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Tag: Robert Habeck

  • Germany chokes on its own austerity medicine

    Germany chokes on its own austerity medicine

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    BERLIN — Germans gave the world schadenfreude for a reason. And southern Europe couldn’t be more pleased.

    For countries that spent years on the receiving end of Europe’s German-inspired fiscal Inquisition, there’s no sweeter sight than to see Germany splayed on the high altar of Teutonic parsimony. 

    The irony is that Germany put itself there on purpose and has no clue how it will find redemption.

    A jaw-dropping constitutional court ruling earlier this month effectively rendered the core of the German government’s legislative agenda null and void left the country in a collective shock. In order to circumvent Germany’s self-imposed deficit strictures, which give governments little room to spend more than they collect in taxes, Chancellor Olaf Scholz’s coalition relied on a network of “special funds” outside the main budget. Scholz was convinced the government could tap the money without violating the so-called debt brake.

    The court, in no uncertain terms, disagreed. The ruling raises questions about the government’s ability to access a total of €869 billion parked outside the federal budget in 29 “special funds.” The court’s move forced the government to both freeze new spending and put approval of next year’s budget on hold.

    Nearly two weeks after the decision, both the magnitude of the ruling and the reality that there’s no easy way out have become increasingly clear. Though Scholz has promised to come up with a new plan “very quickly,” few see a resolution without imposing austerity.

    The expectation in the Bundestag is that Scholz will find enough cuts to deal with the immediate €20 billion hole the decision created in next year’s budget, but not much more.

    In the meantime, his government is on edge. While Economy Minister Robert Habeck, a Green, has been telling any microphone he can find that Germany’s economic future is hanging in the balance, Finance Minister Christian Lindner has triggered panic and confusion by announcing a series of ill-defined spending freezes.

    On Thursday, the government was forced to deny a report that a special fund created to bolster Germany’s armed forces after Russia’s full-scale invasion of Ukraine would be affected by the cuts. 

    At a press conference with Italian Prime Minister Giorgia Meloni late Wednesday, Scholz endured the humiliation of a reporter asking his guest whether she considered Germany to be a reliable partner given its budget crisis. A magnanimous Meloni, whose country knows a thing or two about creative accounting, gave Scholz a shot in the arm, responding that in her experience he was “very reliable.” 

    Greek accounting

    Between the lines, the justices of Germany’s constitutional court suggested the use of the shadow funds by Scholz’s coalition amounted to a bookkeeping sleight of hand — the same sort of accounting alchemy Berlin upbraided Greece for more than a decade ago. Perhaps unwittingly, the court ruling echoed then-Chancellor Angela Merkel’s unsolicited advice to Athens during Greece’s debt crisis: “Now is the time to do the homework!”

    For eurozone countries with a recent history of debt trouble — a group that alongside Greece includes the likes of Spain, Portugal and Italy — Germany’s financial pickle must feel like déjà vu all over again. From 2010 onwards, they found themselves in the unenviable position of trying to explain to Wolfgang Schäuble, Merkel’s taskmaster finance minister, how they planned to return to the path of fiscal rectitude. At Schäuble’s urging, Greece nearly ditched the euro altogether.

    The expectation in the Bundestag is that Scholz will find enough cuts to deal with the immediate €20 billion hole the decision created in next year’s budget, but not much more | Odd Andersen/AFP via Getty Images

    In recent months, Germany has once again assumed the role of the fiscal scold in Brussels, where officials have been negotiating a new framework for the eurozone’s rulebook on government spending, known as the Stability and Growth Pact. The pact, which dates to 1997, has been suspended since the pandemic hit, but it is set to take effect again next year. Many countries want to loosen the rules given the huge budget pressures that have followed multiple crises in recent years. Berlin is open to reform but skeptical of granting its fellow euro countries too much leeway on spending.

    The latest budget mess certainly won’t help the Germans make their case.

    Simple hubris

    The allure of the strategy the court has now deemed illegal was that the government thought it could spend money it salted away in the special funds without violating Germany’s constitutional debt brake, which restricts the federal deficit to 0.35 percent of GDP, except in times of emergency.

    Put simply, Scholz’s coalition wanted to have its cake and eat it too, creating a veneer of fiscal discipline while spending freely to finance an ambitious agenda.

    Despite ample warning from legal experts that the government’s plan to repurpose a huge chunk of emergency pandemic-related funds might not withstand a court challenge, Scholz and his partners went ahead anyway. What’s more, they staked their entire political agenda on the assumption that the strategy would go off without a hitch.

    Last week’s court decision is the national equivalent of a rich kid being cut off from his trust fund: Daddy’s money is still there, but junior can’t touch it and has to exchange his Porsche for an Opel.

    What many in Berlin cite as the main reason for what they are calling der Schlamassel  (fiasco), however, is simple hubris.

    Scholz’s mild-mannered public persona belies a know-it-all approach to governing. A lawyer by training who has served for decades in the top ranks of German government, Scholz, at least in his own mind, is generally the smartest person in the room.  

    During coalition negotiations in 2021, Scholz sold the budget trick idea to his future partners — the conservative liberal Free Democrats (FDP) and the Greens — as a way to square the circle between the welfare agenda of his own Social Democrats (SPD), the Greens’ expensive climate agenda, and the FDP’s demands for fiscal rigor (or at least the appearance thereof).

    Indeed, it’s doubtful the coalition would have ever been formed in the first place without the plan. The Greens and FDP happily went along; after all Scholz, Germany’s finance minister from 2018-2021, knew what he was doing. Or so they thought. 

    Finance minister or ‘fuck-up’?

    Scholz’s role notwithstanding, his successor as finance minister, FDP leader Christian Lindner, shares a lot of the responsibility for the snafu, for the simple reason that it was his ministry that oversaw the strategy. 

    During the coalition talks in 2021, Lindner was torn between a desire to govern and the fiscal strictures long championed by his party. Scholz offered him what appeared to be an elegant way to do both. 

    Scholz’s role notwithstanding, his successor as finance minister, FDP leader Christian Lindner, shares a lot of the responsibility for the snafu | Sean Gallup/Getty Images

    When Lindner, who had never served in an executive government role before, was poised to secure the finance ministry, some critics questioned his qualifications to lead the financial affairs of Europe’s largest economy. 

    POLITICO once asked the question more directly: “Finance minister or ‘fuck-up’?” 

    Many Germans have no doubt made their determinations in recent weeks. 

    Green machine 

    In contrast to the FDP, the Greens, had no qualms about endorsing Scholz’s bookkeeping tricks. 

    When it comes to realizing the Greens’ environmental goals, the ends have long justified the means. 

    In the early 2000s, for example, party leaders sold Germans on the idea of switching off the country’s nuclear plants and transitioning to renewables. They won the argument by promising that the subsidies consumers would be forced to finance to pay for the rollout of solar and wind power wouldn’t cost more every month than a “scoop of ice cream.”

    In the end, the collective annual bill for German households was €25 billion, enough to have cornered the global ice cream market many times over. 

    The Greens’ ice cream strategy — secure difficult-to-reverse legislative commitments and worry about the financial details later — also informed their approach to what they call the “social, ecological transformation,” a plan to make Germany’s economy carbon neutral. 

