A Wake-Up Call for Europe

The EU is worried that the Inflation Reduction Act could sound the death knell for industry. However, it should be viewed as an incentive.

It is far from the first time that the head of the European Commission has set out for Washington to rescue the situation. In the summer of 2018, Jean-Claude Juncker, then-president of the Commission, visited Donald Trump in an attempt to dissuade the president, driven by his “America First” policy, from imposing high tariffs on European auto imports.

Five years later, European Commission President Ursula von der Leyen finds herself on a similar mission. On Friday, she is meeting Trump’s successor, Joe Biden, for negotiations on the Inflation Reduction Act. The massive subsidies package, which will inject $370 billion into the U.S. economy in the coming years with the aim of promoting environmentally friendly technologies, has caused a lot of anxiety in Europe. As the “Buy American” provisions of the Inflation Reduction Act primarily promote firms that manufacture their products in the U.S., the European Union fears a mass exodus from Europe to America.

The rhetoric has gotten out of control in the past weeks and months. There has been talk of discrimination against EU companies, while German businesses, which have only just shaken themselves free of the specter of gas shortages, have used drastic language when warning of the threat of deindustrialization.

Europe undoubtedly finds itself in a complex situation. The EU, whose economy has been more strongly affected by the war in Ukraine, can hardly win a subsidy race with the U.S., and an extravagant subsidy scheme would distort the EU’s single market.

But what gets almost completely lost amid all the lamenting about the IRA is that Europeans are largely in control of their own destiny. With a bit of skill, von der Leyen should be able to negotiate additional exemptions for European companies, as the U.S. also has little interest in a disastrous trade war with its most important partner in the current international context. But ultimately, it is key that the EU comes to see the Inflation Reduction Act as an incentive and opportunity. After all, Biden’s program of investment will lead to the emergence of strong green tech companies that will likely be of interest to the EU both as a customer and a supplier. It is also the wake-up call Europe needs to speed up the energy transition and make its economy more competitive globally.