Making social science accessible

06 Jul 2023

Economy

Europe

Mark Hallerberg analyses the German government’s decision to award a €10 billion subsidy to American chip maker Intel, who will build two new plants in Germany. He suggests the decision reflects a shift in the German economic model, and places the decision in the wider context of US, EU and UK industrial policy.

On June 19 2023, a representative of the German government and the Intel Board signed an agreement in the presence of Chancellor Olaf Scholz and Intel CEO Pat Geisinger. Intel promised to make an investment in Magdeburg to the tune of over €30 billion to build two plants that would produce chips. As Intel’s press release noted, the expectation is to create 7000 construction jobs and 3000 high tech positions in Magdeburg’s ‘Silicon Junction’.  The plants should be operational by 2028 though the subsidy is still subject to European Commission approval.

This agreement between an American chip producer and the German government broke several precedents, which in turn suggests a significant change in Germany’s economic model as well as in its role in the world. It is also a reaction to increases in subsidies abroad, and particularly in China and in the United States.

In terms of subsidies, German companies are used to these going the other way. South Carolina provided American public funding of hundreds of millions of dollars to BMW to build cars in Spartanburg beginning in 1992 while Mercedes located production facilities with lots of public help in Tuscaloosa, Alabama at about the same time. Moving to today, South Carolina agreed to $1.3 billion in subsidies for VW to build ‘Scout’ branded cars in the state while BMW’s and Mercedes’ footprint in auto manufacturing in the US has only expanded.

The usual pattern, therefore, is that American public aid supports German manufacturers.

While the Intel investment is prominent, it is not the first time an American tech company has decided to locate manufacturing facilities in Germany. Tesla opened a so-called ‘Gigafactory’ near Berlin last year. Observers originally expected it to get well over €1 billion in subsidies, but the reason why that subsidy has yet to be paid says a lot about the challenges that face Germany in the tech sector.

The expected subsidy for Tesla was for the firm to build a type of battery near Berlin. The US Inflation Reduction Act (IRA), however, provides a bigger subsidy, and Tesla decided to forego the German subsidy for the American one and to build the batteries in the US. And it is not just American firms making such location decisions – according to a survey of German companies based in the US, 71% planned more investments in the country and 49% claimed that the 2022 Inflation Reduction Act and other ‘Buy American’ legislation affected their plans. Those BMW and Mercedes plants that received subsidies in the 1990s to come to the US are now switching over to the type of electric cars that qualify for the new subsidies.

China, of course, subsidizes its semiconductor industry and its electric car industries equivalent to billions of US dollars as well. The country, in fact, has become a major rival to Germany in the car industry in a few short years, and one sees this development on German streets – for the first time, in 2022 Germany imported more cars from China than it exported to the country.

The German government, therefore, finds itself caught between two superpowers who freely subsidize their tech industries. The €10 billion that Intel will receive in Germany should be seen in this light.

Moreover, Germany has a broader investment problem – in 2022, the total business investment that flowed into Germany was just €10.5 billion. This contrasted with €135 billion that left the country for higher returns on capital elsewhere. So the subsidy pledged to Intel is almost equal in size to all inward business investment last year. It also over three times larger than the largest public subsidy provided by the German government in 2022, which was to aid energy efficiency in buildings nationwide.

So to attract any investment, let alone tech investment, to Germany these days is expensive, and in size and scale the Intel subsidy is unprecedented. It is also humbling – this is not technology developed in Germany but abroad. It heightens a growing sense that Germany is increasingly too small a player in a world economy where the two superpowers are increasing their economic dominance.

An option that Berlin has is to go through the European Union to respond to the growing pressure from China and – through much greater domestic subsidies for semiconductors and electric cars – from the United States.

The European Union has indeed begun to respond to the American IRA and CHIPS Act (providing billions in funding for semiconductor research and manufacturing). It has relaxed state aid provisions. This alone is not a sufficient response – it simply allows the rich member states like Germany to provide more subsidies.

What is potentially more useful is European Union-wide debt created through the ‘Recovery and Resilience Facility,’ which amounts to €750 billion and can be used for climate-friendly industrial policies, which are the policies that the IRA subsidises in the US. As a European Parliament document from June 2023 puts it, ‘The main difference between the US and EU is that the IRA doesn’t create funds, and even less so debt-financed funds, while the EU is mainly relying on funds, and these are being financed by debt.’ It adds that the US government will have to pay for its subsidies in the form of tax breaks somehow, so it probably will use debt financing too.

Germany has benefited less from this type of fund than other member states.  Nevertheless, it is available to European Union member states. For a country that intends to stick to its fiscal rules once again in 2024, with the pandemic supposedly now behind the country, further initiatives at the European Union level may be welcome.

By Professor Mark Hallerberg, Hertie School and SCRIPTS Excellence Cluster.

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