    That’s why the shock of the court decision has hit the Greens hardest. After more than 15 years in opposition, the Greens saw the alliance with Scholz and Lindner as the culmination of their effort to convince Germans to embrace their ecological vision for the future. Just as the hoped-for revolution was within reach, it has slipped from their grasp.

    Habeck, the face of the Green transformation, has looked like a man at his wits’ end in recent days, making dire predictions about the coming economic Armageddon.

    “This marks a turning point for both the German economy and the job market,” Habeck told German public television this week, predicting that it would become much more difficult for the country to maintain the level of prosperity it has enjoyed for decades. 

    Road to perdition 

    For all his candor, Habeck failed to address the elephant in the room: It’s a fake debt crisis.

    There is no objective reason for Germany to be in this dilemma. A best-of-class credit rating means Berlin can borrow money on better terms than almost any country on the planet. With a budget deficit of 2.6 percent of GDP last year and a total debt load amounting to 66 percent of GDP, Germany is also well above average compared to its eurozone peers in terms of fiscal discipline — even counting the debt raised for the special funds. 

    The only reason Germany can’t spend the money in the special funds is not because it can’t afford to, but rather because it remains beholden to an almost religious fiscal orthodoxy that views deficit debt as the road to perdition. 

    That conviction prompted Germany to anchor the so-called debt brake in its constitution in 2009, thereby allowing the government to run only a minor deficit, barring a natural disaster or other emergency, such as a war. 

    For eurozone countries with a recent history of debt trouble — a group that alongside Greece includes the likes of Spain, Portugal and Italy — Germany’s financial pickle must feel like déjà vu all over again | Aris Messinis/AFP via Getty Images

    The constitutional amendment passed by a comfortable margin with broad support from both the Christian Democrats (CDU) and the SPD, which shared power in a grand coalition led by Merkel. At the time, Germany was still recovering from the shock triggered by the 2008 collapse of investment bank Lehman Brothers and had to commit billions to shore up its banking sector.

    The country’s federal government and states had begun planning a reform of fiscal rules even before the crisis. The emergency gave them additional impetus to pursue a debt brake enshrined in the constitution as a way to restore public trust. 

    In that respect, it worked as planned. As countries such as Greece and Spain struggled with their public finances in the years that followed, Germany’s debt brake looked prescient. 

    Even as southern Europe struggled, the German economy went into high gear powered by strong demand for its wares from Asia and North America, allowing the government to not just balance its budget but to run a string of surpluses, peaking in 2018 with a €58 billion windfall.

    Goodbye to all that

    The good times ended with the pandemic. Germany, along with the rest of the world, was forced to dig deep. It had the fiscal capacity to do so, however, as the pandemic justified lifting the debt brake in both 2020 and 2021.

    The fallout from Russia’s attack on Ukraine forced the government to do so again in 2022. 

    By drawing from special funds, Scholz and Lindner believed they could avoid a repeat in 2023. But the court’s ruling dashed that plan. 

    Long before the current crisis, it had become clear to most in government — both conservative and left-leaning — that the debt brake was a hampering investment in public infrastructure (Merkel’s coalition emphasized paying down debt instead of investing the surpluses) and, by extension, Germany’s economic competitiveness. Hence the liberal use of the now-closed special fund loophole. 

    Trouble is, even as many politicians have woken up to the perils of the debt brake, the public remains strongly in favor of it. Nearly two-thirds of Germans continue to support the measure, according to a poll published this week by Der Spiegel. 

    Repealing or even reforming the brake would require Germany’s political class not just to convince them otherwise, but also to muster a super majority in parliament, which at the moment is unlikely.  

    Late Thursday, the finance minister signaled that the debt brake would have to fall for 2023 as well. That means the government will have to retroactively declare an emergency — likely in connection with the war in Ukraine — and then hope that the constitutional court buys it. 

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    Matthew Karnitschnig

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  • What genocide? Volkswagen’s morally expensive bet on China

    What genocide? Volkswagen’s morally expensive bet on China

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    BERLIN — The blowback came in the form of cake.

    An annual meeting of Volkswagen shareholders in Berlin in May was disrupted by protesters, one of whom hurled the creamy confection at the assembled executives, forcing Chairman Hans Dieter Pötsch to flinch out of the way.

    Among the subjects of their ire: A car plant some 3,500 miles away in the Chinese region of Xinjiang, where Beijing has carried out a campaign of mass detention, reeducation and forced labor that the United States has described as genocide of the Uyghur ethnic minority.

    One topless woman in the room waved a banner with the words “End Uyghur Forced Labor” before the protesters were escorted away. Outside, other activists held up signs saying “Camps, forced labor, family separations: VW major shareholders in Lower Saxony must not remain silent about crimes against Uyghurs.”

    Volkswagen denies it has ever utilized forced labor in Xinjiang. But it has been less willing to grapple with the broader accusation: That by maintaining the facility at the request of Beijing, the company — and by extension the German government, which supported the carmaker’s investments in China — is providing political cover for crimes against humanity.

    “Even if there is no forced labor, it is such a big symbol for the Chinese government to show the world that they bring prosperity to the region,” said Eva Stocker, senior project officer from the World Uyghur Congress, an advocacy group for Uyghur rights and self-determination. “But we see it as a genocide.”

    The rising criticism over Volkswagen’s presence in Xinjiang has been accompanied by a shifting in the political and economic winds. Russia’s war on Ukraine has kicked off a broader conversation about strategic dependency, with officials in Brussels and Washington calling for “de-risking” with regard to Beijing. At the same time, worries about climate change are upending the automobile market, with Chinese electric carmakers preparing to challenge legacy brands in Europe on their own soil.

    This all poses a conundrum for Volkswagen, which led the Western charge into the Chinese market in the 1980s and remains dependent on business there for 15 percent of its pretax profit and 37 percent of its new car sales last year.

    China’s treatment of Uyghurs is unlikely to be central to the discussions as German Chancellor Olaf Scholz hosts a Chinese delegation led by Prime Minister Li Qiang this week. But Volkswagen’s relationship to China, and the human rights abuses being carried out there, is illustrative of Berlin’s increasingly uncomfortable dependency on Beijing — and the challenges Germany is likely to face as the West seeks to turn de-risking from a slogan into action.

    Slave labor

    Potential complicity in genocide is a charge to which one might expect Volkswagen to be sensitive. When the company was founded in 1937 by the national labor organization of the Nazi Party, it used concentration camp prisoners as slave labor. Hundreds of infants kept at a children’s home run by Volkswagen were starved to death.

    During the Holocaust, the Nazis sent their perceived enemies to extermination camps. In Xinjiang, human rights groups have documented mass incarceration, forced sterilization, the suppression of religious practices, including the burning of mosques, and the separation of hundreds of thousands of schoolchildren from their parents. Many believe these practices meet the definition of genocide as acts intended “to destroy, in whole or in part, a national, ethnic, racial or religious group.”

    The United States government has denounced human rights abuses in Xinjiang as genocide, as have national legislatures in France, the Netherlands, the United Kingdom, Lithuania and Canada. The German Bundestag has not, though Foreign Minister Annalena Baerbock has called for a ban on goods made with forced labor and for investigations into China’s actions in Xinjiang.

