Every morning, before I even make coffee, I already use dozens of microchips. I reach for my smartphone before my feet hit the floor. The smart thermostat I nudge up one-two degrees. In the kitchen, the smart toaster adjusts its browning time automatically; the coffee machine measures water temperature to the exact degree.
Most of us move through our days like this without a second thought. But behind every swipe, every sensor, every algorithm, there is something far less visible and far more fragile: the microchip.
Semiconductors etched onto silicon wafers and packed with billions of transistors, microchips are modern life’s invisible infrastructure.
And they are everywhere.
Apart from my daily utensils, they power electric vehicles and metro signalling systems, medical scanners and satellites, data centres and defence technologies. And now, increasingly, the AI systems that are reshaping how we work, create and make decisions.
When the global chip shortage struck in the wake of the pandemic, industries across the world, including the EU, felt the impact. Car factories across the EU slowed or stopped. Medical device production stalled.
The external dependence on chips turned out to be a key vulnerability.
Europe’s Big Bet
The EU took note. In 2022, it launched the European Chips Act.
This is the Union’s €43 billion bet to double its global chip production from 10% to 20% by 2030 – this would bring serious chip manufacturing back to European soil.
“This is ambitious but needed for our path to innovation, especially in making Europe a leader in AI,” an EU Commission spokesperson told The European Perspective.
“With the Chips Act, we have already attracted more than €80 billion of investments to the EU,” the spokesperson added, stressing that 85% of the total funding has already been allocated, including longer-term initiatives to support the development of AI chips in Europe.
Sounds impressive, right?
More on paper than in practice.
Europe set itself a target of producing 20% of the world’s chips by 2030. The EU’s own forecast from July 2024 puts it on track to roughly reach 11.7% .
Trade union representative Isabelle Barthès is skeptical. “To reach its 20% market share goal, the EU would need to quadruple its production capacity by 2030. That says it all,” she stressed in May 2025.
Douglas Fuller, an Associate Professor at the Copenhagen Business School who analyses the global semiconductor industry, is cautious about what Europe can realistically achieve.
“I think progress will be relatively slow, based on the projects currently underway in Europe,” he told The European Perspective.
But Fuller says the bigger issue is how Europe defines success.
“There seems to be a confusion between two goals,” he explains. “One is building a globally competitive semiconductor industry. The other is ensuring supply security.”
The first goal, competing head-to-head with the world’s semiconductor powerhouses, is extremely difficult, he says. The second is more achievable: making sure Europe has alternative sources of chips so it is not entirely dependent on other global actors.
“If the objective is simply to ensure there’s a second source of supply,” Fuller adds, “that’s not as hard to do. If that’s the EU’s policy objective, that’s perfectly reasonable.”
The EU is, in fact, pursuing both goals: diversifying its supply chain to ensure the EU’s technological sovereignty, and becoming a leading global chip producing player.
The Hidden Dependency
Yet even building resilience alone, which Fuller deems a more achievable goal, requires solving another problem.
Rare earth elements.
These heavy metals are key to advanced electronics and the machines used to manufacture semiconductors. Rare earths are often not part of the chips themselves, but they are indispensable to producing them.
Rare earth minerals displayed at Baotou, Geology exhibition in Hohhot, Inner Mongolia, China – Wikimedia Commons
Without secure supplies, Europe can design chips and build fabrication plants, but it cannot manufacture them at scale.
Neodymium and dysprosium are magnets used in ultra-precise motors, while cerium and lanthanum are used in optical systems and polishing compounds.
Here’s the uncomfortable reality: China controls around 70% of global rare earth mining output and 85% of processing capacity, giving it a near-monopoly on both the extraction and refining of raw materials.
The EU imports roughly 98% of its rare earth supply from China.
That’s not a supply chain: it is a dependency, which has already been weaponised.
In April 2025, China imposed export restrictions on seven rare earth elements amid escalating trade tensions with Washington. China now approves every export through a government licensing system.
Ursula von der Leyen (President of the European Commission), Xi Jinping (General Secretary of the Chinese Communist Party), Charles Michel (President of the European Council) pose together during the EU-China Summit 2023 – Wikimedia Commons.
The effects of these measures were immediate. By May 2025, prices had surged: dysprosium oxide – a dysprosium powder needed for magnets and optics – had tripled, terbium oxide – used in similar applications – more than doubled, and industries from AI chip manufacturing to automotive production were feeling the squeeze.
Industry voices were quick to sound the alarm. In June 2025, the European Association of Automotive Suppliers (CLEPA) revealed that several production lines had to halt for a while after exhausting their rare earth supplies. Major car makers, like BMW, also reported disruptions across their supply networks.
