Last week, our Director attended the annual 'State of the Union' organised by the European University Institute in Florence. There, he had the opportunity to meet and talk with Kathleen McNamara, Professor of Government and Foreign Service at Georgetown University and currently on a research stay at the EUI as a Simone Veil Fellow.

Marc López
With the war in Ukraine something is happening with the internal single market. If you need a more rapid or quick way to take decisions and you need to invest because you have a problem with your supply chains and you want to be self-sufficient, the way to do that is investing in industrial policy. But if you want to invest in industrial policy, what will happen with the single market? What is your opinion about that?

Kathleen McNamara
Well, I think you put your finger on the tension and on the challenge. I am very struck by what I think is a moment of true change and transformation in the basic foundations of the European project that for the last three decades or so were built on the Single European Act and the Euro, and on the notion that the secret to Europe's success is really in prioritising market efficiency. A kind of universal principle of ‘open the market, have really good competition policy’ and that will actually allow Europe to be stronger in the world, be stronger internally and so on. But the thing is, and this is what I'm exploring in my own work, that is predicated on a very particular type of political authority that is using competition policy and using regulation to govern. Industrial policy, on the other hand, is almost the opposite of that. In the sense that you are visibly shaping the market and privileging certain sectors, you are picking strategically important parts of the economy and economic activity. It's not ‘the market’ that's doing it.

And what I wonder is whether the EU has the kind of political legitimacy to make that a successful project.  Setting aside the question of ‘does it work in terms of being pragmatic’, et cetera, as to be honest, I think that the green transition is so important that I'm willing to have inefficiencies, I'm willing to have mistakes. It has to be done. Climate risk is so catastrophic that even though I think the American IRA, for example, is obviously going to have some problems and inefficiencies and so on, I'm so glad the United States is finally moving towards decarbonisation. Same with the EU. 

But I really wonder whether it's putting too much weight on the technocratic notion of a delegated and apolitical EU, and whether this is really going to demand much more political contestation and electoral politics around the EU.

Marc López
What could happen with state aids right now? As Spaniards, we are particularly worried what the Commission will ultimately decide. The Chips Act, is another example of the flexibilisation of state aid. In my opinion, maybe we could think about European state aids, not state-level aids, because if you have European state aids, it's the Commission, the European Union, that could decide where and why to invest the money. For me, this is the way. But without more political legitimacy it's difficult to think about what to do about the state aid right now? 

Kathleen McNamara
So, again, I think you're exactly asking the right questions. What I'm seeing  and one of the things that really got my curiosity was the EU has created an EU-level state aid structure in this so-called ‘Important Project of Common European Interests’, which strikes me as exactly the sort of answer that you're talking about, which is the EU is actually the right actor to be able to scale up and look across the EU and think about supply chain autonomy in these incredibly complex areas, like chips, batteries, et cetera. And so the six or seven IPCEIs that have been launched already, instead of having a subsidies arms race, it's saying, okay, we're going to direct our economy at the EU level in the same way that the IRA is doing, For example, we're going to broker the financing and expertise for a hydrogen lab in Sicily-- I'm sure there are things in Spain as well. I have a research assistant that's trying to map this out. There's actually not a lot of information about the locations of the IPCEI projects, so it'd be really interesting to find out exactly who are the different firms and actors involved and where are they located and how much is private money, how much is public money, how much is EU money involved. The IPCEI structure, by the way, is based legally on a phrase out of the treaty documents, which says state aid is not allowed except for Important Projects of Common European Interest.

I've been talking to the competition law people at the EUI, and they say it's actually pretty airtight. They're in good legal standing, which is something I was surprised about. Like, what is a common European interest? In the United States, you have a much more apparent national interest…

Marc López
Because you vote for a president.

Kathleen McNamara
Exactly. Right.

Marc López
You vote for a Congress. 