    Volkswagen denies it has ever utilized forced labor in Xinjiang | Freddy Chan/EPA via EFE

    Investigative journalists have found traces of forced labor camps within 15 miles of Volkswagen’s Xinjiang plant, which is a joint venture initiative with SAIC Motor, the largest state-owned automobile manufacturer in China. As POLITICO and other media reported, the use of forced labor was so rampant in the region that schoolchildren were organized by schools to carry out manual labor.

    “By the plant, there are seven concentration camps … so this is what Volkswagen cannot deny, but they say they are not connected with them,” Erkin Zunun, the chief coordinator of the World Uyghur Congress based in Munich, said. “Nobody can say 100 percent there is no connection to forced labor.”

    Ralf Brandstätter, the head of Volkswagen’s China operations, said after a visit to the Xinjiang plant in March that he’d found no evidence of forced labor. “I can talk to people and draw my conclusions. I can try and verify the facts [from joint venture partner SAIC], and that’s what I did,” Brandstätter said. “I didn’t find any contradictions,” he added, citing seven staffers he’d spoken to via translators.

    Over the past few years, European diplomats based in China have made repeated inquiries into Volkswagen’s presence in Xinjiang, according to three diplomats granted anonymity to speak frankly about their exchanges. Time and again, they received the same answer. “They always insist there’s no forced labor, and that the minorities they hire in the local plant are not forced labor,” one of them said. “They don’t care what happens outside the factory.”

    Volkswagen rejected the accusation that by being in Xinjiang, the company is complicit in the human rights violations being perpetrated there. “Will something change if Volkswagen leaves?” said a Volkswagen spokesperson speaking on condition of anonymity. “We have doubts about this.”

    The spokesperson said the company pays its employees at the plant on average 30 percent more than other automakers in the region and has had practically no staff turnover in recent years. “We are offering around 250 workers and their families a good … living in the region,” the spokesperson said.

    ‘Devil’s agreement’

    On its own, Volkswagen’s investment in Xinjiang — and the company’s decision to stay there despite human rights violations in the area — makes little reputational or economic sense.

    Since the COVID shutdowns, the plant hasn’t been used for vehicle assembly or production, but rather as a sorting center for cars heading to local dealerships. Last year, Volkswagen says some 10,000 cars — an average of less than 28 a day — were cleared through the facility, with plans to increase this over the next few years. Staff at the site carry out water resistance checks, quality controls and assess driver assistance systems, a spokesperson said.

    The investment has to be considered in the broader context of Volkswagen’s engagement with Beijing. Unrestricted access to the Chinese market is mission-critical for all German automakers, but for Volkswagen, it’s what makes it a global heavyweight brand. Nearly 40 percent of Volkswagen’s global car sales were in China last year, up from 31 percent a decade ago, according to data from the Center for Automotive Management in Cologne.

    According to a senior Western diplomat, Volkswagen’s Xinjiang presence is part of a “devil’s agreement” that the Chinese government imposed on the German car company 15 years ago. Under the deal, Volkswagen had to agree to build a new factory in Xinjiang — which was and has remained an economic backwater — in return for permission for a dozen new plants in the economically vibrant eastern coastal area, as well as the booming central provinces.

    “The misleading assumption is that we were forced, that we opened the plant as a push from the government in Beijing,” said the Volkswagen spokesperson. “That isn’t true. It was part of a greater plan — the Go West strategy,” referring to the company’s ambitions to expand into less developed parts of China.

    Today, pulling out would risk jeopardizing relations with Beijing, as China often treats expressions of concern about human rights violations in Xinjiang as endorsements of what it sees as U.S. pressure on the country.

    The presentation of the new Golf GTI at the Shanghai car show in 2021 | Hector Retamal/AFP via Getty Images

    Volkswagen is determined to live with its contractual obligation with SAIC to stay in Xinjiang at least until 2030, Volkswagen chief lobbyist Thomas Steg told journalists in March. “This plant is owned and operated by a non-controlled joint venture, all the decisions have to be taken unanimously,” the company spokesperson said.

    In a written statement, Volkswagen Group said it “stands firmly against” forced labor, adding it “takes its responsibility for human rights very seriously in all regions of the world, including China.”

    “In a globalized world, we can only really strengthen Germany as a business location if we maintain and further develop our relations with major economic players such as China,” it said.

    Green evolution

    While Volkswagen has traditionally enjoyed strong support from Berlin for its investments in China, the political winds back home have started to shift.

    The main push comes from the Green Party, a junior partner in Germany’s coalition government, and its calls for “values-driven” diplomacy. In May 2022, the German Economy Ministry, led by Green Party heavyweight Robert Habeck, announced it would stop all investment guarantee schemes for companies looking to invest in the Xinjiang region of China due to the deteriorating human rights situation.

    Volkswagen’s investment guarantees were not extended because the interministerial committee that decides on them determined that the company “has too little control and knowledge … within the joint venture to adequately counter the human rights risks,” a German official said.

    Chinese carmakers with cheaper battery technology are making a play for Europe | Tobias Schwarz/AFP via Getty Images

    Foreign Minister Baerbock has also taken a tougher line, warning companies that they won’t be bailed out with taxpayers’ money if “things go wrong” in other parts of the world. Her stance has not gone unnoticed by Beijing. When Baerbock visited China in April, her counterpart Qin Gang warned Berlin it should be thinking about its business interests.

    “Both sides should maintain and advance existing cooperation, create a favorable environment and stable expectations for cooperation between enterprises of the two countries, and provide stronger growth drivers for the global economy,” Qin said.

    Germany’s first National Security Strategy, released last week, criticizes China for disregarding human rights, although the document does not go further into detail. Berlin also plans to release a dedicated China strategy in July.

    For the automaker, the Green Party’s China policy has become a headache. “It’s crazy what Habeck and Baerbock are doing at the moment … [They] just try to bring confrontation to the world,” said Ferdinand Dudenhöffer, director of Center for Automotive Research, an industry group with close ties to Volkswagen and to Chinese carmakers. “It’s really crazy.”

    Dudenhöffer insisted the German carmaker had done everything within its capacity to ensure good labor standards in the Xinjiang plant. He didn’t believe the company had broached with Beijing the possibility of the plant’s closure or the transfer of its ownership to its Chinese partners. “I think they discussed it internally, but … if you start to talk about that issue [with the Chinese], then you start to go into opposition with the most important market you have in the world,” he said.

    The EV threat

    The irony is that Volkswagen’s morally expensive bet may not even pay off.

    After enjoying decades of market leadership, the German auto giant is struggling to cope with the impending demise of the combustion engine and is facing unprecedented challenges from Chinese-made electric vehicles, which are now set to become the “greatest risk” facing European carmakers, according to a report by Allianz Trade.

    Even as Volkswagen doubles down on the Chinese market, Chinese carmakers with cheaper battery technology are making a play for Europe, with brands like BYD, Great Wall, Nio and Xpeng launching across the Continent.

    While electric vehicles only make up around 5 percent of European sales, EU regulators have mandated a phaseout of the combustion engine by 2035. One analysis predicts Chinese imports could make up nearly a fifth of all European sales by 2025 — bad news for local legacy brands.

    Even if Volkswagen does find a way to hold out at home, its investments in China could be at risk if Europe raises trade barriers against Chinese vehicles, as France has been calling for. Such a move would almost certainly lead to reciprocal action from Beijing, which has not shied away from using its regulatory muscles to push its diplomatic interests.

