japan, South Korea, Australia, and Canada. The United States continues to be the EU’s most important economic and trading partner. However, both the prior and current US administrations take a sceptical view of the development of globalisation over the last few decades and are increasingly stipulating local content requirements (LCRs) for public contracts, infrastructure projects and for green technology subsidies under the Inflation Reduction Act (IRA). The United States is also continuing to block the new appointment of judges to the Appellate Body of the WTO’s dispute settlement system. The Biden administration is not aiming to enter a conventional free trade agreement with concessions regarding mutual market access but only negotiations through frameworks such as the EU-US Trade and Technology Council. A transatlantic free trade agreement is off the cards for the foreseeable future. Russia’s invasion of Ukraine has radically shifted the foundations of European security and plainly revealed how unprepared Europe is for a large-scale conflict that is being carried out in both military and non-military terms. This includes the EU’s dependency on energy and raw materials imports from geopolitically high-risk markets (see Sections 7 and 8), Europe’s inadequate cyber resilience (see Section 4). The same applies to the condition of the EU Defence Technological and Industrial Base (EDTIB) after decades of fragmentation in demand and insufficient investment in both research and development and in procuring capabilities. The EU does have leading technologies in any case but only too small numbers and depending on where and in what the member states and industries have invested. Planning made in times of peace means that industrial production capacities have been cut along the whole supply chain, which has limited the capacity to supply large quantities quickly. The European defence industry therefore faces three major challenges in the next few years. It will have to rapidly equip member state´s armed forces with state-of-the-art material for the new strategic environment, enable the member states to provide constant military support to Ukraine and help other strategic partners that may require assistance. Moreover, it is mandatory to continuously and continually invest in research and technological development to make the needed capabilities available. This requires reliability, forward-looking armaments planning, a willingness to cooperate and the provision of sufficient financial resources and orders by the member states. Russia’s war of aggression against Ukraine has also highlighted the strategic importance of outer space. Space-based infrastructure and applications form the basis of the modern information society, and the associated opportunities and vulnerabilities are huge. Europe has temporarily lost its sovereign access to space, which is elementary for the capacity of governments to make decisions and take action in security policy. Should Russia hack, destroy or even shoot down European satellites, it would not be possible to launch replacement systems in the short or medium term. On account of the

Meeting European challenges – with a competitive industry

increasing interconnectivity of space with other industries, this deficit also impacts emerging technologies such as Industry 4.0, IoT and autonomous driving.

Contributions to global GDP growth; the EU in global comparison to China and the US Since 1980* 1,5

0,5

0 1980-1989

1990-1999

2000-2009 EU-27

2010-2019

2020-2024

China

*From 2019 onwards, forecast value. Source: IMF WEO October 2019; Statistical Office of the Federal State of Baden-Wuerttemberg.

Over the years, the EU’s contribution to global economic growth has continuously diminished. In future, the EU will only be able to keep pace with other regions in the world and defend Europe’s values and interests on the global arena if it is competitive. To achieve this, the EU must seek new partners and institute internal reforms.

Review of the legislative term 2019-2024 Positive examples ▪

The EU was able to make significant headway with some free trade agreements. New FTAs with Singapore and Vietnam are in place. Negotiations were concluded with New Zealand and Chile. Talks on the modernised EU-Mexico Agreement have also been concluded and ratification preparations are underway. The EU and Kenya have concluded negotiations on an Economic Partnership Agreement. Negotiations on trade agreements with emerging and developing countries such as the Mercosur countries, Indonesia and India, on the other hand, have not progressed due to disagreements on sustainability issues. The EU and Australia have not been able to complete their FTA negotiations due to differences over agricultural issues.

Meeting European challenges – with a competitive industry

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When Russia launched its war of aggression against Ukraine, the EU generally took resolute and joint action in terms of administrative, material and financial support for Ukraine and the care of Ukrainian refugees, as well as the various sanctions packages against Russia. Acting against Russia’s violation of international law also secures the foundations of international economic relations and is therefore of primary importance for European industry.

Negative examples ▪

In view of the manifold current geopolitical and geoeconomic upheavals, Europe needs a positive trading agenda that strikes a good balance between trade control as well as trade defense measures and the opening of new procurement and target markets. The recently published European Economic Security Strategy falls short of that mark. A forward-looking economic policy must form an integral component of the EU’s strategy to protect the economy and motivate it to deepen economic relations with both old and new partners.

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The EU has so far not succeeded in tapping into the full potential of the Global Gateway as a central tool for diversification and new strategic partnerships. The presentation of the first lighthouse projects and the prospect of guarantees with a total volume of up to 300 billion euros until 2027 were important steps. Progress in the implementation of concrete projects has however been minimal, with the communication of available platforms and precise project stipulations often being the stumbling blocks.

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The security and defence policy measures designed to strengthen the role of Europe on the global stage with actions such as the Permanent Structured Cooperation (PESCO) on security and defence matters and the European Defence Fund have so far fallen short of expectations, mired by inappropriate processes and decisions motivated by political needs too often. These mistakes must not be repeated in the running or upcoming projects such as the European defence industry reinforcement through common procurement act (EDIRPA), the Act in Support of Ammunition Production (ASAP) and the planned European Defence Investment Programme (EDIP) and European Defence Industry Strategy (EDIS).

Recommendations for the legislative term 2024-2029 EU external economic relations policy ▪

Find a new balance between sustainability requirements and strategic economic interests in FTA negotiations. To support the diversification of supply chains, the EU should provide more incentives for dynamic economic relations with developing and emerging countries in the role of equal partners. In its FTA negotiations, the EU should focus primarily on finding pragmatic and innovative solutions to meeting its ambitious targets on the environment, human rights and working conditions. This would put the EU in a position to complete agreements with partners including the Mercosur countries, India and Indonesia.

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Launch new initiatives for trade and investment. As rules-based trading under the WTO has faltered, the EU should take on a leading role in strengthening the multilateral trading system. The Free and Fair Trade and Investment Club proposed by the Business7 group (B7) under the Japanese presidency and centred on the G7 members and the EU, could serve as a blueprint for a high-level framework for trade and investment. The Club should be open to all countries and regions that agree to meet certain criteria within a certain period. In return, every club member is encouraged to grant national treatment to the other members as far as possible. The strategic

Meeting European challenges – with a competitive industry

objective of such a club should be to offer an attractive trading and investment policy option, particularly to all countries outside the G7 that could constitute important partners. Diversification and rules-based trading need a clear signal that the aim is shared, sustainable and global growth. For this reason, it is of decisive importance that Europe intensifies its efforts to engage with the emerging and developing countries. ▪

Speed up implementation of Global Gateway projects. The planned Business Advisory Group should work towards improving the funds available to Global Gateway. In view of the current migration situation, Africa and the Levant region should receive much greater economic support and internal connections through green transition and digitalisation projects. Latin America and the Caribbean should also be more strongly involved in the award of infrastructure projects.

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Make the EU-US TTC resilient against political shifts. The EU should encourage the TTC to produce more concrete results, such as the development of shared standards for new technologies or the conclusion of further agreements on the mutual recognition of conformity assessments. This is not only important to guard the interests of all participants, but primarily to make the TTC as resilient as possible against political shifts on both sides of the Atlantic.

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A common European stance vis-à-vis China. The German federal government’s China strategy underlined the European consensus on its role as a cooperation partner, competitor, and systemic rival and confirmed Germany’s view that a common European stance on China is essential. The European Commission must step up its efforts to forge a common European policy on China and achieve closer coordination among member states on issues relating to China to bring the EU into a competitive and forward-looking position.

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Adjust to the increased geostrategic significance of Africa. Closer cooperation between Europe and Africa is strategically important for both German and European industry. The goal is to be strong on the global markets and counter unilateral dependencies through broad diversification. The EU should strengthen the African Continental Free Trade Area. Europe should also very swiftly forge sustainable raw materials alliances with African partners. Another key area is tapping Africa’s huge potential for the production of green hydrogen to the benefit of both sides. European enterprises are well positioned here as technology leaders in several areas of the hydrogen value chain. This can help African countries to speed up their own industrialisation. Finally, Europe and Africa should take advantage of the emerging trends in industries such as aerospace to drive a development policy that focuses more on innovation and the free market economy.

