Inglorious procrastination is one of the European Union’s standard responses to major crises. This is not merely due to the difficulty of getting twenty-seven Prime Ministers and Presidents to agree. It is also because of their motivated tendency to ask themselves the wrong questions, thus heading slowly but inexorably to self-harming policy solutions.
After the demise of Lehman Brothers in October 2008, a group of policymakers gathered in Washington to ponder the relevant question (“How do we bail out the bankers to stop them from consuming us?”). Meanwhile, in Brussels a much larger group mused for years over a toxic version of the same question (“Given that EU rules prohibit bailouts, how do we maintain the pretence we are respecting them as we bailout the bankers anyway?”). The result was a costly delay and policy choices which ensured that, whereas in 2008 Europeans earned, in aggregate, 10% more than Americans, by 2022 Americans were earning 26% more than Europeans.
Today, the European Union is about to repeat this self-harming act in response to another unforeseen blow that struck Brussels a year ago. On 16th August 2022 President Biden signed into law the misleadingly labelled Inflation Reduction Act that released $783 billion of subsidies, over a decade, in support of US industry’s green energy transition. In one fell swoop Washington had torn up the so-called Washington consensus; the rules-based free trade and industrial policies that America and Europe had been foisting upon the Global South for thirty years. Suddenly, large unilateral subsidies were introduced by a US government that felt no obligation to keep the rest of the world in the loop, the EU included.
The EU’s bureaucrats and politicians were livid. Overnight, the whole of Europe’s mighty manufacturing sector faced tall fences impeding access to the vast American market. The problem went far beyond German car makers whose electric cars became ineligible for the up to $7500 subsidy that domestically assembled cars benefit from. By subsidising all domestic battery production, Washington ensured that every manufacturer across the United States will face lower energy costs than their European competitors.
It was not long before the shivers down EU policymakers’ spines were further electrified by the news that, after President Biden’s IRA law came into force, the world’s largest chemical producer, BASF, decided to curtail its operations in the EU while Tesla put on hold the completion of a major battery manufacturing plant in Germany. Europe’s rapid de-industrialisation suddenly loomed large on a bleak and inauspicious horizon.
It is hard not to pity the EU’s top brass. They thought that, once Donald Trump was out of the White House, Washington would treat them as partners. They expected the Biden administration to endorse Brussels’ preference for carbon taxes and pricing schemes which, unlike subsidies, encourage not just more clean energy but also overall energy savings. They believed that Biden’s circle would appreciate the readiness with which, following Putin’s invasion of Ukraine, Europe cut itself off dirt cheap Russian natural gas and, instead, is spending billions on the expensive fracked oil and liquified natural gas Europe now imports from Texas and New Mexico.
What is not easy to sympathise with is that, as in 2008, the EU’s decision makers are indulging their penchant for inglorious procrastination, thus inflicting further damage to Europe’s already diminished prospects. A whole year after the IRA was activated, the EU response remains in limbo. Some have argued that this is an exaggeration since the EU, unlike the US, already had a Green Deal in place involving funding pledges not too dissimilar to those of Biden’s IRA. Alas, the devil is in the detail: The EU’s Green Deal offers up to €1 trillion of pledges which, unlike Biden’s IRA monies, is not actual money but, rather, a fictional number akin to the notorious Juncker Plan whose pledged €300 billion of new investment funds never really materialised.
Similarly with the argument that Europe also offers equivalent subsidies to every electric car sold in the EU. A closer look reveals two key differences: First, in the US subsidies come from the federal government, which means that domestic producers do not face discrimination depending on their location; unlike in the EU where subsidies are grossly uneven and reliant on the fiscal health of each member-state. Secondly, in the EU all electric cars receive the subsidy, including US-produced TESLAs. By contrast, in the US no EU-produced zero-emission vehicles qualify for the subsidy.
Why is the EU not following the dictum “if you can’t beat them, join them”? Why not offer the same subsidies Biden made available to US-based manufacturers to companies manufacturing in the EU? The reason is that, unlike carbon trading schemes that pay for themselves, subsidies require a common budget, lest Portuguese or Slovenian manufacturers receive much lower subsidies courtesy of their governments’ relative impecunity. Without a common money pot for EU-wide manufacturing subsidies, Washington’s choice to discriminate against EU manufacturers will lead richer European governments massively to discriminate against the manufacturers of poorer member-states. And without a common Treasury it is impossible to replicate in the EU what the IRA is accomplishing in the US with the active involvement of the US Treasury Department.
As I write these lines, three pieces of legislation are in the pipeline promising a decent EU response to the IRA: The Net Zero Industry Act (which will cut red tape and drop state-aid rules), the Critical Raw Materials Act (which focuses on rare earths and other materials crucial to green tech), and reforms of the European electricity pricing model (which has given a great boost to the monopoly rents of private power oligopolies at the expense of both industry and the struggling classes). While the jury is still out on these, two things are clear already: First, the EU cannot afford the billions it would take to compensate industry for its intolerably delayed response. Secondly, the EU’s leaders will never create the common Treasury the EU needs even if the alternative is calamitous (i.e., exactly as in the euro crisis).
Meanwhile, Germany, is acting virtually alone to stem the mass emigration of manufacturing to the US. Once upon a time, it might have pulled it off by funding the necessary subsidies from the surpluses generated by its coveted business model based on cheap Russian energy, Chinese demand for its finely engineered machine goods, its chemical factories, its mighty car industry. Alas, that business model is now in terminal disrepair: its gas deal with Moscow gone, its Chinese markets imperilled by Washington’s sanctions, its advantage at building fine internal combustion engines, drivetrains, oil heaters etc. undermined by an electrification process that shifted most profits from the makers of things and the owners of terrestrial capital to the masters of green tech and cloud capital that Germany never seriously invested in.
Sadly, Germany’s political class are, again, asking precisely the wrong question. Instead of wondering “How do we replace our broken mercantilist model (of traditional net exports and wage suppression) to one made for the era of cloud-based technologies?”, they are wilfully trapped in the wrong question “How do we lower the energy costs of our manufacturers to maintain our inoperative mercantilism?” Unwilling to fathom that the value-added from electric cars and green energy networks will go to the manufacturers of the kind cloud-based capital that Germany, and the EU more generally, have failed to invest in, they insist in immiserating both the people of Germany and the rest of the EU through another bout of investment-destroying paneuropean austerity.
As long as climate disaster does not lead to our species’ extinction, Europe and Germany, I have no doubt, will bounce back. Don’t know how or when. What I do know is that we are very close to condemning one or more generations of Europeans to persistent underdevelopment.
For The Guardian’s site, where this op-ed was originally published, please click here.