    In 2017, for example, when South Korea sought to buy a missile defense system from the U.S. in order to stave off the threat from North Korea, Beijing vocally opposed the move, and sales of Hyundai and Kia models subsequently plummeted, sparking rows with dealerships and plant closures.

    Under President Xi Jinping, China has also sought to diminish the market share of foreign companies. In telecoms, for example, European players like Ericsson and Nokia have been crowded out by homegrown heavyweights Huawei and ZTE. China may have needed Western companies to jump-start its industrial development, but with Xi seeking to present China as an alternative to the West, that utility is quickly fading.

    In other words, for Volkswagen’s executives, cake-throwing protesters may be the least of their worries.

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    Stuart Lau , Joshua Posaner and Hans von der Burchard

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  • German Christian Democrats rewrite Merkel’s China playbook

    German Christian Democrats rewrite Merkel’s China playbook

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    BERLIN — Germany’s Christian Democrats, the country’s largest opposition group, are planning to shift away from the pragmatic stance toward China that characterized Angela Merkel’s 16 years as chancellor, claiming that maintaining peace through trade has failed.

    It’s a remarkable course change for the conservative party that pursued a strategy of rapprochement and economic interdependence toward China and Russia during Merkel’s decade and a half in power. The volte-face has been spurred by Moscow’s invasion of Ukraine and Beijing’s increasingly aggressive stance — both economically and politically — in the Asian region and beyond.

    According to a draft position paper seen by POLITICO, the conservatives say the idea of keeping peace through economic cooperation “has failed with regard to Russia, but increasingly also China.” The 22-page paper, which is to be adopted by the center-right Christian Democratic Union/Christian Social Union (CDU/CSU) parliamentary group in the Bundestag around Easter, outlines key points for a new China policy.

    In a world order that is changing after Russia’s full-scale invasion of Ukraine, Chancellor Olaf Scholz last year announced a Zeitenwende, or major turning point, in German security policy. Economy Minister Robert Habeck and Foreign Minister Annalena Baerbock, in particular, have stressed the necessity of a comprehensive China strategy, an idea already mentioned in the coalition agreement to form Scholz’s government. Their ministries have elaborated two different drafts, but a comprehensive strategy is not yet in sight.

    “We realize at this point in time, with some surprise, which is why we prepared and presented this paper, that the German government is significantly behind schedule on key foreign and security policy documents,” said CDU foreign policy lawmaker Johann Wadephul.

    The foreword to the position paper states that “the rise of communist China is the central, epochal challenge of the 21st century for all states seeking to preserve, strengthen, and sustain the rules-based international order.” The CDU/CSU parliamentary group is open to working out a “national consensus” with Scholz’s government. That consensus, the group says, must be embedded in the national security strategy and in a European China strategy.

    The relationship with China is described in the same triad fashion that was formulated by the European Commission in 2019 and is in the coalition agreement of the current German government. Under this strategy, the Asian country is seen as a partner, economic competitor and systemic rival.

    But the CDU/CSU group’s paper says policy should move away from a Beijing-friendly, pragmatic stance toward China, especially on trade. “We should not close our eyes to the fact that China has shifted the balance on its own initiative and clearly pushed the core of the relationship toward systemic rivalry,” the text states.

    Such an emphasis from the conservative group is remarkable given its long-held preference for economic cooperation and political rapprochement toward both China and Russia under Merkel. Before leaving office, for example, Merkel pushed a major EU-China investment deal over the line, though it was later essentially frozen by the European Parliament due to Beijing’s sanctions against MEPs.

    “I say to this also self-critically [that] this means for the CDU/CSU a certain new approach in China policy after a 16-year government period,” Wadephul said.

    The paper calls for a “Zeitenwende in China policy,” too, concluding that Germany should respond “with the ability and its own strength to compete” wherever China seeks and forces competition; should build up its resilience and defensive capability and form as well as expand alliances and partnerships with interest and value partners; and demonstrate a willingness to partner where it is openly, transparently and reliably embraced by China.

    The CDU/CSU paper calls for a European China strategy and a “European China Council” with EU neighbors for better cooperation. A central point is also strengthening reciprocity and European as well as German sovereignty.

    “Decoupling from China is neither realistic nor desirable from a German and European perspective,” according to the text.

    To better monitor dependencies, the paper proposes an expert commission in the Bundestag that would present an annual “China check” on dependencies in trade, technology, raw materials and foreign trade, with the overall aim of developing a “de-risking” strategy.

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    Gabriel Rinaldi

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  • Toxic Germanity and the battle for ‘das Auto’

    Toxic Germanity and the battle for ‘das Auto’

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    BERLIN — Europe’s worst-kept secret is that the Germans ultimately decide everything.

    “I’ll never forget how all the other member states held back in anticipation, waiting to see what the Germans would do,” a senior U.K. official, recalling his time in Brussels, recently told a private dinner of MPs and other German officials in Berlin.

    The recollection was meant as a compliment, one the official hoped would ingratiate him with the Germans around the table.

    Sad thing is it worked.

    The second worst-kept secret in Brussels is that for all the “peace project” kumbaya, the Germans actually enjoy dominating the place. That said, even stalwart veterans of the EU bubble were hard-pressed in recent days to cite a more blatant example of toxic Germanity than Berlin’s last-minute intervention to save the internal combustion engine.

    To recap: Last week, EU countries were expected to rubber-stamp a package of measures aimed at ridding Europe’s roads of fuel-burning autos. Under the plan, the EU would prohibit new registrations of cars powered by internal combustion engines beginning in 2035. The sweeping deal, the culmination of years of painstaking negotiations in Brussels and European capitals, is a pillar of the EU’s ambitious goal to become carbon neutral by 2050.

    Berlin’s 11th-hour intervention on a deal everyone believed was done and dusted not only left the EU’s environmental policy in limbo, it also laid bare the bloc’s power vertical in all its dubious Teutonic glory. The message: Germany is no longer even trying to hide its power.

    Enter France.

    “For the French, the situation also represents an opportunity and they are never ones to waste a good crisis,” an EU diplomat said. “The more they can contribute to the idea that Germany goes it alone, the more it strengthens the view that the Germans are an unreliable partner in Europe.”

    Germany’s unprecedented move has given rise to fears that other countries will try to follow its example and hold EU reforms hostage by threatening a last-minute veto to win concessions, in effect rewriting the rules of engagement.

    Germans may not be known for their finesse, but even so, Berlin’s bare-knuckle tactics to save the engine have not just shocked Brussels veterans, it’s angered them.  

    That’s why the real significance of the standoff has less to do with CO2 emissions than how Brussels works. One big concern among EU insiders is that the coalition Germany has assembled to save the car, which includes the likes of Poland, Austria, the Czech Republic and Bulgaria, will go rogue as a bloc on other fronts, with or without German support.

    Berlin’s views on “the future of mobility” were so clear that Mercedes, VW and BMW pledged to shift to all-electric by 2035 | Photo by Sean Gallup/Getty Images

    It’s easy to mock the circuitous nature of EU decision-making, the push and pull between the European Commission, Parliament and Council, communicated in the opaque dialect of Brussels’ earnest eurocrats.

    Boring as it may be, the alchemy produces bona fide results that legitimize and sustain the EU.  

    That Germany is willing to tinker with this delicate balance betrays either ignorance in the current regime of how the EU works, ambivalence, or both.

