Berlin Federal Minister of Economics Robert Habeck (Greens) has proclaimed 2023 the “Year of Industrial Policy”. At the latest with the US subsidy program “Inflation Reduction Act” (IRA), which includes 369 billion dollars in state aid for green industries, demands for state intervention in the economy are piling up in Europe. The EU Commission this week proposed tax rebates and a relaxation of state aid rules in response to the IRA.
But how much industrial policy must there be, and where is the limit? Two German economists have very different views. Lars Feld, head of the Freiburg Eucken Institute and independent chief advisor to Finance Minister Christian Lindner (FDP), considers restraint to be necessary even in these times. “More industrial policy is harmful,” he says. Jens Südekum, Professor of International Economics in Düsseldorf, counters this: “We won’t get any further with textbook logic alone.”
Mr. Feld, Europe wants to respond to the industrial aid from China and above all from the USA with a large funding program for green technologies. Are we currently experiencing the renaissance of industrial policy, the return of the strong state?
Feld: When it comes to climate protection, you can’t do without a state. However, that must not mean the big march in industrial policy. I am very concerned that under this guise we will end up subsidizing old industries on a large scale.
Do you have an example?
Feld: It is right to make the transition to climate-neutral production easier for the steel industry. But many are already planning long-term investment aid for the steel industry. The state regulates climate protection by pricing CO2 emissions and must do more to support research and development. More industrial policy, on the other hand, is harmful.
Mr. Südekum, are we running into a big subsidy race that Mr. Feld fears?
Südekum: Industrial policy is a dazzling term that you can work through. It is not a question of feeding old industrial ships with time-honored industrial policy. But the energy crisis at the latest clearly shows that we won’t get any further with textbook logic alone.
Südekum: In theory, CO2 pricing may be the best way to protect the climate. But that alone doesn’t go far enough. The motherland of capitalism, of all people, shows that: The Americans still can’t do anything with CO2 prices and instead rely on comprehensive subsidies. If we only react to this with even higher CO2 prices, we will block any future for European industry. The only logical response to the Inflation Reduction Act is to subsidize it too.
Field: I see it differently. The IRA does not fundamentally change the situation of European industry. Rather, from their point of view, the Americans are only catching up on what we have been doing for a long time with our state aid. We just don’t associate that with protectionist rules. In principle, there is no need for a broad European reaction to the IRA, but for the ‘Buy American’ clause to be relaxed. In addition: The American states have long relied on emissions trading for CO2 pricing. It is their competence and not that of the federal level.
If France has its way, Europe could catch up on the protectionist part. In response to the IRA, the French envisage a “Made in Europe” strategy including production targets for certain sectors.
Feld: I don’t believe in that at all.
Südekum: I’m not happy about production targets either. But the basic idea is the right one: we have to identify which industries we need here in order to become sustainable. For example, there are around 600 projects worldwide to build electrolysers for the production of hydrogen. Half of them are still in Europe. The USA now wants to attract as many of them as possible with the IRA. Europe cannot simply look on. For this we need cleverly designed incentive programs.
What could they look like? The EU Commission has now proposed tax breaks for business.
Südekum: That would be a good idea, we should generally adopt the sensible aspects of the IRA as far as possible. Tax breaks are a smart approach, they are unbureaucratic and can be implemented quickly.
Feld: To enable the industry to make the transition, tax breaks would be a tried and tested means. However, the EU Commission has not yet said what role tax breaks could play. I am afraid that the EU Commission will not be dissuaded from retaining full decision-making powers about the funding of projects. Tax breaks would be much better applicable across the board.
Südekum: This width should definitely be restricted. The tax credits should only go to companies investing in transformation. On the other hand, there should be no blanket corporate tax cuts, that would not be accurate.
>> Read here: EU proposes US-style tax rebates
Feld: When it comes to location policy, it’s not about being targeted, it’s about creating favorable framework conditions. And that’s where Germany has one of the highest corporate tax burdens in an international comparison, it’s even in a worse position than France, and that’s quite a feat.
Südekum: We are not a low-tax country, but are in the middle internationally. I really don’t see the greatest need for action in tax policy.
In addition, the EU Commission proposes that state aid can be approved more quickly and comprehensively by reforming the state aid law. Doesn’t that drive a wedge between the financially strong states of the EU, especially Germany, and those who don’t have such great opportunities for state aid?
Südekum: Basically, it makes sense to simplify state aid law, it’s just too complex. But yes, there are risks involved. During the Corona period and in the current energy crisis, almost only Germany and France paid out aid in Europe because they had the financial means to do so. If you make it even easier for them now, there is a risk that the imbalances in the EU will increase enormously.
How can this be prevented?
Südekum: It is not surprising that Germany of all countries is opposed to taking on European debt to finance the answer to the IRA. Germany wants to use the relaxed state aid law to its own advantage. But you can’t meet the USA like that. A common European strategy is needed and funding must be part of it.
Feld: I see it completely differently. The funds within the framework of “Next Generation EU” are far from being used up. Talking about additional EU pots now is misguided – and legally questionable. In its judgment on “Next Generation EU”, the Federal Constitutional Court emphasized the uniqueness of a common European borrowing.
>> Read here: Dispute over new debt fund – the EU still has that much money in reserve
Südekum: It’s true that the debate shouldn’t focus on creating new pots. First of all, we have to get the direction and the instruments clear. And then there is the financial need. But one thing is clear: in the end, it must not fail because of the money.
The EU Commission also wants to refrain from new European debt for the time being, also because Germany is blocking it. Mr. Feld, would you limit the possibilities in advance?
Feld: It’s right to see what needs to be done first. But the question arises as to whether all EU countries apart from Germany and France are really unable to raise their own funds. I do not believe that. Instead, Italy and other countries are trying every opportunity to soften the debt rules and mutualize debt – now again, suspended from the IRA. That’s understandable, but you don’t have to give in to it.
Südekum: Lars, we are facing a task of the century, similar to German unity. We didn’t let them fail because of the money.
Feld: Even when we were reunited, we didn’t do “whatever it takes”.
Let’s make it concrete. A chemical company has stopped producing ammonia. But it needs it for Adblue, a raw material that is at least currently strategic. In order to ramp up production again, the chemical company is asking for subsidies. What would Economics Minister Lars Feld do?
Feld: After the chemical industry went completely overboard during the energy crisis last year, I would be tough – and not give any tax money.
Südekum: The question is: What are strategically important goods? Semiconductors are almost certainly on the list. But we also have to build up domestic production in other areas. Is there ammonia now? Maybe not for Germany, maybe for Europe. For Germany, on the other hand, it’s pretty much batteries if we want to remain a car country.
>> Read here: Three scenarios for the future of German industry
Feld: My list of strategic goods will certainly be much shorter than Jens’s. I wouldn’t complicate it at all. As long as ammonia can be produced in Europe, the US, or any Western-friendly country, why should there be a subsidy?
Südekum: Let’s not fool ourselves. This is all going to be a pretty ugly event. In the end, the producers of chocolate biscuits also want to be on the funding list. Politicians must remain strong and proceed systematically here – and science can help here, by the way.
More: Energy costs, bureaucracy mania, staff shortages: where is German industry headed?