EU plans subsidy war chest as industry faces ‘existential’ threat from US

The EU is in emergency mode and preparing a major subsidy campaign to prevent European industry from being wiped out by US rivals, two senior EU officials have told POLITICO.

Europe faces a double hammer blow from the United States If it weren’t enough that energy prices look set to remain permanently much higher than those in the United States thanks to the war of Russia to Ukraine, US President Joe Biden is also currently rolling out a $369 billion industrial subsidy scheme to support green industries under the Inflation Reduction Act.

EU officials fear that companies now face almost unstoppable pressure to shift new investment to the United States rather than Europe. European industry chief Thierry Breton warns that Biden’s new subsidy package poses an “existential challenge” to Europe’s economy.

The European Commission and countries like France and Germany have understood that they must act quickly if they want to prevent the continent from turning into an industrial wasteland. According to the two senior officials, the EU is currently working on an emergency program to channel money to key high-tech industries.

The interim solution being prepared in Brussels is to counter US subsidies with a European fund of its own, the two senior officials said. This 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 businesses invest in Europe and meet ambitious green standards.

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

Another reason for Brussels to react quickly is to avoid EU countries going it alone by spending emergency money, officials have warned. 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 still a sore point in Brussels.

European Commissioner Breton, in particular, has led the pack in sounding the alarm. To meeting with EU industry On Monday, Breton sounded his warning about the “existential challenge” to Europe of the Inflation Reduction Act, according to people in the room. Breton said it was now of the utmost urgency to “reverse the ongoing process of deindustrialisation”.

Breton was echoing calls from business leaders across Europe warning that a perfect storm was brewing for manufacturers. “It’s a bit like drowning. It happens quietly,” said BusinessEurope President Fredrik Persson.

The Cut Inflation Act is a particular pet peeve for EU car-making nations – such as France and Germany – as it encourages consumers to ‘buy American’ when it comes to vehicles electrical. Brussels and EU capitals see it as an attack on 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 subsidy race is now increasingly looking like a controversial plan B.

To do so, it will be essential to secure the support of Germany and of the 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 its willingness to break the subsidy taboo.

France has long called for a counterattack on Washington by channeling public funds into European industry to help the continent’s industrial champions. This idea is also gaining traction in Berlin, which has traditionally been economically more 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 allows our businesses to thrive in global competition, not least through leadership technology,” adding that “we want to closely coordinate a European approach to challenges such as the US Inflation Reduction Act.”

Apart from the meeting of trade ministers on Friday, the idea will also be discussed informally among competition ministers next week. An official said European leaders would also discuss it on the sidelines of the Western Balkans summit on December 6 and during the European Council in mid-December.

Hans von der Burchard, Giorgio Leali and Paola Tamma contributed reporting.