EU Sovereignty Fund: is it appropriate now?

If the Europeans want to defend their prosperity and influence, a special fund for the Bundeswehr – the core of the German “turning point” – will not be enough. Industrial policy retrofitting is also necessary. Americans and Chinese compete to dominate the value chains of the future, whether in microprocessors, solar panels or high-performance batteries.

Precisely because the EU is primarily an economic and not a military power, it must not allow itself to be left behind in these areas. The EU Commission is therefore pushing for an industrial policy counter-offensive, a demand that the chancellor should support.

Precisely because the EU is primarily an economic and not a military power, it must not allow itself to be left behind in these areas.

The Brussels ideas boil down to allowing more subsidies in the energy transition – financed via a “sovereignty fund”. Although EU state aid law has been adjusted, it sets rigid limits compared to the USA and China. No question: subsidies are economically problematic, they distort the market.

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In an ideal world, they would not exist, since globally agreed trade principles guarantee fair competition. But the world as it presents itself today is different. America is distributing billions in aid for green tech made in the USA, the Chinese are nurturing state-owned companies and sealing off their markets.

If the rest of the world doesn’t play fair, Europeans have two options. You can fight a trade war in the WTO’s arbitral tribunals – a more or less useless endeavor since the World Trade Organization is barely able to act. Or they can accept the industrial policy challenge. Changing times means having the courage to choose option two. And yes, new EU bonds are also required for this. The Commission rightly points this out.

A sovereignty fund would complement the Corona recovery fund and also finance green industrial projects in those member states that could not otherwise afford it. The pandemic was not a singular crisis. Russia’s war against Ukraine and global green economic nationalism also pose major challenges for Europe. That’s why the EU’s political response – jointly shaping the future with joint loans – must not be unique.

Cons: This fund sends the wrong signal at the wrong time
by Jens Münchrath

Ursula von der Leyen is always there when there is something big to announce: there is the “Green Deal”, the “biggest program of all time”, there is the 725 billion euro “Next Generation EU” fund to combat the consequences of the pandemic . And then there is the 300 billion “Global Gateway” initiative, with which the President of the Commission wants to counter the Chinese Silk Road initiative. There are no limits to your imagination when it comes to naming or the volume of the packages.

Now von der Leyen is proposing a “sovereignty fund” with which Europe should defend itself against the protectionist US subsidy program with the demeaning title “Inflation Reduction Act”. Irrespective of the fact that this EU fund is also to be financed from joint bonds, which will trigger controversial debates about joint debt liability: this fund sends the wrong signal at the wrong time – especially since the next-generation fund has not yet been used up.

Firstly, the fund could ultimately bring about exactly what it is also in the interests of Europe to prevent – ​​a self-defeating and expensive subsidy race between the transatlantic partners, and this at a time when the unity of the West is more important than ever. Especially from a European perspective.

Even the name “sovereignty fund” seems as if the geopolitical dwarf EU wanted to encourage itself.

Because the USA is much better prepared than Europe for the epochal conflicts with Russia and China. The dependency on America for security policy has seldom been greater than it is now. Even the name “sovereignty fund” seems as if the geopolitical dwarf EU wanted to encourage itself.

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Second: “Industrial policy instead of trade conflict,” shouts Brussels. The fact that the boundaries between the subsidy race and the trade war are fluid is not mentioned. There is no doubt that the new EU fund is based on a protectionist agenda, i.e. a “Europe first” policy. Because protection is its purpose. It only remains to be seen what design von der Leyen will come up with so that European companies can benefit from the subsidies.

Thirdly, even if one sees the subsidies as a legitimate reaction to the discrimination against European companies by the USA, it is clear that Brussels would damage third countries with the same approach, which Europe urgently needs at this time. In any case, the EU’s register of sins for subsidies is long – especially in agriculture.

Instead of hitting back with equal means, the EU should rather focus on negotiations. If necessary, the way would still be to use the standard means: a WTO complaint. It would be a sign that at least Europe has not yet lost faith in a multilateral trade order.

In the end, it is not the subsidy capacity that decides a country’s competitiveness, but a mix of good framework conditions: This also includes a minimum of bureaucracy. The creativity of the head of the Commission would be well invested here. “Sovereignty” also means reacting calmly to trade frictions.

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