France and Germany are left alone to face the fight against the EU summit

It will likely be 25 versus 2 when EU leaders meet in Brussels for a summit on Thursday.

France and Germany are largely on the same page in responding to America’s massive green subsidy plan, the Deflation Act, which will be discussed in depth for the first time by the bloc’s leaders.

French President Emmanuel Macron and German Chancellor Olaf Scholz both back the EU’s green subsidy plan, proposed to shore up Europe’s industrial base and loosen state aid rules to counter the Americans. But their reason for doing so has angered the 25 EU countries who suspect the bloc’s two industrial powers are seeking to prop up their own industries at the expense of less-well-off countries in the single market.

In many ways, Franco-German rapprochement is a welcome change. Just a few months ago, at the height of the energy crisis, the two powers were at loggerheads. Germany’s decision to press ahead with a €200 billion domestic-subsidy package angered other countries, including France, while the two countries clashed over a midcap pipeline linking Spain to Germany via France. Relations were so bad that the EU’s two founding members decided to delay a long-awaited bilateral summit.

Now, they’re singing from the same hymn sheet — and the other 25 members of the block aren’t happy.

“We are rushing to take potentially very far-reaching measures that could risk a subsidy war with the United States and even a subsidy war with each other,” said one official from one country worried about the Franco-German stance.

“There is a very strong pressure from France and Germany to go ahead with these rules. We see a potentially groundbreaking transformation of the EU’s state aid system – we think it’s all being done too quickly and without adequate analysis.”

realpolitik

Like it or not, a solid Franco-German axis has been central to the smooth running of the EU since its inception. It is a fact of Brussels politics that nothing can be done without the blessing of the two largest members. The problem this time is that many in the EU suspect that the latest move to tackle the IRA is a French initiative, which now has the backing of Germany – normally a free-trade voice around the EU table that could limit protectionism. Passion of Paris.

A joint visit to Washington this week by French Economy Minister Bruno Le Maire and Germany’s Robert Habeck has fueled fears that this is just a Franco-German stitch-up (although the two economy ministers insist they are speaking for the entire EU).

The issue to focus on Thursday is the European Commission’s latest proposal to relax state aid rules. An in-depth discussion on possible new money to counterbalance any move to plow cash into countries’ own economies will come later in the year.

In the run-up to the summit, smaller EU countries have joined forces to voice their distaste for proposals to loosen state aid rules, long seen as a cornerstone of the single market and fair competition across the bloc.

Last week, the Czech Republic, Hungary, Latvia and Slovakia joined calls by Denmark, Poland and others to exercise “great caution” in revising the European Commission’s state aid rules, according to a document obtained by Politico.

The document’s main signatories claimed that further relaxation of the bloc’s state aid system after nearly three years of crisis relief “could lead to significant negative effects, including fragmentation of the internal market, harmful subsidy racing and weakening of regional development.”

One result of the Franco-German push was to bring together a motley crew of member states who generally did not find themselves on the same side of the argument when it came to European economic affairs.

“When it comes to state aid, France and Germany are relatively isolated,” said a senior official from another country skeptical of the Commission’s plans on state aid. “

Exaggerated threat

There are also rumblings around Brussels that France in particular may be exaggerating the threat posed by the IRA and using it as a pretext to push its agenda. “Certainly the risk of the IRA has been exaggerated by countries interested in flexible state aid regimes,” said Simone Tagliapietra, a senior fellow at Bruegel, a think tank.

It’s a sentiment echoed across national delegations in Brussels, who want further analysis of exactly what the IRA’s impact on the European economy will be before a sweeping overhaul of the state aid system.

But Germany, and especially France, remain defiant, privately insisting that Europe needs a serious industrial policy to compete with Joe Biden’s investment plan, which includes $369 billion in climate subsidies and investment incentives.

“We’ve won the storytelling battle on these issues because talking about European industrial policy is really new,” an Elysée official said ahead of Thursday’s summit, capturing the view that subsidy talks have now become mainstream in Paris.

As EU leaders prepare to face off in a one-day summit, things are already getting tense.

This week, Germany accused the commission of publishing “misleading figures” on the distribution of state aid to France and Germany. This follows Competition Commissioner Margrethe Vestager’s claim last week that the two countries account for around 80 percent of state aid that has been approved under the relaxed state aid regime introduced during the Covid-19 pandemic.

Sven Giegold, state secretary of Germany’s economy ministry, pointed out that not all of the state aid money approved by the commission was actually used – but the fact that Germany and France were supposed to have so much fiscal space. Only confirmed the suspicions of many countries that they would have the fire-power to power their own industries.

Even some wealthy EU countries with plenty of fiscal space oppose the measure on principle.

While Thursday’s meeting will allow leaders to outline their positions, several diplomats say the real battle is just beginning.

The European Council will return to the issue in March, with the crunch point likely to come during June’s EU summit, when the conversation is expected to turn to the thorny issue of possible new EU finances.

This promises to be a long and divisive debate.

Giorgio Leali contributed reporting from Paris.