Brussels There is hardly an issue that divides Europe as much as the question of whether the European Union should take on new joint debt for the green restructuring of the economy. The US subsidy program IRA (Inflation Reduction Act) alarmed Europe’s politicians and led to calls for a European “sovereignty fund”.
The IRA is a $369 billion package that the US government wants to use to bring key green technologies into its country.
But in the EU there is great resistance to new debt to combat the US plans. Chancellor Olaf Scholz and Dutch Prime Minister Mark Rutte point out that there is still enough money in the various EU pots and that these funds only have to be reallocated and paid out more quickly. Read below for an overview of how much money the EU could mobilize.
The regular seven-year budget of the EU (2021-2027) contains around 1211 billion euros. In addition, there is the special budget “Next Generation EU” decided during the pandemic with a further 807 billion euros (until 2026). In total, slightly more than 2018 billion euros are available at EU level – for all policy areas.
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A significant part of the funds goes into green investments: According to the Commission, 30 percent of the EU budget is earmarked for the fight against climate change. Of the 723 billion euros in the Corona reconstruction fund, a sub-fund of “NextGenEU”, as much as 40 percent are earmarked for the green conversion of the economy.
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Compared to these sums, the 369 billion euros in tax rebates and subsidies from the US government no longer seem so enormous.
“The problem isn’t that Europe doesn’t have a green industrial policy,” says Simone Tagliapietra of the Bruegel Institute in Brussels. “The problem is that Europe has too much of it.” While the US government neatly packaged and marketed its green subsidies under the title IRA, the funds in Europe were distributed across several levels (EU, member states, regions, municipalities).
How much money is still in the Corona reconstruction fund?
The fund consists of aid (338 billion euros) and loans (385 billion euros). The difference between these two types is that Member States have to repay the loans to the Commission. That’s why only seven governments have applied for loans, totaling 165 billion euros.
The aid, on the other hand, is almost entirely allocated to the member states. The money is already planned in the national development plans until 2026. To date, 95 billion euros have been paid out.
Currently, 220 billion euros in loans are still available in the fund. The governments that have not done so until now have until mid-March to apply for these funds. Some southern European countries such as Spain and Portugal are expected to do so as their financing conditions in the markets have deteriorated over the past two years. Countries like Germany, on the other hand, which can borrow money at better interest rates than the EU, have no interest in doing so.
All corona loans that are not called up should flow into the new EU fund “Repower EU” in mid-March. This was decided shortly after the start of the Ukraine invasion in order to become independent of Russian energy as quickly as possible.
Could “Repower EU” be the answer?
Formally, Repower EU is a sub-fund of the Corona Fund. It contains a basic stock of 20 billion euros in new subsidies, which come from the revenues from the European emissions trading.
In addition, five billion from the Brexit adjustment fund were reallocated there. In the future, there will also be undrawn corona fund loans. Depending on how much the states request by mid-March, this sum will be somewhere between zero and 220 billion euros.
The Repower EU loans are not intended exclusively for green investments. Liquefied natural gas (LNG) infrastructure or nuclear power plants can also be financed with it. The funds can also be used to build battery factories, for example. This is where the EU heads of government could start, for example, if they want to focus funds more on certain sectors that are threatened by the IRA.
>> Also read here: Comment – The EU does not need a new debt fund
“You can do a lot with Repower EU to react to the IRA,” says Siegfried Muresan, conservative budget expert in the European Parliament. The corona aid is not a direct answer to the IRA. But the green investments running until 2026 would make Europe a more competitive location.
How much money is still in the flexibility reserve?
The EU budget also contains a flexibility reserve of 21 billion euros for emergencies. By the end of 2021, 1.2 billion euros had been paid out, the figures for 2022 are not yet available. The money would theoretically also be available.
What happens next?
In view of the funds available, the German Federal Ministry of Finance considers a new European investment fund to be superfluous. The EU funds just have to be “used faster and more effectively,” according to Berlin.
In addition, the federal government is relying primarily on national responses: it is pushing for the EU state aid rules to be relaxed so that each country can give more support to strategically important industries.
Bruegel expert Tagliapietra also sees the main problem not as a lack of EU funds, but that the money is scattered across too many departments. This makes a coordinated approach difficult. On top of that, there is a risk that the EU will not be able to achieve economies of scale.
As a first step, he therefore calls for more coordination at EU level. Subsidies are necessary, but what is needed above all is innovation, greater harmonization of rules and more cross-border projects.
At a special summit on February 9, the 27 heads of government want to discuss the European response to the IRA. Until then, there will still be intensive negotiations. French President Emmanuel Macron will visit Dutch Prime Minister Mark Rutte in The Hague on Monday.
On Wednesday, the Commission will present proposals on how the EU should respond to the US program. A temporary relaxation of the state aid rules in individual sectors is expected. However, the debate on possible additional funding is to be postponed to a later date.
More: EU Commission leaders warn of a subsidy race with the USA