Transatlantic ties reach Biden-era low

By Andrew Hammond

Transatlantic ties were forecast to improve significantly and sustainably during Joe Biden's presidency, yet two years into his term of office, relations are deteriorating as a result of the Inflation Reduction Act (IRA).

This landmark legislation was initially welcomed by key EU stakeholders including European Commission President Ursula von der Leyen. However, it has subsequently triggered a huge political row over the massive amount of green energy subsidies given to U.S. industry, threatening Biden's overarching goal of reuniting the Western alliance following the divisions of the Trump presidency.

Earlier last week, von der Leyen said that the EU must address "distortions" created by the $430-billion U.S. plan to incentivize climate-friendly technologies which threaten a potential transatlantic trade war. She said that, unless a compromise is found fast, the EU will "adjust our own rules".

Von der Leyen's call for changes to EU state aid rules follows a series of emergency moves in recent years aimed at streamlining the regime. These include easing restrictions on payments to private companies in response to the pandemic and the energy crisis.
Under the IRA, U.S. consumers get tax incentives to purchase new and second-hand electric cars, to warm their homes with heat pumps and even to cook their food using electric induction. Biden said there could be "tweaks" made to make it easier for European firms to benefit from the subsidies package.

What Biden appears to be referring to is a provision in the IRA that grants exceptions to countries with a U.S. free trade agreement to make it applicable to U.S. "allies." The challenge here, however, is that the EU doesn't yet have such a trade deal with the United States.

French President Emmanuel Macron also said the issue was "fixable" after his recent visit to Washington to see Biden. Macron added that weakening Europe's industry was "not in the interest of the U.S. administration."

What Macron refers to here are the growing perceptions of a threat to Europe's industrial base. These were highlighted last month by the Conference Board, which showcased how much the continent's CEOs are concerned by the economic landscape, after Russia's invasion of Ukraine.

European CEOs' future expectations about their own industry's prospects six months ahead, plus those of the wider European economy, are both at the lowest point since records began.

The data from this survey and some other recent ones is alarming decision makers in Brussels and key European capitals, like Berlin and Paris.
At the end of last month, German Economy Minister Robert Habeck and his French counterpart, Bruno Le Maire, issued a joint statement echoing these concerns and called for an intensified "EU industrial policy that enables our companies to thrive in global competition especially through technological leadership." EU officials are now very seriously thinking through a number of big subsidy packages to try to retain the continent's industrial competitiveness.

One of the schemes being considered in Brussels is a European sovereignty fund to help businesses invest and meet ambitious green standards. The European Commission will discuss the plans with EU countries at this week's European Council of 27 presidents and prime ministers.

Commission officials stressed that the aim is first to try to tap and expand existing sources of funding, like RePowerEU, which aims to end reliance on Russian fossil fuels before 2030 in response to the invasion of Ukraine, before having discussions with member countries about the European sovereignty fund. This is because some countries are adamantly opposed to issuing new EU money.

The Conference Board report makes clear that CEOs are not just concerned about the fact that Europe's energy prices will be larger than those in much of the rest of the world for some time to come. In addition, key parts of the new U.S. industrial subsidy scheme to support green industries under the U.S. IRA kick in next year.

In this landscape, there are growing warnings that the European continent's industrial base may end up structurally uncompetitive if high energy costs persist. These warnings come from executives and industry groups that the economy may end up severely weakened. As context here, Euro-zone manufacturing activity has recently hit its weakest level since early on in the pandemic in May 2020.

European industrial gas demand also fell by 25 percent in quarter three 2022 from a year earlier. Widespread shutdowns are behind much of the drop because efficiency gains alone would not produce such savings.

Energy-intensive industries, such as aluminum, fertilizers and chemicals are at particular risk of permanently shifting production to where cheap energy abounds (for instance, natural gas in the United States costs about a fifth of what firms pay in Europe). Of course, European industry has been shifting production to locations with cheaper labor and lower other costs for decades, but the energy crisis appears to be accelerating this exodus.

Taken together, this data highlights the growing political imperative for Europe to act. In the absence of a compromise with the United States, expect the EU subsidy regime to be revamped by Brussels sooner rather than later.

Andrew Hammond (andrewkorea@outlook.com) is an associate at LSE IDEAS at the London School of Economics.