US president Joe Biden’s $369bn [€341bn] green subsidy package dominated the European political agenda this week as Sweden took over the EU’s six-month rotating presidency.
As one of the bloc’s most ardent free-market guardians, the Scandinavian country was scrambling to defuse ever more explosive calls for equally big EU state subsidies to match the US offer under the Washington’s Inflation Reduction Act (IRA).
Speaking at a conference in Stockholm on Tuesday (11 January), Swedish EU affairs minister Jessika Roswall suggested the best way to deal with US competition is by “deepening the single market and supporting free trade.”
“There is a correlation between free trade and productivity,” she said. “A subsidy race is not the answer.”
The EU Commission on Wednesday presented new regulation which requires companies to notify the EU executive of non-EU subsidies, which will help the bloc protect European businesses from unfair competition.
But this does not prevent businesses from leaving for the other side of the Atlantic if conditions are more attractive.
France and Germany have vowed to retaliate against the US plan with their own subsidies. French commissioner Thierry Breton has been on a whirlwind tour of EU capitals this week to win support for more EU funds and looser state-aid rules.
This would allow individual member states to ramp up their green subsidies and protect their industries against foreign competition.
Sweden’s prime minister Ulf Kristersson this week made it clear that, as an open and export-dependent economy, it was in Stockholm’s interest to bolster free trade, which he described as one of Europe’s “core values.”
But fearing an industrial exodus, the political momentum has shifted in favour of protectionism and EU Commission president Ursula von der Leyen promised to come up with a proposal to relax European state-aid rules.
Presented with the political reality, Roswall admitted it might be legitimate to “temporarily” loosen the rules given the threat IRA poses to EU industries but said subsidies should be a “short-term” solution.
Danish EU commissioner for competition Margrethe Vestager, also coming from an open economy dependent on foreign trade, warned against subsidy overkill and said in December that “competitiveness can’t be built out of subsidies.”
But state-aid rules were already “temporarily” relaxed following the Covid-19 pandemic and extended when Russian president Vladimir Putin invaded Ukraine.
A further extension may be here to stay, even if administered by a reluctant Swedish presidency.
Although it is estimated $369bn will flow into clean technologies suggesting a clear-cut plan, the IRA provides unlimited tax credits to households for everything from electric vehicles to solar panels and heat pumps—meaning the legislation is essentially open-ended.
Von der Leyen is expected to present a proposal for state aid rules at next week’s World Economic Forum in Davos, Switzerland.
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