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Take on a leading role in the rebuilding of Ukraine. The stabilisation of Ukraine is decisive for the security and credibility of the EU. The EU must take clear leadership in the reconstruction of Ukraine, especially given possible political changes in the United States. Legal certainty within the country must be strengthened together with tools to involve and activate private capital. Establishing a Business Advisory Council (BAC) with the incorporation of European business associations and enterprises which can then serve as the framework for a structured exchange between policymakers and business leaders could prove to be a critical component of a successful reconstruction process.

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Not business as usual nor burning all bridges with Russia. It is not conceivable as things stand for relations with Russia to return to normal. In areas where dependencies on Russia still prevail, the EU should firmly invest in alternative supply source options. At the same time, the EU should be more proactive in seeking dialogue with the European-focused Russian opposition and communicate more clearly and forcefully that a democratic Russia could return to being a member

Meeting European challenges – with a competitive industry

of the European family. Existing contacts, particularly in business areas in which the EU remains interested in cooperating with Russia (e.g., climate protection and agriculture), can be retained without violating any of the sanctions in place. European enterprises that are still operating in Russia but adhering to all sanctions in place must not be discriminated. It is not in the interests of the EU that all the positions in the Russian economy are taken up by investors from countries that do not share the values of the EU. Enterprises that decide to withdraw from Russia should without exception be granted access to consulting options. ▪

Create more efficient EU structures for sanctions. The EU sanctions packages against Russia have shown that the EU needs a more efficient structure, similar to the US Office of Foreign Assets Control (OFAC) to ensure a uniform implementation of EU sanctions and swift clarification of unresolved questions.

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Drive a more proactive EU neighbourhood policy. A more successful EU neighbourhood policy is a key component of peace and economic prosperity in Europe and geopolitical stability. It is thus of fundamental importance that the EU invests, for example, in its relations with its Eastern neighbours (through e.g., Global Gateway investments), and increases incentives to adopt EU standards and the rules of the EU internal market.

EU security and defence policy ▪

Accelerate the pace of production of defence goods. Most processes in Europe, from planning to procurement to production and operation, are still running in peace mode. For all urgently needed defence goods, the administrative processes on all levels and at all stages from the award to the fulfilment of contracts must be accelerated rigorously, including for the planning, construction, and operation of production facilities.

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Secure funding for the defence industry. Access to funding is essential to ramp up production and for economic activity in general, particularly in the case of small and medium-sized enterprises along the supply chain. The member states should secure the defence industry’s access to funding via their national promotional banks and enable the European Investment Bank (EIB) to finance the most important defence activities. The EU should also send out a clear political signal to the financial market that security – which also includes defence capabilities – is a prerequisite for sustainability and therefore in line with ESG standards. In this respect the Joint Statement of the defence ministers for strengthening the defence sector´s access to finance is a good first step but needs to be underpinned in the long term.

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Fostering joint procurement of defence goods in collaboration with industry. In view of the uncertainties around the Russian war of aggression against Ukraine and the difficulties regarding the availability of defence capabilities, it should swiftly be examined whether the EU and its member states could take a similar approach to that of the joint procurement of munition for Ukraine for the joint procurement of other defence goods, and what optimization is required. Moreover, it is recommended to develop, communicate, and harmonize procurement plans at an early stage to shorten production lead times.

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Better implementation of the demand for capabilities in procurement projects. The coordination of the European toolbox, the capability planning processes of the EU and NATO and the planning processes of the member states needs to be improved. This applies primarily to proposals regarding joint defence planning, programmes and procurement.

Meeting European challenges – with a competitive industry

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Step up European investment in defence. To ensure targeted investment in military and technological capabilities, member states must allocate at least two percent of their GDP to defence. Supplementary the EU should review its budget, proceedings and actions for security and defence in its Multiannual Financial Framework (MFF) for better efficiency. The EU should incentivise joint procurements in order to successfully meet current demands and to promote the harmonization of demand across Europe.

EU space policy ▪

Make EU space policy more ambitious, courageous and faster. The EU should primarily take the role of anchor customer and directly award contracts to space enterprises. This also means including industry to a greater extent along the whole value chain – from system houses to midcaps to SMEs and start-ups. The access of NewSpace enterprises, above all SMEs and start-ups, to EU programmes must be facilitated in order to promote innovation and stimulate competition.

Meeting European challenges – with a competitive industry

2. Strengthening the EU internal market in response to fiercer global competition The EU internal market is at risk of falling further behind in the international competition to attract business and investment. Three decades after entering into force, the internal market is still a patchwork construction. This is true of both the conventional internal market (goods and services) and all other areas (e.g., the digital sector, see Section 4) and energy (see Section 7). Enterprises, above all start-ups, SMEs and mid-caps, find it difficult to expand and grow beyond national borders due to a large number of obstacles. However, it is precisely a broad-based industry and enterprise landscape that would increase the resilience of Germany and Europe in the face of global competition and secure dynamic competitive advantages for industry. Entrepreneurial ecosystems, clusters and network structures that withstand continuous assessment and can adjust to dynamic change are enormously valuable for pooling competence and allowing synergies – and thus competitive edges – to develop. As things stand, however, many enterprises of all sizes, industries and regions that would actually prefer to stay are considering relocating or are already busy doing so. There is a growing danger that economic ecosystems and structures will fragment as investment in the business location thins, or even fizzles out. As a result of this erosion of differentiated corporate structures, efficient value creation networks, which form the very foundation of industry’s resilience and competitiveness, could fall apart. The required pan-European infrastructure is all too often still not in place to allow the value hubs distributed across the EU internal market to interact efficiently. Instead, the EU is subjecting enterprises to an endless stream of sometimes badly formulated legal regulations that create a considerable administrative burden. EU tax law serves as a good example to show the current deficits of the internal market. Enterprises operating in the EU still have to deal with 27 different corporate tax systems. They are also confronted with excessive administrative obligations and forced to grapple with an almost impenetrable mass of overlapping and unclearly formulated antiabuse tax provisions and reporting duties. In the global competition with the United States and China to attract business and investment, it is not only important to have investment-friendly tax regulations but also forward-looking competition law. Clear competition rules and effective oversight by European and national competition authorities are obviously important, but at the same time, European competition law must not result in disproportionate competitive disadvantages for European enterprises on the global level. The EU must set down a legally certain framework for the green and digital transitions.

The growth potential of the internal market

Source: European Commission

According to European Commission estimates, the dismantlement of national barriers for goods and services in the EU internal market could lead to a financial gain of 713 billion euros until the end of 2029.

Meeting European challenges – with a competitive industry

Review of the legislative term 2019-2024 Positive examples ▪

The European Commission has launched useful initiatives to improve legislative procedures and reduce regulatory duties. These include the introduction of the one-in-one-out principle for all new regulatory initiatives, the introduction of a competitiveness check for all policy initiatives and legislative proposals, and the announcement on reducing the reporting duties under EU legislation by 25 percent. Concrete results are still pending.

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The review of the antitrust block exemption regulations was a major step forward in modernising competition rules, e.g., regarding the rules for business cooperations on sustainability. The treatment of efficiency gains and consumer benefits however still lacks legal certainty, which could lead to a chilling effect on private-sector sustainability initiatives.

Negative examples ▪

The European Commission has not managed to provide any significant impetus towards deepening the internal market. For example, 60 percent of the barriers for cross-border provision of services remain as they were 20 years ago, including regulatory divergence, high administrative burdens, a lack of information, and closed-off markets.

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The EU institutions have adopted directives to combat “harmful” tax competition and profit shifting to low-tax countries in unprecedentedly quick succession. There was no time for individual measures to be implemented across the board, and for their effects to be observed and evaluated before the next piece of legislation was launched. Furthermore, in many cases the European stipulations in tax legislation are not being transcribed into national law on a uniform basis which, in turn, produces tax barriers that compound cross-border business operations.

Recommendations for the legislative term 2024-2029 European internal market ▪

Deepen the internal market as a top EU policy priority. The completion of the EU internal market across all areas must be reinstated as a priority project in preparing the EU for the future. This also includes making adjustments in the structure and working method of the European Commission, in particular better coordination.