    One could argue with justification that Germany was never going to kill the golden goose. Invented and perfected in Germany over more than a century by the likes of Mercedes, BMW and Audi, the internal combustion engine has been the wellspring of German pride and prosperity for generations.

    The image of a piston-fired Porsche 911 zooming down the autobahn is as core to German identity as sex is to the French.

    Take that away, what’s left (aside from beer and bratwurst)?

    Indeed, considering that the country’s automakers haven’t proved particularly adept at manufacturing electric cars (or more specifically the batteries at the heart of the vehicles), there was a strong case for Germany to develop low-emission synthetic fuels that would keep the internal combustion engine alive.  

    Berlin had at least a decade to do so.

    Thing is, it didn’t, choosing instead to pour billions into subsidizing the purchase of electric vehicles and the infrastructure to recharge them (full disclosure: the author is a beneficiary of such a subsidy).  

    What’s more, Germany also encouraged other European countries to follow suit. In fact, Berlin’s views on “the future of mobility” were so clear that Mercedes, VW and BMW pledged to shift to all-electric by 2035. The cluster of countries that have served as the workbench for those companies, from Slovakia to Hungary and Austria, all agreed to go along.

    That’s why the German insistence this month that the EU carve out an exception to the engine ban for cars powered by synthetic, so-called e-fuels has caught the rest of Europe flat-footed.

    Why now? In a word, politics.

    Germans may not be known for their finesse, but even so, Berlin’s bare-knuckle tactics to save the engine have not just shocked Brussels veterans, it’s angered them | John Thys/AFP

    Chancellor Olaf Scholz’s Social Democrats have dropped below 20 percent in a number of recent polls, putting them more than 10 percentage points behind the first-place Christian Democrats.

    Scholz’s smallest coalition partner, the business-oriented Free Democrats (FDP), are in even worse shape. The party fared miserably in a string of recent regional elections and in national polls, it is teetering perilously close to the 5 percent threshold parties need to surpass for entry into parliament.

    Party leader Christian Lindner, who used to drive souped-up Porsches around the storied Nürburgring race track, has vowed to save the engine from the clutches of the Green lobby.

    Scholz, keenly aware that his party’s base also remains attached to “das Auto,” has been happy to let him try and has so far not stepped in to intervene.

    About 1 million Germans work in the auto industry and many of those jobs — especially at suppliers — would be lost if the engine is killed for the simple reason that electric cars have far fewer (and different) parts than traditional automobiles.

    The real mystery is why the Greens, the other party in Germany’s governing triumvirate, have not done more to resolve the crisis. Not only has the environmental party championed the engine ban for years, but it is also the most pro-European party in the government and would normally be at pains to keep Berlin from even appearing to undermine Brussels.    

    Yet Green Vice Chancellor Robert Habeck has largely been silent on the issue. Far from the fray in Europe, he was last spotted in the Amazon having his face painted by an indigenous girl during a swing through the region.

    In a bid to defuse the standoff ahead of next week’s EU leaders’ summit, the German government sent a letter to the Commission on Wednesday, spelling out what it wants in return for lifting its blockade. Its chief demand — a broad exception for e-fuels — was already rejected by the Parliament and other institutions during the original negotiations over the package.

    Reversing that would require the deal to be reopened.

    The French are sure to cry foul.

    And then Germany will push ahead anyway.

    Joshua Posaner contributed reporting.

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    Matthew Karnitschnig

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  • Germany ready to let Poland send Leopard tanks to Ukraine: foreign minister

    Germany ready to let Poland send Leopard tanks to Ukraine: foreign minister

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    PARIS — Germany “would not stand in the way” if Poland or other allies asked for permission to send their German-built Leopard tanks to Ukraine, Foreign Minister Annalena Baerbock said on Sunday.

    The remarks by the Green politician, who was interviewed by French TV LCI on the sidelines of a Franco-German summit in Paris, came in response to comments by Polish Prime Minister Mateusz Morawiecki, who has raised pressure on Berlin in recent days by saying that Poland is willing to supply Kyiv with Leopard tanks, which would require German approval.

    Morawiecki even suggested that Warsaw was ready to send those tanks without Berlin’s consent.

    Baerbock, however, stressed that “we have not been asked so far” by Poland for such permission. “If we were asked, we would not stand in the way,” she added.

    German officials have gotten increasingly frustrated in recent days by what they perceive as a “media blame-game” by Poland, as Warsaw has repeatedly suggested that Germany was hampering plans to send Leopard tanks to Ukraine, although it appears that the necessary request for export permission has not been made yet.

    Germany is, however, still dragging its feet when it comes to the bigger question of whether it would be willing to send its own Leopard tanks to Ukraine, for example as part of a broader coalition with Poland and other countries like Finland and Denmark.

    Pressed on that point during a press conference in Paris on Sunday, German Chancellor Olaf Scholz avoided giving a clear answer, stressing instead that Berlin had never ceased supporting Ukraine with weapons deliveries and took its decisions in cooperation with its allies.

    Poland’s Morawiecki said on Sunday that his country was ready to build a “smaller coalition” for sending tanks to Ukraine without Germany.

    Baerbock’s comments are therefore also raising the pressure on Scholz to take a clearer position on the tank issue — at least when it comes to granting export permissions to other countries.

    After Vice Chancellor Robert Habeck, also from the Greens, said earlier that Germany “should not stand in the way” of permitting such deliveries, the foreign minister’s even more definitive statement makes it even harder for Scholz to take a different position.

    Ukraine has been appealing to Germany and other Western nations to supply modern Western-made battle tanks in order to fend off an expected Russian spring offensive.

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  • Germany’s Scholz changes defense ministers — but not his reluctance on tanks (yet)

    Germany’s Scholz changes defense ministers — but not his reluctance on tanks (yet)

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    BERLIN — Olaf Scholz has once again rebooted his security policy, nominating a new defense minister to take the reins. But when it comes to his reluctance to send battle tanks to Ukraine, the German chancellor is still waiting for the U.S. to take the lead.

    Tuesday’s nomination of Boris Pistorius puts an end to a growing government crisis that had left Europe’s biggest economy for several days effectively without clear military leadership. But Pistorius — whom Scholz hailed as having “the strength and calmness that is needed in view of the Zeitenwende,” Germany’s historic military revamp — will have little time to get adjusted to the new role.

    Pressure is mounting on Germany to participate in a broader alliance of countries that would supply Ukraine’s army with modern Leopard 2 battle tanks. And moments after being sworn in on Thursday, the new defense minister is scheduled to meet U.S. Defense Secretary Lloyd Austin, who is coming to Berlin before a key meeting Friday in Germany where allies will discuss tank deliveries for Ukraine.

    Pistorius is replacing Christine Lambrecht, a loyal defender of Scholz’s cautious tank stance who resigned on Monday after a series of gaffes and missteps that weighed on Berlin’s reputation.

    That means expectations are high for the 62-year-old Pistorius, who is from Scholz’s center-left Social Democratic Party (SPD). Yet Social Democratic lawmakers say the appointment by itself won’t tilt the scales on supplying Ukraine with tanks.

    “I don’t think one has anything to do with the other,” Wolfgang Hellmich, the SPD’s defense policy spokesperson, told POLITICO.

