European Union leaders discussed last Thursday (9 February) how to respond to approximately €343 billion in US subsidies under the Inflation Reduction Act (IRA).
“Europe is worried that these new measures will harm its businesses, but it is still unclear exactly how.”
At a special summit in Brussels, the leaders of 27 countries provided guidance to the EU Commission on how to respond to US green technology initiatives.
Germany and France were allocated slightly less than 80% of the state aid granted since the pandemic, when rules were relaxed. In turn, EU governments are divided on several issues, including the use of state aid to resolve the problem and common funds to support European companies. France and Germany, two of the bloc's economic heavyweights, believe that the response to the IRA is an opportunity to relax state aid rules for the promotion of green technologies and European industry.
Last month, the Commission drafted plans to simplify and speed up companies' access to tax credits in order to prevent businesses from leaving the EU. It also proposed relaxing state aid rules for investment in renewable energy and approving green projects more quickly. However, most member states are concerned that this plan will create an uneven playing field within the European Union.
Before committing to adopting more relaxed state aid rules, most member states want the Commission to determine exactly which sectors and companies could be left behind due to US incentives.
“We want to invest money only in those companies that are significant for the future,” said an EU diplomat, speaking on condition of anonymity as the ongoing negotiations are confidential. He added: “Why should we make state aid flexible in a sector where it is not needed?” We could only support measures that are “temporary, targeted and limited in order to avoid a subsidy race and to ensure that the EU response is proportionate” to the US action, another European Union official also argued.
Some member states are advocating for the creation of new common funds to address the challenge posed by the US. However, Germany and other fiscally prudent member states opposed new common funds to combat US subsidies. They want member states to use existing EU funds.
EU leaders are expected to acknowledge the EU Commission's goal of proposing the creation of a European sovereignty fund, but will not make any commitments.
The Commission has not yet drafted legislative proposals and has not submitted an impact assessment of the IRA. There is little time to reach an agreement on any new instrument, as next year the European Union will hold elections to choose a new parliament and Commission.
“I am not convinced that it [the sovereignty fund] will ever see the light of day,” said another European Union diplomat. For several member states, the question of how national economies are absorbing the C19 recovery funds – utilising and accessing the actual money – has proven problematic. These countries would like to extend the deadline by which recovery funds must be allocated beyond 2026, diplomats said on Wednesday. An extension could be one way to provide assistance to struggling sectors or companies affected by the IRA.
Amendment of rules
Over the last three years, the EU has amended its subsidy regime three times, first in response to the C19 pandemic, then to the energy crisis and now to the IRA.
European Commission Executive Vice-President Margrethe Vestager announced last month that the EU executive had approved €672 billion in aid for EU governments under its latest crisis mechanism, which was adopted following Russia's invasion of Ukraine.
More than two-thirds of the approved state subsidy has been used by Germany (53%) and France (24%), followed by Italy with more than 7%, according to a letter sent by M. Vestager to the governments of the member states.
“The huge investments are tied to a couple of member states; it is essential that funds are available to all EU countries,” warned another European Union diplomat.
The French and German economy ministers announced on 7 February that the US had agreed to address European concerns regarding the IRA. They also added that no concrete proposals had been reached in discussions with US officials in Washington.
French Economy Minister Bruno Le Maire (Bruno Le Maire) said that he and his German counterpart Robert Habeck (Robert Habeck) had achieved “significant progress” in talks in Washington and received “guarantees” that the US would try to mitigate European concerns, reported the agency Reuters.