Anger is mounting in EU capitals at a \u201cmassive\u201d and \u201csuper aggressive\u201d\u00a0$370bn US green subsidy package\u00a0that many fear will deal a hammer blow to Europe\u2019s industry and economy. But the bloc is deeply divided over how to respond.
\nSigned into law last August, the Inflation Reduction Act (IRA) offers huge subsidies and tax credits to companies investing in electric vehicles and renewable energy technologies, such as batteries, solar panels and wind turbines \u2013 as long as the products and parts they manufacture are made in America.
\nThe bloc\u2019s riposte is being hampered by fierce disagreements between member states over relaxing strict EU state aid rules \u2013 which mostly bar such generous corporate tax breaks \u2013 as well as over the prospect of more joint borrowing.
\nAt stake, analysts warn, could be the fate of Europe\u2019s manufacturing base, squeezed not only by record energy prices and an \u201caggressive\u201d China, but now also by a US administration seen as heedlessly protectionist. Some have warned of potential deindustrialisation of\u00a0Europe\u00a0barring concerted action.<\/p>\n
\u201cThe EU has never had an industrial policy worthy of the name,\u201d said Luuk van Middelaar, a historian. \u201cFaced with China and the US now increasingly exercising their power in this way, it really needs one now \u2013 but getting it right will really not be straightforward.\u201d
\nThe EU Commission president, Ursula von der Leyen, has pledged a targeted and temporary relaxation of state aid rules and a common fund to protect the bloc\u2019s green tech industry from wipeout. National leaders are due to discuss the IRA at a summit in February.
\nBuilding on that theme in a speech at Davos on Tuesday, Von der Leyen said Brussels would propose asovereignty fund to boost medium-term resources for innovation, research and green industrial projects, with a bridging solution \u2013 more immediate funds \u2013 to provide \u201cfast and targeted support\u201d.
\nWhether, and how soon, member states can agree on a package, however, is open to question. \u201cFinding the right response to the IRA will be a key political issue for the EU this year,\u201d said Mujtaba Rahman of the Eurasia group. \u201cReforming strict state-aid rules will not be easy. Nor will be debates over an EU fund to maintain a level playing field in the single market.\u201d
\nEU officials and national politicians alike have railed against the IRA, saying it discriminates against European companies selling to the US and \u2013 with US energy costs up to four times lower than in Europe \u2013 could prove catastrophic for industrial investment.
\n\u201cI understand the importance of the IRA from the US perspective but on the side of Europe it is seen as much more controversial,\u201d the Czech industry minister, Jozef S\u00edkela, told a round table at Davos. \u201cIt is saying to European investors \u2018go to the US, because it is more profitable to you\u2019.\u201d
\nAlexander De Croo, Belgium\u2019s prime minister, went further last week, accusing the US of actively enticing European companies to move. \u201cThey are calling firms, in a very aggressive way, to say \u2018don\u2019t invest in Europe, we have something better\u2019,\u201d he said.
\nThe Dutch foreign trade minister, Liesje Schreinemacher, has described the IRA as \u201cvery worrying\u201d, and Germany\u2019s finance minister, Christian Lindner, called it \u201cenormously protectionist\u201d. His French counterpart, Bruno Le Maire, said that subsidies four to 10 times greater than EU rules allow would upend the \u201clevel playing field that is the core of the transatlantic trade relationship\u201d.
\nThe commission has formally expressed \u201cserious concerns\u201d and warned of \u201cretaliatory measures\u201d \u2013 which potentially includes a complaint to the World Trade Organization on grounds that the IRA\u2019s provisions on locally produced content violate WTO rules.
\nAlthough Washington has promised to look into possible adjustments, European officials expect no big changes and view the only tweaks so far \u2013 tax credits for electric vans and trucks \u2013 as altogether inadequate.
\nThe EU\u2019s internal market commissioner, Thierry Breton, has toured EU capitals to float a \u201cEuropean clean tech act\u201d as a way to channel cash to the bloc\u2019s green tech industry,\u00a0noting that all were aware\u00a0of the need for \u201cfast, coordinated, action\u201d.
\nBut Breton\u2019s plan is in its early stages and its funding is unclear amid continuing discord among member states over how to pay for any combined response by the EU27 to what France\u2019s president, Emmanuel Macron, called the \u201csuper-aggressive\u201d IRA.
\nMargrethe Vestager, the EU\u2019s competition chief, last week announced a review of state aid rules, saying European industry faced a number of challenges, including the very real risk of the IRA \u201cluring some \u2026 EU businesses into moving investments to the US\u201d.
\nState subsidies are, however, a notoriously touchy subject within the bloc, with smaller countries in particular fearing laxer rules would allow big countries with more financial firepower \u2013 such as France and Germany \u2013 to offer unfair support to their companies, fatally distorting the single market.
\nParis and Berlin have issued calls for aid rules to be quickly eased. France wants nothing less than a wholesale remodelling of EU industry support, calling for a \u201cmodernisation and simplification shock\u201d including higher notification thresholds for projects in key green tech sectors.
\nBut smaller, less interventionist, countries such as the Netherlands and the Czech Republic, have been far from reassured by recent data showing, perhaps unsurprisingly, that German and French companies hogged nearly 80% of state aid in the EU last year. According to commission data 53% of all state aid permitted in 2022 under a temporary easing of the rules to deal with the energy crisis went to companies in Germany, and 24% went to companies in France \u2013 despite the other 25 member states accounting for at least 50% of the EU\u2019s total GDP.
\nVestager has acknowledged this danger, calling members\u2019 wildly differing capacities to afford big state subsidies \u201ca risk for the integrity of Europe\u201d, and proposed that any relaxation of state aid rules to counter the IRA should be accompanied by a \u201ccollective European fund\u201d, probably financed with joint EU debt.
\nThat idea is supported by France. Italy\u2019s new prime minister, Giorgia\u00a0Meloni, too, said she would back a European sovereignty fund. But Germany and other influential member states, including the Netherlands, are far from keen on the idea if it involves any more joint EU borrowing.
\nLindner was particularly adamant at a meeting of EU finance ministers last December. \u201cA sovereignty fund must not be a new attempt at joint European borrowing,\u201d he said. \u201cWe see no reason for additional European debt.\u201d<\/p>\n