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Pass EU legislation that promotes the internal market. The golden rule for EU policymaking should be that every new regulation must promote cross-border business activity.

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Europeanise national markets. EU member states must swiftly open their national markets in accordance with the country-specific recommendations of the European Commission. National sensitivities can no longer stand in the way of deepening the internal market. EU member states should always transpose EU legislation into national law letter for letter.

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Penalise incomplete transposition of EU law more heavily. The European Commission must penalise incomplete transposition of EU law in the individual EU member states. Political considerations must not be allowed to enter the equation here. The European Commission should initiate infringement proceedings with greater resolve to better combat violations of EU law.

Meeting European challenges – with a competitive industry

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Take account of connections between industry and services. We call upon EU member states to finally implement the EU’s Services Directive in full. The EU should also reform the notification procedure for new regulatory measures affecting services and strengthen the application of the proportionality test. The EU must facilitate the cross-border posting of staff.

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Refrain from reducing the scope of internal market rules. We oppose calls that have been made in some parts to increase the threshold values of the EU directives for public contracts as this would lead to a setback in market liberalisation, transparency and the required effective legal remedies regarding the award of public contracts. The same applies to calls for expanded exemptions of procurement law and a reduction of legal remedies in public procurement.

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Resolutely apply the New Legislative Framework (NLF). The NLF is designed to enable products to be sold without constraint across Europe. In practice, however, a patchy and inconsistent application of the NLF has resulted in a widespread lack of coherence among the various legal regulations. This has a negative impact on industry’s ability to offer and sell products on the European internal market. We will only succeed in constructing a smooth, modern and competitive internal market if the NLF is implemented consistently across the board.

Better legislation and less bureaucracy ▪

Ensure evidence-based legislation. Every legislative proposal must be accompanied by an extensive impact assessment to investigate the potential economic, ecological and social consequences in equal measure and to review the options in a neutral and fact-based way.

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Take better account of stakeholder positions. Relevant and representative stakeholders must be given adequate opportunity to become meaningfully involved both in the drawing up of legislative initiatives and in their subsequent review.

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Introduce a competitiveness check. The competitiveness check announced by the European Commission must become an integral component of every legislative initiative at EU level. As well as being applied to individual legislative proposals, the competitiveness check should also be applied at all levels of EU policymaking and incorporate an assessment of the cumulative impact of all the different policies and regulatory measures on the competitiveness of the EU.

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Ensure better legislation throughout the entire policymaking cycle. The European Parliament and the Council should conduct supplementary impact assessments on the changes they make to the content of Commission proposals. EU institutions must also urgently improve the transparency of their trilogues.

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Tighter monitoring of delegated acts. When drawing up delegated acts, the legislator should better define the scope and conditions of the powers assigned to the European Commission in the basic act.

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Effective implementation of the one-in-one-out rule. The one-in-one-out rule (OIOO) is a positive step in the right direction but is not sufficient to counter the steadily rising costs and duties imposed on enterprises. OIOO should balance out both the administrative costs and the administrative effort involved.

Meeting European challenges – with a competitive industry

EU SME policy ▪

Embed a “think SME first” mentality. SMEs and family-owned businesses need to be put firmly back on the EU agenda in terms of cutting red tape and providing targeted support. Alongside less bureaucracy, better coordination of the implementation of the EU strategies for industry, foreign trade, SMEs and the Green Deal is required.

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Secure financial support. The EU’s Multiannual Financial Framework (MFF) should be based on measures to strengthen entrepreneurial competitiveness. The objective must be to enable SMEs to access EU funding schemes with minimal bureaucracy.

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Address target groups clearly. To enable effectively targeted policy, the financial thresholds of the SME definition should be adjusted to take account of the dramatic price developments. Additionally, mid-caps should be established as a separate category alongside SMEs. In operational terms, it would be helpful to appoint a convincing SME envoy in the European Commission and put the role to effective use across all Directorates-General.

EU competition policy ▪

Take account of new geopolitical environment in market analysis. The European Commission should take a forward-looking perspective in its market analysis of competition law and take greater account of the global competitive environment, the dynamic development of markets and the potential market entry of other enterprises when defining the market.

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Avoid expanding the enforcement toolbox. There are no structural competition problems or legal gaps that would justify the European Commission introducing new enforcement tools – for example by restarting the debate on the so-called New Competition Tool.

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Keep antitrust and merger control proceedings proportionate and legally certain. As the administrative work for enterprises involved in merger control and antitrust proceedings to supply the information required by the European Commission is considerable, requests for information by the European Commission should always follow the principle of proportionality. The announced revision of the antitrust procedural rules must not diminish enterprises’ rights of defence. In the event of planned mergers, enterprises must be able to know in advance and with legal certainty whether the European Commission will review the case or not.

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Pragmatically implement the International Procurement Instrument and Foreign Subsidies Instrument. The EU must protect European Industry from distortions of competition that are caused by the sealing-off of procurement markets in third countries or by unjustified subsidies from third countries that are granted for operations in the EU internal market. New EU instruments such as the International Procurement Instrument (IPI) and the Foreign Subsidies Instrument (FSI) play an important role. However, the application of these instruments should not lead to new excessive bureaucratic burden.

EU tax policy ▪

Evaluate tax compliance duties. The EU has created numerous new compliance duties for enterprises under its tax legislation that translate into an enormous workload and thus urgently need to be evaluated, harmonised and reduced.

Meeting European challenges – with a competitive industry

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Develop overall concept for growth-friendly corporate taxation. The EU should use the entry into force of the global minimum tax rate on 1 January 2024 as an opportunity to develop an overall concept for corporate taxation, evaluate current anti-abuse provisions and cut out any unnecessary provisions. To facilitate cross-border operations, greater focus must be placed on simplifying tax legislation. This expressly also applies to the directive proposal presented on 12 September 2023 on the introduction of an EU-wide, common corporate tax system (BEFIT, Business in Europe: Framework for Income Taxation). The option outlined in the proposal for cross-border loss relief would be an important lever to promote economic activity across borders and thus boost growth and employment in Europe. In view of the highly complex European tax legislation, the BEFIT Initiative must be simplified and aligned with the global minimum tax and special rules at the national level such as German trade tax to prevent inconsistencies and new complexities. The BDI opposes a mandatory introduction of BEFIT.

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Regulate cross-border mobile working with legal certainty. The EU should work on legally certain regulations in collaboration with international partners such as OECD to resolve the tax issues of mobile working in a cross-border context for both enterprises and employees.

Transport infrastructure ▪

Conduct an ambitious review of the Combined Transport Directive. EU institutions should more clearly formulate the provisions of the directive to support investment in transshipment facilities for combined transport in order to prevent individual member states from implementing divergent regulations. Greater harmonisation does not need to mean less ambitious provisions and should not detract from the privileges and thus the appeal of combined transport.

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Get the European rail mobility strategy on track. Industry supports the objective stated in the European mobility strategy to shift freight to rail. Capacity-increasing smaller and medium-scale measures such as additional switches and tracks will be decisive in meeting this objective and relieving the burden on the European rail network. Further important steps are the safeguarding and strengthening of wagonload freight and the introduction of the Digital Automatic Coupling (DAC) across Europe. Current initiatives need to be bundled alongside a broadly based DAC investment and migration strategy that is appropriate for the market and coordinated at the European level. Further measures are also necessary to optimise the management and coordination of infrastructure capacities. The EU institutions should also create the infrastructural conditions to ensure an uninterrupted handling of 740-metre trains across the European rail network.

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Optimise air traffic management. An ambitious Single European Sky (SES) enables climateoptimised flight routes and fuel savings while creating additional capacities in European airspace. The ambitious development of the SES must therefore remain a top priority.

