Jörg Krämer is chief economist at Commerzbank.
(Photo: Imago, private)
EU Economic Commissioner Paolo Gentiloni wants the EU to take on debt again – this time not for the Corona recovery fund, but for a so-called sovereignty fund. With this money, he and his Commission colleagues want to maintain the competitiveness of the economy, which they see threatened by the American “Inflation Reduction Act” and by China.
The financially weak EU member states should be able to subsidize their companies just as much as the financially strong states. This should secure the sovereignty of the EU in the concert of the superpowers USA and China. At first glance, this sounds good. But beware, Gentiloni’s fund is a tough one.
Three reasons why the sovereignty fund isn’t a good idea
First The idea of the sovereignty fund is based on the misconception that states can permanently strengthen companies through financial aid and tax advantages. Of course, parts of the Inflation Reduction Act distort competition because EU companies do not enjoy the same benefits as US competitors.
But the answer should be negotiations to reduce discrimination, not a subsidy race or even a move towards Chinese state capitalism. Subsidies only redistribute resources – usually at the expense of the many consumers and medium-sized companies and in favor of a few large companies that have the necessary resources to obtain subsidies.
The best way for the state to ensure the competitiveness of the entire economy is to create an attractive infrastructure and an appropriate regulatory environment in return for reasonable taxes. Medium-sized companies keep pointing out this truism.
Secondly it is risky to further soften the EU state aid rules, which were already relaxed during the corona crisis, in order to enable more subsidies. The EU has laboriously enforced these rules for years in order to prevent a subsidy race within the EU.
This is important for the functioning of the EU internal market created in 1993, which increases prosperity through an intensive economic division of labour. The single market is part of the EU’s DNA. It should not endanger him just to respond to US subsidies, which are often hyped by those who downplay the EU’s own protectionism.
Third Gentiloni and his fellow commissioners should not finance the sovereignty fund with debt. Finally, subsidies represent current transfers that are to be financed through current income. Subsidies hardly create sustainable values, they are not investments that will later bring income and can therefore be financed with debt.
A debt-financed sovereignty fund weakens the EU
Gentiloni’s sovereignty fund is similar to the Corona recovery fund, which also fails to achieve many of the goals put in the showcase. He hardly pushed the economy after the corona shock because the first funds were only paid out in August 2021, when the euro economy had almost reached its pre-crisis level again.
>> Also read: Response to “Inflation Reduction Act” – Is the EU threatened with fragmentation?
Skepticism is also appropriate when it comes to the promise to help countries, especially those affected by the pandemic. For example, 70 percent of the grants are made available to the member countries on the basis of macroeconomic data that have nothing to do with the corona crisis.
The goal of a greener EU, which the sovereignty fund is also supposed to pursue, is only likely to be achieved to a limited extent. The most effective instrument for reducing CO2 emissions are not subsidies, but fewer pollution rights within the framework of EU certificate trading. It prices CO2 emissions and thus creates incentives for companies to emit less CO2 through private investment.
Both the Corona reconstruction fund and the planned sovereignty fund are unlikely to achieve the goals they have set themselves. Instead, they allow EU member states to shift their debt to the EU.
This is politically beneficial for everyone involved. Member States, even the heavily indebted ones, can appeal to voters by spending more without having to owe them more. The EU Commission increases its importance if it gets involved in the allocation of funds.
But if governments don’t assume the debt needed to finance the funds, they ignore the associated costs and will direct the funds to less profitable projects or even consumption. A debt-financed sovereignty fund makes the EU weaker, not stronger.
The author: Jörg Krämer is chief economist at Commerzbank.
More: 350 billion euros: Von der Leyen wants to keep companies with subsidies in the EU.