At their last summit of the year, European Union heads of state and government called on the European Commission to propose measures for the improvement of climate investment and the competitiveness of European industry until the beginning of 2023. This came in response to the US Inflation Reduction Act (IRA) – a law which the government leaders regard as discriminatory against European companies.

The alarm bells went off in the EU once the bloc realized that the IRA, passed in August of this year, included massive tax breaks and subsidies amounting to 367 billion US dollars to boost US domestic production of, among other things, electric vehicles, solar panels and batteries. The EU regards these subsidies as contrary to fair competition, as most electric vehicle manufacturers could relocate their production to the US. Today, more than 25 percent of electric cars are produced in Europe, while only about 10 percent are produced in the US.

The US legislation foresees tax credits of 7,500 dollars per vehicle for US consumers who purchase electric cars, provided those meet two conditions: One is that at least 40 percent of the raw materials used in the electric battery are extracted in the US or in a country with which the US has a trade agreement. The EU and the US are major trading partners, but they have no such deal. By 2026, the threshold for the tax credits will be raised to 80 percent of raw materials.

The other condition is that at least 50 percent of the battery components are made or assembled in the US, Canada or Mexico, and by 2029, that threshold will be raised to 100 percent.

The IRA foresees a generous incentive program for other areas as well, such as new tax credits to promote carbon capture, clean hydrogen and investments in green energy technologies and the mitigation of greenhouse gas emissions. In these areas, Europe is currently the world market leader.

EU’s new industrial policy will be prominent on 2023 agenda

“We need to give our answer, our European IRA,” European Commission President Ursula von der Leyen said in the European Parliament last week.

A joint EU-US task force to address the EU’s concerns regarding the US subsidy program for green technology has not succeeded so far. Meanwhile, Germany and France outlined their strategy on how to respond on December 20. Accordingly, the EU should be more flexible at introducing state-aid rules for investments in the green sector, following the US model, and halve the approval time for decisions. German Minister of Economy Robert Habeck and French Finance Minister Bruno Le Maire also pushed for the US to include European companies in tax breaks planned for US businesses.

Apart from proposing changes to public investment rules in the bloc, Germany and France also suggested future consultations between the US and the EU over government support granted to the industry. The EU’s central problem is that not all member states have the same fiscal capacity to subsidize production. This could lead to a race in subsidies – even within the EU. And this could again result in major distortions of the single market, which would mortally endanger the bloc.

Absent from the Franco-German strategy was the commission call to set up a fund for the bloc’s entire industrial base funded with joint-EU borrowing. Paris and Berlin want to use untapped resources from the EU’s Covid-19 relief fund, work with the European Investment Bank (EIB) and develop the bloc’s capital markets for more sources of funding.

One of the options is the newly established European Sovereignty Fund to support EU innovation and industrial programs. This gives raise to questions that need to be answered – for instance how big that fund should be, how it should be financed and who would determine what is to be subsidized and by what means.

Spain supports the EU taking measures against the US law because it could affect Spanish investments, for example in hydrogen, and has a clear component of protectionism. Government sources said that they were “not opposed” to having a common financing instrument that was raised by common debt, but warned that the important question was how the money was going be spend.

On the sidelines of the recent EU summit, Slovenian Prime Minister Robert Golob noted that “this act is not anti-China or anti-Europe, it simply is pro- USA.” Be that as it may, Slovenia’s exports would be affected by the US law despite the country’s small size. Dejan Židan, State Secretary at the Ministry of Economy in Slovenia, regards the act as an impulse to think about whether the EU really does enough to support its own industry.

According to Jure Stojan, director of research and development at the Institute for Strategic Solutions (ISR), not having a “uniform European scheme and allowing state aid would be bad. Slovenia would have a hard time keeping up with the aid larger member states can offer their companies.” The researcher believes that given the balance of power in the Capitol, “it is unfathomable that President Biden’s administration would pass amendments to the act. This limits the likelihood of the EU being granted any major exemptions.”

Maintaining Europe’s attractiveness

Gina Raimondo (l-r), Handelsministerin der USA, Antony Blinken, Außenminister der USA, und Katherine Tai, Handelsbeauftragte der USA, Valdis Dombrovskis, Kommissar für Handel der Europäischen Union, und Margrethe Vestager, Kommissarin für Wettbewerb der Europäischen Union, sitzen nebeneinander vor Beginn der Gespräche des Rates für Handel und Technologie zwischen den USA und der Europäischen Union.
Gina Raimondo, U.S. Secretary of Commerce, Antony Blinken, U.S. Secretary of State, Katherine Tai, U.S. Trade Representative, Valdis Dombrovskis, European Union Commissioner for Trade and Margrethe Vestager, European Union Commissioner for Competition, at the U.S.-European Union Trade and Technology Council talks. Photo: Manuel Balce Ceneta/AP/dpa

While Washington and Brussels continue to negotiate possible measures to mitigate the impact on EU businesses and avoid a trade war, the EU 27 believe that measures to maintain Europe’s competitiveness and investment attractiveness and reduce its dependency on third countries for essential supplies are needed in any case.

In conclusions approved during the recent summit, the leaders stressed the importance of an “ambitious European industrial policy to make Europe ready for ecological transition and reduce strategic dependencies (…) in the current global context.” The aim, they said, was to “safeguard Europe’s economic, industrial and technological base” at a time of energy price shocks, and to maintain Europe’s “global competitiveness.”

Europe’s response to the IRA could take shape at the extraordinary summit of the leaders of the EU member states on February 9 and 10, where the main topics will be migration and the EU’s global competitiveness. Sweden, which is taking over the six-month Presidency of the Council of the European Union, stressed that transatlantic cooperation would be one of the key priorities.

This article is published Fridays. The content is based on news by agencies participating in the enr.