The Costs of Conditionality. IPCEIs and the Constrained Politics of EU Industrial Policy

With the global return of industrial policy, most literature examines why states increasingly resort to market activism. Much less is known about how industrial policy works ‘on the ground’. In this paper, we address this how-question through an in-depth case study on the poster child of the EU’s new industrial policy: the Important Projects of Common European Interest (IPCEI). We argue that while the literature has rightly pointed out that attaching conditionalities to public money is key to steering markets effectively and equitably, conditionalities also come with costs. Moreover, they are not the reflection of policy design principles but reflect political, institutional, and ideational constraints that shape which and how conditionalities are applied. We show how IPCEI funding is conditional on meeting demanding eligibility and compatibility criteria, which leads to perverse outcomes, adverse selection, and workarounds. We make concrete suggestions as to how to mitigate IPCEI’s cost-conditionality trade-offs.