With a few well-calibrated words this week in Davos, European Commission President Ursula von der Leyen upped the stakes in the simmering transatlantic conflict over green subsidies. She proposed relaxing Europe’s rigid state aid rules to allow billions of euros in public loans and grants to subsidize the bloc’s green tech industries.

It’s an existential matter, von der Leyen vowed. “We need a very clear message and signal now to the clean-tech industry that Europe is their home and future and it’s worth it to invest here.”

In the background looms the US’s Inflation Reduction Act. European leaders are alarmed by this $369 billion subsidy package that subsidizes green goods – such as batteries and electric vehicles – provided they are manufactured in North America. As the IRA turbocharges American cleantech industries, Europe fears losing competitiveness. Its conventional energy prices are five to six times higher than across the pond, making European manufacturing more expensive than in the US.

Instead of promoting clean tech, some Europeans fear that the IRA’s real goal is to steal their investment. Belgian Prime Minister Alexander De Croo has accused Washington of an “aggressive campaign” to poach EU companies and prod them to expand their US operations. Belgian chemical and steel companies had been approached about switching investment across the Atlantic, he said. And Northvolt, a Swedish battery maker, has paused its planned Gigafactory in Germany to consider building one in the US.

Hostilities look set to mount. Although US President Joe Biden has promised tweaks towards extending some of the IRA’s provisions to European (through looser definitions), US domestic politics make it impossible to retool the package. Congress, with Republicans in charge in the House and razor-thin Democratic majority in the Senate, won’t support major revisions. US officials instead seem to dare Europeans to rev up their own protectionist green program. US Trade Representative Katherine Tai has been suggesting since November that the EU should match and complement the US strategy, so as to galvanize cleantech deployment.

Notably, both the US and Europe share a common goal of catching up to the most subsidy-addicted country of all, China. Over the past two decades, Western companies outsourced production there – to the point that Beijing now exerts de facto control of entire strategic supply chains, such as the solar industry. In her Davos speech, Commission President von der Leyen downplayed talks of transatlantic rivalry, stressing that joint investments in clean energy were nearing one trillion euros and needed to level the playing field with China.

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The European plan is tentatively dubbed the “Net Zero Industry Act,” though other names such as the “Clean Tech Act” or even the “Buy European Act” have been floated. It will focus on watering down rules that limit public investments to inject money into European cleantech industries. A Europe-wide Sovereignty Fund would coordinate investments and attempt to avoid distortions to the single market.

European leaders will discuss the project on February 9-10, though approval remains uncertain. Both France and Germany are supportive, giving the proposal powerful political support. France advocates the Buy European formula. Germany has suggested local content requirements.

But fiscally conservative capitals are opposed to additional large-scale public EU borrowing. Many European countries also face high debts. The limit on state subsidies was imposed to create a level playing field; if abandoned, fragmentation could result, with rich, debt-free countries such as Germany gaining an advantage over debt-stretched nations such as Italy.

Swedish prime minister Ulf Kristersson, who represents the EU’s rotating presidency, says that low productivity, insufficient spending in research and high energy prices “pose greater risks to European competitiveness than a lack of subsidies to production.” Many European business leaders are equally skeptical. They say the US cleantech plans will “grow the entire pie.” A just-published German Economics Institute study says that the IRA will only have a limited impact on European exports to the US.

While Europe debates, the US has acted. IRA funds are being disbursed – and with them, many of the free trade pro-globalization ideas that are supposed to drive the transatlantic alliance.

Otto Lanzavecchia is an Italian journalist for Formiche.net and Decode39. A City, University of London alumnus, he focuses on international affairs, tech, energy, and the ecological transition.

Bandwidth is CEPA’s online journal dedicated to advancing transatlantic cooperation on tech policy. All opinions are those of the author and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.

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