On 17 January, Ursula von der Leyen took the stage at the World Economic Forum, to address a congregation of the richest and most powerful individuals on earth. The President of the European Commission went on to present a robust plan to her audience in Davos in Switzerland, intended to make European industry great again.

It was just eleven months after Russia overtly invaded Ukraine and cut off gas supplies to Europe. And no more than five months after the American Senate passed the Inflation Reduction Act, a bill which earmarked hundreds of billions of dollars for sustainable industries.

European companies would start moving across the Atlantic if they didn’t get additional subsidies

In the autumn of 2022, in response to this huge subsidy package, European wind turbine and battery manufacturers started to lobby for extra funding – alongside oil and gas, steel, chemical and cement companies, sectors responsible for major carbon emissions. They claimed that large numbers of European companies would start streaming across the Atlantic without additional subsidies.

Their campaign had a single crucial demand: Brussels needed to relax its rules for state aid. Companies had to be able to receive the same amount of financial support in Europe as they could find elsewhere. This demand diametrically opposed the beliefs of a significant part of the European Commission and a substantial number of Member States.

Yet Von der Leyen sounded determined when she presented her proposals in Davos a few months later. ‘We have a plan, a Green Deal Industrial Plan, our plan to make Europe the home of clean tech and industrial innovation,’ she said in her speech. 

She announced ‘targeted aid for production facilities in strategic clean-tech value chains, to counter relocation risks from foreign subsidies’. 

The European industrial lobby had campaigned successfully.

Alarm bells

When president Joe Biden signed the Inflation Reduction Act (IRA) in August 2022, Von der Leyen initially welcomed this enthusiastically on Twitter: ‘With it, our 🇺🇸partners are laying the ground for a clean energy economy in the US.’

The bill had been manoeuvred through the Senate with the smallest of majorities. Over a ten-year period it will provide nearly 400 billion dollars in tax credits, subsidies and loan guarantees for ‘energy security and climate change’. Over 161 billion of this is estimated to be earmarked for tax credits for producers of clean electricity. Tens of billions will also go to the production and use of batteries, solar panels, wind turbines and heat pumps, as well as to underground carbon storage.

IRA funding in US dollars

The act is infused with ‘Made in America’.

To be eligible for the full subsidies, electric vehicle manufacturers must source about half of the value of components from the United States or from countries with which the US has a free trade agreement (there are 20 such countries, not the EU).

Wind turbine and solar panel manufacturers will receive a 10 per cent bonus on subsidies if they use steel or iron from the US. And anyone purchasing an electric car will only be eligible for a tax break if it was assembled in North America.

The European Commission wasn’t entirely surprised.

On the radar

In December 2021, the Latvian European Commissioner Valdis Dombrovskis (Trade) warned the US Congress about discriminating against European electric car manufacturers and about tax credits which conflicted with World Trade Organization rules. This did not stop Congress from passing the bill, however.

‘This is not targeted against the EU. It just looks like the US senators didn’t care about the European concerns,’ said Niclas Poitiers, an economist at Bruegel, an American policy institute.

So although the legislation was indeed on the radar in Europe – in any case on Vice President Dombrovskis’ radar – truly indignant responses were few and far between. Only wind energy and hydrogen industry organisations shared their discontent.

The campaign really picked up steam when the European Round Table for Industry (ERT) lobby group became involved. This network of 59 heads of multinationals, such as BMW, Total and Philips, is known for its influence in shaping European industrial policy.

The Round Table shares the concerns about the European business climate that other sector and industry lobby organisations have. These lobbies want Brussels to issue fewer rules and eliminate existing trade restrictions. Another major cause for concern are the sky-high energy costs since Russia’s cutting off gas supplies. 

But the Round Table is much more insistent that state aid rules are eased, however, as it stated in its ‘Industrial Competitiveness Alert’ which it issued on 7 October. The new American subsidies included in the Inflation Reduction Act were an excellent reason to reiterate this demand.

Access

While other organisations in society may complain about poor access to the President of the European Commission, this is not a problem for the Round Table. Of the 17 meetings that Von der Leyen published in the lobby register this past year, eight were with the Round Table or with ERT members.

For example, on 25 October in Berlin, she met with Jean-François van Boxmeer, chair of the ERT and CEO of telecom provider Vodafone, to discuss the European response to the American legislation, among other topics.

When queried about Von der Leyen’s close ties with the lobby group, a Commission spokesperson said to Follow the Money: ‘The President as head of the Commission meets regularly with representatives of these major employers […] to discuss issues of strategic interest.’

