VDMA’s reminder: Europe’s manufacturing competitiveness problem is no longer just about tariffs and subsidies

VDMA’s Warning: Europe’s Manufacturing Competitiveness Problem Is No Longer Just About Tariffs and Subsidies

Europe’s discussion of “competitiveness” is shifting from slogans to more concrete industrial choices. The German Engineering Federation (VDMA) recently issued its views on the competitiveness of EU manufacturing. The core point was not support for or opposition to any single policy, but rather a reminder about the direction of Europe’s industrial policy: if the EU places too much emphasis on protectionism and state-driven demand, it may not solve the structural weaknesses that European manufacturing has long faced.

This kind of statement matters because it reflects a change in how Europe’s industrial sector assesses policy priorities. Over the past few years, the EU has significantly increased its investment in supply chain security, the green transition, and “strategic autonomy,” while policy language has increasingly stressed localization, resilience, and industrial reshoring. But from the perspective of manufacturing companies, what truly determines Europe’s long-term industrial competitiveness is not necessarily whether production capacity can be kept within the EU, but whether Europe can continue to maintain a business environment that is sufficiently efficient, unified, predictable, and innovation-friendly.

Thilo Brodtmann, VDMA’s executive director, effectively broke the issue down into three levels.

First, the EU cannot reduce industrial policy to protection measures and demand stimulus. Such policy tools can of course play a short-term defensive role in certain sectors, for example by helping companies withstand unfair competition or by maintaining production bases in specific areas. But if they become the main policy axis, the risk is that Europe will devote resources to “defending existing capacity” rather than “improving overall productivity.” For manufacturing, the latter is what determines future international competitive position.

Second, Europe’s competitiveness bottleneck is not only external competitive pressure, but also internal market fragmentation and high regulatory costs. VDMA specifically listed “deepening the single market” and “reducing regulatory burdens” as priorities, indicating that the manufacturing sector believes what Europe truly needs is not more localized intervention, but smoother cross-border operating conditions. For industries such as machinery manufacturing, production equipment, and industrial components, market scale, standardized rules, approval efficiency, and regulatory certainty often affect investment decisions more than short-term subsidies do.

Third, Europe needs to truly connect industrial policy with its innovation ecosystem. VDMA supports the idea of establishing a European Competitiveness Fund, while clearly stressing that such funds should be concentrated in key technology areas such as industrial AI and manufacturing. This judgment sends a clear industrial signal: the core problem of European manufacturing is not only cost pressure, but also the fact that technological boundaries are being redefined. Industrial AI, digital production, intelligent control systems, and advanced manufacturing capabilities are becoming the key variables in the next round of competition. If Europe does not direct public funds toward these areas, it will be difficult to preserve its technological advantages in the global manufacturing upgrade.

From the EU policy perspective, this debate also reflects a broader shift: EU industrial policy is facing a rebalancing from a “defensive industrial strategy” toward a “productivity-oriented industrial strategy.”On the one hand, tools centered on local content requirements, carbon-emission standards, and industrial protection will continue to exist. Referring to the ideas related to the Industrial Accelerator Act mentioned by VDMA, such policies are politically easier to gain support for because they can directly respond to pressures on employment, supply chain security, and the green transition. But on the other hand, if these tools are not accompanied by market-integration reforms, technology investment, and business-friendly regulatory design, they may only create “compliance prosperity” in a localized sense, rather than improving the competitive efficiency of Europe’s industrial system as a whole.

This is also the most difficult contradiction in Europe’s current industrial policy: the more policy emphasizes sovereignty and protection, the easier it is to gain short-term political consensus; but if policy cannot also reduce transaction costs, unify rules, and amplify the diffusion of innovation, the eventual beneficiaries may be only a small number of protected industries, rather than the entire industrial base.

For corporate management, this means that in the next few years, the key to Europe’s manufacturing competitive environment will no longer be just subsidy windows or individual project applications, but whether the overall institutional environment is more conducive to investment, capacity expansion, and R&D. Especially for machinery manufacturing, industrial automation, production equipment, and related supply-chain companies, the policy signal is already clear: the EU wants to preserve industrial capacity, but whether it is willing to pay the real cost of reform for that purpose remains another question.

For investment institutions, what is worth noting in this kind of statement is that it suggests the market should reassess the effectiveness of Europe’s industrial policy. If the EU continues to allocate resources to localized protection without simultaneously improving single-market efficiency and the ability to form technical capital, then the valuation logic, capacity布局, and medium- to long-term return expectations of European manufacturing may remain under pressure. Conversely, if the competitiveness fund, industrial policy, and regulatory reform can work in concert, European manufacturing may still have an opportunity to remain globally relevant in high-end equipment, industrial software, and smart manufacturing.

Looking at a longer cycle, VDMA’s comments actually point to a question more important than “manufacturing reshoring”: whether Europe can still prove in the global industrial system that an open market, strong regulation, and high competitiveness are not necessarily in conflict. Over the past few decades, the EU has been good at shaping market order through rules; but in the next stage, Europe must prove that it can also use rules to release productivity, drive innovation, and sustain the continuous upgrading of its industrial base.

If it cannot do that, the challenge for European manufacturing will not just be that “producing in Europe becomes more difficult,” but will evolve into “whether Europe is still an important center of global industrial innovation and high-end manufacturing.”

This is the real signal released by VDMA’s comments: the focus of Europe’s industrial competition has already shifted from whether factories can be kept, to whether factories can keep becoming smarter, more efficient, and more technologically advanced.