Joe Biden has struggled to pass through Congress the major programs to boost the American economy and society that have been the hallmark of his election campaign against Donald Trump.
At one point it appeared that the portion of the package that involved a large “Green Transition” package was in danger of being defeated in Congress, as conservative Democratic Sen. Joe Manchin said on July 14 that he would not support a program that he believed would lead to to an increase in inflation.
Ultimately, there would be another round of secret negotiations between Manchin and Senate Democratic leader Chuck Summer, leading to a smaller but still significant package that combined investments in green energy with health care support.
This law, with the title “Inflation Reduction Act – IRA” (https://www.whitehouse.gov/briefing-room/statements-releases/2022/12/15/biden-harris-administration-releases-inflation-reduction-act-guidebook-for-clean-energy-and-climate-programs/), is at the same time a headache for the EU because it combines the green energy subsidy with the effort to “relocate” green businesses in the USA.
The strengthening of American industry through Green Investments
The Biden administration’s package includes tax breaks and subsidies aimed at boosting green investment in the US itself, totaling $367 billion.
Except that he links them with the express condition that they are linked to investments in the US itself. For example, tax subsidies of 7,500 dollars are provided for the purchase of an electric vehicle, but with two conditions.
1. The first is that at least 40% of the raw materials used in the electric battery are mined in the US or a country with which the US has a trade agreement. The EU and the US have very important trade deals, but they do not have a trade agreement and it is not certain that they will get one in the short term, while the US from 2026 will raise the required percentage for raw materials in batteries to 80%.
2. The second condition that at least 50% of the battery components are manufactured or assembled in the USA, Canada or Mexico, a limit that will rise to 2029 in 2023.
The reaction of the EU
But all this causes concern in Europe. And this is because until now the EU considered that it had a comparative advantage in green technologies and that it could take advantage of the shift of more and more developed economies to the “Green Transition” to export the relevant technologies and products.
But now it sees the US government subsidizing green technologies manufactured on US soil and generally trying to gain primacy in this market to limit the share that will be available to European companies. This would be a real blow to several large European businesses.
Faced with the prospect of the US gaining points in the green technology market, EU leaders, as early as the European Council of December 15, 2022, tried to send the message that they are looking to respond to the challenge from the other side of the Atlantic. The Council’s conclusions explicitly state:
“The European Council underlines the importance of close coordination and common solutions at European level, where appropriate, and calls on the Council and the Eurogroup to closely monitor economic developments and further strengthen coordination in order to achieve a decisive and flexible policy response.
22. Beyond short-term measures, the European Union must take into account long-term challenges, in particular the gap between Europe and its global competitors in terms of growth and innovation. In this regard, the European Council calls on the Commission to present at the beginning of 2023 an EU strategy to boost competitiveness and productivity”.
However, it remained open as to what concrete measures this strengthening of competitiveness would translate into.
“We need our own answer, the European IRA,” Commission President Ursula von der Leyen told the European Parliament in December. Several spoke of the need for greater flexibility in government subsidies to green industry. German Finance Minister Robert Habeck and his French counterpart Bruno Le Maire suggested pressing the US to include European businesses in the tax breaks proposed by the US. However, Germany and France refrain from proposing European borrowing to strengthen the European industrial base and instead propose to use already existing EU funds and the European Investment Bank.
Germany and France propose that there be negotiations between the US and the EU on the terms of state aid to industry. However, for some Member States it would be a problem to have a subsidy race, precisely because not all Member States have the same subsidy potential.
More recently Ursula von der Leyen has proposed the creation of a European Sovereign Fund (modelled on various national “Wealth Funds”) to strengthen the goal of zero emissions policies and the EU’s “strategic autonomy”. It is clear that the attempt to respond both US and Chinese subsidy policies, especially in green technologies.
The intervention of the Three Vice-Presidents and the dilemmas of the EU
Against this background, the joint intervention made by the three executive vice-presidents of the European Commission, Valdis Dombrovskis, Frans Timmermans and Margrethe Vestager, with their joint article in the Financial Times (https://www.ft.com/content/0bf3708d-20fe-4700-8702-bd0f6ef5591e), is of particular interest.
The three vice-presidents admit that the US moves are putting the European industrial base for clean technologies at a disadvantage. However, they argue that Europe should not try to do something similar to the IRA and that a tit-for-tat response. Instead, they insist that what is needed above all is joint economic action and with an emphasis on the logic of the single market, openness and integration of capital markets. They point out, however, that although a temporary framework for state aid may work, nevertheless “a large increase in subsidies, when countries have different financial instruments, simply risks fragmenting the single market. Subsidies should not come at the expense of well-functioning markets and fair competition.”
These policy swings reflect the distance between the US and the EU. It is clear that the US is more willing to move to a more assertive form of government subsidy and variations of protectionism than the EU.
The EU realizes that we are moving into a more competitive condition in the global economy, where the role of state aid will be upgraded, especially since there is no other way to fully finance the “green transition”. The EU has shown that it can pool large resources for common programmes, but not on the scale that this would require, while allowing national aid from the Union’s powerful economies will fuel the problem of divergences and inequalities within it.
Moreover, the way out would be the common European borrowing to strengthen such programs, a measure that is always viewed very negatively by some of the EU’s leading powers. But at the same time, if it does not respond to the American and Chinese moves, it risks to see its “green” industrial infrastructure take a significant hit.