On 6 November, the EU officially aired its objections in a statement to the Biden administration, claiming that the bill was ‘turning a common global objective – fighting climate change – into a zero-sum game’.

Current EU aid to green industry exceeds the IRA

Von der Leyen was not the only card that the Round Table could play.

On 21 November, French president Emmanuel Macron and European Commissioner Thierry Breton met with a delegation. As a former CEO of technology companies Atos, France Télécom and Thomson, Commissioner Breton considers a proactive industrial policy to be a priority: ‘A “Made in Europe” industry is more relevant than ever,’ he said that day. 

The Round Table members emphasised to Macron and Breton that the American plans posed ‘an existential threat to a significant portion of industrial activity in Europe – with potentially disastrous implications on [...] industrial ecosystems across the EU-27’.

The message: ‘Without a compelling European response to the IRA, there is a very real risk of a further wave of deindustrialisation.’

The 33-strong delegation facing Macron and Breton that day included a striking number of energy sector leaders, such as MOL from Hungary, E.ON from Germany, Engie from France, Eni from Italy and British Petroleum (BP) – all companies that made record profits in 2022 thanks to the high energy prices.

The heads of energy-intensive cement companies, such as Holcim and TITAN, car builder BMW and aircraft manufacturer Airbus were also there: not exactly the type of companies that will make Europe more sustainable.

Sugar rush

Their message does not represent the wishes of other industry lobbies. Elsewhere, state aid is not always considered the proper solution to the problems being faced.

‘Such subsidies are not very efficient. They often crowd out private investment. Although they can lead to a brief sugar rush, in the long term their effects are often negligible,’ said Stefan Sagebro from the Confederation of Swedish Enterprise, in a conversation with Follow the Money. ‘In order to finance the subsidies you also have to raise taxes that the companies end up paying for in the long term anyway.’

Germany preferred easing the rules for state aid. Unlike other European countries, it has the money to do so

According to Sagebro, the Round Table ‘is a bit too alarmist’ about the risk of deindustrialisation in Europe. He is not the only one irked by their attitude.

‘Many EU governments have a tendency to be influenced by fear-mongering about competitiveness from companies,’ says Milan Elkerbout, head of climate policy at the Centre for European Policy Studies (CEPS), a leading Brussels think tank.

‘The debate is dominated by the existing majority,’ says a consultant who claims to only work for sustainable pioneers. ‘We are concerned that the current Commission’s ambitious Green Deal will have to make way for an industrial policy set by companies that have already seen their heyday.’

Nevertheless, after the Round Table’s intervention, things really picked up steam.

On 29 November, Breton attended an industry conference in Berlin, where he reached consensus with Robert Habeck, the German Minister for Economic Affairs and Climate Action. In a fiery speech, Breton referred to the discriminatory measures of our ‘like-minded’ partners.

Meanwhile, on 30 November, Macron travelled to Washington DC for a summit with president Biden. Speaking to American Congress members, he called the Inflation Reduction Act ‘super aggressive’.

Manufacturing in the EU and in the US is lagging behind China

Germany supported the campaign to take action for European industry, in response to the US.

Yet where France and Italy were advocating European funding to catch up with the US, Germany preferred easing the rules for state aid, allowing it to support its companies. Unlike other European countries, it has the money to do so.

Changing the rules for state aid does not require the approval of the Member States or the European Parliament. This means that this is the most direct access route to funding for German factories: ‘We need European rules that allow us to subsidise climate-neutral production,’ minister Habeck said at the industry conference in Berlin where he met with Breton.

The word ‘production’ is a crucial one for Germany. Although the subsidy rules do include exceptions for research and development, the European Commission is generally wary of providing direct support to factories.

With the French and Germans already taking action, now the rest of Europe had to be brought on board.

Unusually critical

Between mid-December and early January, European Commissioner Breton visited five European capitals in an attempt to convince governments that Europe needed to respond to the American legislation, which would include loosening the rules for state aid.

On 5 January, Breton visited the Belgian prime minister Alexander De Croo, who would indeed speak in unusually critical terms a few days later: ‘Behind our backs, [the] United States is pulling away potential investment in industrial activity,’ he told Bloomberg.

In the Financial Times, De Croo stated that American government organisations had actively approached chemical and steel companies in Belgium. This meant that the only answer to the ‘unfair’ American IRA was to introduce similar subsidies.