Meeting European challenges – with a competitive industry

3. Securing the financing of strategic forward-looking investments The EU heads of state and government have identified many areas over the last years where strategic investments are needed to boost the technological competitiveness of European industry, to increase strategic resilience – particularly to reduce high-risk dependencies on the People’s Republic of China – and to meet its ambitious climate protection targets. But a clear-cut programme has only been developed in a few of these areas. For example, the EU’s Multiannual Financial Framework 2021-2027 and the Next Generation EU programme (NGEU) have set the course for higher public investment in climate protection and resilience. In the wake of the Covid pandemic and Russia’s war of aggression against Ukraine, the focus has shifted to strategic sovereignty and economic security, which is to be promoted through various EU schemes on energy policy, raw materials supplies, strategic industries and the pharmaceutical industry. The EU has so far, however, failed to come up with consistent and extensive programmes for the transformation of industry and digital technologies and to strengthen security and defence capabilities. The consequences of the turnaround in security policy and the climate policy targets are currently still being addressed largely through national recovery and resilience plans focused on public investment and national subsidies. The Green Deal, the prerequisites for the digital transition, the economic upheavals caused by the Covid crisis and the Ukraine war have all placed a spotlight on European state aid law and led to considerable amendments to the legal framework for state aid. In this period of historic transformation, state aid law must reliably support European enterprises as they strive for future viability and competitiveness. A high level of state aid discipline at the national level and effective oversight of state aid are essential for the EU internal market. In the medium and long term, the economic viability of a project is required in order to be eligible for any kind of state support or funding.

Review of the legislative term 2019-2024 Positive examples ▪

Regarding state aid law, the European Commission demonstrated its ability to take swift action by adopting temporary crisis frameworks for State Aid to cushion the economic impact of the Covid pandemic and the Ukraine war, thus enabling member states to rapidly and flexibly implement large-volume aid packages to support European enterprises. With the Green Deal Industrial Plan and the Temporary Crisis and Transition Framework for state aid, the European Commission has succeeded in expanding the funding landscape available for energy and climate-related technologies. While the Green Plan Industrial Plan does not set out specific funding measures, the Temporary Crisis and Transition Framework opens up further options in many areas.

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Major pieces of legislation have been reviewed during the current legislative term, particularly in terms of the digital and green transitions. These include, among others, guidelines on state aid for energy, climate and environmental protection and the new framework for state aid for research, development and innovation. The expansion of the General Block Exemption Regulation was also an important step forward as it means that the European Commission does not need to be notified of a large proportion of state aid granted by individual member states.

Meeting European challenges – with a competitive industry

Negative examples ▪

EU support of strategic investment in the EU has not progressed beyond initial efforts, despite the many strategic guidelines published by the European Council and in-depth studies by the European Commission. The explicit funding of strategic investment has so far mostly been limited to Important Projects of Common European Interest (IPCEIs) in the areas of microelectronics, batteries, cloud and communication technologies as well as hydrogen. Moreover, compared to the competing regions of North America and China, the volumes of funding are quite low with only single digit billions earmarked per technology area. Strictly speaking, these measures also constitute national state aid within an EU-level legal framework, as hardly any funds from an EU budget or any of its satellite systems have been channelled into these funding measures so far, apart from loans from the European Investment Bank (EIB).

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European Commission proposals for a Net-Zero Industry Act (NZIA) and a Critical Raw Materials Act (CRMA) set ambitious targets but do not contain concrete proposals for financing instruments. In both these areas the volume of required funding is high, and the pressure is mounting to take swift action in view of the high funding allocated in other countries.

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In the course of its mid-term review of the MFF, the European Commission proposed reallocating ten billion euros of funds to the funding of strategic technology projects (Strategic Technologies for Europe Platform, STEP) rather than setting up a European Sovereignty Fund with a volume in the three-digit billion range as initially planned.

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The EU Chips Act is designed to strengthen the sovereignty of Europe. The Chips for Europe initiative earmark public investment of eleven billion euros from EU funds and 40 billion euros overall for the financing of research and development until 2030. This is likely to be too little to achieve the set target of producing 20 percent of value added in the EU by 2030 (current level is around nine percent).

Recommendations for the legislative term 2024-2029 European funding programmes ▪

Strengthen EU support for private investment. In view of the intensified international competition for technology leadership and in the production of key technologies for the green and digital transition, European support of private investment in these areas must be swifter, simpler, more flexible and higher in volume. This applies especially to the hydrogen economy and battery technologies.

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Embed transformation of the economy more strongly in EU economic policy. The transformation of the economy and maintaining industrial competitiveness must be more firmly anchored in the economic policy measures of the EU using the corresponding industrial policy instruments. In the internal market, EU institutions must establish lead markets and support them with a wide-ranging toolbox of standard setting, internal market legislation and contracting.

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Guarantee financing of key strategic and security policy projects. For key security policy and strategic projects, the EU must set down policy guidelines to provide economic security, develop a systematic needs analysis, adopt suitable packages to meet these targets and set incentives for private investment in resilience, particularly in areas where the market would not automatically generate such incentives. Current financing instruments will need to be stepped up or new ones

Meeting European challenges – with a competitive industry

created for this purpose. The European Commission has initiated this kind of review process at least in part with its proposal on economic security. The EU will only be able to establish a comprehensive programme for key security and strategic projects in the EU’s new Multiannual Financial Framework. Covering this area using only current cohesion, innovation and internal market schemes will certainly not be sufficient. ▪

Strengthen budget-financed EU programmes. Loan-financed transition solutions such as the NGEU should be replaced with budget-financed programmes. The EU must be clear about the fact that these public tasks are better and more efficiently tackled at EU level. The issue of financing must also be proactively addressed and obviously not just the EU budget but all financing channels of the EU (and its member states) should be incorporated, including the EIB, InvestEU and the Innovation Fund.

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Accelerate integration of financial markets. EU institutions should finally take resolute action towards achieving a fundamental deepening of the integration of financial markets by realising the Banking Union and the Capital Markets Union. The introduction of a digital euro could and should be on the agenda here in the medium term to pave the way for greater efficiency in payment transactions.

EU state aid law ▪

Improve the IPCEI procedure. IPCEIs are an important instrument for safeguarding European competitiveness and technological sovereignty and promoting innovations driven by the market. Authorisation procedures in this area must be simplified and accelerated. The European Commission should make sufficient capacities available. The IPCEI processes in the individual member states are currently uncoordinated in terms of timing and tend to take place in several waves. Better coordination is urgently needed here, also in the preregistration and notification phases.

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Regular review of temporary regulations for state aid. The measures under the temporary crisis and transition framework must be reviewed regularly to ensure they are still up-to-date and necessary. Further amendments may be required depending on economic developments and future electricity and gas prices.

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Accelerate state aid procedures. Germany is one of the world leaders in research and innovation. However, the global competition for innovative processes and products is intensifying and the time span between research and market launch is shortening for many products. Time is a key factor in efforts to consolidate or maintain competitive leads. State aid review proceedings should therefore be conducted swiftly so as not to unnecessarily delay the time-to-market of research and innovation projects. This includes faster processing of applications, digitalised userfriendly processes and the ability to quickly find suitable funding programmes for new technologies.

Meeting European challenges – with a competitive industry

4. Catching up on digitalisation and closing innovation gaps The level of digitalisation among European enterprises remains low. Only 28 percent of enterprises in Germany count as highly digitalised, while 72 percent are categorised as less digitalised. Grey areas in the legislation of data use, the acute shortage of skilled labour, a lack of data spaces and standards are all factors hampering the digital transformation of companies. The innovation gap between the EU and its international competitors is growing. The innovation capability of Germany is also stagnating, as revealed by BDI’s Innovation Indicator 2023, where Germany again only ranked tenth among 34 industrialised and emerging countries. The gap between Germany and the global leaders is considerable, with problems in innovation transfer, the shortage of skilled labour, low venture capital investment, and the low number of companies conducting basic research all stifling Germany’s progress in innovation. While the country’s innovation system remains stable, it lacks momentum. Further factors impeding the transformation of industry are the plethora of European digital and innovation regulations that companies are obliged to implement as well as the lack of support for innovation targeted at maintaining and consolidating the digital sovereignty of Europe. In the current legislative term, an extensive set of legislative acts have been developed to govern the digital sector, including the Artificial Intelligence Act (AI Act), the Data Act, the Chips Act, the amended cybersecurity directive NIS2, the Cyber Resilience Act, the Digital Services Act (DAS), the Data Governance Act, the Gigabit Infrastructure Act, the 5G Toolbox and the Digital Markets Act (DMA). This regulatory framework has far-reaching implications for business processes and the development of new digital business models. Many of the legislative acts listed above have only been adopted recently or are still in trilogue so it is too early to assess their impact. However, enterprises are certainly facing considerable additional paperwork considering the sheer volume of new regulatory requirements. To ensure compliance, businesses have to appoint specialised staff, which represents an additional challenge in view of the shortage of skilled workers.

