What Policymakers Must Fix in Europe’s Chips Act 2.0

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Europe’s first Chips Act was born in crisis. Faced with pandemic-era shortages, geopolitical shocks, and Washington’s industrial push, Brussels moved quickly to put a semiconductor strategy on the table. Speed delivered political momentum, but not strategic clarity.

Now, as policymakers shape what many call EU Chips Act 2.0, they have something they lacked the first time around: breathing room. Immediate shortages have eased, the first wave of subsidy announcements is largely committed, and the structural constraints of Europe’s semiconductor position are coming into sharper focus.

Increasingly, the debate in Brussels is shifting. Unlike earlier arguments about which technologies Europe should prioritize, Chips Act 2.0 is becoming a test of whether the EU can design funding and governance mechanisms that match the realities of a capital-intensive, globally distributed industry.

“The first Chips Act was very much a reaction,” Niclas Poitiers, research fellow at Bruegel, told EE Times. In his view, the original package moved forward rapidly amid supply chain panic and geopolitical pressure, with policymakers eager to demonstrate they were acting.

That urgency helped mobilize investment. But it also exposed institutional weaknesses in how Europe designs and deploys industrial policy—weaknesses that Chips Act 2.0 will need to address.

A policy built in haste

From Poitiers’s perspective, the origins of the first Chips Act explain many of the tensions now surfacing. The initiative emerged at the intersection of pandemic shortages, U.S. export controls, and political pressure to match Washington’s semiconductor push. The result, he suggested, was a policy assembled faster than Brussels typically moves. “It was very rushed,” he said, adding that the package at times carried “a bit of a political stunt to it,” with visible action taking priority over deep structural analysis.

That speed was not without benefits. Europe succeeded in signaling strategic intent and unlocking major investment commitments. But the design choices embedded in the first Chips Act, particularly around funding and state aid, are now coming under closer scrutiny. The central question for Chips Act 2.0 is whether Europe can move from reactive industrial policy toward a more durable institutional framework.

At the heart of the debate lies a structural constraint unique to the European Union: Most semiconductor subsidies still flow through national budgets rather than a centralized EU funding mechanism. This was not accidental. EU budget rules and political realities limited the Commission’s ability to deploy large sums directly. As Poitiers noted, the EU’s multiyear budget cycle is relatively rigid, making it difficult to rapidly mobilize new funds mid-cycle. The result was a Chips Act heavily dependent on member-state spending power.

“The problem is not EU fiscal ability as a whole,” Poitiers said. “It is that it all hinges on the member states.” That structure creates uneven capacity across the bloc. Countries with strong public finances—notably Germany—can move aggressively to support fabs, while more fiscally constrained members face tighter limits. Smaller countries may have sound budgets but lack the scale to deploy multibillion-euro packages.

The risk, increasingly acknowledged in Brussels, is a fragmented subsidy landscape that reflects national fiscal strength more than European strategic priorities. These tensions are fueling renewed discussion around EU-level semiconductor funding, potentially through a competitiveness fund or similar mechanism.

Poitiers noted that in principle, Europe as a whole has the fiscal capacity to support strategic semiconductor investment. The constraint is political and institutional rather than macroeconomic. If funding remains primarily national, he warned, Europe risks both underinvestment and internal distortion. Wealthier member states can compete aggressively for projects, while others struggle to participate meaningfully.

There is also a coordination challenge. When individual governments negotiate separately with chipmakers, the EU risks subsidy competition within its own borders.

From a global perspective, the contrast with the U.S. is striking. Washington was able to stand up a single CHIPS Program Office with a dedicated mandate to negotiate incentives and deploy funding. “That one group had as their only remit to focus on negotiating with the key semiconductor companies,” Ben Reynolds, research analyst at Rhodium Group, told EE Times. The result was “a much more streamlined process” than Europe’s multilayered approach.

Fixing the policy toolbox

Europe’s governance model makes full centralization unlikely. But the Chips Act 2.0 debate is increasingly focused on whether some shift toward EU-level funding is necessary to reduce fragmentation.

Beyond funding scale, Chips Act 2.0 faces a more technical but equally important challenge: The policy instruments themselves may not be ideally suited to the semiconductor sector. One of Poitiers’s sharpest critiques concerns the heavy reliance on R&D and innovation frameworks to justify what are, in many cases, large-scale industrial capacity investments. From a policy-design standpoint, he sees a mismatch.

“All of these industrial subsidies are justified as R&D subsidies,” he said. But in practice, many projects are fundamentally about expanding manufacturing capacity rather than advancing frontier research.

This distinction matters because EU state-aid rules are more permissive for innovation funding than for straightforward industrial support. The result is a system that sometimes forces policymakers to frame capacity-building projects in innovative terms.

The tension becomes even more pronounced in parts of the value chain such as assembly and packaging. These segments can be strategically important but are not always easily classified as cutting-edge R&D. “If you want to break dependencies, you will have to really bend the rules,” Poitiers said.

For Chips Act 2.0, this raises a structural question: Should Europe continue adapting existing instruments to fit the semiconductor sector or redesign the toolbox more fundamentally?

Even with improved funding mechanisms, policymakers face a familiar political economy challenge. Large, highly visible fab announcements generate political momentum and public attention. Smaller ecosystem investments, whether in packaging, materials, or design, often deliver less headline impact even if their strategic value is high.

Reynolds sees this tension as persistent. There remains, he said, a political incentive to prioritize “splashy investment announcements,” even as expert consensus shifts toward more targeted interventions. For Brussels, the risk is not simply misallocation of funds but misalignment between political signaling and supply chain resilience.

Running through the entire Chips Act debate is the question of technological sovereignty—how far Europe can realistically reduce external dependencies. Reynolds noted that Europe’s semiconductor ecosystem remains deeply intertwined with the U.S., giving Washington significant indirect leverage. “The U.S. has extraordinary leverage over Europe’s semiconductor companies,” he said, citing the reach of export controls and tightly coupled supply chains.

Yet even without U.S. pressure, the deeper structural dependencies would remain. According to Poitiers, full semiconductor autarky is not achievable for any major economy in the foreseeable future. “There is virtually no one that can be an autarky on these things, not even the United States,” he said.

The semiconductor supply chain remains deeply specialized and globally distributed. Attempting to replicate the full stack domestically would be economically prohibitive and technologically inefficient. For Chips Act 2.0, the implication is not retreat but precision. Europe’s strategy must balance resilience with continued integration into global ecosystems, a balance that depends as much on policy design as on industrial ambition.

With the immediate crisis phase over, Europe’s semiconductor policy is entering a more deliberate stage. The first Chips Act demonstrated that Brussels can mobilize quickly under pressure. The second will test whether it can build a more coherent and sustainable policy framework.

That means addressing questions that are less visible but ultimately more consequential: how funding is structured, how state-aid rules are applied, how member-state incentives are aligned, and how Europe positions itself within a deeply interconnected global supply chain.

The window now opening around Chips Act 2.0 is, in many ways, the one that Europe did not have in 2022. Policymakers have more data, more experience, and more time to refine the approach.

If the first Chips Act was about speed, Chips Act 2.0 will be judged on architecture. Europe has already shown that it can act. The next test is whether it can design a system equal to its ambitions.

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