Brussels is ditching its free-market beliefs to compete with China and the US in a clean energy arms race.
Here’s a new bumper sticker idea for European Union officials: Don’t burn fossil fuels, set fire to your principles instead.
The European Commission is preparing to ditch a raft of long-held free-market ideals in order to compete in a global clean energy arms race with China and the U.S. Targets, quotas and state subsidies are back, in a big way.
That’s left some Brussels grandees reeling.
“This direction is quite dangerous,” said Günther Oettinger, Germany’s former European commissioner. “It’s not a single market, it’s a planned economy more and more: a centralized, planned economy. Planwirtschaft as we say in German.”
On Thursday, the European Commission will propose a Net-Zero Industry Act, setting a target for 40 percent of the EU’s clean tech to be built inside the bloc by 2030. Leaked drafts have galled liberals, who accused Brussels of 1960s-style central planning.
Alongside that, the Commission, the EU’s executive arm, will announce a new law aimed at cutting Europe’s dependence on China for critical clean tech minerals — the latest in a growing list of defensive trade moves the bloc is making to bolster its green industries. Last week, a state subsidy overhaul shunted aside decades of single-market orthodoxy.
Oettinger and others wonder what happened to the time, not so long ago, when the EU steadily promoted free-market ideals within and beyond its borders.
“Europe was always about the single market, about private investments, about competition and competitiveness,” Oettinger said.
But those values are being tested and, in some cases, discarded. Why? Because EU leaders are convinced there are now two existential economic challenges bearing down on European governments: climate change and the escalating global rivalry between the U.S. and China. Increasingly, the two pressures are becoming hard to separate.
Beijing’s longstanding dominance of clean tech supply chains spurred Joe Biden’s administration into a green subsidy spree to ensure the U.S. does not cede the new global energy market to its greatest competitor.
In turn, the EU has been forced to respond in order to keep its place at the top table of global manufacturing as solar panels, electric cars and wind turbines replace the heavy, polluting industries of the past.
Climate change — for so long sidelined by policymakers in all three big powers — has become the great driving force of geopolitical and economic competition.
“It’s because the others have started behaving differently that the EU has started behaving differently,” said Pascal Lamy, the former World Trade Organization boss and European trade commissioner in the early 2000s. “The fundamental reason why it’s happening is that the market system does not provide the necessary speed and force for decarbonation.”
The two laws to be announced Thursday follow the same philosophy of “old-school industrial policy” or “dirigisme,” said Marie Le Mouel, an affiliate fellow at Bruegel think tank. The idea is to “pick winners … which is quite a shift from the previous way of thinking about industrial policy,” she added.
‘New historic era’
The realignment began to emerge in response to the ‘America First’ Trump administration, then leapt forward with the state interventionism that delivered emergency vaccines and medical supplies during the pandemic. It gained further momentum when Russia invaded Ukraine, forcing governments to bail out ailing industries.
But this month’s proposed changes are more permanent than the “war economy” measures introduced during the COVID crisis, said Luuk van Middelaar, a Dutch historian and founder of the Brussels Institute for Geopolitics.
“No, this is worse: we are entering a new historic era, a period of global competition where — for both the U.S. and People’s Republic of China — issues like industry, tech and climate become part of the overall strategic rivalry with the other. In the U.S., the train on this already left the station … So this leaves the EU in a difficult place. Better get used to it,” he said.
It’s a huge win for Paris, which has been pushing a “strategic autonomy” policy in Brussels for years. The EU’s industry chief Thierry Breton, a Frenchman, saw his opportunity in the EU’s response to Biden’s subsidy splurge to push France’s agenda on the European level.
In response to the United States’ €369 billion green subsidy package — the Inflation Reduction Act — and concerns that high energy costs are eroding European industrial competitiveness, the EU last week announced even weaker state aid rules. These could facilitate the emergence of global green tech giants, but also compromise the bloc’s commitment to internal EU competition.
“There are clear signs of more state intervention, and of course, this relaunches the problem of the internal market and the dominance of the most industrialized countries like Germany or France over others,” said Lamy.
It doesn’t mean the free traders are going down without a fight.
Sweden, which currently holds the rotating presidency of the Council of the EU which gives it some agenda-setting power, is pushing to get several of the EU’s free-trade deals over the line. Germany’s liberals are leading a rebellion against an EU push to phase out combustion engine cars. Meanwhile, 11 EU countries are pushing the Commission to water down the state aid overhaul.
But Breton and his interventionist allies seem increasingly to have won the battle.
“Some say: ‘Don’t start a subsidy war,’” Breton told reporters in Paris on Monday. “But it’s not us who started it.”