EU must adapt state aid rules in face of US green subsidies, warns commission chief

The EU must “simplify and adapt” its rules on state aid in response to the US’s new $369 billion (€351 billion) climate package, which has soured transatlantic ties and sparked fears of a trade war between Brussels and Washington, European Commission president Ursula von der Leyen said on Sunday.

Europe should “adjust our own rules to make it easier for public investments”, Ms von der Leyen said, in her first set of proposals responding to a chorus of demands from EU states to mitigate and counter the US green energy subsidy scheme.

“The new assertive industrial policy of our competitors requires a structural answer,” she said in a speech focused on the trade row, which EU leaders have warned risked “fracturing” transatlantic unity.

The suggestions from the head of the EU’s executive, despite the risk of disrupting rules to ensure fair competition between EU member states and sparking a subsidy war with Washington, underscores the scale of concerns in Brussels at the US Inflation Reduction Act. The remarks come ahead of meetings between EU and US officials on the topic on Monday.

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US president Joe Biden has hailed the legislation as the most “aggressive action” his country has taken to confront the climate crisis. But European allies complain that measures such as tax credits and subsidies for products such as electric vehicles give US-based enterprises an unfair advantage and will lure EU industries to relocate.

In response, Ms von der Leyen said the EU must overhaul its public investment regulations and reassess whether “new and additional funding at the EU level” was required. Brussels should also continue to demand the US adjust the act to resolve contentious issues.

“There is a risk that the [Inflation Reduction Act] could lead to unfair competition, could close markets and fragment ... critical supply chains,” Ms von der Leyen said. In response, the EU should “take action to rebalance the playing field ... [and] improve our state aid frameworks”.

“We are very careful to avoid distortions in our single market ... But we must also be responsive to the increasing global competition on clean tech,” Ms von der Leyen added. “If we see that investments in strategic sectors are leaking away from the European Union, this would only undermine the single market. And that is why we are now reflecting on how to simplify and adapt our state aid rules.”

Ms von der Leyen’s call for changes to the bloc’s state aid rules follows a series of emergency moves in recent years aimed at streamlining the regime, such as easing restrictions on payments to private companies in response to the Covid-19 pandemic and the energy crisis.

However, further steps to loosen the rules will be contentious among member states given concerns that extra spending by deep-pocketed capitals led by Germany will skew the single market. Other member states have largely exhausted their spare fiscal firepower amid debt-to-GDP ratios of at least 100 per cent.

While acknowledging the risk of a “subsidies race,” Ms von der Leyen said a trade war with the US was not in anyone’s interest, and that “competition and co-operation can be two faces of the same coin”.

“Of course, Europe will always do what is right for Europe. So yes, the European Union will respond in an adequate and well-calibrated manner to the Inflation Reduction Act,” she said.

“But does this mean that we will engage in a costly trade war with the United States in the middle of an actual war? This is not in our interest. And nor in the interest of the Americans,” she added.

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Mr Biden said on Thursday while hosting French president Emmanuel Macron in Washington that he was open to addressing EU concerns.

“There are tweaks that we can make that can fundamentally make it easier for European countries to participate or be on their own, but that still needs to be worked out,” the US president said.

Ms von der Leyen’s proposals came after Charles Michel, the European Council president who represents the leaders of the EU’s 27 member states, also called for a renewed debate about common financing as the union’s competitiveness is hit by soaring energy prices caused by Russia’s war against Ukraine and the IRA subsidies.

Mr Michel said that while some member states had the firepower to support embattled industries, other capitals were stretched and were making legitimate demands for a discussion on new EU money.

“It is good that some member states have the possibility to mobilise money to support economic development, but it is very important to make sure it doesn’t create distortions in the single market,” said Mr Michel.

He said the discussion on whether there should be a fresh injection of EU funding was a repeat of the debate that led up to the creation of the bloc’s unprecedented Covid-19 recovery fund. The question, he added, was “are we ready or not to mobilise financing, and how do we finance the money we need?” — Copyright The Financial Times Limited 2022