It’s the kind of thing you often get at Davos: a soaring mountain-top declaration of intent which looks less impressive on examination at sea level. Ursula von der Leyen, the European Commission president, said on Tuesday that the EU would meet US spending on green technology with a major public investment drive of its own.
After months spent complaining about the US Inflation Reduction Act, the EU has privately given up on carmakers based in Europe being fully included in the preferential tax credits for electric vehicles (EVs) now given to the US, Canada and Mexico. Instead, it signalled its own spending to come.
This, of course, is what the US wants: coaxing the EU on to its preferred territory of meeting climate targets with cash rather than rules — public spending and tax cuts rather than carbon pricing and regulation.
Washington also says it prefers co-ordination rather than competition. But neither transatlantic partner truly has the institutions or the willingness to co-operate on green investment, and in the EU’s case there remains controversy about what and how much public money should be shelled out.
For the US, at least two features of the IRA make international co-operation hard. One, the bill was in effect written by Congress, not the administration. Senator Joe Manchin, the IRA’s congressional bellwether, has the needs of West Virginia rather than western Europe in mind. He was prepared to extend the EV credits to Canada and Mexico, but not beyond. Second, much of the outlay is structured in the form of tax credits, whose ultimate size depends on take-up and is thus unpredictable.
From Europe’s side, any co-ordinated response is limited by a familiar issue: the EU is set up much more to regulate competition between member states within the single market than between the 27-state bloc and the outside world. During the scramble for personal protective equipment in the early months of Covid in 2020, for example, Europe felt obliged to impose blocks on extra-EU exports of medical goods to prevent trade seizing up within the EU.
Relaxing these rules to allow more national state aid means unbalancing the internal playing field towards the richer countries. The subsidy-sceptical EU competition commissioner Margrethe Vestager sent a letter on state aid to member states last week. It pointedly included a chart showing that 77 per cent of the spending under new relaxed aid rules introduced in the wake of the Russian invasion of Ukraine was from France and Germany, which make up less than half of EU GDP.
It’s not just fairness but competence and incentives that are in doubt, particularly given the dysfunctionality of certain political-industrial complexes. Modern German corporatism, for example, has created a formidable manufacturing sector, but few could accuse it of being far-sighted or having collective European interests at heart.
The German carmaking lobby has miserably failed to embrace electric vehicle technology in domestic production, preferring to churn out internal combustion engines, and the country’s tame regulators failed to prevent emissions cheating in the Dieselgate scandal. The part of the EV story everyone in Europe would rather forget is that China will soon be supplying much of the EU market no matter how much cash Brussels or Berlin now throws at its domestic industry. (One consolation: EU industrial policy is unlikely to fail as badly as in the UK, whose flagship EV battery producer Britishvolt crashed into administration this week.)
The logical solution is of course a pan-European fund, of the kind pushed by France and partially embraced by von der Leyen and Vestager. But while liberal northern European states like Sweden, current holder of the EU’s rotating presidency, may be keen on maintaining a level playing field in the single market, they aren’t big on more fiscal centralisation.
You can make a case, in a field like green goods with a rapidly expanding technological frontier, first-mover advantage and large positive externalities, for targeted and co-ordinated government assistance. But institutional mismatch and unfortunate incentives make it unlikely that’s what the supposed transatlantic alliance is going to deliver.