Sharp criticism of von der Leyen’s debt fund

In a speech in Bruges on Sunday, von der Leyen advocated relaxing European state aid law in order to enable more government investment in the energy transition. She also advocated a jointly financed “sovereignty fund” so that the less economically strong EU countries also received the necessary investments.

“The new self-confident industrial policy of our competitors requires a structural response,” explained von der Leyen. “A common European industrial policy requires common European spending.” With her proposal, the President of the Commission reacted to the “Inflation Reduction Act” (IRA) by US President Joe Biden, which will come into force at the beginning of 2023. The $370 billion clean energy investment plan favors American firms and threatens to shut out European competitors from the US market.

>> Read here: The USA is promoting its own economy with billions, to the annoyance of Europe – now Ursula von der Leyen is reacting

Europeans have been looking for an appropriate answer for weeks. From their point of view, the law represents a clear breach of free trade rules. The options range from a lawsuit before the World Trade Organization (WTO) to punitive tariffs on US products and their own subsidies. The US government had advised the Europeans on the latter in internal talks.

Von der Leyen also favors the subsidies – to the great displeasure in Germany. The idea of ​​a common industrial policy, financed by a “sovereignty fund”, is being promoted above all by Paris. France’s Finance Minister Bruno Le Maire confirmed on Monday that a “European IRA” was needed.

Fund divided Paris and Berlin

German conservatives and liberals, on the other hand, are united in their rejection. In Berlin, the FDP faction deputy in the Bundestag, Christoph Meyer, warned of a “debt-financed subsidy race”. Instead, the EU must become more attractive to private investment, he said.

The economic policy spokesman for the conservative EPP group in the European Parliament, Markus Ferber (CSU), accused von der Leyen of taking over the position of French President Emmanuel Macron so that he would support her for a second term at the head of the Commission. It’s “adventurous” to start talking about new community debt again, Ferber said. The answer to the “unacceptable” US law cannot be: “Now we also subsidize against WTO rules.”

The chairman of the Trade Committee in the European Parliament, Bernd Lange (SPD), also warned against a subsidy race with the USA. First, it is unclear whether it can be won at all. And secondly, a “sovereignty fund” would not solve the problem of market access in the USA either. He is therefore calling for Washington to be sued at the WTO and, if necessary, to impose punitive tariffs.

On the other hand, there is support from the SPD in Berlin. Europe needs “a forward-looking update of its own industrial policy strategy,” said SPD parliamentary group leader Achim Post. “The proposals of the EU Commission are a premium that must now be taken up and further developed.”

But economists are skeptical. Ifo President Clemens Fuest points out that Europe already has a subsidy program for the green transformation with the Corona reconstruction fund. “Adding another one is not the right way, especially since the funds from the first one have not yet flowed out,” said Fuest. Holger Görg, President of the Kiel Institute for the World Economy (IfW), warns against hasty action. “Own subsidies would clearly be the wrong reaction,” he said. They are a massive waste of money and could end up leading to a trade war.

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The economist said the IRA was far less dangerous than von der Leyen believed. The 370 billion euros in subsidies stretched over ten years, so the funds corresponded to less than 0.2 percent of US economic output. “In addition, the United States has lost much of its attractiveness for foreign investment in recent years,” explained Görg. This points to deeper problems that cannot be solved by financial incentives.

EU does not expect US to change its laws

Ifo economist Fuest added that the right reaction was to negotiate with the USA about removing the protectionist regulations in the IRA. Remarkably, the director of the employer-oriented Institute of the German Economy (IW) in Cologne also sees it that way. Michael Hüther is considered one of the most important advocates of a subsidy-based industrial policy.

“When it comes to the answer to the IRA, however, it is much wiser that our companies also participate in the large amount of money,” he said. Hüther sees “good chances” that the USA will succeed in softening the tying of the tax advantages to domestic production for Europe as well, as they are already planning for Mexico and Canada.

However, the EU Commission does not expect the USA to rewrite its law. According to the Brussels authorities, the implementation regulations could possibly be changed in the interests of the Europeans. However, it is unlikely that European companies will ultimately be granted the same advantages as Canadian and Mexican companies. Because the aid passages in the law are formulated very clearly, every change would have to go through Congress again – and that excludes the US government.

Irrespective of the IRA, however, IW boss Hüther sees the need to implement von der Leyen’s idea for a common European transformation fund with credit financing. Across Europe there is an enormous need for spending on the energy transition and new infrastructure. “Expenditures for several generations cannot be financed with tax money from one generation,” says Hüther. His message to Finance Minister Lindner: “We cannot pretend that Germany can make politics in isolation that would not affect anyone else in Europe.”

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