Is the EU threatened with fragmentation?

Berlin, Brussels Paolo Gentiloni should not spend easy days in Berlin. The EU Economic Commissioner spoke with Chancellor Wolfgang Schmidt (SPD) on Tuesday morning, the meeting was scheduled to last until nine o’clock. But the need to talk was greater, Gentiloni only arrived at 9.43 a.m. for his follow-up appointment, which was about a kilometer away.

Gentiloni’s main concern: Europe’s response to the US subsidy program “Inflation Reduction Act” (IRA). It provides $369 billion in aid and massive tax breaks for climate protection industries. Europe fears an exodus of important parts of its industry.

Brussels wants to counter this, also with tax breaks for certain green investments, as leaked on Monday. For this purpose, the law on state aid should be relaxed. This is what the draft for the “Green Deal Industrial Plan” of the EU Commission says, which will be officially presented on Wednesday.

A “subsidy war” must be avoided, Gentiloni said in Berlin, saying the proposal will “be an opportunity to speed up and streamline procedures, particularly for those associated with the green transformation.”

But in large parts of Europe there is no trace of euphoria, on the contrary: there are fears that the plan will fragment the EU. Austria’s Finance Minister Magnus Brunner (ÖVP), for example, told the Handelsblatt that regulations and approval processes had to be simplified “instead of sliding into a trade war through subsidy competition that endangers our prosperity in the long term”.

Member States fear the EU is drifting apart

Last week, several member states made their dislike of exactly the approach that Brussels is now proposing clear. In a letter to Commission Vice-President Valdis Dombrovskis, Austria, Denmark, Finland, Estonia, Ireland, the Czech Republic and Slovakia warned that relaxing state aid law would endanger competition in the internal market.

>> Read here: EU proposes US-style tax rebates

The critics point out that the Commission under President Ursula von der Leyen has already relaxed the state aid rules twice during the pandemic. Around 80 percent of the government aid paid out as a result went to German and French companies because the two countries have more financial opportunities for this.

The EU Commission wants to solve the problem of unequal advantages by backing its green industrial plan not from national budgets, but with “appropriate funding at EU level”. However, the Commission has so far not given any details on this.

In Brussels it is expected that existing money from the EU budget and the Corona special fund will be reallocated to fill a new “sovereignty fund”. In fact, there are still billions in unused funds. However, whether these are sufficient as a response to the IRA is disputed. The alternative to countering the fragmentation of the EU would be fresh money: the EU could take on debt together.

But this idea is completely absent from the EU Commission’s paper. Around ten EU countries are blocking joint borrowing, including the seven that are upset about relaxing state aid law – but above all Germany.

Gentiloni wants European debt – and meets “friendly” rejection

Gentiloni’s visit to Berlin is therefore less a tour to explain his own proposals and more an attempt to expand his own push. The Commissioner is the face of advocates of new EU debt. The Italian had made it clear several times in the past few weeks that he thought there was no alternative. However, the issue is also controversial in the Commission. And with the paper of his institution, Gentiloni is finally on the defensive.

Communicatively, he is now trying to wriggle out. One should not think the discussion about the answer to the IRA from the end, he says. However, it is clear to all observers that European loans for Gentiloni are not the end of the debate on how the EU should act, but the beginning. If he still wants to achieve success, he must first and foremost get the Germans on his side.

On Monday evening, Gentiloni already reported on his talks in the German capital at an event of the Berlin Hertie School – in particular with the Federal Minister of Finance Christian Lindner (FDP). Lindner is the epitome of German resistance to Gentiloni.

Paolo Gentiloni

“Of course, we don’t have a subsidy war in mind,” said the EU Economic Commissioner in Berlin on Tuesday.

(Photo: Imago Images)

The liberal always emphasizes that the money from the existing EU pots is enough. Chancellor Olaf Scholz (SPD) does not think much of new EU debt either. And even in the environment of the Green Economics Minister Robert Habeck, support for this was significantly greater.

>> Read here: Dispute over new debt fund – the EU still has that much money in reserve

But Gentiloni would have to convince Lindner anyway. He reported to the Berlin students about a “quite friendly” conversation with the finance minister. Of course, Lindner made his position clear. “That didn’t totally surprise me,” Gentiloni joked. He did not elaborate further, it did not sound like a positional rapprochement with the minister.

That would also be surprising, because in Berlin there is not even a consensus as to whether tax breaks as proposed by the Commission are the right means at all. According to government circles, the Chancellery should take a positive view of this, because the companies could immediately recognize their funding opportunities.

Federal Minister of Economics Habeck had already brought this path into play in a paper before Christmas. However, there are also doubts in his house: tax breaks are not targeted enough.

Second strand of negotiations: EU debt rules

However, Gentiloni sold it as good news that Lindner had agreed to get involved in the discussion about reforming the EU debt rules. The EU Commission presented its proposals for this in the autumn. For the proponents of new European debt, this could be an adequate substitute by giving them more leeway with national debt instead of European debt.

Gentiloni thus has more than one line of negotiation. But that shouldn’t make it any easier for him. Because the federal government and in particular FDP leader Lindner have long since made it clear that they do not want to go as far as the EU Commission imagines when it comes to the debt rules of the Stability and Growth Pact.

More: EU Council President proposes four-point plan against US subsidy program

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