The European Union presented its industries with a counteroffer to a massive U.S. subsidies plan Wednesday, in an effort to keep burgeoning green industries inside the bloc.
The problem? It’s fighting a bidding war it can’t win.
The European Commission’s President Ursula von der Leyen presented Brussels’ plans to counter the U.S.’s $369 billion Inflation Reduction Act (IRA), a green-tax credits initiative that Brussels fears could drive business across the Atlantic. The EU’s response, called the Green Deal Industrial Plan, wants to make it easier for sustainable companies to access tax breaks, redirect cash toward clean-tech industries and relax state aid rules.
“We have to give an alternative to the offers they get from abroad,” Commission President Ursula von der Leyen said Wednesday about the EU’s domestic industrial firms. “We want this industry to stay here and to prosper here.”
But the plan already faces major criticism, for two reasons: It’s largely drawing from existing, not new, funding lines; and it risks casting smaller EU countries against big powers Germany and France over fears that the bulk of subsidies will benefit the latter two.
It means the EU with its new initiative still lacks the fire power to fight back against aggressive U.S. subsidy sprees — and the U.S. knows it.
“The EU is making a sensible move for the green transition,” one U.S. official said. “But firms will decide for themselves where the most attractive green business environment is.”
Europe’s old money
The Commission’s recommendations that member countries repurpose funds from existing financial frameworks to finance the effort are being met with skepticism from observers.
“Fresh money is what we need,” Renew MEP Valérie Hayer said. “If we keep using money that’s already on the table to face both our traditional priorities and brand new, extraordinary challenges ahead, we will fall short.”
In terms of cash lifelines, the Commission is turning to unspent funds from its €800 billion recovery package and wants tax breaks for green firms under its REPowerEU alternative energy fund, which repackaged €220 billion in unused loans with a €20 billion top-up in new grants. Another option is the bloc’s private investment framework, InvestEU, the Commission said.
“The Commission proposal amounts to little more than old wine in new bottles,” center-right lawmaker Markus Ferber said. “The grand new industrial plan is essentially the Commission’s 2023 work program squeezed under a new headline. It is predictably disappointing.”
But EU trade chief Valdis Dombrovskis claimed the bloc was not merely “reshuffling existing money,” describing the €20 billion in grants under the RePowerEU package as “fresh money on the table.”
The latest repackaging of existing funds comes after the bloc’s last attempt at a subsidies race with the U.S. — the Chips Act, presented in February 2022 — backfired. The EU’s headline €43 billion figure for the plan was outdone by the U.S.’s $52 billion splash on its own CHIPS and Science Act, while large parts of the EU’s package came from national and private investments. The EU-level contribution of €3.3 billion drew ire for being redirected from existing programs.
The state aid dilemma
Relaxing state aid rules will allow EU members to funnel billions into green industries. The renewable energy sector and efforts to decarbonize industrial processes will benefit the most as part of the new temporary crisis and transition framework.
But after three years of loosened emergency-subsidy rules in the wake of the pandemic and the war in Ukraine, some national governments are concerned that a further opening of the floodgates would drive cash to the bloc’s richest nations — Germany and France — and claim that the EU’s economy faces an uncertain future.
“State aid for mass production and commercial activities can lead to significant negative effects including the fragmentation of the internal market, harmful subsidy races and weakening of regional development,” the governments of Denmark, Finland, Ireland, the Netherlands, Poland and Sweden said in a paper sent last week and obtained by POLITICO.
The EU’s competition chief Margrethe Vestager on Wednesday also highlighted how Germany and France had accounted for nearly 80 percent of state aid approved under emergency subsidy rules. “European countries are not equal when it comes to state aid,” she said.
Attempts to preserve the internal market’s level playing field will always hamstring the EU’s global competitiveness: “We will never be able to compete on level terms with the United States when it comes to financing,” one EU diplomat said. “The whole state aid debate is a double-edged sword. If we relax subsidy restrictions too much, then we compromise the integrity of the single market.”
“But if we do nothing, we concede failure. That isn’t an option.”
Some even argue that competing with the U.S. isn’t worth the effort.
“We need to take a chill pill: Most of the emotional interventions are based on [the fear] that the IRA will destroy [the] European economy,” one EU diplomat said, calling for caution on further relaxing state aid.
“On state aid, we need to remember that the temporary framework was supposed to be short and sweet, not long and sour.”
Paola Tamma contributed to this report.