    Kristian Klinck, an SPD member of the Bundestag’s defense committee and an army reserve officer, also said he didn’t see “any significant change in this regard because of the personnel change in the defense ministry.”

    While stressing that Pistorius will play a role in deciding on further military aid for Ukraine, Klinck said “this very important question of the delivery of battle tanks” would be decided “primarily in the chancellor’s office” and in coordination with other allies.

    Scholz himself reiterated his reluctant position during an interview with Bloomberg on Tuesday, saying that any decisions on further weapon supplies could only be taken in close coordination with allies.

    That argument for holding back tank deliveries has started to sound less convincing, however, given the calls from allies like Poland to jointly send Leopards, and after the U.K. announced it would supply Ukraine with its own Challenger 2 battle tanks.

    German officials have indicated, though, that Scholz would likely move if he received backing from the U.S., especially if Washington also agreed to send battle tanks.

    During a call between Scholz and U.S. President Joe Biden on Tuesday, both leaders discussed “effective, sustainable and closely coordinated” military support for Ukraine, according to a German spokesperson. This has raised expectations that a breakthrough on tanks could still be feasible.

    Pressure on Scholz

    Green MP Anton Hofreiter, chair of the Bundestag’s European affairs committee and a long-standing critic of Scholz’s cautious position, said it was time for the chancellor to act.

    “The decision to supply tanks ultimately rests with the chancellor. Behind him is his Social Democratic Party, which unfortunately is still often under the illusion that relations with Russia can be normalized again and that Moscow should therefore not be provoked too much,” Hofreiter told POLITICO.

    Anton Hofreiter, co-head of the German Green Party Bundestag faction | Sean Gallup/Getty Images

    Hofreiter, whose Green party is part of Germany’s government coalition alongside Scholz’s SPD and the pro-business Free Democratic Party, argued Germany was presenting “an unclear, wavering and hesitant picture” of its military support for Ukraine.

    “Allies are now watching Berlin very closely: If we continue to close our minds on the Leopard issue, Germany would be increasingly isolated in Europe,” he said.

    Scholz’s vice chancellor, Robert Habeck, also from the Greens, upped the pressure on the chancellor last week, saying Berlin should not stand in the way if allies like Poland, Finland or Spain want to send their own Leopard 2 tanks to Ukraine — an important demand because Berlin must authorize any re-export of the German-made battle tanks.

    The government’s deputy spokesperson later clarified that there were “no differences” on the issue between Habeck and Scholz, suggesting the chancellor would support his deputy’s line.

    The remarks raised expectations that Berlin may use Friday’s meeting to at least give its allies the green light on sending Leopard tanks. But it remains uncertain whether Scholz will join the coalition and offer Germany’s own tanks, either from the German army or defense industry stocks.

    Scholz said Tuesday that he would not debate these questions in public.

    There are also questions in Germany about whether the recent political crisis within the defense ministry has left Scholz weakened. Scholz personally chose Lambrecht and defended her until the end, despite concerns she had failed to properly spend a reject influx of defense funds and let Germany’s ammunition stockpiles run low (in addition to her gaffes and waning standing among the military).

    The SPD’s Hellmich, however, expressed optimism that these shortcomings would now improve with the newly appointed minister.

    “Boris Pistorius has been in the political business for a long time and is knowledgeable on the subject. He sits on the defense committee of the Bundesrat [Germany’s upper house of parliament] and is a member of the NATO Parliamentary Assembly,” Hellmich said.

    “That’s why the troops are in good hands with him.”

    This article was updated to include details of a call between Olaf Scholz and Joe Biden.

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  • Thierry Breton: Brussels’ bulldozer digs in against US

    Thierry Breton: Brussels’ bulldozer digs in against US

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    Thierry Breton is winning the war of ideas in Brussels.

    The ex-CEO is a political whirlwind with a gigantic portfolio as internal market chief, the backing of French President Emmanuel Macron and lots of proposals. He’s been touring European Union capitals to win support for plans to shield Europe’s industry from crippling energy prices, American subsidies and “naive” EU free traders.

    France’s decades-long push for more state intervention is finally finding some echo in Berlin and the 13th floor of the Berlaymont building, occupied by European Commission President Ursula von der Leyen, who largely owes her job to Macron.

    Omnipresent and ebullient, Breton is playing a key role in marshaling industry and political support for sweeping but so far vague plans to boost clean tech, secure key raw materials and overhaul EU checks on government support that he blasts as too slow to help companies.

    “Of course there is resistance; my job is precisely to manage and align everyone,” he told French TV this week of his January meetings with Spanish, Polish and Belgian leaders to flog a forthcoming industrial policy push that could be a turning point in how far European governments will finance companies.

    Time is short. Von der Leyen wants to line up proposals for a February summit. European industry is complaining that it can’t swallow far higher energy prices and tighter regulation for much longer, with at least one announcing a European shutdown and an Asian expansion.

    Breton said governments don’t need convincing on the need for rapid action. But he’s running up against one of Europe’s sacred cows — EU state aid rules run by Executive Vice President Margrethe Vestager that curb government support with lengthy checks to make sure companies don’t get unfair help. She’s also under intense pressure to preserve a “level playing field” as smaller countries worry about German and French financial firepower.

    The French internal market commissioner’s bullish style often sees him act as if he’s got a role in subsidies. In the fall, he sent a letter to EU countries asking them to send views on emergency state aid rules to the internal market department, which is under his supervision, two EU officials recalled. 

    In a meeting with European diplomats, a Commission representative had to correct it, the EU officials said, asking capitals to make sure the input goes instead to the competition department overseen by Vestager. 

    Europe First

    While Breton doesn’t like to be called a protectionist, his latest mission has been to protect Europe from its transatlantic friend.

    As early as September, one Commission official said, the Frenchman was mandated by Europe’s industry to speak out against U.S. President Joe Biden’s Inflation Reduction Act, which provides tax credits for U.S.-made electric cars and support to American battery supply chains.

    U.S President Joe Biden gives remarks during an event celebrating the passage of the Inflation Reduction Act on September 13, 2022 | Anna Moneymaker/Getty Images

    His Paris-backed campaign charged ahead while EU officials and diplomats tiptoed around the subject. Some within the Commission headquarters found his bad cop routine helpful in keeping pressure on the U.S. 

    “He’s been constructive, though clearly disruptive,” said Tyson Barker, head of the technology and global affairs program at the German Council of Foreign Relations.

    The Frenchman has even pitched himself as the bloc’s “sheriff” against Silicon Valley giants, warning billionaire Elon Musk that an overhaul of the Twitter social network can only go so far since “in Europe, the bird will fly by our rules.”

    “Big Tech companies only understand balances of power,” said Cédric O, a former French digital minister who worked with Breton during the French EU Council presidency. “When [Breton and Musk] see each other, it necessarily remains cordial, but Breton shows his teeth and rightly so. It’s his job.”

    Breton can even surprise his own services, according to two EU officials. In May, the Commission’s department responsible for digital policy — DG CONNECT — was caught off guard when Breton announced in the press that he would unveil plans by year-end to make sure that technology giants forked out for telecoms networks. 

    In so doing, Breton — who was CEO of France Télécom in the early 2000s — resurrected a long-dormant and fractious policy debate that had been put to rest almost a decade ago, when erstwhile Digital Commissioner Neelie Kroes ordered Europe’s telecoms operators to “adapt or die” rather than seek money from content providers.

