The German Council of Economic Experts considers it harmful if subsidies in the USA and Europe mutually support each other. Instead, bureaucratic hurdles in support programs for companies should be reduced.
The so-called “business wise men” have warned of a subsidy race between Europe and the United States. Instead, the EU should adapt its existing support programs for “green technologies”, according to an analysis presented today by the German Council of Experts on the effects of the US support program “Inflation Reduction Act” (IRA), which is worth billions.
In order to strengthen the competitiveness of European companies, additional subsidies would also be required in the EU as an answer to the IRA. “A subsidy race would, however, be associated with considerable welfare losses for both the USA and the EU and should therefore be avoided,” is the recommendation of the government advisors.
Should it be easier for companies to get help?
The EU is already promoting low-emission technologies to a comparable extent as the USA with the IRA, it said. However, the “business wise men” are in favor of changing the EU funding programs.
“The IRA tax breaks mean that companies can plan better than the European support programs. They should also cause less bureaucracy than subsidies that are awarded in the application process,” say the economic experts. The German Council of Economic Experts is an independent body that advises the federal government on economic issues.
According to Council member Ulrike Malmendier, the existing EU funding programs could be used to examine how eligible companies can make use of subsidies easier and how bureaucratic hurdles can be reduced.
Big difference in electricity costs
The German Council of Economic Experts shares Europe’s fears about the IRA only to a limited extent: “The subsidies within the framework of the IRA itself are likely to have only minor macroeconomic effects on the EU.” However, the US government’s production and investment subsidies in certain industries relevant to meeting climate targets could increase the incentive to invest in the United States rather than the EU.
In general, existing energy price differences are likely to have a much greater impact on the attractiveness of Europe as a location than the IRA itself, according to Council member Achim Truger. In the past three months, electricity prices in Germany were an average of 9 cents per kilowatt hour higher than in the USA. Council member Martin Werding spoke out in favor of rapidly expanding the electricity supply and the energy infrastructure in order to reduce energy costs.
“What do I get from you?”
Chancellor Olaf Scholz warned yesterday that only the subsidy competition with the USA is driving companies to demand subsidies from the state. “There are companies that you only heard about a short time ago that wanted to invest and didn’t want any money at all. And they’re now saying: I can get money elsewhere, what do I get from you?”
The US program for climate-friendly technologies is therefore very ambiguous for Europe. On the one hand, it is good if the USA is now investing in this area. “We will not fare well now if all states start a big subsidy race,” added the Chancellor. However, the federal government itself only recently agreed that the US chip group Intel would receive almost ten billion from the German state for the construction of a new factory in Magdeburg. Critics consider this sum to be far too high.