Europe’s Latest ‘Green New Deal’ Is Counterpunch To U.S. Inflation Law

Ever since President Biden signed the Inflation Reduction Act (IRA) into law, Europe has been on the offensive. They were sadly mistaken if they thought Biden’s “work with allies” approach meant that he would ask Europe to greenlight the U.S. government’s trade and economic development policies. That law, which many have dubbed the climate law, gives the post-fossil fuels economy a lift via tax incentives. The one that really got Europe’s goat was a ban on tax credits up to $7,500 on EVs that satisfy the law’s regional content requirements. That would cut Mercedes, Audi, BMW, and Volkswagen imports out of the loop, making their EVs automatically more expensive than those that qualify for the tax credit at home.

Washington has been unmoved on this issue, however.

The IRA is already working by some measures. BMW said in October that it would invest $1.7 billion to make EVs in the U.S. That means new, middle-income jobs, and new tax revenue for the state.

“Many European firms have already announced they are drawing up plans to increase their investment in the U.S.,” says Barclays Capital analyst Maggie O’Neal in London.

Other than BMW, she named Norwegian battery group Freyr and Italian solar energy company Enel. “Since the passing of the IRA, at least 20 new or expanded clean energy manufacturing plants have been announced in the U.S., and half of them are foreign companies,” she says.

So now Europe is coming up with their bigger, badder version of a Green New Deal; a deal they have been bragging about since announcing it in 2019.

Coupled with the fact that their previous base supplier of natural gas — Russia — is persona non grata there, Europe is scrambling both to find new replacements for Russian fuel and catch up to American policies for EVs, in particular.

Europe Goes Green, Again

The Inflation Reduction Act poses a severe risk to European automotive manufacturing. The law offers companies billions of dollars of tax credits to boost investment in clean-energy technologies here, not just for the automotive supply chain. To pushback and compete, the European Commission is urging EU members to respond with tax breaks and subsidies as a counterweight. And to speed up procedures for investment in the post-fossil fuels economy Europe loves so much.

On Feb. 1, the European Commission presented a package of proposals called the Green Deal Industrial Plan for the Net-Zero Age (GDIP) to support Europe’s post-fossil fuels manufacturing base. It is officially presented as a genuine “industrial policy” for Europe that would “support the twin transitions to a green and digital economy, make EU industry more competitive globally, and enhance Europe’s open strategic autonomy.”

This new green new deal “marks a major change from the past rhetoric of the Commission,” says Philippe Gudin, a European economist for Barclays in Paris. The old green new deal announced in the Trump years (as a countermeasure and a virtue signal following Trump’s exit from the Paris Climate Accord) was mainly focused on competition rules, free trade and had little government involvement in the new clean tech economy.

That has changed.

No money has been allocated for this. But the money is there and more may be coming by the summer.

Large industrial powers, namely Germany, will have the edge over Spain and Portugal in terms of what they can afford to spend. For instance, Germany can afford to give up some tax revenue. Spain and Portugal will be hard-pressed to do that. Most of the European auto industry is centered in Germany, France and Italy, but Spain does have some solar manufacturing.

According to numbers released by the European Commission in January, Germany and France account for almost 80% of the 672 billion euros approved for state aid, unrelated to the green deal. Italy recently joined Spain to call for EU-wide funding to ensure the green tech industrial base isn’t all French and German.

As far as money goes, the Commission says that some 270 billion euros are available in new energy regulations, mainly through REPowerEU, that can be used along with the Innovation Fund and InvestEU. They want to throw the kitchen sink at this to compete with the U.S. so manufacturers aren’t moving there and exporting to Europe. The European Union is our second largest trade deficit after China.

Barclays forecasts that the macroeconomic impact of GDIP on the EU could be larger than the 1.5 percentage points of additional GDP expected from the pandemic recovery fund, known as the NextGenerationEU recovery plan (NGEU). Without these green deal measures, the industrial sector of Europe would “likely be dramatically hit,” Barclays says.

Unlike the IRA, however, GDIP does not have a single budget. Barclays says it will use unallocated funds for now from the NGEU and REPowerEU, which was created in May to reduce the EU’s dependence on Russia. Combined, Barclays estimates the public spending will be upwards of $440 billion over a 10-year period. Though it is not easy to make a direct comparison, the IRA spending was $336 billion.

Barclays thinks additional funding could be announced in Europe after election season in May 2024.

It won’t be easy. The EU has identified a 210 billion euro financial hole for the next four years as it tries to decouple from Russian energy. Assuming they are not going back to Russian oil and gas markets, Europe will continue to scramble for new sources of old fuel, including coal, and funding to build the technologies needed for new energy — whether it is batteries, wind turbines or solar.

China is a massive player in these markets, and Europe depends on them.

Therefore, the GDIP is also motivated by the risks related to China.

The IRA and the EU Green Deal strategy were created to address energy security and supply chain risks. Both packages are attempts to diversify supply chains away from Russia and China.

Sounding like a member of Capitol Hill, European Commission president Ursula von der Leyen said last month at the World Economic Forum that the EU desired to “derisk rather than decouple” from China.

Europe’s dependence on China for energy has increased. EV battery materials and solar are closely linked to China supply chains. In the first half of 2022, European imports of Chinese solar panels jumped by 137% over 2021.

The EU is no longer tied to Russian gas imports for some 35% of its gas supplies. But China now accounts for 75% of all EU solar panel imports, Barclays says.