The pressure kept building. In October 2025, China announced plans to add five more rare earth elements to the export control list, before delaying implementation by one year. This means that, while, in 2025 the impact was not felt, it would be in 2026.
So What’s Europe Actually Doing?
Brussels insists it is striving to address its rare earth vulnerability.
“We even have a very clear target,” the Commission spokesperson said. “By 2030, we want to extract 10%, process 40%, and recycle 25% of what we consume annually. At the same time, we want to limit reliance on any single external supplier to 65%.”
The only supplier that this applies to is China.
The EU is mobilising funding through instruments such as the Global Gateway and the European Investment Bank, alongside new strategic partnerships with countries including Canada, Australia, Namibia, Chile and South Africa, some of which will be focusing on extracting rare earths.
“Last year alone, we approved 60 new Strategic Projects, including seven on rare earths,” the European Commission spokesperson told The European Perspective.
That means that less than 10 projects out of 60 target rare earths – a share that hardly suggests a serious strategic focus.
Recycling is one of the EU’s central strategies for reducing dependency, as mentioned by the EU spokesperson.
But experts caution that its impact will take time.
“Recycling has the potential to reduce Europe’s dependence on rare earth imports, particularly with regard to magnet materials,” says Marcell Kutzsch of German Mineral Resources Agency (DERA).
“However, in the short term, until around 2030, its contribution is expected to remain minor.”
This is because recycling of rare earths faces a structural problem. Europe still lacks the infrastructure to collect, sort and process electronic waste at scale, with less than 40% of the e-waste currently being recycled.
There are not yet enough discarded devices containing recoverable rare earths. Even when present in a product, rare earths are extremely difficult to recover, because they are typically part of complex alloys, bound with strong adhesives, which makes them hard to separate.
This also makes the recycling process expensive and environmentally taxing, as it is very energy-intensive and requires extreme temperatures and the use of hazardous chemicals. Some initiatives, including EU-funded projects such as INSPIREE, are working to address these challenges.
“Even in the longer term,” Kutzsch adds, “recycling will remain only one component among several.”
For union representative Isabelle Barthès, the choice is political. “At the end of the day, the planet’s resources are limited,” she emphasised.
“It is the role of public authorities to channel research and innovation into the right sectors and activities,” meaning that if the EU invested more in the recycling of rare earths, significant improvements could certainly be achieved.
For now, though, as the EU focuses its energy and resources on expanding extraction projects around the world, recycling seems far from a priority.
Scant or not?
According to the United States Geological Survey, while rare earths are relatively abundant in the Earth’s crust, minable concentrations are less common than for most other mineral commodities.
China holds half of the world’s total of just over 90 million metric tons of known rare earths.
That sounds manageable in terms of finding alternative supply sources, until you look at the other side of the ledger: even if you combined every known reserve held by every other country on earth, including Brazil’s 21 million metric tons, India’s 6.9 million, Australia’s 5.7 million, Russia’s 3.8 million, and all the rest, you would still only roughly match what China holds alone.
Apart from not matching China’s sheer volume of rare earths, these other resources are geographically dispersed and unevenly developed, and many deposits remain difficult or expensive to exploit.
For some rare earths, diversification options are limited, as they are mostly concentrated in China.
Take dysprosium, for instance. China holds roughly 60% of the world’s known dysprosium reserves, with refining concentrated almost entirely at a single facility in Wuxi. There is no realistic near-term alternative.
You cannot diversify away from a monopoly dictated by geology.
Most of the known reserves of dysprosium, one of the rare earths, are now found in China.
European Factories, Chinese Materials
Some of the EU-endorsed projects already underway illustrate both the scale of Europe’s ambitions and just how deeply rare earth dependency runs through them.
Take the European Semiconductor Manufacturing Company (ESMC), a new production facility breaking ground in Dresden in 2024 and expected to be operational by 2027. It is a joint venture between Taiwan’s TSMC – the world’s largest chip foundry – and European electronics companies Bosch, Infineon and NXP. It will be TSMC’s first chip factory on European soil.
The German government secured European Commission approval to provide €5 billion in state support, with total investment exceeding €10billion. This approval was required under EU rules, which prevent member states from giving large targeted subsidies without the Commission checking that they do not distort the single market.
The ESMC building under construction in Dresden, March 2026 – Wikimedia Commons
When fully operational, the plant will produce chips using 12- to 28-nanometre technology nodes: the kind that sit at the heart of automotive electronics, industrial machinery, communications equipment and driver-assistance systems.
At full capacity, it could turn out close to 480,000 wafers, a significant annual capacity, a year and create around 2,000 high-skilled direct jobs, with thousands more expected in the surrounding ecosystem.