Meeting European challenges – with a competitive industry

Companies that use AI technology (% of companies) As of 2021 30

0 DK PT FI LU NL SI DE BE MT SE HR AT ES IE EU FR IT SK CZ EL LV LT BG CY HU PL RO Source: Eurostat, EU survey on the use of ICT and electronic trading among companies.

Europe is still far behind its set targets regarding the use of artificial intelligence – while the European Commission is aiming to bring the proportion of companies using artificial intelligence to three out of four by 2030, it is currently at eight percent across Europe (large companies: 29%; SMEs: 7%). The shortage of skilled workers and concrete use cases as well as inadequate data management, data quality and legal uncertainties in the use of data represent the main obstacles to increased digitalisation.

Review of the legislative term 2019-2024 Positive example ▪

German industry regards digital and innovation policy regulations and support initiatives as a tried and tested method for the rules-based deepening of the digital internal market. The Chips Act, for example, is a necessary addition to maintaining the future viability of Europe as a location to produce semiconductors. The introduction of horizontal cybersecurity requirements for all products with digital elements in the Cyber Resilience Act is a major step towards strengthening Europe’s cyber resilience and supporting companies in the implementation of the requirements emanating from the NIS 2 Directive.

Negative examples ▪

The EU was much too hesitant in investing in Europe’s digital sovereignty. The European Commission repeatedly announced new measures but failed to back these with adequate “fresh” capital. The financing in each case was a reallocation from existing innovation budgets, such as from the EU framework programme for research and innovation Horizon Europe to the EU Chips Acts.

Meeting European challenges – with a competitive industry

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Many of the digital policy measures adopted by the EU only represent meagre contributions to strengthening Europe’s resilience and future viability. In fact, the EU Data Act exacerbates the current legal uncertainty in the processing of data and threatens to undermine the protection of trade secrets without tangibly improving innovation policy. Instead of the undifferentiated, one-sizefits-all approach taken, it would have been better to look at data use in the individual industries and take greater account of the unique aspects of each sector. The excessive reporting requirements set out in the NIS 2 Directive will unnecessarily tie up the few available cybersecurity staff without really strengthening the cyber resilience of companies. The EU general data protection regulation (GDPR) makes it more difficult for companies to use and share personal data in different locations since the implemented protection measures are evaluated differently by the various data protection authorities in charge. The results of the negotiations on the AI Act so far also show that in generative AI, for example, the risks of this technology are given much greater weight than the opportunities.

Recommendations for the legislative term 2024-2029 ▪

Limit digital policy regulation to the absolute minimum. Rather than immediately trying to regulate new technologies, the EU urgently needs to strengthen the technological openness of society, invest in competences and the training of skilled workers, and provide targeted support for the development of new, innovative technologies. The European Commission should now give the numerous digital policy measures it has adopted time to take effect and develop – in close collaboration with industry – unbureaucratic implementation concepts tailored to industrial practice within the framework of implementing acts.

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Enable better data usage in Europe. The EU should advance the development of EU data spaces. It should refrain from introducing any additional regulations, and instead critically evaluate and adapt the recent EU legislative acts.

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Create a legally certain basis for the use of data. The consulting services provided by the European data protection authorities to companies should be improved and more assistance offered for practical implementation. Efforts should be made to ensure that the GDPR is interpreted as uniformly as possible across Europe. In the case of the transatlantic sharing of data, a permanently legally certain adequacy decision is urgently required for the transfer of personal data. Further adequacy decisions are needed for the transfer of personal data to other third countries.

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Strengthen innovation in artificial intelligence. The focus here should be on measures that foster innovation such as regulatory sandboxes. In addition, compliance duties for high-risk applications should be swift, low-cost and unbureaucratic for SMEs and start-ups.

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Drive implementation of the EU Chips Act. The process for obtaining subsidies needs to be more transparent and manageable for companies of all sizes. On the governance side, the EU Semiconductor Board must be capable of performing its duties as an advisory council and be available and accessible to companies seeking to get involved. Furthermore, the process of building strategic and technological sovereignty and meeting the 20% production target set by the EU must be tackled not just with the EU Chips Act but also by combating the shortage of skilled workers and by finally launching the projects under the Important Project of Common European Interest (IPCEI) Microelectronics II.

Meeting European challenges – with a competitive industry

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Avoid innovation-stifling regulation of the industrial metaverse. The concrete use cases of the industrial metaverse are still in the early development phase. European enterprises are currently investing extensively in research and development activities to unify current technologies into a completely matured industrial metaverse. For this reason, imposing regulation at this stage would be nipping innovation in the bud.

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Implement DMA and let it take effect. The focus here should lie on clear stipulations and procedural steps for enterprises and on effective enforcement. Further regulatory measures for the platform economy beyond the DMA are currently not needed, particularly as the DMA has only been in binding effect as of 2 May 2023.

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Strengthen Horizon Europe. The EU should equip Horizon Europe with adequate new funds to ensure its sustained support of innovative research projects. Additional financial resources are needed to fuel scientific progress and support industry’s innovation capability. Mission-oriented and evaluated project funding is needed to ensure that all stakeholders in society are united in achieving the overarching goals.

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Business-friendly implementation of cybersecurity. The European Commission must ensure that the NIS 2 Directive is implemented uniformly across Europe and that companies operating across the EU only have to submit incident reports once. The European Commission also needs to support industry in the implementation of the Cyber Resilience Act with a timely publication of the necessary standardisation mandates.

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Refrain from developing further cybersecurity certification schemes after the Cybersecurity Act. Under the Cyber Resilience Act, all products with digital elements will need to fulfil riskadequate cybersecurity requirements. The development of cybersecurity requirements for individual product groups within the framework of the Cybersecurity Act (CSA) is therefore no longer necessary and such plans should be abolished for the sake of regulatory clarity. Development processes that are already underway should exclusively define technical security requirements and work in close collaboration with industry.

Meeting European challenges – with a competitive industry

5. Managing cross-border health risks efficiently The Covid pandemic starkly showed the severe impact that health risks can have on the economy. In the wake of the pandemic, many European countries suffered a deep recession. Lockdown measures and disruptions to trading led to a considerable drop-in economic activity. Many companies had to shut down or curtail their operations, triggering a loss of jobs and insolvencies. The uncertain environment also meant that much investment was suspended. Consumer spending decreased due to the uncertainties and the restrictions. Global supply chains were disrupted, with travel restrictions and closures impeding the flow of exports and imports.

Added value lost in Germany through pandemic and war Annual and quarterly losses in real gross domestic product 1 in billion euros

1Development of real GDP: comparison to development without pandemic and war; figures are rounded up.

Source: Michael Grömmling, 2022, Ökonomische Verluste in Deutschland durch Pandemie und Krieg, IW Kurzbericht no. 91.

The economic costs for Europe of the direct burdens of the pandemic and its consequences were high. In Germany alone, value added without these impacts would have been 300 billion euros higher overall from 2020 to 2021, according to German Economic Institute (IW) estimates. In 2022, the Ukraine war put additional pressure on the economy while the losses from the Covid pandemic were also still tangible.

Meeting European challenges – with a competitive industry

Review of the legislative term 2019-2024 Positive examples ▪

The EU has adopted various initiatives to better manage future health risks. These include building a European Health Union and the EU Global Health Strategy 2022-2030 to improve coordination and collaboration in public healthcare through measures such as improved early warning systems, the provision of information and best practice processes, and the sharing of health data.

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The EU has also announced that it will increase investment in the healthcare sector to make healthcare systems more resilient and better prepared for future crises. Investments are planned in medical research, the development of vaccines and treatments, strengthening the healthcare infrastructure and the training of medical staff. These announcements must now be turned into action.

