Luis Garicano is a former member of the European Parliament and is spending the academic year as a visiting professor of economics and strategy at Columbia Business School and the University of Chicago Booth School of Business. He is also a nonresident Scholar at Bruegel. Guy Verhofstadt is a Member of the European Parliament and former Prime Minister of Belgium.
of US President Joe Biden Inflation Reduction Act (IRA) challenges Europe.
With $370 billion to spend, the policy aims to ensure that the energy transition is firmly in the hands of US-based companies – and the European Union must respond. Yet the bloc’s initial response, as proposed by Commission President Ursula Von der Leyen and Commissioner Thierry Breton, risks making matters worse.
Relaxing state aid rules would only favor the few EU countries that already have the budgetary and technological means to react on their own – France, Germany and the Netherlands. And further divisions in our single market would further damage the prospects of already uncompetitive high-tech industries in the EU.
Instead, what the EU needs is a real European solution.
First, we must finally complete the single market. As things stand, the digital, telecommunications and capital markets remain fragmented, and if the current plethora of regulators remains in place, the rules will not be harmonised. Instead, we need an EU-wide regulator for digital and telecommunications markets, modeled on the US Federal Communication Commission, which would position the EU as a leader in the setting global standards.
In the same vein, harmonized corporate governance and disclosure rules are needed to strengthen our Capital Markets Union, and barriers to cross-border professional services should also be removed. The pan-European energy market also requires investment in new power transmission lines to increase the security and resilience of the bloc’s energy supplies.
Second, rather than relaxing state aid rules, we need to change competition rules, while taking into account global rivals. As we saw in the Alstom-Siemens affair, we facilitated the takeover of a European competitor by a Chinese company rather than the merger of two European companies. More realistic rules would allow us to create European companies capable of taking on the American and Chinese giants.
Third, the NextGenerationEU should be transformed into a permanent fiscal instrument, allowing Europe to invest in EU-wide projects that drive the green transition and help shape sustainable energy and digital innovation, rather than subsidize national governments. This funding should come from the EU’s new own resources – in particular the carbon border adjustment mechanism and the global minimum tax of 15% on multinational companies.
That – and only that – would create the possibility for the EU to match Biden’s IRA tax credits.
Finally, while subsidizing companies in the microchip and greenchip sectors may provide short-term benefits, such an approach ultimately fails to address the need for sustained basic research that spurs innovation.
Since Brexit, the EU has become a research minnow – just consider the ranking of the 25 most competitive universities globally published last year by the Times Higher Education Supplement. Directly reflecting the limited investment in research and development made by the EU – as well as the backward governance structures of universities in many EU countries – the list includes only one EU university, while Britain has four, the United States leads with 16 and China. comes with two. The Shanghai Ranking also tells a similar story.
The bloc once tried to build a leading European technology university, founding the European Institute of Technology (EIT) in 2008, but the effort fizzled when it came to deciding where to locate it. Culminating in the familiar European compromise of breaking it into pieces and rolling it out to multiple EU cities, the EIT struggled to attract talent and funding, and its impact on the European tech landscape was limited. .
Overall, European governments should avoid looking for national solutions to the energy crisis and digitalisation. Instead, we must work to complete the single market for capital, digital and financial services, provide common European funding for EU businesses, strengthen our competitiveness and invest in a thriving university system.
We cannot afford to remain so divided financially, economically, technologically and, ultimately, politically.