EU Prepares Subsidy Package to Compete with U.S. IRA

The European Union is preparing a big subsidy package to compete with the United States and protect European industry from getting left behind by American rivals. Europe has been dealing with both high energy prices and U.S. legislation that threatens its industrial future. Energy prices look to remain much higher in Europe than in the U.S. for the foreseeable future. On top of that, Biden has also signed the Inflation Reduction Act (IRA) in August that sets out $369 billion in subsidies to support green industries in the United States.

Those two developments have been concerning the EU officials that new investments will be shifted to the U.S. rather than Europe. European Commissioner for Internal Market Breton has warned that the IRA poses an “existential challenge” to Europe’s economy.

Both the European Commission and EU members including France and Germany have realized they need to act quickly if they want to prevent a plunge in industrial production in the continent. The EU has started working on an emergency plan to funnel money into key high-tech industries.

The EU is preparing to counter the U.S. with a fund of its own, dubbed the “European Sovereignty Fund,” which was already mentioned in the State of the Union address by Commission President von der Leyen in September, to help businesses invest in Europe and meet ambitious green standards.

The EU officials and governments feel like they should act extremely quickly as some companies have already begun making decisions on where to build their future manufacturing sites for energy transition technologies, including electric vehicles (EVs), EV batteries, wind turbines and semiconductors.

Brussels also want to act quickly to prevent members going alone in making available emergency cash. The chaotic response to the gas price crisis, where EU countries reacted with all sorts of national support measures that threatened to undermine the single market, is on the bloc’s mind.

In his meeting with EU industry leaders, Breton said it was a matter of utmost urgency to “revert the deindustrialization process taking place.” He was repeating calls from European business leaders that have been warning about a perfect storm brewing for manufacturers.

The Inflation Reduction Act has particularly impacted EU automakers, as it encourages consumers to buy U.S. made EVs, as it includes a tax credit scheme. Brussels and EU capitals see this as undermining global free trade, and Brussels wants to cut a deal in which its companies can enjoy the same American benefits.

However, if a diplomatic solution doesn’t come to fruition, a contentious subsidy race will become increasingly likely.

France has long been calling for counter measures against Washington by funneling state funds into European industry to help it compete. That idea is now also gaining traction in Berlin, which has traditionally been economically more liberal.

On Tuesday, German Economy Minister Habeck and his French counterpart Le Maire issued a joint statement to call for an “EU industrial policy that enables our companies to thrive in the global competition especially through technological leadership,” adding that “we want to coordinate closely a European approach to challenges such as the United States Inflation Reduction Act.”

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