Luis Garicano is a former member of the European Parliament and is spending the academic year as a visiting professor of economics and strategy at Columbia Business School and the University of Chicago’s Booth School of Business. He is also a non-resident fellow at Bruegel. Guy Verhofstadt is a member of the European Parliament and a former prime minister of Belgium.
United States President Joe Biden’s Inflation Reduction Act (IRA) is challenging Europe.
With $370 billion to spend, the policy intends to make sure the energy transition is firmly in the hands of U.S.-based companies — and the European Union has to react. Yet, the bloc’s initial response, as proposed by Commission President Ursula Von der Leyen and Commissioner Thierry Breton, risks making things worse.
Loosening state aid rules would only favor the few EU countries that already have the budgetary and technological means to respond on their own — France, Germany and the Netherlands. And new divisions in our single market would further harm the prospects of the EU’s already uncompetitive high-tech industries.
Instead, what the EU needs is a truly European solution.
First, we need to finally complete the single market. As it stands, the digital, telecommunications and capital markets remain fragmented, and if the current plethora of regulators stay in place, rules won’t be harmonized. Instead, what we need is an EU-wide regulator for the digital and telecom markets, modeled after the American Federal Communication Commission, which would position the EU as a leader in setting global standards.
In the same vein, harmonized corporate governance and disclosure rules are needed to boost our capital markets union, and barriers to cross-border professional services should be removed as well. The pan-European energy market also requires investment in new power transmission lines to increase the security and resilience of the bloc’s energy supplies.
Second, rather than relax state aid rules, we must change competition rules, while taking global rivals into account. As we saw in the Alstom-Siemens case, we have made it easier for a Chinese company to take over a European competitor than to merge two European companies. More realistic rules would allow us to create European companies that are able to take on the U.S. and China giants.
Third, the NextGenerationEU fund should be transformed into a permanent fiscal instrument, allowing Europe to invest in EU-wide projects that boost the green transition and help shape sustainable energy and digital innovation, rather than subsidizing national governments. That funding should come from the EUs new own resources — especially the Carbon Border Adjustment Mechanism and the 15 percent global minimum taxation on multinational companies.
This — and only this — would create the possibility for the EU to match the tax credits of Biden’s IRA.
Finally, while subsidizing companies in the chip and green sectors may provide short-term benefits, such an approach ultimately fails to address the need for the sustained fundamental research that drives innovation.
Since Brexit, the EU has become a research minnow — just consider the rankings list of the top 25 globally competitive universities put out last year by The Times Higher Education Supplement. Directly reflecting the limited investment in research and development made by the EU — as well as the backward governance structures of universities in many EU countries — the list only includes a single EU university, while Britain boasts four, the U.S. leads with 16, and China comes in with two. The Shanghai ranking tells a similar story as well.
The bloc did once try to build a top European technology university, founding the European Institute of Technology (EIT) in 2008, but the effort floundered when it came to decide where to locate it. Culminating in the familiar European compromise of break it into pieces and spread it among multiple EU cities, the EIT has struggled to attract talent and funding as a result, and its impact on the European technology landscape has been limited.
Overall, European governments have to avoid seeking national solutions to the energy crisis and digitalization. Instead, we need to work to complete the single market for capital, digital and financial services, provide common EU funding for EU firms, sharpen our competitiveness, and invest in a thriving university system.
We cannot afford to remain so financially, economically, technologically and, ultimately, politically divided.