But here is the uncomfortable detail buried inside that ambition. To manufacture chips at 12–28 nanometres, you usually need EUV and DUV lithography machines, which are needed to print tiny features forming the chips’ basis. Their ultra-precise motors need neodymium and dysprosium.
Strip out the rare earths, and the factory floor stops working.
The dependency does not end at the factory gate, either. The cars and machines these chips will go into are themselves full of rare earths: neodymium magnets in electric power steering and hybrid engines, lanthanides in lasers and optical modules, rare-earth-doped materials in sensors and actuators.
This is not just at ESMC.
Ephos, an Italian company working out of Milan and supported through state aid through the EU Chips Act, produces photonic chips, microchips that use light (photons) instead of electricity (electrons) to process, transmit, and sense data. These devices promise higher speeds, lower energy use, and reduced heat compared to traditional electronic chips.
These types of chips often use rare-earth materials. Erbium, ytterbium, or neodymium are commonly used as dopants in glass or crystal structures to generate or amplify light signals.
When asked about their dependence on Chinese rare earths, neither of these companies replied.
In other words, the chip logic itself may not need rare earths. But almost everything around it does: the tools that make it, and the products it ends up inside.
Brussels says it is aware of this and is now accelerating its efforts to address.
The Policy Pipeline
Across the full length of the chip supply chain, raw materials, equipment, design, manufacturing, packaging, the EU is ramping up policies and initiatives.
Securing more rare earths is a key focus, through initiatives such as RESourceEU Action Plan.
Adopted in December 2025, RESourceEU aims to secure critical raw materials, including rare earths, and reduce dependencies on imports. It plans to mobilise €3 billion in EU funds within the next 12 months for priority critical raw material projects.
The Commission spokesperson described the plan’s ambition directly: it “charts a path towards a faster diversification of critical raw material supply chains.”
The plan will support projects that substantially reduce dependency by up to 50% by 2029 for the battery, rare earths and defence raw materials value chains.
On the chip side, a second legislative package, informally called “Chips Act II,” is expected from the Commission sometime in 2026. Where the first Chips Act focused on manufacturing capacity as an emergency response to the pandemic shock, the next phase is intended to be more strategic and broaden the scope.
Policy discussions point toward stronger support for advanced packaging, quantum and photonic chips, and energy-efficient processors for AI and industrial use.
The bloc’s ambitious agenda reflects a key shift in how Europe thinks about technology.
For decades, Europe treated semiconductors as commercial goods best sourced from wherever the market supplied them cheapest. Policymakers now treat them as strategic infrastructure, closer in kind to energy or food security than to consumer electronics.
Interconnected or alone?
That reframing is necessary. But treating chips purely as a matter of economic sovereignty, without considering Europe’s place in a deeply interconnected global industry, risks becoming a self-defeating strategy.
As Isabelle Barthès of IndustriAll Europe warns, Europe’s industrial strategy must not turn into a chip war that fuels broader geopolitical tensions. The US and China already treat chip dominance as a zero-sum game, with trade bans and export restrictions on both sides aiming to curb each other’s progress in the field.
“The collaboration between companies, both domestically and internationally, can help optimise production capacity and reduce the risk of overcapacity,” she says. “We need to carefully weigh strategic autonomy and strategic interdependence.”
For the EU, that balance is key. Strengthening domestic production cannot come at the expense of disengaging from global supply chains, including those that involve China. The aim should not be isolation, but resilience within an interconnected system.
Without that equilibrium, Barthès warns, the cooperative foundations of the global economy risk eroding, along with the conditions that make stable competition possible. The early signs are already visible: resources increasingly channelled into drones and missiles rather than productive investment, as rearmament gathers pace in the EU and beyond. “This is not sustainable,” she told The European Perspective.
Self-sufficiency, in other words, is a legitimate objective. But pursued in isolation, without sustained diplomatic engagement and international cooperation, it risks replacing one set of vulnerabilities with another.
The damage from China’s export controls in the EU was already significant and that was just collateral fallout from a US-China dispute the EU didn’t even start.
If the EU were to adopt similarly provocative measures, like banning Chinese companies’ access to public procurement in key fields or impose sanctions or blacklists, it could invite a far more direct and forceful response from Beijing, one aimed squarely at undermining Europe’s own semiconductor ambitions.
Brussels therefore faces a delicate balancing act: building sufficient domestic capacity to reduce critical dependencies, while preserving the trade relationships that continue to underpin its economy.
The decisions taken now will shape not only Europe’s industrial base, but its position within a global economic order that is itself currently under negotiation.
How that order takes shape, and who has a voice in it, will depend in part on whether major players double down on competition or find ways to sustain collaboration.
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