The Commission’s Plan to Counter IRA
But also — ECB, Medicines, Ukraine
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The Briefing
As the extraordinary European Council on IRA taking place on 9-10 February draws near, the European Commission presented the Green Deal Industrial Plan (GDIP) in a communication on 1 February.
Ursula von der Leyen had announced the plan at the World Economic Forum in Davos on 17 January. The GDIP is the EU's response to the Inflation Reduction Act (IRA), which aims to promote ecological transition — and "made in America" green technologies
CALENDAR • The GDIP will be on the agenda of the special European Council dedicated to the IRA on 9 and 10 February. Heads of state and government are meeting to agree on a common position. The Commission committed to making legislative proposals on the measures agreed on by the 27 before the next European Council on 25 March.
BACKFIRE • The GDIP would target the same sectors as the IRA: batteries, hydrogen and critical raw materials — among others. The proposed actions are based on 4 axes:
a favorable regulatory environment for net zero emission industries.
national and European funding.
ensuring adequate skills for the green transition.
an ambitious business agenda.
The new regulatory environment would be defined through a "Net-Zero Industry Act" which would set clear targets for industry by 2030, a "Critical Raw Materials Act" which would aim to secure access to critical materials, and a reform of the functioning of the electricity market which would be announced in March by the Commission.
FUNDING • The Communication also clarifies the issue of funding, which still divides Member States and the College of Commissioners.
On the one hand, Member states such as France and Italy — supported by Thierry Breton, Charles Michel and Paolo Gentiloni — are in favour of new joint loans to finance the EU's plans. On the other hand, Germany, Sweden and the Netherlands are strongly opposed to raising common debt and instead prefer to rely on existing funds.
The plan presented by the Commission attempts to strike a balance between these divergent positions, which have been expressed in recent weeks through non-papers and forums.
In the short term, the GDIP plans to rely on existing funds such as REPowerEU, InvestEU and the Innovation Fund. 100 billion euros in cohesion funds would also be used. In the long term, the plan considers creating a European Sovereignty Fund. When questioned by the press, Ursula von der Leyen was unable to give any further details on the latter.
STATE AID • In order to achieve the EU's green industry ambitions, the GDIP also aims to allow more state aid. In particular, the plan considers the possibility of allowing member states to match the level of subsidies in third countries in specific cases, in order to attract companies.
The Commission also wants to extend the temporary crisis framework (TCF) to all renewable energies and green hydrogen production, while increasing the maximum amounts per beneficiary until 2025. Originally established in March 2022, the framework aims to facilitate state aid to deal with the economic consequences of the war in Ukraine.
Finally, the plan includes an increase in the thresholds above which states are required to notify the Commission of their state aid projects.
DIVISIONS • These measures are not supported by all Member states. Many criticise the plan's lack of precision, accusing the Commission of opening the door to uncontrolled subsidies in France and Germany, as the two Member states enjoy large fiscal capacities.
Competition Commissioner Margrethe Vestager herself acknowledged the risks posed by the measures, insisting that they were temporary. "Some countries will be able to provide much more money than others," she said during a press conference.
In response, some analysts are calling for a European financing tool. Simone Tagliapietra, senior fellow at Bruegel, told Euractiv that "the EU needs a serious tool at European level, aimed at avoiding a dangerous subsidy race within the EU that would only revive the classic North-South divide".
For Margrethe Vestager, this is a balancing act: on the one hand, the Commissioner recognises the threat that the IRA represents for the industry. On the other hand, she wants to avoid disturbing the single market.
CONSULTATIONS • The Commission has consulted Member States on proposed state aid reforms.
In a letter to Valdis Dombrovskis, the Czech Republic, Denmark, Finland, Austria, Ireland, Estonia and Slovakia had already expressed their opposition to a relaxation of state aid law. Italy had also expressed its negative views on the subject.
