EU may be forced to act to prevent industry exodus

EU may be forced to act to prevent industry exodus

EU may be forced to act to prevent industry exodus
EU officials are thinking of subsidies to retain the continent’s industrial competitiveness. (AFP)
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Trans-Atlantic ties were forecast to improve significantly and sustainably during Joe Biden’s presidency, yet we are two years into his term of office and relations are deteriorating as a result of the Inflation Reduction Act.

This landmark legislation was initially welcomed by key EU stakeholders, including European Commission President Ursula von der Leyen. However, it has subsequently triggered a huge political row over the massive amount of green energy subsidies given to US industry, threatening Biden’s overarching goal of reuniting the Western alliance following the divisions of the Trump presidency.

Earlier this week, Von der Leyen said that the EU must address “distortions” created by the $430 billion US plan to incentivize climate-friendly technologies, which threatens a potential trans-Atlantic trade war. She said that, unless a compromise is found fast, the EU will “adjust our own rules.”

Von der Leyen’s call for changes to EU state aid rules follows a series of emergency moves in recent years aimed at streamlining the regime. This includes easing restrictions on payments to private companies in response to the pandemic and the energy crisis.

Under the Inflation Reduction Act, US consumers get incentives to purchase new and second-hand electric cars, to warm their homes with heat pumps, and even to cook their food using electric induction. Biden said there could be “tweaks” made to make it easier for European firms to benefit from the subsidies package.

What Biden appears to be referring to is a provision in the act that grants exceptions to countries with a US trade agreement to make it applicable to America’s “allies.” The challenge here, however, is that the EU does not yet have such a trade deal with the US.

French President Emmanuel Macron also said the issue was fixable after his visit last week to Washington to see Biden. Macron added that weakening Europe’s industry was “not the interest of the US administration.”

What Macron refers to here are the growing perceptions of a threat to Europe’s industrial base. This was highlighted last month by a report by the Conference Board, which showcased how much the continent’s CEOs are concerned by the economic landscape in the wake of Russia’s invasion of Ukraine.

There are growing warnings that the European continent’s industrial base may end up structurally uncompetitive

Andrew Hammond

European CEOs’ expectations about their own industry’s prospects for the next six months — plus those of the wider European economy — are at their lowest point since records began. The data from this survey and some other recent ones is alarming decision-makers in Brussels and other key European capitals, like Berlin and Paris.

At the end of last month, German Economy Minister Robert Habeck and his French counterpart Bruno Le Maire issued a joint statement echoing these concerns and calling for an intensified “EU industrial policy that enables our companies to thrive in global competition, especially through technological leadership.” EU officials are now very seriously thinking through a number of big subsidy packages to try to retain the continent’s industrial competitiveness.

One of the schemes being considered in Brussels is a European sovereignty fund to help businesses invest and meet ambitious green standards. The European Commission will discuss the plans with EU countries at next week’s European Council gathering of the bloc’s 27 presidents and prime ministers.

Commission officials stressed that the first priority is to try to tap and expand existing sources of funding, like RePowerEU, which aims to end EU reliance on Russian fossil fuels by 2030 in response to the invasion of Ukraine. They will then have discussions with member countries about a European sovereignty fund. This is because some countries are adamantly opposed to issuing new EU money.

The Conference Board report makes clear that CEOs are not just concerned about the fact that Europe’s energy prices will be higher than those in much of the rest of the world for some time to come. In addition, key parts of the new US industrial subsidy scheme to support green industries under the Inflation Reduction Act kick in next year.

In this landscape, there are growing warnings that the European continent’s industrial base may end up structurally uncompetitive. Executives and industry groups fear that the economy could be severely weakened. Providing context here, eurozone manufacturing activity has recently hit its weakest level since the height of the COVID-19 pandemic in May 2020.

European industrial gas demand also fell by 25 percent in the third quarter of this year compared to 12 months earlier. Widespread shutdowns are behind much of the drop because efficiency gains alone would not produce such savings.

Energy-intensive industries, such as aluminum, fertilizers and chemicals, are at particular risk of permanently shifting production to where cheap energy abounds (for instance, natural gas in the US costs about a fifth of what firms pay in Europe). Of course, European industry has been shifting production to locations with cheaper labor and other lower costs for decades, but the energy crisis appears to be accelerating this exodus.

Taken together, this data highlights the growing political imperative for Europe to act. In the absence of a compromise with the US, expect the EU subsidy regime to be revamped sooner rather than later.

• Andrew Hammond is an Associate at LSE IDEAS at the London School of Economics.

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