The Ukraine war triggered an energy crisis in Europe and had an impact on the global economy. The Russian invasion of Ukraine has surely rekindled relationships between the United States of America (USA) and Europe, as well as reinforced the North Atlantic Treaty Organization (NATO). As it is known, the USA is the number one trading partner of the European Union (EU). However, certain US initiatives have made Europe uneasy. The US Inflation Reduction Act (IRA), which has been on the agenda for weeks, has alarmed European leaders. In this context, French President Emmanuel Macron paid a visit to the USA on 29 November 2022.
With its $369 billion package, the IRA drew the criticism of Europe. This law aims to strengthen domestic production in clean energy technologies and increase employment in the industry. Europe believes that such a package would harm its industries. The bill’s tax incentives for renewable energy pose a significant risk to European leaders, who are concerned about their economic sector relocating their operations to the United States. Europe is currently grappling with inflation. In addition, the continent is geographically close to the conflict. As a result, there is also the risk of a European recession. In short, Europe regards the IRA as a hostile attempt to exploit Europe’s vulnerability. Furthermore, similar critiques were levelled beyond the context of the IRA.
As mentioned above, the USA is the EU’s number one trading partner. After Russia invaded Ukraine, this partnership increased because, before the start of the Ukraine War, Russia was the EU’s primary gas supplier.
As you know, Europe entered an energy crisis following the Ukraine War. In addition to rising energy prices, inflation has surged across Europe. So, the USA began to export liquefied natural gas (LNG) to the EU to fill the gap created by Russia. However, Bruno Le Maire, France’s Economy Minister, criticized the USA for raising the price of gas exported to Europe, warning against “American economic domination.”[1] Later, the IRA was added to the agenda, causing tensions between the EU and the USA.
Since the introduction of the IRA, France has advocated for European allies to embrace counter-subsidy packages, such as the “Buy European Act.” Indeed, the EU nations most affected by the IRA’s electric vehicle subsidies are France and Germany, which are home to the automobile industry’s behemoths.
This issue has been brought up in the EU-US Trade and Technology Council as well (TTC). This format was established last year to enhance relations between the US and the EU.[2] The IRA includes provisions for electric vehicle tax credits, which will apply if the product is assembled in the US and the bulk of parts are acquired domestically or from a free trade partner.[3] Mexico and Canada, which have free trade agreements with the US, can benefit from these subsidies. The EU wants that a similar framework to be implemented for them as well. As a matter of fact, during his visit to Washington, Macron did hear encouraging remarks from President Joe Biden. Because Biden stated that the IRA could be tweaked and that its goal wasn’t to “exclude Europe.”[4]
On the other hand, changing the bill is difficult since the bill had barely passed through Congress. Aware of the issue, European Commission President Ursula von der Leyen advocated for a modification of EU state aid regulations as well as the establishment of a sovereign fund to boost local investment in sustainable technologies.[5] Following that, German Finance Minister Christian Lindner stated that if von der Leyen’s suggestion entailed restructuring current instruments, Berlin was willing to discuss it.[6] However, Lindner expressed his opposition to establishing an instrument based on joint European debt with these words: [7]
“A revamp of the EU’s subsidy rules could thus skew the single market, as countries with more fiscal firepower and lower debt ratios can outperform their European peers by spending more money.”
As can be seen, if a shared debt mechanism is to be developed inside the EU, Germany’s veto may be invoked. Another option is to file a complaint with the World Trade Organization (WTO). But this may not yield any results. Furthermore, the procedure might take a lengthy period, upsetting the US. However, this is not ideal because entering a trade war may have a detrimental impact on the EU, which is dealing with inflation and rising energy prices.
In conclusion, with IRA, Washington is seeking to combat inflation while also keeping Europe out of competition. Thus, it could be stated that the US is attempting to make the EU, one of its most important market competitors, reliant on itself by taking advantage of the Ukraine War and the IRA.
[1] “Biden Enters A New Type of Tango with Paris”, Politico, https://www.politico.com/news/2022/12/01/biden-macron-alliance-ukraine-00071539, (Date of Accession: 07.10.2022).
[2] “Trade War over Green Subsidies Looms Large over EU-US Tech Summit”, Euro News, https://www.euronews.com/my-europe/2022/12/05/trade-war-over-green-subsidies-looms-large-over-eu-us-tech-summit, (Date of Accession: 07.10.2022).
[3] Ibid.
[4] “Trade War Averted? Macron Gets Biden to ‘Tweak’ His Industrial Subsidies”, Politico, https://www.politico.eu/article/emmanuel-macron-joe-biden-us-france-lands-unexpected-concession-on-inflation-reduction-act/, (Date of Accession: 07.10.2022).
[5] “Von der Leyen Calls for EU to ‘Adapt’ State-Aid Rules in Answer to US Green Subsidy Scheme”, Politico, https://www.politico.eu/article/von-der-leyen-eu-state-aid-us-inflation-reduction-act/, (Date of Accession: 07.10.2022).
[6] “Germany Rebuffs EU Joint Borrowing to Match US”, Euractiv, https://www.euractiv.com/section/all/news/germany-rebuffs-eu-joint-borrowing-to-match-us/, (Date of Accession: 07.10.2022).
[7] Ibid.
