EU Should Avoid a Subsidy Race with the US
The European Union should refrain from further debt-financed subsidies made in response to the US Inflation Reduction Act (IRA). This was the clear call issued by the ifo Institute in an expert opinion for the German Federal Ministry of Finance. The call was led by ifo researcher Niklas Potrafke and ifo President Clemens Fuest. “The EU should avoid getting into a subsidy race to attract battery- or solar-cell factories that use known technologies; such a move is self-defeating,” Fuest says. Potrafke adds: “The EU should focus on competitively awarding funding for research, development, innovation, and infrastructure development.”
It would be advisable, however, for the EU to oppose protectionist elements of the US IRA, Potrafke says. He welcomed the fact that the EU and the US were negotiating this in talks. In addition, the EU already has the NextGenerationEU programs for climate protection, which still have funds available. Moreover, the introduction of a minimum tax in the US as stipulated by the IRA is likely to increase the tax burden on global companies, thus making investment in the US less attractive.
In a separate article, Fuest called for Europe to make up for its own failures in industrial policy. Inexpensive and secure energy supply requires stronger integration of European energy markets, an expansion of energy networks, renewables, and nuclear power, and funding for research in these fields. What is also needed is a new regulatory framework enabling the development of a platform economy in the energy sector, in which private households and companies simultaneously act as consumers and producers of energy.
ifo Viewpoint 244: Europe’s Industrial Policy and the Response to IRA
Europe is seeing a renaissance in industrial policy. Industrial policy usually involves influencing an economy’s sectoral development by means of subsidies, partial state ownership of companies, or regulations. It can also include promoting mergers of companies to form national champions – large companies which are supposed to conquer the world’s markets with their governments’ support. It’s also common to bar foreign investors from taking over domestic companies that are deemed strategically important.
Die Betroffenheit der deutschen Wirtschaft durch den US-Inflation Reduction Act
2023
Studie im Rahmen des BMF-Forschungsauftrags fe 3/19: Rahmenvertrag Wissenschaftliche (Kurz-) Expertisen zu Grundsatzfragen der Finanz-, Steuer- und Wirtschaftspolitik
