Biden’s IRA has blindsided Europe. And playing catchup can lead to 2 big mistakes

US President Joe Biden and European Commission President Ursula von der Leyen.

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The European Union is working to create a plan to compete with President Joe Biden’s unprecedented climate subsidies. But in this process, he will face two key problems.

The European Union has long called on the United States to be more active in climate policy. Biden did this with the Deflation Act. But this has created competitive problems for European businesses – much to the chagrin of politicians in the region. Brussels is considering how best to respond.

“U.S. laws don’t happen overnight,” Amre Packer, director of the Eurasia Consulting Group, told CNBC. And added that the EU could have acted faster.

The EU was asleep at the wheel… With 28 representatives in Washington, the Europeans could have done more to counter the IRA before the IRA was ratified.

The US Inflation Reduction Act, also known as the IRA, was passed by US lawmakers in August and includes $369 billion in spending on climate and energy policies.

Among other aspects, it would provide a tax credit to consumers who buy electric cars made in North America – which could automatically make European-made electric cars more attractive to buyers because they are likely to be more expensive.

We will continue to invest more in the region to achieve significant growth.

Some European companies have recently announced investment plans in the United States to take advantage of the anticipated increase in demand. And more people can follow suit.

Volkswagen It has ambitious goals for the North American region. “We now have a unique opportunity for profitable growth and electric growth in the United States,” a spokeswoman for the German company, one of Europe’s largest automakers, told CNBC via email.

EnelAn Italian energy company has focused 85 percent of its €37 billion ($40.2 billion) investment between 2023 and 2025 in Italy, Spain and the United States.

In particular with regard to public support policies, the IRA includes unprecedented measures in the field of green technology and we think that it can act as a stimulus for the EU to move forward in this direction, from a significant expansion of Support renewable technologies that are key. For the energy independence of our continent, the company’s spokesperson told CNBC via email.

“It’s too early to say who will invest where,” Luisa Santos, deputy director of BusinessEurope, a group of business federations, told CNBC. “But it’s quite clear that some companies will invest in the United States anyway,” he added, pointing to an expected increase in investment going to the United States — at the expense of Europe.

Spending more than others

European authorities are currently looking to ease state aid rules to give governments more room to financially support companies and key sectors.

The European Commission, the EU’s executive arm, is expected to present a proposal in the coming weeks.

But this solution may not be ideal. Countries with bigger budgets can deploy more than poorer countries, which threatens the integrity of the EU’s single market – where goods and people move freely and has more than 440 million consumers.

Belgian Prime Minister Alexandre de Croix told CNBC that more government aid is “not a good answer.”

“There is a level playing field [in Europe]. Belgium is a small market, very open economy, Germany is a big market. “If it’s a race of who has the deepest pockets, we’re all going to lose and it’s going to lead to a subsidy war with the United States,” de Croix said earlier this month.

Several other experts have also raised concerns about easing state aid rules. Former Italian Prime Minister Mario Monti told Politico Europe that this was a “dangerous” approach.

In a letter published last month and seen by CNBC, European competition chief Margrethe Vestager said: “Not all member states have the same fiscal space for state aid. That’s a fact. And a risk to European unity.”

Slow to respond

In addition to the challenges of facilitating state aid, timing is also a risk.

European authorities will discuss and decide how to provide more green incentives in the medium and long term. On the one hand, some argue that current European investment programs should be allocated towards these subsidies. But on the other hand, others argue that the block needs to attract new liquidity to implement such a huge project.

Therefore, it is likely to become a deep and tense political issue that could drag on for some time.

European Economy Commissioner Paolo Gentiloni said in Berlin on Tuesday that there were “different views” on the table.

“But I am satisfied that there is a clear intention to engage in this discussion,” he said after talks with German Finance Minister Christian Lindner, who has previously said he would not support new public borrowing.

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