Watchdog: Vestager’s response to US Inflation Reduction Act revives state aid debate

Legal Analysis 20 January

Watchdog: Vestager’s response to US Inflation Reduction Act revives state aid debate

Watchdog is a weekly column offering commentary from our editorial team on antitrust policy and enforcement across Europe. The opinions expressed here are those of the writers only. 

It should come as no surprise that in these opening weeks of 2023, the US Inflation Reduction Act (IRA) has remained at the top of European Commission’s (EC) agenda. 

Months of political pressure from Germany and France resulted in an intervention from EC Executive Vice President (EVP) Margrethe Vestager last Friday (13 January) as she sent a letter to member states soliciting views on a new package of state aid tweaks.

Billed as a “strong European response” to the USD 400bn American green investment bill, Vestager put forward a series of new proposals and re-packaged existing ones, from the imminent revision of the General Block Exemption Regulation (GBER) to a proposal introduce a new category of “anti-relocation investment aid” for green investments in strategic sectors.

Whether Vestager’s proposals will satisfy those EU member states advocating for a more muscular response, as well as opposing voices from within the EC’s own College of Commissioners, remains to be seen. 

Member states have until next Wednesday (25 January) to respond with their views on the need for such new tools. The pending European Council meeting next month (9-10 February) will also be revelatory of the direction of travel of state aid policy in the months to come.

Viewed from afar, it has been a remarkable three years for state aid policy. First, there were the unprecedented relaxations in order to clear EUR 3trn in aid (not all of which was actually spent) as part of Europe’s response to the economic impacts of the Covid-19 pandemic. Just as that temporary framework was winding down, Russia’s invasion of Ukraine solicited a new temporary framework, again expanded in July 2022 to allow additional support for decarbonisation and renewables projects. 

Under that latest (and ongoing) framework, the EC has allowed EUR 672bn in state aid, two-thirds of which been allocated by Germany and France alone. It should come as little surprise that the Franco-German motor is driving further relaxation of the rules again.

The proposals that Vestager’s services are consulting on are largely continuous with existing supports. Some aspects are already in the pipeline: the GBER revision has been long expected and the REPowerEU Plan has been under consideration for some time.

The anti-relocation investment aid is the most interesting development. Such aid is not completely new to state aid law, noted a state aid practitioner closely following the file. Conceptually it draws from the regional aid guidelines, where it is easier to justify aid to investments in ‘assisted areas’. A key question for practitioners, who await the pending detailed consult with member states, will be whether the EC will allow such aid to be granted to simply outbid a US subsidy (unlikely said the lawyer), or whether it will be tied to more stringent conditions that incentivise private investment.

The extent to which these proposals satisfy Paris and Berlin, and dissenting voices in Brussels, will be a development to watch in the weeks to come.

Since Vestager’s letter, debate has resumed within the EC’s College. On Monday (16 January), EC Internal Market Commissioner Thierry Breton responded with his own call for an ambitious response to the IRA. While ostensibly touting the same solutions as his fellow Commissioner, the slight divergence in their language was notable. The problem of green financing is not just a temporary issue, its the “new reality”, said Breton in a blog post. The framework in place cannot only be about short-term temporary solutions, he said. While EC president Ursula von der Leyen, speaking at the World Economic Forum in Davos, reiterated the need for time-barred supports, the debate does not appear ready to die off soon.

At the member state level, the developments have been no less compelling. Also on Monday, the French government issued a letter to the EC calling for a “shock” of modernisation and simplification of the state aid framework. Other capitals have been more muted in their response – the consultation promises to solicit many member states who are supportive of the EC’s controlled approach to state aid. A key development to watch next week will be the outcome of Vestager’s Monday (23 January) meeting with French Finance Minister Bruno Lemaire. The Wednesday (25 January) high-level forum on state aid will be another indicator of where state aid policy is headed.

We are only weeks into 2023, yet the IRA promises to be a topic that will stay with the EC through the year to come – Vestager’s last full-year in office. Investment in sustainable energy and climate-friendly technology should not be a zero-sum game, but as industrial titans like BASF and upstarts like Swedish battery producers Northvolt are drawn to invest in the US, it’s clear that the political pressure from certain quarters in the EU will remain at a high pitch. The EU’s state aid playbook will be under pressure for some time.