The EU’s plan for critical technologies ends up as a shadow of the promised sovereignty fund

Strategic Technologies for Europe Platform (STEP), the EU’s plan to mobilise investments in the digital, deep tech, cleantech and biotech sectors, survived by the skin of its teeth as negotiators from the Parliament and Council reached an agreement on the revision of the EU’s long-term budget last week.

Instead of the proposed €10 billion in additional funding, STEP will get €1.5 billion, but this will all go to the European Defence Fund (EDF), reflecting a growing shift towards defence spending.

“The Commission discovered over the last year that there was very little appetite among member states to create a significant new fund at EU level to finance industrial policy,” said Nils Redeker, deputy director of the Jacques Delors Centre, a Berlin-based think tank.

The Commission’s inability to clearly cost its industrial policy needs, stressed member state finances, and the fact there is still money left in the €723 billion Recovery and Resilience Facility (RRF) which can be used to support strategic projects, all explain member states’ reticence, he said.

Commission president Ursula von der Leyen initially proposed creating a new European Sovereignty Fund to secure EU competitiveness in critical technologies, in response to the US inflation reduction act which is investing $369 billion in the US green tech sector.

In the end, it was decided a more modest approach could be implemented more easily without having to wait for the next long-term budget negotiations.

“As its name implies, STEP remains an important element for testing the feasibility and preparation of new interventions, as a step towards a European Sovereignty Fund,” a Commission spokeswoman said.

For now, STEP aims to leverage funding from existing programmes including the EDF, RFF, Innovation Fund, InvestEU, Horizon Europe, and cohesion policy funds, and to create synergies between these different funds.

It provides financial incentives for channelling cohesion policy funds towards investments in critical technologies, by offering a 100% co-financing rate for STEP priorities.

“Depending on the extent of member states’ reprogramming in favour of STEP projects under cohesion policy funds and the RRF, the investment potential of STEP could reach €50 billion across the EU,” the spokeswoman said.

Redeker though argues the lack of a meaningful fund at EU level, “cements a national state aid-driven approach to industrial policy in Europe”, whereas the idea for a sovereignty fund was to promote a coordinated approach and lower the risk of economic divergence.

In 2023, the EU relaxed its rules on state aid to allow member states more flexibility to invest in clean tech production, but the new rules will only run until the end of 2026.

Redeker says the STEP agreement is “not a major loss” for the Commission and Parliament, as it was never going to provide significant investments. “The key question is what happens after 2026.”

There could be permanent changes to the state aid regime, a new EU fund, or a mix of the two. “Much depends on political developments between now and then,” he added.

This year will see elections in the European Parliament in June, followed by a new Commission, which is likely to focus on industrial competitiveness and defence. But we are also seeing increasing backlash against the EU’s Green Deal ambitions, including from within von der Leyen’s own party, the EPP.

Jules Besnainou, executive director of business group Cleantech for Europe, agrees that the “downgrade from a sovereignty fund to STEP” was more significant than the final budget cuts. “We were never going to meet our cleantech manufacturing ambitions with a €10 billion instrument,” he said.

Besnainou rejects the suggestion that cleantech and defence research are in competition for resources, as they can be complementary. “But similarly, what are you going to solve in the defence space with €1.5 billion?” he said.

Public budgets may be tight, but a huge sovereignty fund is not the only option. “There’s so much you can do already, and we’re a bit disappointed that more creative ideas aren’t being put forward,” he said. “We need extremely targeted public derisking and not necessarily huge subsidies.”

Cleantech for Europe is calling for an EU cleantech investment plan to mobilise capital from institutional investors, and direct revenues from the Emissions Trading System towards green technologies.

As for the non-funding aspects of STEP, Besnainou fears plans for an online portal to provide information about funding opportunities will only add an additional layer of complexity. Nor is he convinced the 'Sovereignty Seal' label applied to high quality projects contributing to STEP objectives will help companies attract private funding, if there is no public funding attached.

Horizon Europe cuts

Marc Lemaître, the Commission’s director general for research and innovation, cut a frustrated figure as he discussed the STEP budget cuts at the annual Science|Business conference on Tuesday.

He pointed out that the original proposal would have allowed the European Innovation Council to invest up to €50 million in startups and SMEs which are scaling up strategic technologies, compared to the current €15 million cap.

“These would have been investment rounds of overall €250 million and above – exactly what we see today is very much required in Europe, but it's not being delivered by capital markets,” he said.

The Commission wanted to mobilise €2.6 billion for this in the last three years of Horizon Europe. Instead, the Horizon Europe budget was cut by €2.1 billion. “It will be very difficult, in this context, to turn this into a reality,” Lemaître said.

After last week’s agreement, several MEPs raised concerns about the member states’ refusal to agree on a proper financial package for STEP and the wide range of technologies included in the package.

"With STEP, Europe will be able to invest more strategically in technologies needed for the green and digital transition,” Christian Ehler MEP (EPP), the Parliament’s lead negotiator for the industry (ITRE) committee, said in a statement. He warned however that the Horizon Europe cuts “will harm the EU’s global technological leadership”.

Green MEP Henrike Hahn blamed “the refusal of some member states including a German finance minister to set up a strong sovereignty fund” for the lack of ambition. “For some, the national branding of industrial policy successes is more important than joining forces to support European companies,” she wrote on her website.

“A quiet commitment to potentially expand STEP in three years is clearly not enough,” she added. “China does not wait until Europe has woken up.”

Rasmus Andresen MEP, budgetary spokesperson of Greens/EFA and shadow rapporteur for STEP in ITRE, called the initiative a “very important step”, but expressed concern over the broad scope of application. “We would have liked to see a stronger focus on strategically important sectors that are relevant to climate protection and add to our competitiveness,” he said.

A final plenary vote in the Parliament is expected to take place later this month, before adoption by the Council.