The IRA and European industrial policy

With the US turning interventionist, the EU will look foolish still backing ‘free markets’. Time for an enterprise policy.

The IRA threatens Europe. This IRA is not the paramilitary organisation which blighted so many of our lives in Ireland, Britain and even mainland Europe. It is the Inflation Reduction Act—embodiment of the new, state-led, interventionist industrial policy of the United States.

The IRA threatens European jobs. Promoted by the president, Joe Biden, the act entails massive subsidies of $369 billion to companies, American or not, which invest in the US, creating green jobs.

The first European casualty may be a major car-battery plant which was to be built by Volkswagen in eastern Europe. The company is now considering investing in the US, where it will receive $10.54 billion in subsidies for building the plant and creating the jobs—unless the European Union can match this.

Thrown into disarray

The IRA has thrown European leaders into disarray. EU economic policy has been quite neoliberal for decades, faith in the ‘free market’ being associated with a distrust of ‘industrial policy’. Yet now it has been challenged by a very interventionist US, offering many subsidies to investing companies.

In practice, many states in Europe are highly interventionist themselves, in their subsidies to companies in manufacturing and other areas. The stringent EU rules against state aid, originally aimed at states’ own commercial state enterprises, now seek to stop governments propping up ailing private firms (including banks), thus threatening competition. But this is not a strategic approach, being firm-led, patchy and underestimated.

EU leaders should recognise the extent of corporate welfare in member states and assess realistically the value of state aids in achieving their objectives. All member states intervened deeply during the financial crisis, rescuing banks, insurance companies and so on. That was followed by Keynesian-style intervention in favour of firms during the pandemic. This in turn has been followed during the energy crisis with further support for private firms (and households). All on top of existing subsidies and grants, such as those for research and development, manufacturing and regional policy.

Shift to clean energy

The objective of the IRA is to reduce inflation. Revenue of $740 billion will be raised, including from taxes—mostly the new, 15 per cent minimum, global corporation tax—while that $369 billion will be invested in climate action. The investment aims not just to support the US vehicle industry and wider manufacturing base but also to shift enterprise to clean energy.

The US is also imposing progressive conditions on companies. There will be ‘local content requirements’, aimed at China for security reasons, which are illegal under World Trade Organization rules. There will be production and investment subsidies for manufacturers of clean-technology products, including batteries and components used in renewable-electricity generation. There are also subsidies for producers of carbon-neutral electricity, as well as hydrogen and other ‘clean’ fuels. Independent researchers from the Rhodium Group estimate that the IRA could extend the reduction of US greenhouse-gas emissions by 2030 to 32-42 per cent, compared with 2005, albeit still well short of the country’s goal under the Paris Agreement of a 50-52 per cent reduction.

A grant of $7,500 towards American-made electric cars will also be given to consumers earning under $150,000 a year. Tax rebates of up to $8,000 will be available for home improvements.

In further state intervention, the US Chips Act proposes that beneficiaries of subsidies must no longer invest in China, end share buybacks and demonstrate that firms will provide employees with ‘affordable, accessible, reliable and high-quality childcare’. The companies involved are also ‘strongly encouraged’ to seek collective-bargaining agreements with trade unions before they invest in new plants.

‘Profound ideological shift’

The Financial Times quotes Shahin Vallée, former EU adviser to the French president, Emmanuel Macron, and now senior fellow at the German Council on Foreign Relations: ‘They are using industrial policy to push social policies. There has been a profound ideological shift in the US, and in Europe we still haven’t adjusted to it.’

While EU subsidies do not discriminate against foreign producers, some of the subsidies in the IRA will do so. Supply chains will also be reorganised internationally as the US aims to manufacture locally and in particular to reduce dependence on China.

This presents a problem for some EU companies. BMW, Enel, Freyr, Reposal, Linde and Total are considering shifting investment to the US in response. The European commissioner for competition, Margrethe Vestager, said the ‘competitiveness of Europe’ faced multiple challenges, including pressure to respond to the IRA. This risked ‘luring some of our EU businesses into moving investments to the US’.

Some mainstream commentators assert that Europe should ‘focus on boosting its structural competitiveness’ and should not ‘impose local-content requirements of its own, should not loosen state-aid rules and should not mimic the IRA’s approach to manufacturing subsidies’.

And while European Commission representatives promise additional funding to counter the US corporate handouts, they face opposition from the ‘frugal’ EU member states’, among them Germany and the Netherlands.

Indeed the EU agreement on banning the sale of combustion engines from 2035 has recently been undermined by the German and Italian vehicle industries’ strong lobbying of their governments, which about-turned and now oppose this decision. Luisa Santos of BusinessEurope, the Brussels-based lobby group claimed that ‘the EU faces more complex regulation, and higher energy costs, which is a very substantial incentive to go to the US’.

Europe needs to do more to boost supply-chain self-sufficiency in renewable energy, Catherine MacGregor, head of the French utility Engie, has warned. A ‘big chunk’ of Engie’s ten-gigawatt battery capacity target by 2030 would be realised in the US, she said. The US scheme should inspire Europe, including in rewarding not only companies that produce goods domestically but also those that ‘buy local’. France has promised a ‘Buy European Act’ but this has not been supported by other EU states so far.

Enterprise policy

The EU says its industrial policy ‘aims to strengthen the competitiveness of EU industry and to promote a more sustainable, resilient and digitalised economy that creates jobs’. It launched a new vision in 2020 and renewed it a year later, focusing on the autonomy of the union and on the green and digital transitions in European industry.

EU industrial policy should expand into an enterprise policy, encompassing all areas of entrepreneurship as well as including services and the public sector. The public dimension should not be confined to policy but embrace activity in growing state or partly state-owned commercial firms. Public procurement is responsible for around 15 per cent of EU gross domestic product and it should be utilised strategically to encourage investment in the green transition.

The EU should reform its suites of subsidies to industry by imposing conditionality, on pay and conditions for workers and climate measures, while finally seeking to regulate corporate subsidies in future international trade agreements. The actual level of subsidies (direct, indirect and via tax breaks) to industry and services, including by member states, should be assessed and the EU should encourage co-operation in supporting innovation and start-ups.

There should be a policy return to ‘national champions’ but now focused on successful large indigenous firms in one state co-operating with firms in their sector across the union. Where Europe is weak in technology, it should use enterprise policy to drive greater co-operation and innovation within the huge single market.

The EU must build a type of globalisation that safely executes the green transition, where incomes are more equally shared and where supply chains are more European-focused.