The EU’s Single Market is celebrating its 30th anniversary this year, and for the occasion, the European Commission has just come up with a very special birthday gift: the Green Deal Industrial Plan. The plan is the EU’s response to the US Inflation Reduction Act (IRA) and its $370 billion in green industry subsidies. But by proposing yet another tweak to the market’s state aid rules, the Commission’s present might turn out to be a poisoned chalice.
Under the Commission’s plans, Member States will be allowed to grant more public money to companies in strategic net-zero sectors. The objective is two-fold: to accelerate the deployment of renewables and the decarbonisation of industries, and to prevent companies from relocating outside of the EU, drawn by subsidies.
The case for more state aid is strong. Companies across Europe are complaining about the complexity of receiving EU funding and praising the simplicity of the tax credits announced under the IRA. With more flexibility, Member States could support companies in strategic sectors faster and in a more predictable way.
In practice, however, we all know how this ends. Germany and France have granted 77% of the 672 billion euros of aid approved under the previous temporary framework, while the large majority of Member States lacked the budgetary capacity to support their companies and industries. A new European Sovereignty Fund has been announced in the plan as a compensation token for those countries that cannot afford lavish subsidies. But since the EU budget has been pushed to its limits and raising new joint debt is a taboo in many Member States, nobody knows where the money for this fund is supposed to come from.
Several Member States have expressed their concerns regarding the plans of the European Commission. And they have good reasons for it. In the realm of state aid, the Commission does not need the approval from the two co-legislators – the European Parliament and the Council – to adopt changes to the rules. Of course, the Commission will have to accommodate diverging views as much as possible, but an aligned German-French position will very much mark the way forward.
So if subsidies are to be allowed, let’s make them work for the EU! It is time to use state aid as a truly European instrument of industrial policy, although temporary. We must ensure that the benefits created by large subsidies do not remain confined to the borders of a few countries, whilst the products of the subsidised production process enjoy free movement in the Single Market. I propose a revision of the criteria under which the Commission approves or rejects requests for authorisation of state aid from Member States.
If a country with enough fiscal space wants to inject large sums of public funds in a project, the latter should involve companies from other Member States in the value chain. The intensity and the ceilings of the aid allowed would increase gradually as more companies from more Member States are involved. In a nutshell: the more companies from different Member States are involved, the more state aid.
This would incentivise companies wishing to avail themselves of a subsidy by their home Member State to seek cooperation with suppliers and partners from other Member States. The requirement shouldn’t be too difficult to comply with for companies in strategic sectors, given that European supply chains are highly interconnected. But it would further promote the integration of the Single Market.
Creating incentives for cross-border cooperation isn´t a new idea. But so far, it has only be applied to EU instruments -lastly in RePowerEU – to boost projects that interconnect Member States’ energy supply. It can also be expected that a newly created European Sovereignty Fund would seek to promote such synergies in strategic sectors too. Important Projects of Common European Interest (IPCEIs) are also a good platform for cooperation among Member States, but they remain too inaccessible for smaller countries and SMEs, who lack the budgetary and administrative resources to navigate through the complex process.
So, why not use national state aid for that purpose too?
With the current approach, the EU risks entering a race for national strategic autonomy. All 27 Member States will try to re-shore industry within their borders, but only a lucky few, if any, will make it to the finish line. If the EU wants to be serious about its strategic autonomy, it must start using the industrial policy tools it has at its disposal. Encouraging cooperation between companies across Member States in strategic sectors is a crucial first step.
At the same time, we should not forget that money doesn’t build competitiveness. Our regulatory framework remains too complex, bureaucratic and unpredictable to be a driver of innovation. Companies get lost in a myriad of support schemes without knowing how to apply to them. Besides, the lack of a strong capital markets union complicates the access to private funding.
For its 30th anniversary, the Single Market will be flooded with subsidies. Perhaps, the best anniversary present would be to complete it.
Eva-Maria Poptcheva is MEP for Renew Europe.