The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Jennifer Johnson

LONDON, June 1 (Reuters Breakingviews) - Microchips are the tiny enablers of modern economic growth – and only a fraction are made in Europe. Legislation introduced in 2022 proposed that the bloc double its share of global chip production to 20% by 2030. It's not working, meaning a change in focus is justified.

According to Reuters, which cited a draft of the EU’s so-called Chips Act 2.0, the bloc wants to boost domestic demand for European-made chips, in part by getting governments to buy them from local startups. The bloc's tech chief Henna Virkkunen will on Wednesday outline the broader plans, which supplement the original Chips Act from three years ago.

Focusing on boosting local demand for cutting-edge silicon effectively acknowledges the key flaw with the old approach. The dream was to get chipmakers like Intel INTC.O or TSMC 2330.TW to build manufacturing facilities or "fabs" in Europe, helped by subsidies. Yet this supply-side approach foundered, in large part because it didn't have a clear answer to the question of who in Europe would buy the cutting-edge semiconductors.

Intel cancelled the planned construction of two “mega fabs” in Germany last July. It was largely a financial decision. But it also reflected a lack of commitments by European customers. Leading-edge fabs require leading-edge local chip designers to use them, which Europe lacks. Using government money could give young cutting-edge chip startups a boost, even if it might not be a game-changer.

Alongside this, it would make sense to simplify and centralise the way Europe hands out subsidies. The comparison with the U.S. is stark. The 2022 American CHIPS and Science Act mobilised $39 billion in federal funding for grants and loans to would-be fab developers, and offered them a 25% federal investment tax credit. Individual states could then chip in, too.

Though the EU Chips Act vowed to marshal €43 billion to support semiconductors, it wasn’t all drawn from one large pot. Some funding was redirected from other European programmes, while member states were expected to contribute large subsidies. The commission would then evaluate proposals. Streamlining the process would be tough given Brussels' political constraints, but now is a good moment to try.

The bigger question is whether European politicians can realistically do anything to get cutting-edge fabs on the continent. Brussels has a poor track record of stimulating corporate innovation.

If that continues to be the case, Europe has other ways to maintain its relevance in the AI race. The bloc’s most valuable company, ASML ASML.AS, builds machines that are key to producing virtually every advanced semiconductor on earth. Besi BESI.AS and ASM International ASMI.AS, both also Dutch, make equipment that is crucial for chip assembly and manufacturing. Germany’s Infineon Technologies IFXGn.DE produces power semiconductors that can control and manage electricity in data centres, while France’s Soitec SOIT.PA makes the base materials on which chips are built.

In other words, Europe has a few quiet chip-industry linchpins, even if it lacks a cutting-edge fab of its own. That should mitigate the concern if the latest version of the EU Chips Act proves as ineffective as the last.

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CONTEXT NEWS

European Union technology chief Henna Virkkunen will, on June 3, lay out ​details of the bloc's latest attempt to develop and control critical technologies and services, including semiconductors.

Reuters reported on May 28, citing a document, that the European Commission wants governments to buy chips made ​by EU startups.

The proposal, dubbed Chips Act 2.0, supplements the original Chips Act implemented three ​years ago, according to the Reuters report.