Kathleen McNamara
As a political scientist, I find this a really interesting question. And as a European, you probably find this interesting, too. So I think the IPCEI framework is a very robust one, but it is missing key elements, such as adequate fiscal capacity at the EU level. So there we are again-- will this new moment that we're in, this geopolitical moment, this moment in terms of climate change and everything else, will it force the building of true fiscal capacity at the EU level? That's the question I have. And how would that happen? And there's one thing that I'm hearing at this EUI State of the Union conference, which is that I think a lot of European industry really wants the EU to match the IRA. And so you are getting this sort of demand. We know historically, throughout all time, a lot of what happens in terms of political development can track what the private sector capitalists are wanting, and they demand certain things from their government. So it's an interesting question how this will translate in the EU case.

Marc López
In fact, some important companies in Spain decided to invest in the United States because of these subsidies.

Kathleen McNamara
Exactly.

Marc López
One more question. It's about what kind of globalisation. Because we can affirm that it's not possible to be really self-sufficient at all.

Kathleen McNamara
Why would you want to be, as there are so many benefits from globalisation if properly managed--that is the key point.

Marc López
And the other question is in what areas you decide to be, really, self-sufficient? One example: in Spain, we are a large producer of electricity with renewables, but 95% of solar panels are from China.

What kind of self-sufficiency is possible?

Kathleen McNamara
That is the critical question.

Marc López
Because okay, it's true that Spain could have an opportunity right now with the price of electricity. It's very important for us because we can attract companies from outside Spain, like for example Volkswagen to Valencia. We offered Volkswagen very cheap energy prices. And there is something very competitive here for Spain but…

If we have capacity to produce cheap electricity, it's because of the solar panels from China. What kind of Spanish industrial policy is possible then? And for me, there is an important question, which is in what kind of strategic areas do we decide to stake claim and say, ‘this is mine’? 

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Kathleen McNamara
Yeah. I don't have the answer. Thank goodness. I'm an academic. I don't have to actually decide. Thank Heavens. But I think that, I don't know if you were at the panel I was talking about yesterday…

Marc López
Yes, I was.

Kathleen McNamara
Okay. So I said that it's wrong to think in these binary terms of globalisation or deglobalisation, that's nonsense. What we actually need to think about, and what I think I would love to see in terms of your own publication’s work is to really keep pushing towards a better understanding of how to refashion globalisation and the global trade regime to be more sensitive to what you can think of as managed globalisation or calculated globalisation, whatever you want to call it, to allow for a kind of pulling back on things which I think today we understand are crazy. That we would have, whatever it is, 80% of high value chips made in Taiwan, this one little island right next to China. In what world is that a sensible thing to do? And that's not even the product necessarily of sort of market efficiencies, right? Taiwan spent a lot of time and money developing its chip factory. So this whole notion that there's sort of the market versus states, it forgets that markets are always and everywhere constructed by political authorities, even neoliberalism and financialisation--as Polayni said, laissez-faire was planned. Given all that, I think it's about making really sensible judgements around how to better manage globalisation.

On the energy side, there's this trilemma I don't know if you've heard of, where we have to find the sweet spot that balances sustainability, security, and equity, things that are in tension. And obviously, just saying, no, we're not going to import solar panels from China, is not the right answer as because of climate change we need them. So I would like to trust that sensible people in the Commission and elsewhere in the United States Trade Representative (USTR), on the American side, are thinking through these things. I mean the US, of course, is in an easier position in many instances because we're not quite as dependent as Europe is on Chinese markets. I guess another thing to think about is playing the long game. So in the short run, yeah, we're going to import from China, et cetera, but let's think about trying to establish our own capacities in critical areas. So dichotomies are probably not the way to be thinking about these things. You know this! But I keep saying it, and some people in Washington are like, oh, industrial policy is protectionism. I’m like, ‘What? I don't think so. Not this version of industrial policy.’ It really is different. 

Marc López
Biden is putting the role of the state in a place where maybe in the United States it's not known.

Kathleen McNamara
Yes. At least not for the last three decades.

