by Oliver Noyan
The speech by German Economy Minister Robert Habeck gave the impression of an almost paradigmatic shift in German economic thinking. In response to Washington’s Inflation Reduction Act and surging energy prices, Habeck outlined an eight-point plan to save the EU from deindustrialisation.
The danger is real. According to a survey by the Federation of German Industries (BDI) around 20% of German industrial players from the famous Mittelstand (medium-sized companies) are currently pondering relocating their production sites to third countries due to the high energy prices and tax incentives elsewhere.
Habeck’s call for a “robust European response” was read by many as a departure from the long-standing German position – to regulate instead of subsidising the economic sphere – towards something France has been long aiming for.
After all, Habeck’s warning that Europe needed a new legal framework that allows for “subsidies for industrial production” sounds surprisingly similar to the longstanding calls by French President Emmanuel Macron to retaliate against the US Inflation Reduction Act by creating its own subsidy scheme.
“We need a Buy European Act like the Americans, we need to reserve [our subsidies] for our European manufacturers,” Macron was already outlining last month, adding that his German counterpart Olaf Scholz would back him on the matter.
But not everything that glitters is gold. While France and Germany have tried hard to give the impression of unity on the matter, Berlin was quick to backpedal.
While Europe would need a European response, this would not entail the need to “protect and prop up” the industries but to take on the challenge “at the level of competition and of innovation,” Habeck’s spokesperson said on Wednesday (30 November).
“And the focus is not on subsidising, on entering a subsidy race. On the contrary, he has clearly denied that,” the spokesperson continued.
These statements also clearly contradict the European Commission’s plans.
Speaking at the very same event as Habeck, the EU Commissioner for Internal Market, Thierry Breton, outlined the need for a “European Sovereignty Fund” that would provide the “adequate financial firepower” to defend European interests against an increasingly protectionist China and USA.
“I believe it is time that we encourage private investment, facilitated by state aid support, in innovative projects, but also in projects that contribute to EU sovereignty and resilience” Breton added.
Clearly, despite all the signals of unity in recent weeks, Germany still does not seem to be convinced that assisting companies with additional state aid is the way to go.
This opposition might as well have to do with the way such investments and subsidies should actually be financed.
One way would be to leave it with the member states and simply relax the bloc’s strict state aid rules. However, enabling countries to subsidise their companies would likely create a subsidy race within the European Union itself, instead of at the global level.
Even worse, it might even undermine the single market, since larger member states are able to pump more money into the market than others – a lesson Germany already learned when its plan for a €200 billion energy package drew the ire of its European allies
However, the second option – to have a better subsidy scheme on the EU level – is even more unlikely.
To create the “sovereignty fund” that could be on par with the US Inflation Reduction Act, a new round of joint borrowing would be unavoidable. But as we have seen in recent months, this is a no-go for Berlin, despite all these multiple crises.
In the end, it seems that the European response to an increasingly protectionist world will be a toothless tiger.
While others like the US, China or even the small country of South Korea are spending billions to boost their industries, the EU will probably only get yet another initiative or platform for shared practices, with no financial backing attached.
*first published in: Euractiv.com
By: N. Peter Kramer
