The Inflation Reduction Act: In the Face of Global Economic Competition, European Industry Is Defenseless

While a plan seeks to allocate $369 billion in subsidies for clean technology provided it is produced on American soil Francois-Joseph Schichan is pleading for a European response that takes into account the differences between the industrial structures of the member states.

The decline of European industry is accelerating, and the EU remains powerless. The latest threat involves massive subsidies by the American government to its industry via the Inflation Reduction Act.

Congress passed the bill last summer that, among other things, authorizes spending more than €390 billion (approximately $369 billion) for renewable energy and sustainable development. It also mandates that certain products like electric vehicles be assembled in North America. It is one of the U.S. administration’s largest programs of industry support in recent decades.

European institutions and certain EU member states have recognized the danger these massive subsidies represent. There is a likelihood that wide swaths of European industry incapable of standing up to American competition will disappear at a moment when its competitiveness is suffering from the elevated cost of energy. In terms of future investments, European companies are also likely to prefer the U.S. to Europe.

Europeans delivered petitions to Washington, including one from French President Emmanuel Macron during his state visit last December, a petition that the Biden administration flatly rejected, stating the U.S. would not rewrite the IRA. And even if it wanted to, it is not likely the U.S. would be able to do so given the new political balance in Congress after last November’s midterm elections.

In the face of the United States’ predictable refusal to modify its approach, the debate has now moved to Brussels and the EU member states. Within the European Commission, the interventionists, represented by Commissioner for Internal Market Thierry Breton, are opposed to the liberals, represented by Commissioner for Competition Margrethe Vestager. Though conscious of the risks the IRA poses for European industry in an unfavorable economic environment, the executive leadership of the EU remains largely disunited.

Adding to the divisions within the Commission are those among the member states themselves. Some fear an economic and trade conflict with the U.S. although they do not realize that it is, in fact, already underway. Others do not want to allow France and Germany, which have greater budgetary latitude, the opportunity to massively support French and German industries to the detriment of their own. Finally, there are those who remain attached to the EU’s evangelizing mission in favor of free trade and free and undistorted competition and feel that it must continue to set an example by limiting states’ ability to take action within the economy. Germany, for its part, has moved closer to France to defend an interventionist approach, but the liberals in the coalition of Chancellor Olaf Scholz are not on the same page.

Until now, these divisions have resulted in measures that fail to meet the challenge, leaving European industry largely defenseless. The Commission has proposed easing state aid regulations that will allow member states to support their renewable energy sectors and sustainable development. But this move will only be temporary and targeted, subject to Commission authorization and will lack any credible financing. Moreover, these proposals risk being weakened during the upcoming negotiation process.

The situation for European industry will not improve. With its huge subsidies, the U.S. is confirming the protectionist tendencies of successive American administrations. If we still needed to be reminded, regardless of whether we are dealing with Donald Trump or Joe Biden, it is “America First” to defend the economic interests of the country. For its part, China also subsidizes its industry, notably in renewable energy and sustainable development. The EU is thus caught in the vise of competition between the major powers. The much-hyped unity of the Western camp on the war in Ukraine is off the table regarding matters of economic interests.

Ultimately, a divided European response to the IRA reflects the fundamental differences between the economic and industrial structures of the member states. To a certain extent, these differences are irreconcilable. The European approach should take this into account by giving member states more discretion.

For its part, the U.S. is not concerned with European protests but competition with China and maintaining its dominance in the economic sectors of the future. And to that end it is prepared to accept, and even favor, an acceleration of Europe’s economic and industrial decline.

François-Joseph Schichan is a former diplomat, consultant in geopolitics and European affairs at the consulting firm Flint Global.