French comes as reinforcement
What is Habeck doing in Washington?
By Jan Ganger, Washington
2/6/2023, 6:12 p.m
Both the US government and Robert Habeck are committed to fighting climate change. But the US subsidy package worth hundreds of billions of dollars has alarmed both the EU and the German Economics Minister.
This is in the spirit of Robert Habeck: The USA is making enormous sums available to transform the economy towards climate neutrality. But there is – from a German point of view – a problem. The “Inflation Reduction Act” (IRA) program contains a good deal of protectionism. In Germany and the rest of Europe, there is a fear that, given the huge resources and the American desire to locate production in the USA, European companies will be disadvantaged and important branches of industry may migrate to the USA.
So the German economy and climate protection minister made his way to Washington to persuade the US government to make the IRA more Europe-friendly. He meets reinforcements in the US capital: France’s Economics Minister Bruno Le Maire is traveling from Paris. The duo want to push for changes together. “There’s a lot to talk about,” Habeck said before leaving for Washington. The federal government is pleased that the Americans are taking climate protection seriously. However, there are “a few critical points”. The main problem: The US government wants to give preference to companies that produce in the USA in the green transformation. For example, e-cars should only receive subsidies if their batteries are manufactured in North America.
Habeck assured that the EU Commission was in charge of the negotiations with the USA. He and Le Maire would only support her. In the US government, one may see the distribution of roles differently and see the two largest economies in the EU as the key contacts. The fact that Habeck paid a visit to the Swedish EU Council Presidency shortly before the US trip to coordinate things does not change that.
400 billion dollars. Or 800 billion?
The US program has it all. There is talk of a volume of almost 400 billion dollars that is to be made available over the next ten years. The buzzer is possibly much higher. Analysts are promising up to 800 billion dollars – depending on how the program is designed in detail and how much money is ultimately accessed.
One thing is certain: the Americans cannot do without protectionism. Because the Democratic administration under President Joe Biden would never have received the support of the Republicans in Congress for promoting green technology without a good dose of “America First”. And outside of the United States, too, there is understanding for industrialising regions that have been left behind – and thus countering Trumpism in its strongholds.
Spending tax money to fight climate change is not a problem for either the EU Commission or the federal government. Above all, they are not happy about the incentives to lure production to the USA – namely of future technology such as the manufacture of wind turbines, solar cells, batteries and electric cars as well as the hydrogen industry. The EU is unlikely to succeed in formally granting its member countries the same advantages as Canada and Mexico, with which the USA have concluded a free trade agreement.
The hope is that the design and application of the IRA clauses will come as close as possible to these advantages in many areas. The model is an agreement that has already been reached: Electrically powered leasing cars are to be exempted from the “Made in North America” clause – leased cars currently make up almost 80 percent of the US e-car market.
Traveling to Paris and Berlin for your own benefit?
Meanwhile, in parts of the EU, Habeck and LeMaire’s joint visit to Washington is viewed with some suspicion. EU Economic Commissioner Paolo Gentiloni warned of a “subsidy war”, meaning a race between the US and the EU. But from the point of view of some EU members, this danger may lie elsewhere: the Franco-German axis is working together to enable governments to spend a lot of money to protect their own industries. Berlin and Paris can provide large funds for this, while other countries lack the necessary financial leeway.
EU Competition Commissioner Margrete Vestager recently pointed out that Germany and France together account for “almost 80 percent of the state aid” that the EU approved in the corona pandemic. “The EU countries are not equal here,” she criticized. To put this in context: in the German climate and transformation fund alone, funds of almost 180 billion euros are available for the years 2023 to 2026.
The EU Commission presented its own subsidy package last week to counter the IRA program. Rules for state aid are to be relaxed, unused funds from the Corona aid pot are to be used differently, ecological projects are to be approved more quickly and trade agreements to secure scarce raw materials are to be promoted. Around 250 billion euros of existing funds should be reallocated, said Commission President Ursula von der Leyen.
Lindner against community debt
However, this should only be the beginning. If the EU Commission has its way, the Union will take on joint debt in order to increase its clout. But this is met with resistance from many EU member states – at the forefront of the opponents is German Finance Minister Christian Lindner. The French, however, are traditionally very open to the idea.
Le Maire sets other priorities for now. A “reorientation of European industrial policy” is necessary, he said and specified what he means by that: The EU must allow the member countries “much more massive state aid” to promote domestic investments in green hydrogen, electric car batteries or semiconductors, for example. This must also include subsidies. In view of the financial strength of France and Germany, this should not meet with particularly warm approval in many EU countries.
Such state aid is forbidden in the EU so that competition in the internal market is not distorted. But Competition Commissioner Vestager has already announced that she will further adjust the conditions that were relaxed during the Corona crisis in response to the US subsidies. At the end of the week, the Commission wants to make concrete proposals at a special summit of heads of state and government.
Before that, the German economy minister, together with his French counterpart, is trying to defuse the “America First” elements in the IRA subsidy program, which the “Economist” describes in three words: big, green and mean.