Europe’s Steel Policy Dilemma: Green Transition, Industrial Security and Permanent Protection
Main takeaways from an Italo-German roundtable on the future of the European steel industry. A commentary by Daniel Gros, and Philipp Reinhold
This commentary draws on the main takeaways from an Italo-German roundtable on the future of the European steel industry, co-organised by IEP Bocconi and the Europa-Institut at Saarland University on June 15, 2026.
Held in the framework of the January 2026 Protocol on a German-Italian Plan of Action for Strategic Bilateral and EU Cooperation, the event brought together representatives from government, industry and academia to discuss decarbonisation, energy costs, scrap markets, defence-related steel demand and the EU’s shift towards stronger trade protection.
In the spirit of the “Protocol on a German-Italian Plan of Action for Strategic Bilateral and EU Cooperation” of January 2026, the event co-organized by IEP Bocconi and Europa-Institut of Saarland University, on Monday, on June 15, 2026, brought together representatives from government, industry and academia to discuss current challenges faced by the steel industry in the two countries and in an European context.
A key difference between Italy and Germany is that in Italy most steel is already produced in electric arc furnaces (EAF) whereas in Germany, which traditionally produced its own coal and later profited from cheap gas imports, blast furnaces (BF) continue to play a relevant role.
Current transformation projects of German steel companies focus on direct reduction (DRI), EAF and hydrogen-based processes. Each of these production processes has its advantages and disadvantages, but one thing is clear: EAFs produce fewer (direct) CO2 emissions. At the same time, they primarily use scrap as raw material.
Given the different starting points, it would therefore be expected that the steel industry in both countries would take different stances on CO₂ pricing under the EU’s Emissions Trading System (ETS).
However, governments have set up various support schemes aimed at covering the additional costs arising from the ETS. One major competitive disadvantage facing German industry is the comparatively high cost of energy, which also affects Italian manufacturers with production facilities in Germany.
Another big difference that remains is that decarbonizing BF production requires huge investments, whereas EAF installations just require availability of low carbon power.
Investment in the transition of blast furnace processes in Germany has already begun, as the allocation of free emission allowances under the ETS is set to expire in a few years’ time.
This means that those steel producers who are already investing, for example, in the use of hydrogen to produce low-carbon steel have a strong interest in ensuring that the reduction in free allowances is implemented as planned.
Whilst a departure from the existing ETS schedule could reduce the costs of the green transition, it would at the same time devalue investments (regardless of whether they are financed by private loans or government subsidies) that are based on the current ETS mechanism and the expected allowance prices.
Strengthening the circular economy has been recognized as an overarching necessity that takes precedence over the other interests in the scrap sector. Germany is one of the world’s largest exporters of this raw material for steel production, whilst Italy is a significant net importer of scrap within the EU.
There is currently competition between Italy and third countries, particularly Turkey, regarding access to scrap products from other EU Member States.
A major obstacle to freer trade in scrap metal is that it is subject to differing legal frameworks, including both the international Basel Convention and national environmental regulations, which distinguish between scrap (and as a raw material for steel production) and general waste. This hinders the functioning of the single market for scrap.
A key argument for giving the steel sector special treatment is that steel is needed for defense. However, only a small fraction of all steel production (less than 0.5% of the total) is needed for armaments production. Each tank or armored vehicle might require up to 50 tons of steel.
But only a few hundred are being produced annually, resulting in steel consumption of a couple of hundred thousand, while EU production and consumption exceed hundred million tons.
The production of artillery shells, of which over 2 million are being produced, requires more steel than the production of tanks or other land-based systems. Whether this small portion, which mostly includes special steel from limited suppliers, must be preserved to exclude potential supply risks remains an open question.
Regardless of the specific role played by steel products in the defense sector, it has become clear that the current policy is based on a “strategic importance” of the steel sector. It is not entirely clear how this is to be determined.
Socio-economic factors such as job losses and regional economic structures play a role to a certain extent, as does a lack of trust in supply chain relationships with countries such as China.
The overall differentiation between “high-risk suppliers” and “trusted partners” which seem to become more important in times of economic security policy may lead to practical difficulties and – in any case – higher costs.
The Demand for Permanent Protection
A decisive turn towards protection was the most hotly debated issue during the roundtable.
The EU steel sector has long been protected by trade defense instruments (TDIs) which focus on selected product categories and that must be in line with WTO law requirements.
In response to the first Trump tariffs on steel, the EU introduced its own safeguard measures in 2018/2019. The fear was that high US tariffs on steel imports would lead to trade being diverted to the EU, resulting in a surge of imports into the internal market.
Despite claims from the industry that point to ongoing injury from high import volumes, safeguards can last only eight years. Therefore, they will expire by the end of June.
However, during 2025, the EU and global steel policies changed fundamentally. Industry pressure for more protection intensified as capacity utilization rates and margins remained low.
According to OECD data, 165 million tons of new capacity additions are projected for the period 2025-27 and, as a result, global excess capacity is expected to increase to 721 million tons by 2027.
Members of the Global Forum on Steel Excess Capacity (GFSEC) decided on October 2025 to develop a joint response by the end of 2026. GFSEC brings together a number of major steel-exporting countries with the aim of addressing the causes and effects of overcapacity.
India and China have since withdrawn from the forum. The US and Canada already resorted to new unilateral import restrictions on steel, leading to further pressure on the EU.
Because of high political pressure, industrial decline and developments in other jurisdictions, the EU has adopted a steel overcapacity regulation which represents a permanent mechanism to protect EU steel industry from this structural problem.
It is incomparably stricter than the 2018/2019 safeguards in the sense that it establishes a tariff-rate quota (TQR) of only one half of the amount of the previous level and the tariff applied to imports above this very low quota is increased to 50%.
The TRQs is based on the import penetration ratio in 2013 in terms of EU apparent consumption. The official justification for choosing this year is that it represents the equilibrium before the emergence of the huge Chinese overcapacity (“level of imports that prevailed before the 2015 overcapacity crisis broke out”).
However, given that steel trade fluctuates considerably from year to year, it would have been more appropriate to take a multiyear average around 2013.
This would have yielded much higher TRQs as 2013 was the year with the second lowest import penetration ratio over the last quarter of a century.
It is thus difficult to argue that 2013 represents a fair benchmark. Moreover, the TRQs apply to all countries, including the many with which the EU has a free trade agreement who did not expect that they would suddenly be confronted by EU trade barriers in this sector. It requires significant tariff renegotiation and may also lead to retaliation.
Europe has a long history of problems in the steel sector, starting in the early 1980, when the then much smaller European Community elaborated a plan to provide temporary protection coupled with reductions in capacity and reductions in the workforce.
Over 40 years later, the sector is still not profitable, but this time the EU seems inclined to provide protection that looks permanent and is not subject to adjustment in the industry. The outlook for this sector thus remains bleak.
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
