Europe’s Core

In May 2023, Olaf Scholz proclaimed that a great ‘reindustrialization’ was taking place in Germany. Speaking at the launch of a new $5 billion Infineon semiconductor fabrication plant, the Chancellor boasted that one in three European microchips would now be ‘Made in Saxony’. A month later, Intel confirmed that it would invest $33 billion in two new factories in Magdeburg: the single largest foreign direct investment in the history of the Federal Republic. This was followed by an announcement that the Taiwanese semiconductor giant TSMC would assume a 70% ownership stake in a new €11 billion fabrication plant in Dresden. The so-called free market didn’t draw these companies into ‘Silicon Saxony’: an eye-watering €20 billion in subsidies from the German government did. The Eurozone’s High Priest of budgetary discipline has cast aside its holy writs, responding to the decline of its export-led growth model by going on a subsidy binge.

The immediate cause of the volte-face was the inflationary aftermath of the Covid-19 pandemic. In October 2021, as Europe began to unwind lockdown restrictions, the Director General of the European Automobile Manufacturers’ Association (ACEA), Eric-Mark Huitema, issued a warning. Europe’s automotive sector – the bulk of which is concentrated in Germany and its hinterlands – had suffered €100 billion of production losses during 2020, and the global supply of semiconductors was collapsing. In light of these shortages, Huitema called for a pan-European ‘strategic plan to increase the production of semiconductors in the EU’, with the aim of minimizing Europe’s dependency on overseas markets.

Across the Rue de Loi from ACEA’s headquarters, the European Commission was busy developing its plans to shore-up ailing European industry. Ursula von der Leyen stressed the need to bolster the EU’s chipmaking capacities in order to restore its ‘technological sovereignty’ amid rising geopolitical tensions. This culminated in a €43 billion package – the 2023 EU Chips Act – which sought to reduce Europe’s external dependencies while reshoring semiconductor production to the Single Market. The most important feature of the Act isn’t its headline price tag or lofty ambition to ‘double Europe’s share of the global semiconductor market by 2030’. Its real significance is at the level of the member states. The Commission has relaxed state aid restrictions, allowing national governments to inject public funds into their domestic semiconductor sectors. The Directorate General for Competition – traditionally the enforcer-in-chief of the EU’s strict anti-subsidy regime – has rubberstamped the new arrangements. Rather than zealously policing ‘anti-competitive’ practices, Brussels will now be giving active support to a mass subsidy regime.

This marks a decisive break from the recent past. In the 1990s and 2000s, Washington and Brussels viewed the development of the semiconductor industry as an example of globalization working as intended. The semiconductor supply chain is notoriously complex, incorporating multiple firms across numerous national borders. Producers in the UK specialise in the software that underpins modern chip manufacture; Silicon Valley dominates high value-added chip design; Taiwan exercises an effective monopoly over the fabrication of high-end chips; back-end manufacturing is outsourced to countries such as Malaysia and Vietnam. Western elites wagered that the eastwards expansion of the supply chains would consolidate the primacy of US and European companies, reducing prohibitive start-up costs, allowing them to focus on R&D, and ensuring a continuous supply of low-cost components.

But the business-school boosterism that underpinned this vision of globalization has unravelled. Rather than a sphere of seamless market exchange, the semiconductor supply chain has become a zone of economic rivalry and geopolitical conflict. China, determined to reduce its dependence on the West for high-end technologies, rapidly built-up its domestic fabrication capacities. In 2000, the year before its accession to the WTO, China launched the Shanghai Manufacturing International Corporation (SMIC), a state-backed fabrication plant which aims to challenge its rival across the Taiwan Strait. In 2014, under the auspices of the ‘Made in China 2025’ programme, Beijing set aside $170 billion to support the development of Chinese ‘national champions’ – with SMIC one of the major recipients. By 2019, China accounted for 20% of global semiconductor exports, a figure that was projected to continue to rise over the following decades.

