The European Union will present long-awaited proposals on Wednesday to counter massive US subsidies for green technology that threaten a European industry already struggling with high energy prices and unfair competition from China.
Faced with member states divided between supporters of the free market and advocates of state aid, European Commission President Ursula von der Leyen is under pressure to respond urgently to the US Inflation Reduction Act (IRA).
Why should the European Union respond?
The United States adopted the Irish Republican Army Act last year, providing subsidies and tax cuts worth $370 billion to American buyers of electric cars – if they “buy American” – and leaving European carmakers in a panic.
European industry has sounded the alarm about the impact of the US inflation law on the continent, as rising energy costs and US subsidies may prompt companies to leave.
Unlike their American counterparts, European companies are already facing huge energy bills, unable to turn to cheap Russian gas after Moscow’s invasion of Ukraine.
Gas prices charged to European manufacturers have tripled compared to the average of the past decade, while gas bills have remained stable in Asia and North America.
The EU has already committed to investing hundreds of billions of euros in green technology including solar panels, batteries and hydrogen, and the bloc risks becoming dependent on Chinese companies that benefit from both massive subsidies and fewer environmental restrictions.
“Many companies are already moving part or all of their production outside Europe,” said BusinessEurope, the EU’s main business lobby.
Thousands of jobs are at risk in the chemical, steel and other sectors.
What are the options?
Commissioned by EU member states in December to develop a European response, von der Leyen is seeking to ease the regulatory restrictions that burden green industries.
It has already announced plans for a new law that would make it possible to support strategic European projects, by speeding up and simplifying permits and financing.
Relaxing state aid rules is controversial
The committee’s draft proposals include a temporary relaxation of state aid rules, which target priority sectors, as well as support for investments in factories through tax benefits.
But loosening state aid rules, controversially, would help the bloc’s richest countries, especially France and Germany, as they can pump money into their businesses at the expense of EU rivals.
Germany and France respectively account for 53 and 24 percent of state aid notified to Brussels since March 2022 when rules were relaxed in the wake of the war in Ukraine, with Italy coming in third with 7 percent.
In a letter signed by seven countries, including Austria, Denmark and Finland, they stressed that “the competitiveness and better investment environment for the bloc cannot be built on permanent or excessive and untargeted subsidies.”
Some EU members, including France and Italy, are calling for new mutual funds. Von der Leyen has promised to work on a new European sovereign fund that will be paid for through an increase in the bloc’s budget.
But such a mechanism would only be possible with the support of Germany, and other “frugal” northern EU members, who oppose joint borrowing or any increase in their contributions to the budget.
Other proposals for financing
EU Single Market Commissioner Thierry Breton suggested other ways to fund the response, including mobilizing remaining funds and loans for the €800 billion European Recovery Plan from the European Investment Bank.
When will the European Union decide?
EU leaders are expected to decide on von der Leyen’s proposals at a summit in Brussels next week.
While there is consensus on the need to move quickly, the idea of creating a sovereign fund will be delayed until later this year, according to the draft proposals, with countries including Germany, the Netherlands and Sweden opposing it.
The extent of today’s package, beyond easing regulatory pressures and loosening state aid rules, is uncertain. There are real fears in Europe of a trade war with the US, while many remain concerned about a response that violates free-market principles.
The Commission’s three executive vice presidents wrote in the Financial Times on Thursday that the EU and the US “have a lot to gain when we work with each other”.
Valdis Dombrovskis, Frans Timmermans, and Margarete Vestager also called for a “thriving open market across the Atlantic,” and warned of the danger of a “massive rise” in government subsidies to the single market.
