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Inflation Reduction Act: EU sees its competitiveness threatened by the US

The Inflation Reduction Act (IRA)is determined to tackle longstanding economic and social issues, like climate change. This plan includes public investment through subsidies to develop clean energy technology as fast as possible, ahead of the European Union. This has caused quite a stir for EU policymakers as subsidies could result in European industrial capital moving to the other side of the Atlantic. However, these European flagship companies, especially those that focus on renewable energies and climate-friendly tech, have been establishing their position in the US economy for a long time now either through joint-ventures or acquisitions of established American companies.

Although they will not be the only companies looking to make the most of these subsidies, the US will certainly prefer to work with these European well-known conglomerates than their Chinese counterparts. Even if subsidies are not the only reason for these conglomerates to move to the other side of the Atlantic, the size of the investment proposed in the IRA will allow them to increase scale at a pace that would hardly be possible in Europe. In fact, even if the EU were able to match this level of investment, the investing environment looks much more friendly in the US, as it ensures steady demand for years to come and protection from Chinese unfair competition practices.

US plans to kickstart its own version of a green deal, has been a wake-up call for the EU to push forward with theirs. This strategy to accelerate the EU green deal, formally known as the Green Deal Industrial Plan, aims to compensate for the difference in the size of investment. It is determined to promote looser state aid rules specifically for green investment, as well as fast-tracking permits to manufacturers of green tech and investing in the education and training of the workforce in green industries. Ultimately, the Commission has hinted the creation of a European Sovereignty Fund that would facilitate the investment on industrial enterprises in the future.

Getting caught up in the middle of the US-China trade war has a lot to do with the EU economic dynamics. As the US becomes the main energy supplier for the EU, and how China’s lockdowns have affected the EU economy over the last couple of years, there is little room for the EU to confront any of the two powers to ensure itss own competitiveness. Also, fear of a long war in the Eastern front of the bloc, and the subsequent disruption in energy supply that it is causing, is weighing heavily on the large industrial companies’ plans, affecting the profitability of their businesses.