Marc López
Yes, it's fascinating. Absolutely interesting. But you really need the state to be in the political, in the industrial policy. But what happens if Biden loses the next election? And if many European states are conservatives? Could industrial policy be the way to have a common position between conservatives and progressive liberals?. You see here, for example, Meloni. Meloni is conservative in a lot of things. But she thinks pragmatically. She's very interested in the role of the state in the large public companies because she knows that it's very important right now.

Kathleen McNamara 
Well, so what I'm seeing, and I think this is again, incredibly fascinating story that I would like to see more academic and public policy work on is thinking about how is this playing through in terms of firm-level actors and how they're making decisions and then how does that translate in terms of partisan, electoral politics? So we know that a lot of the IRA money is, of course, going into the red states, and it happens that like Spain, sometimes the red states are places that have a lot of sun and wind and empty land. And so it makes sense. And they also often are the states that are the states without unions. And so, yes, of course, Volkswagen wants to locate its plants in these places, but VW is also making the wager that this translates through to political support in that state no matter who the next president is. It's very difficult for the Tennessee senator to vote against the next versions of the IRA if it means that jobs will be lost. And again, that's something I would love to understand better in the EU context. Do we see the same ‘pork barrel politics’ at work in Europe?

If so, that's a new, transformative thing for the EU that makes EU politics much more like a federalist system, much more like a nation state. It's not merely a technocratic regulatory regime at this point. It's really this kind of bread-and-butter pork barrel politics. I was always fascinated with when you travel around Europe and you see the sign saying the EU is paying for the Heritage site or the EU is paying for this road, or whatever, but it hasn't had much of an impact yet on electoral politics, maybe as the scale is just so much smaller. I don't know. It's an interesting question. When does an EU industrial policy translate to a kind of political engagement and support for the EU as a political authority? I don't know. My country, the United States, it's very hard to know, really, what's going on. But I'm astonished at how much Biden has gotten done. I'm astonished and incredibly impressed at who he has put into these important positions in the Federal Trade Commission, USTR, Treasury, Commerce. The appointments have been superb in terms of people who are willing to get all this stuff done.

Whereas I think Obama was always cautious. He was always trying to kind of play nice with Wall Street and Silicon Valley. Joe Biden, maybe he's at a point in his life where he's just like, ‘no, I don't have time for that’. And so I know a lot of the Biden administration people, and I find them to be superb at their jobs. And so, yes, we do worry about inefficiencies. We do worry about spending money which is just waste. But I think the intentions of these people are amazing. I think that the discussion around climate change is so dramatically different than what it was before. So I'm actually hopeful in many ways that we're actually at a good moment. It took a lot to get us here, and there's a lot of terrible stuff happening. But I think that certainly in the EU and the US that governments are responding in very appropriate ways.

Marc López
Two more questions. One thing is, what about the IRA and Europe? Many Europeans think that it's very problematic for Europe, but at the same time, we need the United States to do it, right? Because we need the United States to invest in the green transition. We need this. But at the same time, we are very worried.

Kathleen McNamara 
The one thing that I might fault my wonderful Biden colleagues on is I feel like they have not paid attention to the diplomacy side of the IRA as they should. And my hunch is that they're so focused on getting this stuff done in the US. And they're sort of hunkered down because they know the stakes are incredibly high in terms of what if Trump becomes president again and et cetera. So I think they haven't spent as much time as maybe they should have of trying to work diplomatically with the Europeans to give them the heads up of what's happening, to reassure them that this is not meant to be a sort of offensive move against Europe and to really work together to find commonalities. I think friend-shoring is a perfectly good idea. 

And so Von der Leyen, when she came and met with Biden a month and a half ago or so, from what I understand, that was a really successful meeting that cleared the air to some degree. But talking to people below that head-of-state level, there still is exactly, as you say, just a lot of, on both sides, frustration. My American Biden team friends tell me interestingly that they're so frustrated with the Europeans. They say the Europeans are standing in the way of trying to move forward with the green transition. The EU love’s the World Trade Organisation and free trade ideology. And I'm like, who are you talking about? First of all, the EU started the green transition long before the US. And the EU itself is having its own big debate about how to refashion trade. So it depends who you talk to. I'd be curious what you think about this, but to somehow characterise what the EU is today in those hyper neoliberal terms seems just flagrantly wrong. So I try to tell them it's flagrantly wrong. So I'm hopeful that there will be more conversation, better diplomacy.