Negative examples ▪

The EU has introduced regulations that burden the healthcare industry and weaken its ability to contribute to preventing and containing health risks with innovative medical solutions. The medical technology industry is suffering under the impact of the EU Medical Device Regulation (MDR) and the EU In Vitro Diagnostic Medical Devices Regulation (IVDR). Well-proven products have been withdrawn, incentives to develop niche products are missing, and innovation momentum is being stifled. Enterprises are migrating to the United States or Asia before they have even considered marketing their products in Europe. At the same time, the revised package of pharmaceutical legislation released by the European Commission curbs the innovative strength and competitiveness of pharmaceutical manufacturers. The all-important issue is the length of market exclusivity. Shortening this period of protection for new medicines will lead to a deterioration of the current situation and jeopardise the future of investment and innovation in Europe.

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In general, we welcome the objective of the Commission’s proposal for a Single Market Emergency Instrument (SMEI) to ensure that the internal market continues to function during a crisis. Parts of the proposal are too broad in scope and some of the powers of intervention included are far too extensive and must be cut in the further legislative process. This applies above all to the planned request for information that the European Commission can, in some circumstances, oblige enterprises and business associations to comply with.

Recommendations for the legislative term 2024-2029 EU healthcare policy ▪

Strengthen the industrial healthcare sector. Enterprises in the industrial healthcare sector need planning and legal certainty and a favourable environment for their investment decisions. The European legislator must establish a legal framework that takes account of the individual structure of the industry and makes Europe competitive as a business location for the healthcare sector and fit for the future. Necessary factors include strengthening resilience and supply chains, incentives for innovation and digitalisation, less bureaucracy and simplified recognition procedures for needed skilled workers.

Meeting European challenges – with a competitive industry

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Revise MDR. Extending the MDR transition period was sensible and necessary but has still left some implementation issues unresolved. The problems with the contents of the MDR must also be resolved and requirements, interpretations and processes further adapted. An evaluation of the MDR is scheduled in the regulation itself for 2027. This evaluation should definitely take place earlier.

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Use the EU pharmaceutical package as an opportunity in global competition for innovation and investment. The European Commission must urgently further revise the EU package on pharmaceutical legislation to establish a legal framework that makes research, development and production economically viable for large companies as well as SMEs. In the global competition to attract business, long-term incentives, swifter approval procedures and targeted state aid measures are the key criteria. Excessive stocking, reporting or transparency duties, on the other hand, tend to serve as a deterrent.

EU internal market ▪

Make the EU internal market resilient to crisis. Some national isolation measures within the EU during the Covid pandemic clearly showed that the EU must ensure that the single market freedoms are always upheld, even during times of emergency and crisis.

Meeting European challenges – with a competitive industry

6. Tackling climate change and environmental risks with technological innovations Europe faces the task of securing its future in a sustainable way. Climate neutrality must be achieved by the middle of this century, the natural environment preserved, and resources secured through an efficient circular economy. This presents huge challenges for enterprises. Industrial facilities need to be converted to climateneutral and low-emission production; chemicals need to be used safely; facilities are required to have as little impact on nature and biological diversity as possible while remaining interconnected within the European internal market and globally through multimodal transport and travel chains; and companies need to use resources effectively by making their products sustainable, using recycled material and avoiding or at least reducing waste. Companies have technical solutions to address all these challenges. Technological innovation is the foundation for the path to a sustainable economy and society. The European Green Deal presented by the European Commission in late 2019 is the world’s most ambitious sustainability package. Since then, the EU has adopted numerous new climate, environmental and transport policy regulations under the Green Deal that have put enormous pressure on industry to transform without offering convincing prospects for competitive production within Europe. EU climate legislation glaringly exemplifies that industrial competitiveness has been largely disregarded in the implementation of the Green Deal so far. While the United States has taken a combined approach to climate and industrial policy and provided for massive investment in technological innovation with its Inflation Reduction Act (IRA), the EU has tried to steer the transformation of the industrial sector primarily by increasing carbon prices. As a result of numerous EU initiatives, the carbon price for industrial and energy facilities under the current EU emissions trading system (ETS1), presently at just under 100 euros per ton, is set to rise significantly over the next few years. This leads to one-sided additional costs for European airlines, shipowners, airports and seaports in international competition and these competitive disadvantages will be further exacerbated by new, binding quotas for the use of sustainable fuels in air and maritime transport. The European Commission claims that the newly established Carbon Boarder Adjustment Mechanism (CBAM) will prevent carbon leakage just as effectively as the free allocation of emission trading certificates used so far, even though this is a completely new instrument and there is no experience to draw on. The impact of the new emissions trading system for heating and transport fuels (ETS2; from 2027) on the current ETS1 and on the transformation of the newly included building and road transport sectors is also entirely unknown. Overall, uncertainty is growing massively for operators who want or need to invest in new facilities and processes. To transform the mobility sector, the EU is primarily focusing on ambitious product regulation by imposing carbon fleet emission restrictions without ensuring technological neutrality or providing sufficient support in the form of charging and refuelling infrastructure. Sustainable fuels which are essential for decarbonising transport will only be available to a limited extent in the foreseeable future and to non-competitive prices in international air and maritime transport. If Europe does not finally comprehend that competitiveness is an essential prerequisite for achieving the green transition, the EU is in danger of falling behind in the global competition for climate, environment, drive and fuel technologies and will see urgently needed investments being diverted to the United States or China instead. There is a real risk that our dependency on fossil fuels will be replaced by industrial and technological dependencies.

Meeting European challenges – with a competitive industry

Historical trends and future projections for greenhouse gas emissions Million tons CO2 equivalent (Mt CO2 e)

Historical greenhouse gas emissions without land use, land use change and forestry (LULUCF) Projections with existing measures (WEM) with LULUCF Source: European Environment Agency.

In 2020, EU greenhouse gas emissions were a good 34% lower than in 1990. European emissions have been reduced by around 1.5 billion tonnes within 30 years (1990-2020). In the next ten years (2021-2030), the EU needs to reduce emissions by another 1.3 billion tonnes. This is a major challenge, particularly without Russian gas imports.

Review of the legislative term 2019-2024 Positive example ▪

The EU’s circular economy action plan was important to get the ball rolling. Initiatives such as the regulation for sustainable products are further steps in the right direction. On the downside, however, it involves a lot of work for all participants. The success of these initiatives will depend on selecting the appropriate instruments.

Meeting European challenges – with a competitive industry

Negative examples ▪

The legally binding EU climate protection regulations place an excessive burden on European industries. European industrial competitiveness is being seriously jeopardised because of the EU’s determination to force the transformation in a comparatively short space of time under the Green Deal. There is still no overriding and comprehensive industrial strategy in place at EU level, and the Net Zero Industry Act (NZIA) is unlikely to change this.

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The EU has not managed to effectively coordinate the various objectives of the Green Deal. This failure to set priorities is endangering the overall success of the project. The revisions of the Industrial Emissions Directive and the Air Quality Directive are likely to lead to more paperwork and more extensive and longwinded authorisation procedures to convert industrial facilities. This, in turn, increases the risk of failing to meet climate targets on time.

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The EU has missed the opportunity to create the prerequisites for a successful transformation of mobility through a coherent and holistic approach. Particularly problematic are the insufficient level of ambition in the expansion of refuelling and charging infrastructures that are prerequisites for alternative drive systems, an insufficient harmonisation of legislation on green fuels and carbon pricing in road transport as well as a lack of measures to preserve the competitiveness of international transport operators.

Recommendations for the legislative term 2024-2029 ▪

Strengthen production of European net-zero technologies. The EU should develop the NZIA into an industrial policy strategy whose incentives and framework conditions trigger a ramp-up of net-zero technologies and thus contribute to meeting the ambitious Green Deal targets. Investing in European projects must become more attractive through faster procedures, more favourable location costs and regulatory reliability in a technology-open approach. The challenges in the individual sectors must be met in a technologically neutral way that drives the use of green electricity and sustainable molecules (green hydrogen, sustainable fuels. etc.).

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Speed up authorisation procedures for industrial facilities. The proposed NZIA only covers a very limited group of key technologies. The EU must launch an initiative to systematically speed up authorisation procedures for industrial facilities in general and not just for these technologies to help bring about the transformation and secure the competitiveness of European industry.