REACTIONS • The French government deems the financial part unsatisfactory. Several professional associations also criticised the plan, stressing its lack of concrete progress. While German industry welcomed the Commission's approach, the idea of a European Sovereignty Fund is causing division among the French coalition.
Following the Communication, nine Member States — France, Romania, Bulgaria, Poland, Slovenia, Croatia, Slovakia, the Czech Republic and Hungary — wrote a letter to the Commission, in which they cal for the inclusion of low-carbon hydrogen — produced from nuclear energy — in the EU's Renewable Energy Directive (RED), which is currently under review. They argue that the Commission should respect the principle of technological neutrality.
The European Parliament is also preparing its position. Initially, MEPs were due to adopt a resolution at the mini-plenary on 1 February. They postponed this until mid-February. For the moment, there is no agreement between the groups.
For its part, the EPP does not want a common debt. As for Renew Europe, the group seems to want to widen the scope of the GDIP. Valerie Hayer of Renew Europe also expressed reservations about using existing funds: "If we continue to use the money that is already on the table to address both our traditional priorities and the extraordinary new challenges that lie ahead, we will fail”.
WHAT NEXT? • The special European Council on the IRA will be held on 9-10 February. Future proposals will be discussed during the next European Council on 25 March.
In the meantime, Bruno le Maire and Robert Habeck will fly to Washington on 7 February to try to obtain adjustments before the European Council. In particular, they should ask the US government for more transatlantic transparency on subsidies and tax breaks.
In Case You Missed It
ECB • On 2 February, the ECB raised its key interest rates by 0.5% (50 bps) to their highest level since 2008 — the deposit rate is now 2.5%. The Governing Council announced it would maintain the steady pace of rate hikes, with a further 0.5% hike expected at its next policy meeting in March. Core inflation, reported at 8.5% (from 9.2% in December), has not yet shown convincing signs of moderation.
Despite monetary tightening that began in July 2022, the euro area is still experiencing a positive, albeit sharply slowing, growth rate (0.1% in the last quarter of 2022). In addition, as part of its balance sheet deleveraging, the ECB has announced a targeting of corporate bond reinvestment to "issuers with the best climate performance".
MEDICINES • The EU has been facing a latent risk of drug shortages for several months now. Some generic producers have significantly reduced their supply of affordable products such as paracetamol due to lack of profitability — notably as a result of the price cap on medicines and soaring production costs.
One of the aims of the EU's response, expected in March, is to reduce market exclusivity granted to patent-holding companies from 10 to 8 years. Combined with a simplification of the authorisation procedures for generics, the project aims to allow for a faster entry on the market for generics, which would lower the price of products and reduce geographical inequalities in access to medicines.
This proposal is criticised by representatives of the pharmaceutical industry, who fear that this cut in their income will result in a slowdown in medical research investment.
KYIV SUMMIT • On 3 February, the EU-Ukraine Summit took place in Kyiv. It is the first joint summit since Ukraine was granted candidate status to the EU. The EU delegation included von der Leyen, Michel and sixteen EU Commissioners. Topics on the agenda included economic sanctions against Russia, European military, diplomatic and financial support, and food security.
President Zelenskyy has high hopes to continue gathering Western support. It is a hard task one year into the war. After securing battle tanks, Politico reported that Ukraine made several requests for fighter jets. In US policy circles, the demand will be considered. The German Chancellor has doubled down that Berlin would not send fighter jets, in fear of escalating the war.
What we’ve been reading
In the New York Times, Steven Erlanger argues that the war in Ukraine is leading to a new distribution of power in Europe. On Twitter, Mujtaba Rahman explains why he thinks this is not happening.
In the South China Morning Post, Kandy Wong looks at how the discovery of rare earths in Europe could reduce the continent’s dependency on China.
This week’s newsletter is brought to you by Battiste Murgia, Gautier Parthon de Von, Julie Houillon-Leonis, Maxence de La Rochère et Augustin Bourleaud. See you next Monday!