Ursula von der Leyen is drawing up a plan to save Europe’s industries from toppling towards ruin. There’s just one problem: Europe’s governments hate it. 

The EU Commission president will this week lay out her ideas for an industrial policy designed to help major manufacturers and other businesses remain competitive in the face of two existential threats: high energy bills and American domestic subsidies for their rivals. 

Central to her blueprint is loosening restrictions on how much money governments — or the EU centrally — can pump in as subsidies known as “state aid” to prop up struggling businesses. 

The risk is that if subsidy limits are lifted, the EU’s richest economies like Germany and France will be free to outgun the bloc’s weakest minnows, and that would wreck the principle of fairness underpinning the European single market. 

“These plans risk fragmenting the single market and laying the ground for a subsidies free-for-all,” one EU diplomat said. The European economy’s so-called level playing field “hangs by a thread” after trillions of euros in state subsidies were already approved during the pandemic and to counter the initial shock of Russia’s invasion of Ukraine, the diplomat added.

Von der Leyen’s plans for a new European sovereignty fund – potentially a source of cash open to smaller member countries – is only a “ploy” to get more subsidy rules relaxed, another suspicious diplomat added.

In draft conclusions seen by POLITICO, Council President Charles Michel has also pitched the idea of establishing a fund financed by joint EU loans that would allow EU countries to subsidize industry on equal terms.

A wide range of EU ambassadors hit out at those draft conclusions in a meeting last week, four EU diplomats told POLITICO. In the meeting, Dutch Ambassador Robert De Groot slammed Michel’s pitch as “Karl Marx” on steroids, according to three of the diplomats.

‘Written in Paris’

Another EU diplomat said the draft conclusions “were written in Paris.”

France — which has been forthcoming with its own grand industrial designs for Europe — including calls for the EU to accelerate production targets and establish an emergency sovereignty fund — has been at the forefront of efforts to expand and extend looser state aid rules that would allow governments shower more money on companies. 

EU leaders will thrash out their options at a summit on February 9 and 10. Von der Leyen plans to follow that up with more detailed industrial policy proposals in March, followed by a Net-Zero Industry Act which would channel investments into green tech production sites as part of new benchmarks for climate-friendly industries. She has said she’d work in the longer term on the European sovereignty fund.

Denmark, Finland, Ireland, the Netherlands, Poland and Sweden already laid out their fears that “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,” according to recent nonpaper obtained by POLITICO.

And last week, finance ministers of Finland, the Czech Republic, Denmark, Estonia, Ireland, Austria and Slovakia sent a letter to Trade Commissioner Valdis Dombrovskis, criticizing what they call “permanent or excessive non-targeted subsidies” in response to the U.S.’s moves.

Italy also sent around a nonpaper that warns against loosening state aid rules and points to 77 percent of state aid approved under the current crisis framework as “concentrated in two member states” – France and Germany – “and this imbalance could further increase” since other countries can’t match their spending power.

For her part, Competition Commissioner Margrethe Vestager has taken a guarded approach, telling EU state aid attachés recently that a subsidy rush to boost EU industrial competition “will not work.”

Sparring EU nations

As EU nations continue to spar over how best to respond to the United States’ huge green subsidy package, the Commission holds the cards when it comes to where the money is likely to come from. 

As part of draft plans that von der Leyen is set to present to EU nations on Wednesday, the Commission’s preference is to repurpose unused loans from the bloc’s recovery package and other financing frameworks such as RePower EU, rather than raise funds through new debt issuance. 

And in the broader question of how Europe can compete globally by protecting jobs, talk has also turned to whether or not Brussels should bolster its SURE financing framework, which leverages social bonds to provide loans to EU nations.

Certain countries aren’t happy about the repurposing of an instrument that was used during the depths of Europe’s economic crisis, as part of the pandemic recovery efforts. 

It’s especially sensitive for the “frugal” countries, such as Germany and the Netherlands. Others are skeptical as well, as it’s not likely to yield much easy money in comparison to the U.S. tax breaks in the Inflation Reduction Act. 

German Finance Minister Christian Lindner said on Monday that he was “not in favor of more subsidies and excessive state aid [and] I’m not convinced that we need any kind of further funding instrument.” He said Germany was reluctant to repeat EU debt-based instruments like NextGeneration EU or SURE. “I suggest to avoid these debates because there is no good end to expect,” he said.

Given the divisions, the European Council is not likely to lead to a clear direction, several of the diplomats said.

Hope remains high that Washington and Brussels may find common ground before the EU embarks on a subsidy spree of its own. EU officials are pushing for greater access to the U.S.’s subsidy program for European firms.

“There is still room to take some of the negative side effects off the table,” one EU diplomat said. “There is room to keep talking.”

Jakob Hanke Vela, Suzanne Lynch, Nicholas Vinocur, Giorgio Leali and Paola Tamma contributed reporting.