‘There is a real risk that you spend money on things that would have been done anyway’

Economists warn about the disadvantages of such a subsidy race. ‘It’s one thing to lobby for regulation, another for the government to hand out cash. And that is what we’re talking about here: really big amounts of cash. This creates incentives for more problematic sides of lobbying,’ says Niclas Poitiers, for example, who works for Bruegel, the influential think tank. 

Poitiers: ‘Companies considering manufacturing in Germany, France or Malaysia can basically go to the government and ask them: what are you willing to offer me? There is a real risk that you spend money on things that would have been done anyway.’

Meanwhile, other traditional sectors, such as the steel, cement and automotive industries, continue to use their lobby groups to pressure Brussels policymakers into devising a European response to the American legislation.

Renewable energy companies are under the impression that these established industries are making false claims to rake in subsidies. This is reflected in the words of Jan Cornillie, who leads the strategy and policy team at 3E, a renewable energy company. ‘The IRA is currently being used to push the message that European industry is in danger, but that would have been the case without the IRA too,’ he says.

Murky legislative process

Brussels still had one more important hurdle to take before it could ease the state aid rules for clean tech production: Margrethe Vestager, the Danish European Commissioner for Competition, responsible for maintaining a level playing field between companies.

Vestager voiced her concerns openly: unleashing subsidies would primarily benefit Member States with access to ample funding, like France and especially Germany.

Vestager’s hesitancy came to the fore on 1 February, when Von der Leyen presented her plan in Brussels, two weeks after her speech in Davos.

When Vestager took to the same stage, shortly after Von der Leyen, to make proposals on changing the state aid rules, she was candid about her doubts.

‘This is of course a serious risk to competition and the integrity of the Single Market,’ she said. ‘Because not all countries have the same capacity to match aid. Recent figures [...] show that Germany [53 per cent] and France [24 per cent] together accounted for almost 80 per cent of the state aid [which Member States submitted for approval in the aftermath of Russia’s invasion of Ukraine].’

Europe cannot afford to engage in tit-for-tat with the US without risking self-inflicted economic damage

Vestager was not the only one harbouring doubts. Many countries fear their companies losing out to competition.

On 10 February, eleven Member States, including the Netherlands, Poland, Sweden and the Czech Republic, sent the European Commission a letter in which they urged caution in easing state aid rules. They wrote that state aid can lead to ‘the fragmentation of [the] internal market, harmful subsidy races and weakening of regional development’.

Policy institutes, environmental organisations and business sector lobbying organisations all voiced their concerns about Von der Leyen’s plan. Even the three Executive Vice-Presidents (besides Vestager, Green Deal leader Frans Timmermans and Trade Commissioner Valdis Dombrovskis) warned that ‘Europe cannot afford to engage in tit-for-tat with the US’ without risking self-inflicted economic damage. 

But it was all too late.

Von der Leyen wins

Although it did consult the Member States about easing the state aid rules – albeit in a far from transparent procedure – the decision was ultimately the Commission’s. Informal conversations with EU officials indicate that the debate within the Commission itself was settled quite early in favour of Von der Leyen. In early November, together with her cabinet and the powerful Secretariat-General, she took control of the European response to the IRA.

From that point on, it became clear that European support was coming for the clean tech industry. Opponents started focusing on limiting the time the easing will apply and the number of eligible sectors. ‘We need to make sure that we don’t invest in polluting companies or ones that are no longer able to compete,’ a Member State diplomat said.

On 9 March, the Commission finally published its proposals for the adapted state aid rules.

The new rules were given just as little publicity as the approval process that preceded them

Until the end of 2025, Member States are allowed to match green subsidies available outside the EU. This option is limited to the sectors addressed in the Inflation Reduction Act: batteries, solar panels, wind turbines, heat pumps, electrolysers and underground carbon storage (relevant for industries with sizeable carbon emissions).

Financial support may also be provided for the production of important components, and for the production and recycling of raw materials required for the technologies listed above. A substantial part of the investments must be made in ‘disadvantaged areas’ within Europe.

The new rules were given just as little publicity as the approval process that preceded them. Instead, the Commission emphasised its proposal for the Net-Zero Industry Act a week later (see the box: The Green Deal Industrial Plan).

The lobbying campaign of Europe’s business elite in the meantime continues at an unabated pace.

On 21 March, not even one week after the Commission proposed its Net-Zero Industry Act, chemical companies delivered a damning verdict about the law in the Financial Times, saying it ‘lacks precise elements and misses simple, clear cut reasons for businesses to invest [in Europe].’

Translation: David Raats