BRUSSELS — Will it ever be enough? 

Brussels officials are growing increasingly exasperated with businesses demanding more state cash, and threatening — if they don’t get it — to quit Europe and relocate to America. 

“These demands just keep on coming,” said one frustrated EU diplomat. “Sometimes we genuinely wonder: Are they legitimate concerns or are companies just seizing on the moment and testing how far they can go?”

The first problem is that U.S. President Joe Biden has used a vast package of government subsidies under the Inflation Reduction Act (IRA) to tempt many big European industrial players — like VW and battery supplier Northvolt — into considering a move to the U.S.

The second problem is how the EU has responded to the first. 

Amid fears that European industry is facing existential decline, the Brussels fightback against Biden’s reforms involves more leeway for EU countries to pour more state aid into their economies and targets for greater self-sufficiency. With China already dominating green tech supply chains, it’s becoming a global subsidies arms race — and that’s every lobbyist’s dream. 

“Of course these threats are part of a lobby strategy,” said one business lobbyist, requesting anonymity because he was not authorized to speak publicly.

At stake is not only the future viability of European manufacturing if the Brussels plan fails, but the very founding principles of free-market economics on which the EU was built. The risk for EU governments is that their efforts fall flat, businesses move anyway or falter, and colossal amounts of taxpayers’ money get wasted along the way. 

Yet Brussels can’t do nothing. 

Next week, national leaders will descend on the Belgian capital for an EU summit, where they will discuss how to make Europe’s economy more competitive. A big part of that will be building out capacity for the industries of the future such as electric cars, batteries and renewable energy generators like solar panels and wind turbines. 

It’s the perfect time for companies to ramp up their demands for pro-business European legislation and more state aid money. Multinationals are threatening to move their car plant or battery factory elsewhere or at the very least postpone final investment decisions, costing the EU jobs, taxes and global economic weight. The likes of chip designer Intel has fired warning shots, while Tesla recently announced a strategy shift away from Europe to benefit from the U.S. subsidies. 

When CEO Elon Musk was looking for the right location for Tesla’s European so-called giga-factory in the late 2010s, he received red carpet treatment and large subsidy promises in Germany, the Netherlands and Belgium to convince him to do the multibillion-euro investment in their respective countries. 

“We’ll look into the possibilities there,” Niklas Wahlberg, Volvo Group’s vice president for partnerships, said about the new U.S. package of tax credits. “But Europe is also very important to us. We need to see Europe attempting to take the lead for the green transition globally.”

Privately, automotive lobbyists say subsidy shopping is just part of the game. “You would wonder about the business management abilities of multinationals if they didn’t use this as a bargaining chip,” said Holger Görg of the Kiel Institute for the World Economy.

What’s more, it’s not just European and American brands in the market for state handouts to finance clean technology. Chinese firms, dominant in batteries, are playing the game too.

“Every single person I know working in automotive has had a Chinese company try to headhunt them,” said one carmaker lobbyist. “They’re essentially sales jobs, they want you as a European to go speak to governments and get a good deal on a factory or whatever.”

The EU feels it’s already answering business demands with a set of massive policy changes, steering away from its decade-long liberal economic approach. 

On Thursday, the European Commission launched its Net Zero Industry Act as part of its Industrial Green Deal. Last week, Brussels presented plans to further relax its crisis state aid rule, including new subsidy rules for a range of strategically important technologies.  

Crucially, the proposal allows EU nations to offer the same level of support for companies that firms could get abroad, as part of a “matching aid” clause — thereby going toe-to-toe with the U.S.

“The Inflation Reduction Act seems to do exactly what everyone has feared and criticized: initiate a subsidy race,” said David Kleimann, a trade expert at the Bruegel think tank. “Big multinational corporations can now play the EU against the U.S. offer.”

Kleimann called it a “psychological game” to drive up the price, pointing to a threat from German carmaker Volkswagen to “wait” for the EU’s response to the IRA before deciding on the location of a planned battery plant. 

Volkswagen’s battery boss Thomas Schmall took to LinkedIn this month to list a series of demands, including capped energy prices, if policymakers expect his company to build on its announced investments in cell factories in Salzgitter, Germany and Valencia, Spain.

“The conditions of the IRA are so attractive that Europe risks to lose the race for billions of investments that will be decided in the coming months and years,” Schmall wrote. Just days later, he took the lead in announcing a multibillion investment by Volkswagen in Canada, where production is eligible for IRA subsidies.

Pushback 

There has been pushback amid these warnings. Ahead of last week’s subsidy splash from the EU’s state aid enforcers, a contingent of EU rebel states warned the Commission that loosening the purse strings on the bloc’s subsidy controls would imperil the harmony of the internal market. 

Geert Bourgeois, an MEP from the European Conservatives and Reformists (ECR), warned relaxing the limits on subsidies will bring about a new cash race within the EU itself, after the battle with the U.S. initiated by the Inflation Reduction Act. “This is a misallocation of public funds and detrimental to employment and consumers in the smaller member states,” Bourgeois said.

“Europe can’t open the subsidy floodgates,” said Julia Poliscanova from Transport & Environment, a clean transport campaign group. Money alone isn’t the answer. “The point is that cash is the U.S.’s only climate policy,” Poliscanova said. 

The pro-business European People’s Party (EPP) has recently sought to block or amend a raft of EU green regulations over concerns they undermine competitiveness. 

Görg, from the Kiel Institute for the World Economy, warned that throwing around subsidies will not change long-term investment decisions. He pointed to other factors, such as the size and potential of the market, the location of suppliers, or the economic and political stability in the region. 

“Firms that are thinking of moving to the U.S. anyway are of course quite happy to take this handout that you get in the U.S.,” Görg said.

Meanwhile, European multinationals are also using those announcements to pressure the EU or national governments, he added. “So you’re basically giving more money to firms that are already doing very well. In terms of government objectives, that’s probably not really what you want to do with your money.”