EU debt fears hinder US green subsidies riposte

The European Union is under enormous pressure to push back against the US Inflation Reduction Act and its vast array of clean technology subsidies. Politically, there’s strong desire to act. Unfortunately, green financing doesn’t grow on trees. If the EU wanted to maximise its bottom line, it could transform its temporary pandemic borrowing programme into a long-term resource.

Financial markets love the 750 billion euro Nextgenerationeu programme and its sister funds. They rewarded expanded joint EU borrowing with high credit ratings and low borrowing costs, and they would welcome a longterm, liquid, safe asset with open arms.

The hitch is, permanent EU debt is a highly electrified third rail. Only the historic shock of Covid-19 made the current programme possible, and fiscal hawks like Germany and the Netherlands insist that the fund has to wind down on schedule.

That ties von der Leyen’s hands. Before she can loosen state aid rules, she needs to make sure smaller member states won’t be put at a competitive disadvantage to larger ones. But she can’t help anyone play catch-up without new income. Since September, von der Leyen has been pushing a “solidarity fund” to offset the imbalances that could arise out of freer-flowing EU subsidies.

France is the fund’s only vocal supporter. The EU may fudge the issue by repurposing money in the existing seven-year budget plan.

But this would likely require cutting back on other commitments and could only happen in the context of a broader spending debate. It also wouldn’t come close to the 350 billion euros that Single Market Commissioner Thierry Breton suggested might be needed as an effective US riposte.

European Council President Charles Michel has suggested reviving an expired 100 billion euro pandemic unemployment plan as a bridge fund. But Germany staunchly opposes any more EU debt. Von der Leyen’s remaining options are modest.

Politically, she’s likely to trumpet faster regulatory timelines and other state-aid rule changes that do not unlock much new money. Practically, her commission can quietly finesse EU budget rules to help countries funnel more investment into solar panels, wind farms, hydrogen and heat pumps.

Financially, the EU can search its metaphorical couch cushions to repurpose a few billions here and there to help out where it can. The EU got caught by surprise at how much the US was prepared to pour into climate-forward industries. Bond investors could help, but the politics won’t allow them to step in at scale. To move ahead, von der Leyen will just have to scatter some seeds and see what grows.