An Integrated Strategy for Building Resilience and Driving Innovation

A targeted economic policy strategy is required to safeguard Europe’s sovereignty. In their article, Professor Hanna Hottenrott, head of the ZEW Research Unit “Economics of Innovation and Industrial Dynamics” and ZEW President Professor Achim Wambach, PhD write about the need for the EU to reinforce its innovative strength, reduce strategic dependencies on raw materials and build more resilient supply chains.

Europe faces a dual challenge: increasing its innovative strength while securing strategic sovereignty in critical areas. Other economic areas such as the USA and China are investing massively in research and development (R&D), but in Europe, these investments are only increasing at a modest rate. This undermines the competitiveness of European companies and threatens to weaken the continent’s prosperity in the long term. At the same time, European economies are highly dependent on external supply chains, particularly for critical raw materials and high technologies. Europe needs a coherent, integrated strategy for building resilience and driving innovation in order to meet these challenges.

Innovations drive economic growth and social progress. Although it is widely recognised that R&D is a key prerequisite for productivity gains and sustainable transformation, R&D expenditure in the European economy is growing more slowly than in other leading economic areas. By implementing national measures to finance research, Germany has increased the share of R&D in its GDP, but there is still no overall European strategy. It is therefore important to pool government funding more efficiently, coordinate it and make better use of economies of scale. Successful examples like CERN and EuroHPC show that European projects are crucial to maintain global competitiveness.

Young, growth-oriented companies play a decisive role in the development of disruptive technologies. However, as the EU lacks the incentives and favourable regulatory conditions to attract venture capital, it accounts for only a fraction of global venture capital. Regulatory uncertainty and fragmented European labour and product markets remain obstacles to the growth of young innovative companies. To counteract this, more flexible investment models should be created, access to stock markets improved and a pan-European company form for start-ups introduced. Measures such as the Future Financing Act in Germany or the adaptation of the Solvency II regime show that reforms are possible. These approaches need to be expanded across the EU to improve the investment climate for high-tech companies.

Europe’s technological and economic sovereignty is essential to the long-term stability and competitiveness of the region. Dependence on a small number of countries for critical raw materials and highly developed technologies poses significant risks. The European Union has recognised this and taken initial steps with initiatives such as the European Critical Raw Materials Act and the European Chips Act. Nevertheless, a more comprehensive approach is needed if the EU is to become strategically independent. One of the key challenges is ensuring the supply with critical raw materials that are indispensable for the digital and green transition. Many of these raw materials are currently sourced from only a small number of countries. This does not only cause price fluctuations but also exposes the EU to a higher risk of geopolitical blackmail. Therefore, investments into the entire value chain should be intensified; in addition, the extraction, processing and recycling of raw materials in Europe need to be expanded. This requires coordinated European efforts, as well as new free trade agreements with countries rich in raw materials, in order to reduce the dependency from supplier countries.

The EU should establish a coordinated procurement system for critical raw materials. As disruptions in supply chains in the past have shown that production stoppages can cause significant economic damage, an EU-wide platform should be established to pool demand and increase bargaining power vis-à-vis suppliers. Another important instrument is creating a European Supply Security Office, with a remit that includes systematically analysing risks, collecting data on supply chain security and conducting stress tests. Close cooperation with businesses and political institutions would enable the development of targeted measures to strengthen Europe's resilience to external shocks.

Securing European sovereignty requires a targeted economic policy strategy. The EU must strengthen its own innovative capacity, reduce strategic raw material dependencies and build more resilient supply chains. Only through a coordinated European strategy can the EU secure its economic and technological competitiveness in the long term.

This opinion piece was first published by TableMedia [€].