Economics Update February 2023 - EU vs. USA: Subsidy races do not lead to the goal

Europe is preparing to react to the US government's "Inflation Reduction Act", which provides tax relief for investments in climate protection and has a volume of 369 billion dollars, with its own subsidy pact. Such a subsidy race between the EU and the USA will prove to be an aberration for the desired ecological transformation of the national economies.

Subsidies undermine the market mechanism

Like any subsidy, ecologically motivated state aid in certain sectors also harbours the danger of preserving outdated production structures. Take the steel industry, for example: it is certainly desirable that the energy needed for steel production be produced in future with green hydrogen and thus in a climate-neutral way. On the part of the state, the infrastructure can and should be provided here. But the question of how much steel production will be located in Europe in 10 or 15 years can only be answered by the market. It is worth remembering that steel production in Germany alone fell by more than 20 per cent between 2006 and 2021, while imports of steel rose by more than 50 per cent. The bottom line is that this shift enables gains in prosperity, because it allows resources to be used more productively in other areas. With a view to climate protection, however, it must be prevented that CO2-neutral industries in Europe are displaced by CO2-intensive production in other parts of the world. An arduous but goal-oriented path would be to negotiate rules on the requirements for globally traded goods in as multilateral a treaty as possible.

A second major danger of subsidies is that they favour already known solutions, of which it is mostly unclear to what extent they actually contribute to climate protection. The alternative would be to create a reliable framework for open-ended research and for the rapid implementation of practicable solutions. In the end, it could be to the EU's advantage to purchase subsidised batteries cheaply from the USA and offer its own, possibly superior technologies on the world markets.

Transfer Union under a Green Cloak?

The demand to finance EU subsidies for "green technologies" with new debts at EU level is particularly critical. It is significant here that the fear of a decline of European industry is systematically stoked, which does not seem plausible in view of a subsidy volume of just over 2 percent of total equipment investment in the USA. This shows very clearly that many actors are not concerned with climate protection or competitiveness, but with pushing open the door to a comprehensive transfer union. This does not lead to the desired results, because it weakens the incentives for necessary structural reforms in the individual countries. A real improvement in the competitiveness of the EU as a whole will not be achieved in this way. It would be better if the EU did not engage in a subsidy race with the USA, but developed independent and economically superior solutions for the ecological transformation of the economy.