EU environmental policy ▪

Review the European Green Deal in terms of its impact on Europe as a business location. The EU must review the individual components of the Green Deal to ensure they form a coherent whole. The pressing challenges involved in the climate transformation make it particularly important to set clear priorities in order to resolve the many conflicting objectives between the individual measures. This may require revising or withdrawing proposed measures such as the directives on industrial emissions and air quality.

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Strengthen the competitiveness and innovation capability of industry in Europe. It is imperative that the EU develops a strategy to strengthen the competitiveness and innovation capability of industry in Europe in order to meet the targets set in the Green Deal. This also requires

Meeting European challenges – with a competitive industry

security concerning materials. Regulations such as the proposal to restrict per- and polyfluoroalkyl substances (PFAS) work in exactly the opposite direction. ▪

Coordinate limit values for air pollutants with climate transformation measures. The feasibility of the reduction targets laid down in the air quality directive needs to be continuously reviewed and the timelines adapted in view of the climate transformation measures that have meanwhile been adopted.

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Keep value added in the EU when revising REACH. The possible revision of the REACH Regulation must be approached with care. Regulatory measures to meet ambitious targets must be designed in such a way that value added is retained within the EU. For progress to be made in innovative technologies, it must still be possible to use chemical substances provided these do not pose a risk or if these risks can be adequately contained.

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Take account of business sector contributions to maintaining biodiversity. The European Commission should launch an initiative that systematically records the measures taken by companies to protect nature and boost biodiversity. Member states should be obliged to take account of these measures under the regulation on nature restoration.

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Guarantee use of waters for business and industrial operations. The Water Framework Directive (WFD) should undergo an in-depth revision. It must be made easier for business and industrial operations to use waters. As many bodies of water will fail to meet the timeline of the targets set out in the WFD, at least three more management cycles should be added to ensure that the targets are met and that stakeholders have legal certainty.

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Close cycles and strengthen innovation in the circular economy. Legislation adopted between 2019 and 2024 has greatly changed the regulatory environment of the circular economy (e.g., EU batteries regulation, EU eco-design regulation, EU regulation on shipments of waste, EU packaging directive). In order for these legislative acts to strengthen the competition for innovation in the circular economy, a vast number of more specific acts (implementing and delegated acts) need to be developed and adopted. It is extremely important that these acts are drawn up in coordination with the relevant stakeholders from the business sector, that they take account of corporate expertise, and that coherent definitions are used throughout. This applies especially to the implementation of the new eco-design regulation.

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Better coordinate the legal areas relevant to the circular economy. Companies can only think and plan in cycles if the relevant legal areas are well coordinated. The convergencies between waste, product and material legislation are still not aligned to the circular economy approach. Product-related double regulations must be avoided at all costs.

EU climate policy ▪

Support industries with the transformation. A strategy that is based purely on high carbon prices in the EU ETS acts as a punishment for production facilities if crucial infrastructure is missing. Carbon Contracts for Difference, lead markets for green fuels and Green Public Procurement, on the other hand, can make a decisive contribution to establishing a stable framework for a successful transformation.

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Simplify access to aid measures. The funding and support landscapes for companies in the EU and the member states should be brought together and made much clearer.

Meeting European challenges – with a competitive industry

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Support ramp-up of hydrogen economy. The EU should revise contradictory regulations such as the Renewable Energy Directive III (RED III), the EU taxonomy and the EU gas package to make investing in H2 technologies worthwhile.

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Critically review CBAM. The EU should correct CBAM so as not to make the export of CBAM goods impossible through the loss of free allocation. If CBAM proves not to be a suitable mechanism to stop carbon leakage, the EU should abolish it.

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Expand H2, carbon and renewable infrastructure across borders. Important climate protection technologies such as Carbon Capture and Storage (CCS) and, particularly, Carbon Capture and Utilization (CCU) technologies are energy-intensive and therefore require sufficient amounts of renewable energy to be available at competitive prices.

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Honestly communicate the importance of innovative technologies for climate protection. The climate targets can only be met through the application of innovative technologies, so it is crucial that these are accepted by the public.

EU transport policy ▪

Correct mistakes. The European Commission must use the corrective powers ascribed to it in the review clauses. This particularly applies to the Alternative Fuels Infrastructure Regulation (AFIR), the CO2 emission performance standards for cars and vans and the regulation on the uptake of sustainable aviation fuels (ReFuelEU Aviation).

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Support the ramp-up of alternative drives and green fuels. The EU should quickly develop the charging and refuelling infrastructure for all modes of transport, drive systems and fuels across the EU. For road transport, the EU should issue clear CO2 price signals via the ETS and energy taxes on fuels under the Energy Taxation Directive (ETD).

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Strengthen collaboration with power-to-liquid (PtL) producing countries. To make sufficient volumes of eFuels available before 2030, international sustainability and quality standards, international certificate trading (book & claim) and international regulations for the crediting of sustainable fuels are required.

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Prevent carbon leakage in air and maritime transport. The EU should compensate the unilateral extra costs of sustainable fuels over fossil fuels for international air and maritime transport to prevent carbon leakage and distortions of competition. For aviation, this could be financed by converting national aviation taxes into an end target-based and earmarked European climate levy. Unilateral European measures must be continuously flanked by initiatives geared towards harmonising climate protection efforts on the international level.

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Ensure proportionality and coherence in open dossiers. The EU should take an ambitious but realistic and coordinated approach in the ongoing legislative processes on Euro 7 and the CO2 emission standards for Heavy-Duty Vehicles, while keeping their sights firmly set on the ramp-up of the charging and refuelling infrastructure.

Meeting European challenges – with a competitive industry

7. Overcoming energy scarcity and high energy prices Russia’s war of aggression against Ukraine delivered an external shock to the energy markets, sending energy prices skyrocketing, particularly for gas and electricity. This development should not be attributed to market failure. The exceptional fluctuations on the electricity market were the result of enormous price increases in primary fuels – gas in particular – due largely to political factors including the suspension of gas supplies by Russia as a geopolitical weapon, the blowing up of the Nord Stream pipeline, and the politically driven purchase of gas. The energy markets have calmed down again now, but prices remain high. Current market expectations suggest that at least in the medium term, prices for both electricity and gas will remain much higher than in the past. Electricity and gas are essential goods for modern societies, dependent on a constant supply of energy that is affordable for all sections of society and the economy. Gas and electricity are the two most important sources of energy for German industry, more than coal and crude oil or petroleum products. The enormous price increases have therefore impacted the entire value chain and all industries. Energy-intensive industries are directly affected by the price increases. They are often at the beginning of the value chain and produce intermediates that are then used by many other industries, particularly mechanical engineering and the automotive industry, both being key industries of German economy. These energy price increases represent a considerable competitive disadvantage for many industries as competitors outside of Europe have not faced comparable cost hikes. The current wholesale gas price in the United States, for example, is only around a quarter of the European wholesale price.

Industrial production: steep drop in energy-intensive industries in Germany, early 2015 = 100 Manufaturing industry (excluding construction and energy)

Energy-intensive industries

115 110 105 100 95 Energy-intensive industries: including the chemical industry, metal production and the paper industry

96,6

80 75 70 1. Jan. 2015

1. Jan. 2016

1. Jan. 2017

1. Jan. 2018

1. Jan. 2019

1. Jan. 2020

1. Jan. 2021

1. Jan. 2022

1.xDec. 2022

Meeting European challenges – with a competitive industry

Review of the legislative term 2019-2024 Positive examples ▪

Overall, the EU was unified in its response to the energy crisis by taking joint coordinated measures and making preparations such as the emergency gas plan.

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In response to the situation, the European Commission set up the Temporary Crisis Framework (TCF) to provide member states with an expanded toolbox for crisis management and transformation. In this emergency, this was an important step to mitigating the negative impact of the energy crisis on the economy and for private consumers.

Negative examples ▪

The effectiveness of the German energy price cap was hamstrung by the European Commission. Many companies were only able to claim a fraction of the support promised, partly because they were not able to predict their EBITDA going forward and it was therefore not clear whether they met the strict EBITDA criteria needed to qualify for the relief measures.

