Dutch diplomacy is one of the great oxymorons (though as we saw this week with the Leopard 2 debate, German diplomacy is often not far behind). A leaked proposal of the EU’s plan for a new debt instrument in response to the US’s Inflation Reduction Act, which aims to subsidise green investment in America, hasn’t gone down well in northern Europe. Politico quotes the Dutch ambassador to the EU, Robert de Groot, response to the proposal for a recovery fund as “Marx on steroids”. I also have big issues with the leaked proposal by Charles Michel, president of the European Council, not because it is left wing, but because it makes no sense.
The German finance ministry also rejected the idea with a less incendiary comment, arguing that the new common debt would be counterproductive. In times of rising interest rates and rising inflation, fiscal policy should strive for stabilisation, not expansion. It does not happen often, but on this occasion I have to agree with the Germans on an important point of economic policy.
As the German newspaper Frankfurter Allgemeine Zeitung reports, the Michel proposals have been universally rejected, except by Greece, Italy and Portugal. Michel committed a classic act of EU diplomatic brinkmanship by trying to create facts through a draft summit declaration. When EU leaders meet in February, the summary of their meetings is already pre-written by EU ambassadors. Sir Humphrey, the fictional UK civil servant from the 1980s TV programme Yes Minister, would have been delighted. The ambassadors do most of the work. The leaders then discuss the remaining issues. But on this occasion, it was the ambassadors who killed it.
Michel is now retreating. He said he only wanted to generate a debate about how to protect European industry wandering off to America. The problem for the EU is that the US is offering real money – $369bn in subsidies – and it can’t do the same.
This is true, but the bigger question is: should the EU react to the US at all? I would, for example, dispute the thesis that the EU needs to stem the tide of deindustrialisation. On the contrary, I see deindustrialisation as an opportunity. There are many ways for an economy to prosper other than through mechanical and chemical engineering.
I agree with Michel on a specific point: companies are making their decisions about whether to go to the US right now. Whatever the EU does will be too late in any case. The European Commission will only next week make its own proposal. The European Council will not take any decision until March. The promise of unspecified regulatory changes will hardly be sufficient to convince a European company not to relocate to America. It did not stop BioNTech shifting the core of its research to the UK, for example, a decision that is only beginning to penetrate the German media: Bild last week reported with shock and horror that Germany’s single most successful start-up company is leaving.
Michael Pettis, who normally focuses on China and global financial flows, made a good point on this European debate on Twitter. He said there was something “surreal” about surplus countries seeking to roll back the apparently protectionist policies of deficit countries. He wrote in response to an argument by Brad Setser, who said that the US Inflation Reduction Act is not all that different from what Belgium has been doing for years: luring US companies to Europe with the help of subsidies.
The European position can only be understood from the perspective of its neo-mercantilist economic model. Running surpluses against the rest of the world is the German and Dutch business model, and has become the euro area’s business model after the sovereign debt crisis of the 2010s. Germany is in crisis if its external trade surplus disappears.
What this debate shows us is that Europe’s strategy going forward will be to stem the tide of deindustrialisation, and resist reform. What can possibly go wrong?
A version of this article originally appeared on EuroIntelligence.
[See also: If Ukraine has a future, it’s with the EU]
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