    After Breton’s commitments, the Commission’s services were soon scrambling to develop some sort of a coherent policy program to deliver on the Frenchman’s comments. A consultation is scheduled for early this year. 

    Carte blanche

    Breton is a rare creature in the halls of the Berlaymont, where policy is hatched slowly after extensive consultation. To a former CEO with a broad remit — his portfolio runs from the expanse of space to the tiniest of microchips — rapid reaction matters more than treading on toes or singing from the hymn sheet. This often sees him floating ideas and then pulling back.

    Last year he alarmed environmentalists by raising the prospect of a U-turn on the EU’s polluting car ban. He wagged his finger at German Chancellor Olaf Scholz for a solo trip to China. He called for nuclear energy to be considered green. He has pushed out grand projects — such as industrial alliances on batteries and cloud, or a cyber shield — that he doesn’t always follow up on.

    He’s even pushed forward a multibillion-euro EU communication satellite program dubbed Iris², a favorite of French aerospace companies, that will see the bloc build a rival to Musk’s space-based Starlink broadband constellation.

    “It’s clear that he’s been given more free rein than others,” said one EU official. “He has von der Leyen’s ear,” the official added, noting that Breton enjoys “privileged access” to the Commission president — who may be mindful that she’ll need French support for a second term.

    According to an official, Breton “has von der Leyen’s ear” and enjoys “privileged access” to the Commission president | Valeria Mongeli/AFP via Getty Images

    Indeed, Breton’s massive role was partly designed as a counterweight to a German president.

    “There is a criticism of von der Leyen for being too German,” explained Sébastien Maillard, director of the Jacques Delors Institute think tank. “There may inevitably be a division of roles between them — [where Breton is] a counterbalance.”

    He’s been called an “unguided missile,” but more often than not, the Frenchman has Paris’ backing when going off script. His October op-ed with Italian colleague Paolo Gentiloni, which called for greater European financial solidarity, was part of France’s agenda, according to one high-ranking Commission official.

    “When he went out in the press with Gentiloni against Scholz’s €200 billion, he was clearly doing the job for Macron,” the official said. 

    His November call for a rethink on the 2035 car engine ban came just after a week after critical green legislation had been finalized by Commission Executive Vice President Frans Timmermans and jarred with the EU’s own position at the COP 27 climate summit in Indonesia. But it aped the position of French auto industry captains, such as Stellantis CEO Carlos Tavares and Renault’s Luca de Meo, who wanted Brussels to slam the brakes on the climate drive.

    Breton had not coordinated his car comments with colleagues in advance, according to two Commission officials.

    Less than 10 days later, French Prime Minister Elisabeth Borne echoed caution about the “extremely ambitious” engine ban and warned that pivoting to electric car manufacturing was daunting.

    Going A-list

    Breton acknowledged himself that he wasn’t Macron’s first choice for the critical EU post, telling POLITICO at a live event that he was a “plan B commissioner.”

    Asked if he was targeting an A-list job for the new Commission mandate in 2024, he said he “may be able to consider a new plan B assignment — if it is a plan B.”

    “He is thinking about the future,” said one EU official. “Look at his LinkedIn posts. He is thinking past the next European elections. He definitely wants to convince Macron to get an expanded portfolio.” 

    Grabbing the Commission’s top job may be tricky, relying on how EU leaders will line up, according to multiple EU and French officials. 

    There are other jobs, including overturning the unwritten law that no French or German candidate can hold the economically powerful competition portfolio. Another option could be becoming Europe’s official digital czar, combining the enforcement powers of the Digital Services Act and the Digital Markets Act into a supranational digital enforcement agency, one EU official said.

    Breton has shrugged off speculation on his long-term plans.

    “All my life, I have been informed of my next potential job 15 minutes before,” he said last month.

    Jakob Hanke Vela, Stuart Lau, Barbara Moens, Camille Gijs and Mark Scott contributed reporting.

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  • Europe accuses US of profiting from war

    Europe accuses US of profiting from war

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    Nine months after invading Ukraine, Vladimir Putin is beginning to fracture the West. 

    Top European officials are furious with Joe Biden’s administration and now accuse the Americans of making a fortune from the war, while EU countries suffer. 

    “The fact is, if you look at it soberly, the country that is most profiting from this war is the U.S. because they are selling more gas and at higher prices, and because they are selling more weapons,” one senior official told POLITICO. 

    The explosive comments — backed in public and private by officials, diplomats and ministers elsewhere — follow mounting anger in Europe over American subsidies that threaten to wreck European industry. The Kremlin is likely to welcome the poisoning of the atmosphere among Western allies. 

    “We are really at a historic juncture,” the senior EU official said, arguing that the double hit of trade disruption from U.S. subsidies and high energy prices risks turning public opinion against both the war effort and the transatlantic alliance. “America needs to realize that public opinion is shifting in many EU countries.”

    The EU’s chief diplomat Josep Borrell called on Washington to respond to European concerns. “Americans — our friends — take decisions which have an economic impact on us,” he said in an interview with POLITICO.

    The biggest point of tension in recent weeks has been Biden’s green subsidies and taxes that Brussels says unfairly tilt trade away from the EU and threaten to destroy European industries. Despite formal objections from Europe, Washington has so far shown no sign of backing down. 

    At the same time, the disruption caused by Putin’s invasion of Ukraine is tipping European economies into recession, with inflation rocketing and a devastating squeeze on energy supplies threatening blackouts and rationing this winter. 

    As they attempt to reduce their reliance on Russian energy, EU countries are turning to gas from the U.S. instead — but the price Europeans pay is almost four times as high as the same fuel costs in America. Then there’s the likely surge in orders for American-made military kit as European armies run short after sending weapons to Ukraine. 

    It’s all got too much for top officials in Brussels and other EU capitals. French President Emmanuel Macron said high U.S. gas prices were not “friendly” and Germany’s economy minister has called on Washington to show more “solidarity” and help reduce energy costs. 

    Ministers and diplomats based elsewhere in the bloc voiced frustration at the way Biden’s government simply ignores the impact of its domestic economic policies on European allies. 

    When EU leaders tackled Biden over high U.S. gas prices at the G20 meeting in Bali last week, the American president simply seemed unaware of the issue, according to the senior official quoted above. Other EU officials and diplomats agreed that American ignorance about the consequences for Europe was a major problem. 

    “The Europeans are discernibly frustrated about the lack of prior information and consultation,” said David Kleimann of the Bruegel think tank.

    Officials on both sides of the Atlantic recognize the risks that the increasingly toxic atmosphere will have for the Western alliance. The bickering is exactly what Putin would wish for, EU and U.S. diplomats agreed. 

    The growing dispute over Biden’s Inflation Reduction Act (IRA) — a huge tax, climate and health care package — has put fears over a transatlantic trade war high on the political agenda again. EU trade ministers are due to discuss their response on Friday as officials in Brussels draw up plans for an emergency war chest of subsidies to save European industries from collapse. 

    “The Inflation Reduction Act is very worrying,” said Dutch Trade Minister Liesje Schreinemacher. “The potential impact on the European economy is very big.”

    “The U.S. is following a domestic agenda, which is regrettably protectionist and discriminates against U.S. allies,” said Tonino Picula, the European Parliament’s lead person on the transatlantic relationship.

