EU Commission leaders warn of a subsidy race with the USA

Brussels The EU Commission is divided over the European response to the American Inflation Reduction Act (IRA) on the ecological restructuring of the economy. The three most important deputies of Commission President Ursula von der Leyen (CDU) warned in a guest article in the “Financial Times” on Thursday of a subsidy race with the USA.

The US law, which has been in force since January, provides 369 billion euros in tax rebates and subsidies for green technologies. In Brussels there are fears that European companies could migrate to the USA given the massive support.

Some in Europe are calling for the EU to respond to the US law with similar measures, write Commission Vice-Presidents Valdis Dombrovskis, Margrete Vestager and Frans Timmermans. “Such an exchange of blows carries the risk of considerable damage to one’s own economy.”

The three commissioners bear the title “Executive Vice President” and together with von der Leyen form the inner circle of the Brussels authorities.

Their intervention is apparently aimed at Industry Commissioner Thierry Breton, who has been campaigning in European capitals for months for a robust industrial policy response to the US law.

Breton: Transitional solutions are not enough

Last week, Breton wrote in a LinkedIn post that “short-term workarounds” are not enough. Rather, the EU must build a “strong production base”, “and by that I mean entire ecosystems with suppliers and small and medium-sized companies”. Previously, together with Economics Commissioner Paolo Gentiloni, he had already called for a new EU investment fund to be financed by community debt.

The three commission deputies also express concern that the IRA could lead to disadvantages for European companies. They are therefore in favor of relaxing the European state aid rules “for a limited period and in a targeted manner” in order to support strategically important sectors. The Commission intends to make a concrete proposal on this next week.

Subsidies could jeopardize the internal market

At the same time, however, the trio warns that a massive increase in subsidies could fragment the internal market because the member states have different financial strengths. “Subsidies must not come at the expense of functioning markets and fair competition,” they write.

In fact, a number of smaller EU states are critical of the planned relaxation of state aid rules. They fear that large countries like Germany and France will then support their corporations with state aid and exacerbate economic inequality in the Union.

Belgian Prime Minister Alexander de Croo summed up the concern last week: “The answer cannot be that we relax state aid rules, because then there will be a race to see who has the deepest pockets, and by definition Germany has deeper pockets.” than Belgium.”

Margrethe Vestager (left) and Ursula von der Leyen

Competition Commissioner Vestager is currently working on further relaxing EU state aid rules.

(Photo: IMAGO/Panama Pictures)

Commission chief von der Leyen therefore reiterated last week in Davos that a compensation mechanism is needed. “In order to avoid fragmentation of the single market and to support the transition to clean tech across the Union, we also need to increase EU funding,” she had said. She had already called for a European “sovereignty fund” in December.

Commission does not want to talk about new debts yet

In their guest article, Dombrovskis, Vestager and Timmermans name the income from emissions trading, which is expected to amount to 700 billion euros by 2030, as a possible source of financing for the “sovereignty fund”. The European Investment Bank is also to be used for financing.

However, the Commission does not want to start the financing debate just yet. She intends to present a concrete proposal for the sovereignty fund in the summer at the earliest. First of all, one must be clear about the goals of an industrial policy and the needs of individual sectors, according to Brussels.

The Europeans also hope that they will get further concessions on the use of the IRA in the joint task force with the USA. They want to ensure that European companies can receive US subsidies just like Canadian and Mexican ones. Washington has already moved on subsidies for electric cars.

Brussels also wants to achieve something similar in battery production and critical raw materials. Ultimately, it also depends on which sectors need how much support.

Ministry of Finance against push by EU Council President

The EU heads of government want to deal with the topic at their next summit on February 9th. In a draft of the final declaration, EU Council President Charles Michel has already outlined a framework: in addition to easing subsidies, he also wants to talk about new financing instruments.

Among other things, he proposes launching a new program based on the model of “Sure”. The EU had thus financed short-time work in needy member states during the pandemic. The Commission had issued EU bonds worth 100 billion euros and passed the money on to 19 governments in the form of cheap loans.

The proposal, which Michel had already made in the Handelsblatt on Monday, has met with fierce resistance in a number of capitals. “Proposals to prepare the way for new joint debts will not bring Europe any further,” the Federal Ministry of Finance announced on Thursday. There is no financial need for this either, because only a fraction of the money from the Corona reconstruction fund Nextgen EU has flowed out.

“The money for investments is there. It doesn’t need more funds, the existing money has to be used more quickly and effectively.” Dutch Prime Minister Mark Rutte made a similar statement this week.

More: EU Council President Charles Michel outlines European response to IRA

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