EU plans war chest for subsidies as industry faces US ‘existential’ threat – POLITICO

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The EU is in emergency mode and preparing a big boost in subsidies to prevent European industry from being wiped out by American rivals, two senior EU officials told POLITICO.

Europe is facing a double blow from the U.S. If it weren’t enough that energy prices look set to stay permanently much higher than in the U.S. thanks to Russia’s war in Ukraine, U.S. President Joe Biden is currently launching a $369 billion industrial subsidies scheme to support green industries under the Inflation Reduction Act.

EU officials fear that businesses will now face almost irresistible pressure to move new investment to the US rather than Europe. EU industry chief Thierry Breton warns that Biden’s new subsidy package poses an “existential challenge” for the European economy.

The European Commission and countries including France and Germany have realized they need to act quickly if they are to prevent the continent from turning into an industrial wasteland. According to the two senior officials, the EU is now working on an emergency program to funnel money into major high-tech industries.

The interim solution now being prepared in Brussels is to counter US subsidies with its own EU fund, the two senior officials said. It would be a “European Sovereignty Fund”, already mentioned in Commission President Ursula von der Leyen’s State of the Union address in September, to help companies invest in Europe and meet ambitious green standards.

Senior officials have said the EU must act extremely quickly as companies are already making decisions about where to build their future factories for everything from batteries and electric cars to wind turbines and microchips.

Another reason Brussels needs to react quickly is to prevent individual EU countries from squandering emergency money on their own, officials warned. The chaotic response to the gas price crisis, where EU countries have reacted with all sorts of national support measures that have threatened to undermine the single market, is still a sore point in Brussels.

European Commissioner Breton, in particular, has led the pack in sounding alarm bells. At the meeting with EU industry leader on Monday, Breton issued his warning about the “existential challenge” for Europe from the Inflation Reduction Act, according to people in the room. Breton said it was now a matter of the utmost urgency to “reverse the ongoing deindustrialization process”.

Breton was echoing calls from business leaders across Europe warning of a perfect storm brewing for manufacturers. “It’s a bit like drowning. It’s happening in silence,” said Fredrik Persson, president of BusinessEurope.

The Inflation Reduction Act is a particular bogeyman for EU auto nations – such as France and Germany – as it encourages consumers to “Buy American” when it comes to electric vehicles. Brussels and EU capitals see this as a weakening of global free trade and Brussels wants to strike a deal in which its companies can enjoy the same American benefits.

With a diplomatic solution looking unlikely and Brussels wanting to avoid an all-out trade war, a run on subsidies is now looking increasingly likely as a controversial Plan B.

To do so, it will be crucial to secure the support of Germany and more economically liberal commissioners such as trade chief Valdis Dombrovskis and competition chief Margrethe Vestager.

At a meeting of EU trade ministers on Friday, Brussels hopes to get more clarity from Berlin on their willingness to break the taboo on subsidies.

France has long called for a counterattack against Washington by channeling state funds into European industry to help the continent’s industrial champions. That idea is now also catching on in Berlin, which has traditionally been more economically liberal.

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

In addition to the meeting of trade ministers on Friday, the idea will also be discussed informally among competition ministers next week. One official said European leaders would also discuss it on the sidelines of the Western Balkans summit on December 6 and at the mid-December European Council.

Contributors were Hans von der Burchard, Giorgio Leali and Paola Tamma.

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