Germany & France account for most EU subsidies. Here’s why it’s a concern

When it comes to subsidies, Germany and France are Europe’s kings, leaving the bloc’s other 25 countries standing by idly as mere spectators of their joint reign.

The latest numbers released by the European Commission confirmed what many had for months feared: since Brussels tweaked the bloc’s state aid rules in March 2022 to cope with the economic fallout from Russia’s war in Ukraine, Berlin and Paris together account for 77% of the €672 billion approved programmes.

The changes allowed for faster and easier disbursements of subsidised loans, subsidised grants and subsidised state guarantees for companies trying to escape bankruptcy under the weight of skyrocketing energy bills, supply chain disruptions and the Kremlin’s counter-sanctions.

Germany and France, two industrial heavyweights, made good use of the amendment: Berlin had over €356 billion in economic support green-lighted by the European Commission – a stunning 53% of all extraordinary aid –  while Paris got 24%, which roughly translated into €161 billion.

Italy came a distant third, securing approval for €51 billion (7.65% of the total), and Denmark stood in fourth place, with €24 billion. The rest of the bloc collectively accounts for less than 12% of the remaining state aid approved by the EU Commission, or about €78 billion.

“These figures are subject to daily change and the aid approved does not necessarily correspond to the aid that member states have disbursed,” a European Commission spokesperson told Euronews, noting the €672 billion figure was a “best estimate” based on 200 decisions taken.

‘We need to start a real discussion’

Although Berlin and Paris have historically enjoyed a political and economic dominant role inside the European Union, the striking numbers have given other capitals pause at a critical time when subsidies have come back to the very top of the bloc’s agenda.

The debate was sparked by Washington’s Inflation Reduction Act (IRA), a massive programme of tax credits and direct rebates promoted by President Joe Biden that unabashedly favours American-made green technology.

Over the next ten years, the IRA will dole out up to $369 billion for companies and consumers who wish to produce, invest and buy things like solar panels, wind turbines, heat pumps, electric vehicles, batteries and electrolysers – but only if these products are predominantly manufactured in North America.

The EU considers this provision as discriminatory, unfair and illegal, and fears the sudden injection of money might trigger a devastating industrial exodus across the Atlantic Ocean, leaving hundreds of factories deserted and thousands of workers unemployed.

The question has acquired a borderline existential dimension that adds to a series of epoch-defining challenges the bloc has battled within a very condensed period of time.

How exactly should Europe respond this time around?

So far, there is no clear consensus. Germany and France have expectedly joined forces to call for a new subsidy push, and even a “Made in Europe” strategy, while others, including the Netherlands, Ireland, Poland, the Czech Republic and the Nordics, have asked for caution before further relaxing state aid rules.

“We need to start a real discussion on how to improve productivity, how to enhance competitiveness and how to attract more companies based on our own capabilities and not based on long-term state aid rules,” Swedish Prime Minister Ulf Kristersson, whose country holds the EU Council’s rotating presidency, has said.

An exclusive and coveted competence

Technically speaking, state aid refers to any form of economic support given by a government to a specific company or group of companies that generate an advantage over their competitors.

Since the economies of the 27 member states are deeply interconnected and interdependent, the European Commission enjoys exclusive competence to examine state aid programmes and decide whether fair competition across the single market is preserved or threatened.

If the implications are too damaging, the executive is entitled to strike down the proposal, effectively prohibiting a member state from disbursing the subsidies.

However, in reality, around 91% of state aid initiatives are exempted from the Commission’s scrutiny, such as social assistance, development, transport infrastructure, natural disaster relief, culture, education, environmental protection, innovation and digitalisation.

For example, a member state does not need to notify Brussels if it wants to pour money into textbooks for primary schools, grants for national filmmakers or Internet expansion in deprived areas.

This leaves out a small but critical fraction of subsidies – those with a marked industrial character – that the Commission must carefully assess. 

The so-called “temporary crisis frameworks,” like the one unveiled in March last year to mitigate the economic crisis triggered by the war and the energy crunch, add greater flexibility to the internal assessment and enable faster approvals with a wider scope.

With an avalanche of American green subsidies looming over the continent, Brussels is working on yet another crisis framework to convince European green manufacturers to keep their business home.

“We will propose to temporarily adapt our state aid rules to speed up and simplify them. Easier calculations. Simpler procedures. Accelerated approvals,” European Commission Ursula von der Leyen told the audience of the World Economic Forum in Davos on Tuesday. 

Von der Leyen spoke of tax breaks and targeted support to “counter relocation risks from “foreign subsidies.”

“But,” the president noted, “we also know that state aid will only be a limited solution which only a few member states can use.”

‘It must be in the interest of all 27 member states’

Although von der Leyen avoided pointing the finger, the latest figures released by her own executive indicate the “few” countries that will benefit from a state aid boost will be those who enjoy ample fiscal firepower and strong political willingness.

Namely, Germany and France.

More worryingly, the stats reflect a growing dissonance between national subsidies and the industrial sector, which faces the greatest risks from the costly energy crisis and the enticing American credits.

According to Eurostat, the country with the largest manufacturing output was Germany, with 27% of the EU’s value of sold production in 2021, followed by Italy (16%), France (11%) and Spain (8%).

This means Germany and France accounted for 38% of total industrial production.

Looking at GDP numbers, a similar dissonance appears: according to the World Bank, the entire EU economy was worth $17.18 trillion in 2021, with Germany contributing $4.26 billion and France adding $2.96 billion.

This means Germany and France accounted for over 42% of the bloc’s GDP.

But when it comes to the extraordinary state aid approved since March 2022, the two heavyweights took up almost 80% of all direct support approved by Brussels, a huge mismatch that threatens to rattle the whole single market and leave smaller and poorer member states in the dust as Berlin and Paris march ahead with their counteroffensive of subsidies.

“There is no time to lose in establishing a new European industrial policy to support green industry and encourage industries to relocate to European territory,” French Finance Minister Bruno Le Maire has said.

“It is not a policy that we want to put in place just for France and Germany,” he added. “It must be in the interest of all 27 member states.”

The European Commission has pledged to establish a “European Sovereignty Fund” to offer sources of common financing to those governments that cannot afford or refuse the option of aggressive state aid.

But this fund remains an idea on paper and is unclear how it will be bankrolled as the bloc’s seven-year budget is already negotiated and has barely any space left to accommodate fresh expenditure. It is also unclear if this fund, once established, will be able to compensate for the German-French subsidy push.

The idea of issuing common EU debt, as the bloc did to set up the €750-billion coronavirus recovery plan, has gained traction but remains opposed by some frugal countries, including, crucially, Germany.

Meanwhile, European Commission Vice-President Margrethe Vestager, a staunch advocate of free markets who oversees competition policy, has promised to facilitate subsidies for green technology – but with caveats.

“It can be a short-term boost, of course, but we do not build competitiveness out of subsidies. This must be a temporary adjustment,” Vestager told the European Parliament.

“We build competitiveness out of a well-functioning, dynamic and innovative market.”