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It will likely be 25 versus 2 when EU leaders meet in Brussels for a summit on Thursday.
France and Germany are largely on the same page when it comes to how to respond to America’s massive green subsidy plan, the Inflation Reduction Act, which will be discussed in-depth for the first time by the bloc’s leaders.
Both French President Emmanuel Macron and German Chancellor Olaf Scholz support the EU’s green subsidies plan, with its proposed relaxation of state aid rules to shore up Europe’s industrial base and fight back against the Americans. But their reasons for doing so have infuriated the 25 other EU countries who suspect the bloc’s two industrial powerhouses of seeking to prop up their own industries at the expense of less-well-off countries in the single market.
In many ways, the Franco-German rapprochement is a welcome change. Just a few months ago, at the height of the energy crisis, the two powers were at loggerheads. Germany’s decision to push ahead with a €200 billion domestic-subsidy package infuriated other countries, including France, while the two countries clashed over the MidCap pipeline connecting Spain to Germany via France. Relations were so poor that the two founding members of the EU decided to delay a long-anticipated bilateral summit.
Now, they are singing from the same hymn sheet — and the other 25 members of the bloc aren’t happy.
“We’re rushing into taking potentially very far-reaching measures that risk running into a subsidy war with the United States and even a subsidy war with one another,” said an official from a country with concerns about the Franco-German position.
“There is a very strong push by France and Germany to go forward with these rules. We see a potentially groundbreaking transformation of the EU state aid regime — we think it’s all being done too fast and without sufficient analysis.”
Realpolitik
Like it or not, a solid Franco-German axis has been central to the smooth running of the EU since its inception. It’s a truism of Brussels politics that nothing ever gets done without the blessing of the two largest members. The problem this time is that many in the EU suspect the recent flurry of activity to counter the IRA to be a French initiative, which has now got the backing of Germany — usually a free-trade voice around the EU table that can constrain the protectionist impulses of Paris.
The symbolism of a joint visit by French Economy Minister Bruno Le Maire and Germany’s Robert Habeck to Washington this week has added to fears that this is all just a Franco-German stitch-up (though the two economy ministers insist they speak for the whole EU).
The issue that is due to come into focus Thursday is the European Commission’s recent proposal to loosen state aid rules. An in-depth discussion on possible new money to counterbalance any move by countries to plow cash into their own economies will come later in the year.
In the run-up to the summit, smaller EU countries have joined forces to express their disdain for the proposal to loosen state aid rules, long seen as a bedrock of the single market and fair competition across the bloc.
Last week, the Czech Republic, Hungary, Latvia and Slovakia joined calls by Denmark, Poland and others for the European Commission to exercise “great caution” in the revision of its state aid rules, according to a document obtained by POLITICO.
The original signatories to the document had claimed that further relaxing the bloc’s state aid regime after nearly three years of crisis exemptions could “lead to significant negative effects including the fragmentation of the internal market, harmful subsidy races and weakening of regional development.”
One fallout from the Franco-German push has been to bring together a motley crew of member states who typically don’t find themselves on the same side of the argument when it comes to European economic matters.
“On state aid, France and Germany are relatively isolated,” said one senior official from another country that is skeptical of the Commission’s plans on state aid. “Almost all other countries, including Italy for example, are pushing to preserve the internal market.”
Exaggerated threat
There are also grumblings around Brussels that France in particular may be exaggerating the threat posed by the IRA and using this as an excuse to push through its agenda. “The risk of the IRA has been overstated by those countries that are keener on flexible state aid arrangements, for sure,” said Simone Tagliapietra, a senior fellow at Bruegel, a think tank.
It’s a sentiment echoed across national representations in Brussels, who want more analysis of exactly what impact the IRA will have on the European economy before embarking on a massive rethink of the state aid regime.
But Germany, and especially France, remain defiant, insisting privately that Europe needs a serious industrial policy to compete with Joe Biden’s investment plan, which includes $369 billion in climate subsidies and investment incentives.
“We won the battle of narrative, of storytelling on these issues because talking about European industrial policy is very new in reality,” said an Elysee official ahead of Thursday’s summit, capturing the view in Paris that subsidy talk has now become mainstream.
As EU leaders prepare to face off for the one-day summit, things are already getting tense.
This week, Germany accused the Commission of pushing out “misleading figures” on state aid disbursements in France and Germany. It follows claims by Competition Commissioner Margrethe Vestager last week that the two countries account for almost 80 percent of state aid that has been approved under the looser state-aid regime that was introduced during the COVID-19 pandemic.
Sven Giegold, Germany’s state secretary at the economy ministry, pointed out that not all of the state aid money approved by the Commission has actually been used — but the very fact that Germany and France have been deemed by the Commission to have so much fiscal space has only confirmed the suspicions of many countries that they will have the fire-power to bolster their own industries.
Even some wealthy EU countries with plenty of fiscal space to play with oppose the measure on principle.
While Thursday’s meeting will allow leaders to thrash out their positions, several diplomats say that the real battle is only beginning.
The European Council will return to the matter in March, while the crunch point may come during the June EU summit, when the conversation is expected to turn to the thorny issue of possible new EU money.
It promises to be a lengthy and divisive debate.
Giorgio Leali contributed reporting from Paris.
