Loukas Tsoukalis reflects on the US Inflation Reduction Act – which includes generous subsidies to promote a green transition which would impact on the competitiveness of European firms – and analyses the ongoing debate in Europe about how best to respond.
In August 2022, as part of the Inflation Reduction Act, the US Congress adopted a very ambitious programme aimed at energy autonomy and the fight against climate change. The name of the Act is largely misleading, but who cares? The US under the Biden Administration is now entering in a big way the fight for the greening of the US economy through generous subsidies to encourage investment in carbon free production.
Isn’t this what Europeans and others have been constantly asking the Americans – who are among the world’s biggest polluters – to do?
It is indeed a remarkable and welcome change from the Trump years, when the then US President provided the model for climate deniers across the globe. But now Europeans, the British included for a change, are again complaining. This is because US subsidies to promote the transition to a green economy have a strong Made in America element. Europeans naturally fear that such subsidies will divert investment away from Europe to the United States.
Europe has already suffered considerably from Russia’s invasion of Ukraine and subsequent efforts to decouple itself from Russian energy. Europe now imports liquified natural gas (LNG) in large quantities to replace Russian gas, part of which comes from the US. Alas, it costs much more than Russian gas in the good old days.
This also places European producers at a disadvantage vis-à-vis their American competitors who usually buy their gas at much lower prices. Bad enough as this is already, Europeans will now also have to face unfair competition through large US subsidies to those who invest locally in the US, all in the name of climate policy.
Europeans and Americans are of course allies. They are also competitors in a global economic system that has been under heavy strain in recent years. The war in Ukraine came at the tail end of a succession of large transformations and major crises that have progressively undermined globalisation in its (neo) liberal version (the kind of globalization we have lived through during the last forty years or so). On the one hand we have the long-term trends of growing inequalities within developed countries and climate change. On the other, there is the financial crisis of 2007-8, then the pandemic, and today a large-scale war. They have all struck at the foundations of the multilateral liberal order.
As a result, we have been witnessing the return of the state as protector and provider of public goods, notably a liveable environment, public health, and social cohesion. This is true of most, if not all, European countries.
Meanwhile, in a world of growing strategic rivalry and rising nationalism (which is also the world we have been living in for some years now) security considerations are increasingly taking precedence over economic concerns. Sanctions, export controls and subsidies thus become powerful economic weapons in the hands of governments.
The United States, the erstwhile guardian of the multilateral liberal order, is now trying to make the most of such weapons in a largely dollar-based international economic system. With a heavily polarized and highly unequal society at home, coupled with the growing challenge from China, many US politicians resort to economic nationalism as the best way to win popularity and get some legislation through.
The Biden Administration is thus steering a very difficult course, with unholy compromises along the way. The Inflation Recovery Act is a very good recent example that combines green ambitions with economic nationalism, among other things.
As so often happens, the French have taken the lead inside the EU in seeking a joint response. They are first working with the Germans, while preparing the ground for the European Commission.
They want to convince the Biden Administration to take back the protectionist elements of the new legislation and, if unsuccessful, to match US subsidies with a similar European programme: a form of European industrial policy. Resorting to arbitration by the World Trade Organization (WTO) would not be of much help today: again, a sign of times.
EU rules for state aids were very much relaxed during the pandemic to allow room for national governments to help their producers and citizens during prolonged lockdowns. But since some governments have deeper pockets than others, and a free-for-all competition of state aids would seriously undermine the European single market, the relaxation of rules was accompanied by the creation of a highly ambitious and jointly financed programme. The outcome – NextGenerationEU – has a budget of 800 billion euros and a strong redistributive bias in favour of weaker members.
Can the EU do a similar thing today in response to the US Inflation Recovery Act? National subsidies with the blessing of the Commission could be combined with an EU Sovereignty Fund as already proposed by the French and the European Commission. It won’t be easy though because such an initiative would come soon after the extensive measures adopted during the pandemic. Furthermore, some European states at least would not feel happy with common measures seen as being in competition with American policy. Yet, progress is being made – and the Germans may again have the last word.
Europe’s coming of age as an economic and political adult is the big challenge facing EU members in a rapidly changing and, indeed, threatening world. It is also the title of my new book which I shall present at the LSE on 26 January.
I highlight that the cost of Brexit for the UK, mostly in terms of the cost of exclusion, is likely to increase further as the EU grows into adulthood. Let’s therefore hope it won’t take too long for the dust to settle and thus allow for some sober thinking about the next stage of EU-UK relations.
By Loukas Tsoukalis, Affiliate Professor, the Paris School of International Affairs at Sciences Po; Emeritus Professor, the University of Athens; and President of the Hellenic Foundation for European and Foreign Policy (ELIAMEP).
You can purchase Loukas’s book Europe’s Coming of Age here.