Marc López
We need more conversation.

Kathleen McNamara
We need much more conversation. And that's something that I hope to contribute to over the next months, when I go back to the states, as I’m involved in several different types of think-tank and other types of things.

Marc López
The Roosevelt Institute?

Kathleen McNamara
I have great respect for the Roosevelt Institute, it's a really important group, and Todd Tucker, of course, is pivotal for this whole debate. But also the Carnegie Foundation is getting involved. You know, I think it's really important to have these conversations.

Marc López
Last question. China.

Kathleen McNamara
China. What a great question. 

Marc López
What to do with China? An example from Spain, the port of Valencia, which is the fourth most important port in Europe. 40% of the commercial traffic depends on Cosco, which is a Chinese company. What do you think? Because for the Prime Minister of Spain, it's impossible to say to Cosco that we don't want to have them in the port of Valencia. Because if Cosco were to decide not to be in the port of Valencia, then the port of Valencia would not be the fourth largest port of Europe, it would be the 10th or the 11th largest port in Europe. Just an example.

Kathleen McNamara
And people will lose their jobs.

Marc López
Yes, exactly. But China decides, and Cosco is not a normal company. It is a state-controlled company. Von der Leyen talks about economic security. What does economic security mean? Is it also not only about economic security for Europe, but also about economic security for your workers in Valencia?

Kathleen McNamara
Well, this is one thing that I'm really also trying to sort of get a handle on myself. I'm curious what you think. My impression is that this is not a settled question inside the EU itself. Again, it depends on who you talk to. And this is just a real-time debate that's going on. I thought Von der Leyen’s speech about China a couple of weeks ago was extraordinary in the sense that it could have come out of the White House or the National Security Council of the United States. Right?  It to me was the most sort of geopolitically, I wouldn't say bellicose, but certainly the strongest statement I could imagine in terms of China as a potential future adversary to the EU, this is what we need to do. We need to wake up. On the other hand, of course, you have French and German leaders going to China and making very nice friends with them every week. And so, I think that really reflects this real tension in terms of finding that sweet spot between protecting both hard security and economic security. So maybe with things like dual use technologies, we put it in a box, we say, no, we're not going to trade that with China. You worry about port control because 40% is a lot. Right? So, again, you think about diversification. But perhaps everything has to be taken on a case-by-case basis, with this broader frame of China is not like the United States. And as you said yourself, these are state owned companies.  Which immediately changes it. And thinking in very long term…

Marc López
And what kind of state? Because a state-controlled company from China is not the same as a state-controlled company from Denmark. 

Kathleen McNamara
Or even China ten years ago. It’s very different. So, what I think is so interesting, though, is when I think about previous periods of hyper-globalisation, you had the turn of the last century, and you had a multipolar system, and you had Great Britain which was a hegemonic actor but I think there was a little sense of more balance, of power, equality. And all of them were essentially the same types of regimes. And then, of course, you had the Cold War, and it was much easier to manage in some ways, because we didn't trade with the Soviet Union. They were our adversary. We weren't intertwined with them economically. We had these different spheres.

And then we had the post-Cold War period where, again, the wager that we make, the West makes, is that we'll bring China into the globalised, neoliberal international order and it will become just like us. And that's how we're going to square this circle and deal with all of the challenges that we have. But that has not happened and so how do you manage a deeply economic interdependent relationship with an actor that is not a liberal democracy and that you're not sure about? I don't think we've had this before in history, but I might be wrong.

Marc López
I think Jack Sullivan's speech last week….

Kathleen McNamara
That was amazing. I thought that was an incredible speech last week. That was really good.

Marc López
It's something like Von der Leyen’s speech. 

Kathleen McNamara
Yes, absolutely. Setting out a clear framework despite our uncertain times--it may not be the answer to all the questions, but it is a necessary place to start.