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Due to European Commission reservations, the federal government was not able to present its announced power plant strategy as planned in the first half of 2023. In order to maintain supply security during and after Germany’s phase-out of nuclear and coal-fired power production, a considerable number of additional hydrogen-ready gas-fired power plants need to be built within a very short period of time.

Recommendations for the legislative term 2024-2029 ▪

Maintain proven electricity market design. Despite the skyrocketing energy prices caused by Russia’s war of aggression against Ukraine, the market did not fail. The tried and tested electricity market design should therefore not be abandoned in this period of crisis but should continue to be based on the triad of energy policy targets and the established market mechanism of the merit order principle. Contracts for Difference should not be binding but continue to be available for member states as a voluntary market design option.

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Ensure internationally competitive electricity costs. With the current levels of spot and forward rates, internationally competitive electricity-intensive production in Europe is simply not possible. The EU must therefore do everything it can to increase supply on the electricity market. Planning and authorisation procedures need to be further accelerated to drive the expansion of renewable energy. To encourage a rapid expansion of back-up capacities, production-neutral revenue streams should be permitted.

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Deepen internal energy market. The EU should continue to drive ahead with the European internal energy market and closely interconnect the required infrastructure (including for hydrogen and CO2 alongside electricity and gas). More coordination, dialogue and consultation with stakeholders on infrastructure planning is needed for the further development and expansion of Europe’s energy infrastructure.

Meeting European challenges – with a competitive industry

8. Reducing dependencies on critical raw materials to prevent shortages and price explosions European industry is highly dependent on imports of critical raw materials from geopolitically high-risk countries, which poses a risk for the security of supply in Europe. Today, Europe is already more dependent on many critical minerals such as rare earths from China than it ever was on oil and gas from Russia. Conventional market mechanisms have been losing force on the global critical mineral markets for years now. The risks of Europe’s dependence range from fluctuating commodity prices to possible shortages or even non-availability. Industry cannot function without raw materials. We need them for emerging technologies that are key to the transition to climate neutrality. Without lithium and rare earths there will be no energy transition (e.g., wind farms), no electric mobility (e.g., battery packs), no digitalisation (e.g., semiconductors), no industry 4.0 – nor any expansion of infrastructure or a powerful defence industry. Technological development is significantly increasing the demand for raw materials. While demand is rising and the global competition for critical raw materials is intensifying in the course of the green and digital transitions, there are structural deficits in the supply of these raw materials in several metal markets. Protectionist measures adopted by several countries are further obstructing trading in these strategically important raw materials. With such a mismatch between supply and demand, the competition is fierce, and Europe is in danger of losing important sources of raw materials to other countries. If we allow this to happen, Europe’s dependence and the supply risks will increase.

Availability risk of raw materials, by technology and sector

Source: European Commission.

Meeting European challenges – with a competitive industry

Review of the legislative term 2019-2024 Positive example ▪

The EU Action Plan on Critical Raw Materials that is geared towards reducing vulnerabilities in the supply of raw materials was a good start to put raw materials security on the policy agenda. Another positive development was the founding of the European Raw Materials Alliance (ERMA), which has been working on the development of an investment pipeline for European value chains, including for rare earths and permanent magnets for electric cars. However, it took Russia’s war of aggression against Ukraine to finally spark the impetus for negotiations on the important Critical Raw Materials Act (CRMA), which is about to be implemented.

Negative examples ▪

The international efforts of the EU to secure access to raw materials, for example through strategic partnerships with Canada, Ukraine, Kazakhstan and Namibia, and the participation of the EU in the US-led Minerals Security Partnership and the EU´s Global Gateway strategy have so far not delivered much in terms of concrete results. These efforts should be bolstered by incentives and support for corporate deals.

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EU initiatives in other policy areas are threatening to additionally obstruct industry’s access to raw materials. The European Commission’s proposal for an EU supply chain act, for example, endangers the development of alternative value chains. Many companies are likely to find that doing business with high-risk, resource-rich countries in Africa is no longer competitive due to excessive red tape and considerable liability risks. While human rights and the protection of the environment are undoubtedly concerns shared by both policymakers and the business sector, the responsibility for these should not be shouldered by companies alone. The EU should instead empower suppliers from partner countries to protect human rights and the environment using development policy measures.

Recommendations for the legislative term 2024-2029 ▪

Secure implementation of the CRMA. The strategic projects to extract, process and recycle strategic raw materials must be launched without further delay. More postponements in planning and authorisation procedures need to be avoided. The CRMA has not yet been adequately aligned with other legislation and regulations such as taxonomy, chemicals legislation, the eco-design directive or supply chain due diligence obligations. The European Commission must resolve conflicting objectives together with the member states in favour of greater supply security.

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Drive forward implementation of the CRMA at all levels. The success of the CRMA will depend primarily on the member states. It is the municipalities who will implement the projects and are responsible for their social acceptance. This will require close-meshed communication between the European, national and local levels. Solutions for competitive energy and electricity costs and for ensuring an adequate supply of skilled workers for the extraction, processing and recycling of strategic raw materials will also be required.

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Secure investment and financing of critical raw materials. The EU needs a separate IPCEI for critical raw materials. The EU Multiannual Financial Framework should be subject to regular review to provide the funds necessary for strategic projects as and when needed. The use of current and new EU funds, European Investment Bank (EIB) programmes, and the European Bank for

Meeting European challenges – with a competitive industry

Reconstruction and Development (EBRD) for raw materials projects should also be reviewed by the new European Commission. Regarding EU taxonomy, mining must not be classified as unsustainable as this would impede investment in exploration and mining projects. ▪

Energise existing EU raw materials partnerships and tap additional supply markets. The EU should forge more raw material alliances with African, Latin American, and Asian partners to provide political support to private-sector operations. Local government authorities and companies should be supported with development cooperation instruments and European companies provided with direct incentives to take up operations in the partner country through financing tools such as guarantees. The EU further needs to encourage diversification in relevant third markets by reducing trade barriers. European raw materials interests must be consistently reflected in EU trade policy as well as international energy and industry cooperation, particularly with likeminded partners such as the United States and Japan.

Publishing information Federation of German Industries (BDI) Breite Strasse 29, 10178 Berlin www.bdi.eu | T: +49 30 2028-0 Lobby registration number: R000534 Editorial team Dr Heiko Willems BDI/BDA The German Business Representation T: +32 27921002 | E: h.willems@bdi.eu

Dr Klaus Günter Deutsch Research, Industrial and Economic Policy T: +49 3020281591 | E: k.deutsch@bdi.eu

Joscha Ritz BDI/BDA The German Business Representation T: +32 27921003 | E: j.ritz@bdi.eu

Céline Rosskamp BDI/BDA The German Business Representation T: +32 27921006 | E: c.rosskamp@bdi.eu

Michael Harms German Eastern Business Association T: +49 30206167133 | E: m.harms@oa-ev.de

Uta Maria Pfeiffer Mobility and Logistics T: +49 3020281436 | E: u.pfeiffer@bdi.eu

Dr Thomas Holtmann Environment, Technology and Sustainability T: +49 3020281550 | E: t.holtmann@bdi.eu

Dr Carsten Rolle Energy and Climate Policy T: +49 3020281595 | E: c.rolle@bdi.eu

Rabea Knorr Health Industry T: +49 3020281495 | E: r.knorr@bdi.eu

Friedolin Strack International Markets T: +49 3020281423 | E: f.strack@bdi.eu

Dr Thomas Koenen Digitalisation and Innovation T: +49 3020281415 | E: t.koenen@bdi.eu

Matthias Wachter International Cooperation, Security, Raw Materials and Space T: +49 3020281579 | E: m.wachter@bdi.eu

Matthias Krämer External Economic Policy T: +49 3020281562 | E: m.kraemer@bdi.eu

Fabian Wehnert German Mittelstand and Family Businesses T: +49 3020281470 | E: f.wehnert@bdi.eu

Niels Lau Law, Competition and Consumer Policy T: +49 3020281401 | E: n.lau@bdi.eu

Dr Monika Wünnemann Tax and Financial Policy T: +49 3020281507 | E: m.wuennemann@bdi.eu

BDI document number: D 1846