Europe is facing a major decline in competitiveness and the flight of businesses to the US. Five important factors determine this tension:
- the challenges in energy supply especially after the war in Ukraine,
- the very high prices,
- the geopolitical risks,
- the lack of specialized professionals,
- and the great incentives given by Biden Administration to attract business to US soil, are the biggest threats.
The Results of the Research
Already European business leaders are considering moving investment, production, or both to the American continent – to the detriment of Europe, their businesses and their workers. Research conducted by the “European Round Table for Industry and the Conference Board” titled “Business confidence stabilises, but Europe’s competitiveness is on the decline“, shows that 57% of the heads of European multinationals are considering shifting investments or operations to the US in the next two years.
Industry
Furthermore, the vast majority of these respondents—over 80%—believe that Europe is losing competitiveness as a base for industry, as the continent is hit by geopolitical risks, high inflation and energy costs, as well as skills shortages and supply chain disruptions. Russia’s invasion of Ukraine worsened a difficult environment for companies in Europe, characterized by lower productivity growth.
Checkmate movement from the USA with special legislation
The so-called US Inflation Reduction Act (IRA) has created major distortions in competitiveness on both sides of the Atlantic despite the Commission’s efforts to bridge the gap. The IRA is an important environmental law because it favors green investment, but it also includes trade-distorting subsidies, including local content requirements that are prohibited under World Trade Organization rules – the first time the US has done so, striking in the international trading system that could cause protectionism in other countries.
The IRA’s massive subsidies discriminate against foreign – including European – industries. The IRA’s cleantech grants are simpler and less fragmented and focus primarily on mass deployment of green technologies rather than innovation;
For example, the IRA Act provides large subsidies for cars produced in the US even by European companies. This is why many European manufacturers are considering investing in America instead of Europe. The same is true of other industries, from chemicals to technology.
The China
The US move with the IRA Act has a lot to do with its feud with China. Essentially, America’s response to Chinese competition is to pursue an industrial policy that will harm European and Japanese manufacturers. Washington also protects major domestic manufacturers by providing them with incentives to continue developing technologies such as electric vehicles there. The end result is a reorganization of global industries such as the automotive industry, with Europe – and especially Germany, which is a leader in such production – losing competitiveness and market share.
At the same time Europe must also manage high energy costs, the growing digital technology gap with the two superpowers and the urgent need for increased defense spending to counter the new threat from Russia.
