Dresden provides impetus and lessons for Macron’s industrial policy push

The French president wants to unleash an “investment shock” in strategic industries in the EU, but subsidies alone are unlikely to make the bloc competitive.

Emmanuel Macron, France’s president, has recently given a number of sobering speeches about Europe’s future. His main message: Europe faces a dangerous set of challenges that could destroy the EU unless urgent action is taken. He has championed the concept of “European sovereignty” to ensure the bloc is economically secure and geopolitically able to act. In his Sorbonne speech in early May, Macron defined five strategic industries – AI, quantum computing, space, biotechnology and new energy – that he thinks are vital for Europe’s future and deserve support through active industrial policy, such as domestic production targets, skills development and joint investments.

Building on his remarks at the Sorbonne, Macron’s latest speech last week was not only significant because it was delivered in Dresden, my hometown. Rather, the East German city is seen as an economic success story due to its emergence as the key production location for European semiconductors, another strategic industry that has received ample media and policymaker attention in the last few years. One in every three chips made in Europe is produced around Dresden by companies such as Infineon, Bosch and GlobalFoundries. It could be even more by the end of the decade. The region is set to play a major role in ensuring Europe’s “digital sovereignty”. For Macron, the success of Dresden as a semiconductor hub might serve as a blueprint for the development of other strategic sectors in Europe.

Public investment has been an instrumental catalyst for the development of the cluster, be it after the re-unification of Germany and, especially, more recently. Last year, the EU agreed on the European Chips Act that aims to mobilise €43 billion in public investment in order to double the EU’s global market share in advanced semiconductors to 20%. As a result, Infineon and GlobalFoundries expanded their footprint with new plants in Dresden and global leader TSMC chose the city for its first fabrication plant in Europe, at the cost of €10 bn. Intel largely chose Magdeburg further down the river Elbe for its €30 bn project because of space constraints in Dresden, though the company seeks to integrate into the growing Saxon ecosystem. Public and private investment in the wider cluster has totalled more than €47 billion since 2022, more than €16 bn of which in the form of generous government subsidies. It seems no coincidence that Macron chose Dresden for his call to double the EU’s budget to enable an “investment shock” in strategic industries.

Another factor enabling Saxony’s success has been cluster effects and international networks. Chips Act money has not been used to grow something completely new. Dresden already had a vibrant ecosystem of more than 300 companies, including a number of large anchor investors, and several renowned research institutes (besides the Technical University) related to the semiconductor industry. Furthermore, the cluster initiative “Silicon Saxony” has successfully supported the development and marketing of Dresden as an international semiconductor centre for many years. It is set to replicate this now at the European level. Last year, Saxony launched the European Semiconductor Regions Alliance which brings together representatives of the EU’s main chips producing regions and the European Commission under the initial chairmanship of the Saxon minister-president. The aim is to connect Europe’s leading chips clusters and to play its part in ensuring that cooperation takes place between all political levels in the EU. It could set an example for other industries too.

However, there are also limits to Dresden’s success story. Innovation remains a challenge. Most companies around Dresden focus on the production of chips. There have been very few start-ups to receive VC funding and to grow big as a result. There are no major corporate headquarters in Dresden. Despite some excellent public and business R&D initiatives, Germany is still trailing by a margin its competitors in East Asia and the US in semiconductor patents. The Chips Act’s heavy focus on manufacturing capacity is unlikely to change this fundamentally. A lack of skilled workers and high energy costs pose further problems. Saxony is now undertaking big efforts to make Dresden, a city of 550,000, more attractive to foreign talent, as employment related to the chips industry is expected to increase from about 76,000 to more than 100,000 by the end of the decade.

Despite the city’s growing prominence in the European semiconductor industry, Europe’s share in global production has fallen since the beginning of the century. Without public money and amidst an intensifying global competition for chips, Europe and Saxony would have fallen further behind. Critics have warned that European chips clusters remain less competitive compared to peers in East Asia and the US, which costly subsidies are unlikely to change. These recent investments will only come online in the next few years, so their success is yet to be (dis-) proven. The lesson in the meantime perhaps is that a forceful industrial policy as championed by Macron can lead to greater European “sovereignty” and self-sufficiency, but whether it will ultimately boost the industry’s competitiveness in Europe remains to be seen.

This will be critical for both the returns on public investments as well as for the French president’s wider plans: All industries that Macron views as strategic will depend on competitively priced, cutting-edge chips. And just like semiconductors, these are industries that are highly mobile and R&D intensive. While the EU debates how to mobilise billions of euros to promote certain industries, the bloc should pay equal attention to strengthening Europe’s cost competitiveness and innovation capacity.

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