ANALYSIS: EU subsidy race is on – and Germany is winning it

Germany is the number-one beneficiary of the relaxation of state aid rules, having received almost half of the total state aid approved since February 2022, according to fresh data from the European Commission – deepening concerns over market fragmentation.

The relaxation of state aid rules is one of the European Commission’s major tools to support national investments in the green transition.

As of 4 September, the Commission has approved €742 billion worth of state aid since February 2022, 48.4% of which was granted to Germany, according to fresh numbers the Commission shared with Euractiv.

France comes second with its state aid comprising 22.6% of the EU total, while Italy is third with ‘only’ 7.8%. For 21 out of 27 EU member states, their state aid accounts for anywhere between 2.3% and 0% of the total amount.

These numbers confirm, as well as contribute to, the enduring economic reality that richer EU countries with more fiscal firepower can draw on their public finances to subsidise industrial development, either through direct grants, tax breaks, loans or guarantees.

And the EU’s latest moves to relax state aid do not contribute to levelling the playing field across all member states.

Relaxation time

As the economic fallout from Russia’s full-scale invasion of Ukraine became evident, the Commission introduced a Temporary Crisis Framework (TCF) in March 2022, which looked to relax state aid rules to enable member states to more efficiently and speedily support economic recovery.

State aid rules are critical in the Commission’s toolbox to ensure there is no competitive distortion among member states, and to avoid crowding out of private spending by public money.

In March, the framework underwent a review, transforming it into the Temporary Crisis and Transition Framework (TCTF) – following the same logic, but with an eye to enabling higher investments in the green transition. It came just months after the US introduced its own Inflation Reduction Act (IRA), a $400 billion tax break and investment package.

The TCTF enlarges the scope of aid relaxation to a wide array of renewable sources of energy, and introduces the principle of a ‘matching subsidy’: if a company gets a subsidy offer from a third country outside Europe, EU member states are allowed to match this offer in a bid to convince the company to invest in Europe instead.

“Some countries will be able to deliver far more money than others,” Margrethe Vestager, former Vice-President of the European Commission in charge of competition – now on leave to focus on the European Investment Bank (EIB) Presidency race – warned at the time of an intra-European bidding war to subsidise industry.

She made clear the framework was temporary, and rules should go back to normal after 31 December 2025.

By February 2023, over half – 53% – of the €672 billion in state aid approved by the Commission was dished out by Germany.

EU's Vestager warns of fragmentation risks, but expands state aid

On Wednesday (1 February), Margrethe Vestager presented a new framework for state aid that will allow member states to subsidise more companies for longer, while also warning that such subsidies were a threat to the integrity of the single market.

Market fragments

“The problem here is that the relaxed state aid rules benefit countries like Germany that have low public debt and can afford to lavish subsidies,” Zach Meyers, a research fellow at the Centre for European Reform (CER), a think tank, told Euractiv.

“These subsidies risk wasting public funds by promoting a subsidy race within the EU, and distorts competition by encouraging investment to move within the EU to areas where more subsidy is available, rather than where the investment would be most efficient,” he added, warning of significant risks to market fragmentation – more so than ever before.

This, so the economic theory goes, could lead to a two-speed Europe, between richer member states that are able to spend the necessary public money to attract and retain investment, and poorer counterparts that do not have the financial means to support hefty industrial investments necessary to best prepare the green and digital twin transitions.

“Several member states are complaining,” Anna Cavazzini, a German Green MEP and President of the European Parliament’s Committee on the Internal Market, told Euractiv. Finding a middle ground between preserving single market integrity and meeting new investments needs is tricky, she said, and she blames the Commission for having “underestimated” the risks.

In her view, Important Projects of Common European Interest (IPCEI), which support cross-border R&D or industrial deployment initiatives, should be rolled out faster, and paperwork reduced. A “Europeanisation of money”, of the likes of an EU Sovereignty Fund, is also badly needed, she said.

The same story goes for semiconductors, a strategic technology for which the EU wants to increase home production. A dedicated ‘Chips Act’, adopted in July, looks to loosen state aid to support the creation of factory plants in the EU.

“The fragmentation question must be asked,” Mathieu Duchâtel, Director of International Studies at the Institut Montaigne, a liberal-leaning think tank, told Euractiv. A China and semiconductor expert, he says the Commission is not clear on its overall strategy: “Either we sprinkle [the aid] across the EU, or we organise clusters”.

Contacted by Euractiv, the Commission said it was monitoring the situation in the Single Market, and “stands ready to swiftly respond in the event of any new crisis situation”.

March showdown: When EU fiscal rules meet industrial policy

When EU leaders meet in Brussels at the end of March, the conversation over how Europe should subsidise its green transition will clash with the discussion over the reform of the bloc’s fiscal rules, providing opportunities for a compromise deal.

EU-wide money pot

The conversation over new EU-wide financing to counteract the worse effects of state aid imbalances was meant to be at the core of the EU’s response to the IRA last winter – but fell short of any ambitious commitments.

The new Strategic Technologies for Europe Platform (STEP), presented by the Commission in June, is no more than a re-hashing of already-existing EU funds, with a €10 billion top-up from member states. The Commission expects STEP to leverage up to €160 billion worth of private investments.

“This is wild mathematics: it assumes public support will unlock vastly more private spending,” Meyers deplored.

“The US put €370 billion on the table, and our response is an extra €10 billion [to the budget],” Valérie Hayer, a centrist Renew MEP, told Euractiv in an interview at the time the STEP was unveiled. “That’s very, very disappointing.”

Even an EU pot of money might not resolve the market fragmentation problem fully, CER’s Meyers warns. He points to the EU’s need to fund early-stage riskier investments, since private capital markets are less developed in Europe than they are in the US.

“Most of the start-ups and scale-ups that could benefit from a sovereignty fund are in richer member-states – so the risk is that the sovereignty fund [or the STEP] makes fragmentation worse, not better,” he said.

Not all are so concerned, however. “If Europe wants to maintain an industrial base, the key issue is not the preservation of the level playing field in the Single Market, but to deepen the Single Market, improve EU industry’s ability to face international competition and avoid investment leakage to non-EU countries,” a June report from ERT, a business lobby, reads.

We need to “mov[e] beyond paying lip service to the importance of the Single Market and devoting some political capital to actually deepen it,” an ERT spokesperson told Euractiv.

EU Commission wants new technology fund, but no fresh cash in sight

The European Commission announced on Tuesday (20 June) it would create a new Strategic Technologies for Europe Platform (STEP), formerly known as the EU Sovereignty Fund, but expectations are low as no new cash has been brought to the table.

[Edited by János Allenbach-Ammann/Nathalie Weatherald]

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