Biden’s IRA has left Europe in a blind spot. And playing catch-up can lead to two big mistakes

US President Joe Biden, in the foreground, and Ursula von der Leyen, President of the European Commission.

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The European Union is working around the clock to create a program to challenge the president Joe BidenUnprecedented climate support. But it will face two major problems in the process.

The European Union has, for a long time, asked the United States to be more active in climate policy. Biden implemented this with the Inflation Reduction Act. But it raised competition issues for European companies – something that upset politicians in the region. Brussels has been left pondering how best to respond.

“US legislation does not pass overnight,” Emre Becker, director of the Eurasia Consulting Group, told CNBC, adding that the EU could have acted faster.

“The EU was asleep at the wheel… With 28 representations in Washington, the Europeans could have done more to counter the IRA before it was adopted.”

The American Inflation Reduction Act, also referred to as the IRA, was approved by US lawmakers in August and includes A record $369 billion in spending on climate and energy policies.

Among other aspects, it provides tax credits to consumers who buy electric cars made in North America – this could make electric cars made in Europe less attractive to buyers because they are likely to be more expensive.

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

Some European companies have recently announced investment plans in the United States to take advantage of the expected increase in demand. More can follow suit.

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Volkswagen It has ambitious targets for the North American region. We now have a unique opportunity to grow profitably and to grow electrified in the United States,” a spokesperson for the German company, one of Europe’s largest automakers, told CNBC via email.

Enelan Italian energy company, is concentrating 85% of its €37 billion ($40.2 billion) investments between 2023 and 2025 in Italy, Spain and the United States.

“Specifically with regard to public support policies, the IRA includes unprecedented measures on green technology and we believe that it can serve as an incentive for the European Union to move forward in this direction, in order to support the significant expansion of renewable technologies that are fundamental for energy independence on our continent. A company spokesperson told CNBC via email.

“It’s still too early to say who will invest and where,” Luisa Santos, deputy director at BusinessEurope, a group of business associations, told CNBC. “But it is very clear that some companies will invest in the United States anyway,” she added, referring to an expected increase in investment towards the United States – at the expense of Europe.

others spending

European officials are currently looking into government aid rules so that governments have more room to financially support key companies and sectors.

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

But this solution may not be ideal. Countries with bigger budgets will be able to put more money to work than poorer ones, jeopardizing the integrity of the EU’s much-vaunted single market — the free-moving goods and people of more than 440 million consumers.

Belgian Prime Minister Alexandre de Croo 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 this becomes a race for who has the deepest pockets, we will all lose and that will lead to a war of support with the United States,” De Croo said earlier this month.

Several other experts have also raised concerns about relaxing state aid rules. This is a “dangerous” approach, former Italian Prime Minister Mario Monti told Politico Europe.

In a letter released last month and seen by CNBC, European competition chief Margrethe Vestager said: “Not all member states have the same fiscal space for state aid. This is a reality. And a risk to Europe’s integrity.”

slow to respond

In addition to the challenges with the relaxation of government aid, the timing also presents a risk.

European officials will discuss and decide how to provide more green stimulus in the medium to long term. On the other hand, some argue that existing European investment programs should be redistributed towards these subsidies. But on the other hand, others argue that the bloc will need to raise new funds to implement such a huge project.

Thus, it is likely that it will turn into a deep and tense political matter that can drag on for a while.

Paolo Gentiloni, European Economic Commissioner, said Tuesday in Berlin that there are “different points of view” on the table.

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

Finance Minister Christian Lindner says Germany will likely face a recession

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