    An American official stressed the price setting for European buyers of gas reflects private market decisions and is not the result of any U.S. government policy or action. “U.S. companies have been transparent and reliable suppliers of natural gas to Europe,” the official said. Exporting capacity has also been limited by an accident in June that forced a key facility to shut down.

    In most cases, the official added, the difference between the export and import prices doesn’t go to U.S. LNG exporters, but to companies reselling the gas within the EU. The largest European holder of long-term U.S. gas contracts is France’s TotalEnergies for example. 

    It’s not a new argument from the American side but it doesn’t seem to be convincing the Europeans. “The United States sells us its gas with a multiplier effect of four when it crosses the Atlantic,” European Commissioner for the Internal Market Thierry Breton said on French TV on Wednesday. “Of course the Americans are our allies … but when something goes wrong it is necessary also between allies to say it.”

    Cheaper energy has quickly become a huge competitive advantage for American companies, too. Businesses are planning new investments in the U.S. or even relocating their existing businesses away from Europe to American factories. Just this week, chemical multinational Solvay announced it is choosing the U.S. over Europe for new investments, in the latest of a series of similar announcements from key EU industrial giants. 

    Allies or not?

    Despite the energy disagreements, it wasn’t until Washington announced a $369 billion industrial subsidy scheme to support green industries under the Inflation Reduction Act that Brussels went into full-blown panic mode.

    “The Inflation Reduction Act has changed everything,” one EU diplomat said. “Is Washington still our ally or not?”

    For Biden, the legislation is a historic climate achievement. “This is not a zero-sum game,” the U.S. official said. “The IRA will grow the pie for clean energy investments, not split it.” 

    But the EU sees that differently. An official from France’s foreign affairs ministry said the diagnosis is clear: These are “discriminatory subsidies that will distort competition.” French Economy Minister Bruno Le Maire this week even accused the U.S. of going down China’s path of economic isolationism, urging Brussels to replicate such an approach. “Europe must not be the last of the Mohicans,” he said.

    The EU is preparing its responses, such as a big subsidy push to prevent European industry from being wiped out by American rivals. “We are experiencing a creeping crisis of trust on trade issues in this relationship,” said German MEP Reinhard Bütikofer. 

    “At some point, you have to assert yourself,” said French MEP Marie-Pierre Vedrenne. “We are in a world of power struggles. When you arm-wrestle, if you are not muscular, if you are not prepared both physically and mentally, you lose.”

    Behind the scenes, there is also growing irritation about the money flowing into the American defense sector.

    The U.S. has by far been the largest provider of military aid to Ukraine, supplying more than $15.2 billion in weapons and equipment since the start of the war. The EU has so far provided about €8 billion of military equipment to Ukraine, according to Borrell.

    According to one senior official from a European capital, restocking of some sophisticated weapons may take “years” because of problems in the supply chain and the production of chips. This has fueled fears that the U.S. defense industry can profit even more from the war. 

    The Pentagon is already developing a roadmap to speed up arms sales, as the pressure from allies to respond to greater demands for weapons and equipment grows.  

    Another EU diplomat argued that “the money they are making on weapons” could help Americans understand that making “all this cash on gas” might be “a bit too much.” 

    The diplomat argued that a discount on gas prices could help us to “keep united our public opinions” and to negotiate with third countries on gas supplies. “It’s not good, in terms of optics, to give the impression that your best ally is actually making huge profits out of your troubles,” the diplomat said.

    Giorgio Leali, Stuart Lau, Camille Gijs, Sarah Anne Aarup and Gloria Gonzalez contributed reporting.

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  • EU plans subsidy war chest as industry faces ‘existential’ threat from US

    EU plans subsidy war chest as industry faces ‘existential’ threat from US

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    The EU is in emergency mode and is readying a big subsidy push to prevent European industry from being wiped out by American rivals, two senior EU officials told POLITICO.

    Europe is facing a double hammer blow from the U.S. If it weren’t enough that energy prices look set to remain permanently far higher than those in the U.S. thanks to Russia’s war in Ukraine, U.S. President Joe Biden is also currently rolling out a $369 billion industrial subsidy scheme to support green industries under the Inflation Reduction Act.

    EU officials fear that businesses will now face almost irresistible pressure to shift new investments to the U.S. rather than Europe. EU industry chief Thierry Breton is warning that Biden’s new subsidy package poses an “existential challenge” to Europe’s economy.

    The European Commission and countries including France and Germany have realized they need to act quickly if they want to prevent the Continent from turning into an industrial wasteland. According to the two senior officials, the EU is now working on an emergency scheme to funnel money into key high-tech industries.

    The tentative solution now being prepared in Brussels is to counter the U.S. subsidies with an EU fund of its own, the two senior officials said. This would be a “European Sovereignty Fund,” which was already mentioned in the State of the Union address by Commission President Ursula von der Leyen in September, to help businesses invest in Europe and meet ambitious green standards.

    Senior officials said the EU had to act extremely quickly as companies are already making decisions on where to build their future factories for everything from batteries and electric cars to wind turbines and microchips.

    Another reason for Brussels to respond rapidly is to avoid individual EU countries going it alone in splashing out emergency cash, the officials warned. The chaotic response to the gas price crisis, where EU countries reacted with all sorts of national support measures that threatened to undermine the single market, is still a sore point in Brussels.

    European Commissioner Breton especially has led the pack in sounding alarm bells. At a meeting with EU industry leaders Monday, Breton issued his warning on the “existential challenge” to Europe from the Inflation Reduction Act, according to people in the room. Breton said it was now a matter of utmost urgency to “revert the deindustrialization process taking place.”

    Breton was echoing calls from business leaders all over Europe warning about a perfect storm brewing for manufacturers. “It’s a bit like drowning. It’s happening quietly,” BusinessEurope President Fredrik Persson said.

    The Inflation Reduction Act is a particular bugbear to EU carmaking nations — such as France and Germany — as it encourages consumers to “Buy American” when it comes to electric vehicles. Brussels and EU capitals see this as undermining global free trade, and Brussels wants to cut a deal in which its companies can enjoy the same American benefits.

    With a diplomatic solution seeming unlikely and Brussels wanting to avoid an all-out trade war, a subsidy race now looks increasingly likely as a contentious Plan B.

    To do that, it will be vital to secure support from Germany and from the more economically liberal commissioners such as trade chief Valdis Dombrovskis and competition chief Margrethe Vestager.

    At a meeting of EU trade ministers on Friday, Brussels hopes to get more clarity from Berlin on whether they are willing to break their subsidy taboo.

    France has long been calling for a counterstrike against Washington by funneling state funds into European industry to help industrial champions on the Continent. That idea is now also gaining traction in Berlin, which has traditionally been economically more liberal.

    On Tuesday, German Economy Minister Robert Habeck and his French counterpart Bruno Le Maire issued a joint statement to call for an “EU industrial policy that enables our companies to thrive in the global competition especially through technological leadership,” adding that “we want to coordinate closely a European approach to challenges such as the United States Inflation Reduction Act.”

    Apart from the trade ministers’ meeting on Friday, the idea will also informally be discussed among competition ministers next week. One official said European leaders will also discuss it on the margins of the Western Balkan summit on December 6 and at the European Council mid-December.

    Hans von der Burchard, Giorgio Leali and Paola Tamma contributed reporting.

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