The Obama administration was initially relaxed about this rapid ascent, but some within the national security establishment soon began to voice concern. Semiconductors are a ‘dual use’ technology, capable of both civilian and military deployment, and China’s drive to secure technological independence also threatened to undermine one of the critical ‘chokepoints’ that Washington held over Beijing. With the 2018 Export Control Reform Act, the US authorities began to systematically frustrate China’s technological advance. Trump placed Huawei on the US ‘entity list’, and Biden expanded the restrictions, compelling US allies – including the Dutch firm ASML – to limit the export of critical machine tools and intellectual property to high-tech Chinese firms. At the same time, the Biden administration ramped-up support for domestic chipmakers, channelling $280 billion via the CHIPS Act to US industry.

The escalating chip war between the US and China sent shockwaves through Europe’s industrial core. Export controls, chip shortages and fierce competition over subsidies threatened to undermine the technological primacy of European industry. The primary casualty was Germany. In the boom years of the 2000s and 2010s, Germany consolidated its position as a globalized production platform. But the triumphs of yesterday cast a shadow over its ailing export-led economy today: dependence on Russian energy, persistent inflation above the Eurozone average, weak consumer spending power compounded by high borrowing costs, and a collapse in demand for German exports. ‘The risk of deglobalization is particularly acute for Germany’s growth outlook’, observed Joachim Nagel, President of the Bundesbank. ‘Its economy is far more open to trade than that of many other countries.’

For this reason, the pieties that dominated Europe’s political economy throughout the neoliberal era – multilateralism, competition policy, supply-side reform – will no longer do. A world of ‘weaponized interdependence’, as the political scientists Henry Farrell and Abraham Newman put it, places a premium on strategic capacity, state power and scale. For European capital, what’s needed is a new framework for EU integration, capable of underwriting the trading bloc’s position at the core of the world economy. As a 2019 joint statement by the French and German governments put it, the choice is either to ‘unite our forces or allow our industrial base and capacity to gradually disappear’.

The EU Chips Act, with its ambition to create a pan-European framework capable of competing with the US and China, is an expression of this ‘unify or die’ logic. But it aspires to a peculiar kind of unification. The EU, of course, is still highly fragmented. Its budget remains a paltry 1% of the bloc’s overall GDP, which means there are insufficient resources at the supranational scale to support an expansive continent-wide industrial policy. Pooling resources, in effect, means creating the conditions for already existing industrial clusters and states with fiscal firepower to further consolidate their dominant positions. Convergence around a common EU industrial policy threatens to accelerate divergence between member states. Since the EU relaxed its restrictions, Germany has accounted for a staggering 53% of the total €672 billion issued in state aid. Germany has also benefited from new pan-European frameworks designed to support strategic sectors, gobbling up half of the state aid attached to the ‘Important Projects of Common European Interest’ in microelectronics.

In the wake of the Eurozone crisis, a cleavage emerged between Europe’s export-led northern core and its debt-led southern periphery. Elites had promised that European integration would support upwards convergence in economic performance amongst member states. But under the euro, with its strict debt and deficit rules and lack of fiscal transfer mechanisms, it became clear that integration was delivering the precise opposite. German industry boomed while the Eurozone’s southern debtor states suffered the penury of permanent austerity. Today, the conditions that enabled this bout of export-led dynamism are unravelling, with deleterious implications for German capitalism. But the EU’s response – a new pan-European industrial policy, enabling more muscular state interventionism – represents an attempt to reinforce Europe’s industrial core.

The myths that drove neoliberal globalization have now been shattered by the battle over semiconductors and other strategic sectors. Rules that were once rigidly applied are being bypassed to enable new waves of state interventionism; the ‘level playing field’ of the Single Market is being circumvented to shore-up dominant fractions of European capital. Meanwhile, new myths are being forged: an ever-more integrated and autonomous union, bound together by the challenge posed by China and Russia. As EU policymakers mobilize against their external rivals, the bloc’s internal rifts – between industrial core and underdeveloped periphery – continue to widen.

Read on: Christopher Bickerton, ‘Thinking Like a Member State’, NLR 138.