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As the EU discusses its reaction to the US Inflation Reduction Act, it has to keep in mind its position in the struggle between the US and China.

When Commission President Ursula von der Leyen announced the ‘Green Deal Industrial Plan’ at the World Economic Forum (WEF) in Davos this week, her choice of words was interesting.

After months of Commission officials and member states crying foul over the discriminatory nature of the subsidies in the US Inflation Reduction Act, von der Leyen only mentioned that the act “raised a number of concerns in terms of some of the targeted incentives for companies,” but otherwise focused on how the EU and the US could “work together” and “jointly benefit” from their collaboration.

Towards the end of her speech, her vocabulary changed distinctively as she took aim at China. “We must respond more robustly,” she said, lamenting that China used unfair trade practices and that it “dominates” some essential sectors.

She vowed to use “all our tools to deal with unfair practices.” Touting the EU’s new foreign subsidies regulation, von der Leyen promised, “we will not hesitate to open investigations if we consider that our procurement or other markets are being distorted by such subsidies.”

Trade expert David Kleimann, a visiting fellow at the economic policy thinktank Bruegel, told EURACTIV that “in her speech, you could have exchanged the word China for the US, and it would have been equally true.”

But why, then, all this waxing about cooperation with the US while insisting on a combative stance against China?

“It does not seem to be a time to antagonise the US for security reasons,” Kleimann said, referring to the European dependence on US leadership in reacting to the Russian invasion of Ukraine.

The Commission president is incentivised to remain on the good side of the US administration. And this increasingly means showing or at least feigning, her toughness towards China.

Tobias Gehrke, geoeconomics expert at the European Council on Foreign Relations (ECFR), points to the US motivation behind the bill to curb inflation.

“The US economic strategy has been adjusted from the top down,” he told EURACTIV, arguing that national security and, therefore, the perceived threat from China were on top of the priority pyramid.

From this point of view, a tougher stance on China could make sense for an EU that tries to get the US to be less discriminatory against European industry.

In a blog post with ECFR-colleague Majda Ruge, Gehrke recently argued for a “united front” that the EU and the US could build against China.

According to him, the EU is currently pursuing a two-sided strategy. On the one hand, the EU threatens the US that the inflation bill actually makes it more likely for the EU to be pushed more closely to China, an argument that Trade Commissioner Valdis Dombrovskis recently made.

On the other hand, there are von der Leyen’s remarks that criticise China for its vast subsidisation and focus on the need of “de-risking” European supply chains from too much dependence on China.

Trade expert Kleimann, meanwhile, sees risks in such a strategy.

“Hardening on China to assuage the US would be a big mistake,” he said, warning that the US had different interests from the EU, as evidenced by the fact that EU interests were not really taken into consideration when the inflation reduction act was decided.

“The US is becoming an actor that is beginning to be a problem on a par with China,” he told EURACTIV.

“The EU has to think about policies that make it much more autonomous.”

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Chart of the Week

Not everybody likes the Franco-German push for more lenient state aid rules. The chart below shows why.

According to a letter sent by Commissioner Margrethe Vestager to EU finance ministers, a stunning 53% of the €672 billion in state aid approved under the state aid temporary crisis framework have been dished out by Germany, making it the uncontested European champion of industry subsidisation.

A further relaxation of state aid rules would make the single market’s famed “Level Playing Field” even more out of balance.

“Simply relaxing EU state aid rules is not a solution,” Italian minister of the economy Giancarlo Giorgetti said when he was in Brussels on Tuesday (17 January), warning of a fragmentation of the internal market as financially less potent countries would find themselves at a disadvantage.

Resistance is also brewing behind the scenes. “A broad coalition from North to South and East wants to have a proper assessment of the real impact of the Inflation Reduction Act on European business before we jump to conclusions,” an EU diplomat told EURACTIV.

You can find all previous editions of the Economy Brief Chart of the week here.

Economic Policy Roundup

Euro area finance ministers move forward on Digital Euro. Meeting on Monday (16 January), finance ministers meeting in the eurogroup formation published a joint statement on the digital euro project, laying out the principles that a digital euro should follow. While the ministers have not yet taken their final decision on whether to introduce a digital euro, they welcomed the Commission’s plan to table a proposal in the first half of 2023.

EU Parliament adopts position on Unshell directive. By a large majority, the European Parliament adopted its negotiating position on the Commission’s proposal to clamp down on the use of shell companies to avoid taxes. Compared to the Commission’s proposal, the Parliament increased the scope of the directive so that more companies would fall under the reporting requirements of the order and more companies could be penalised. The Parliament also pushed for more information-sharing requirements between member states.

NGOs want stricter bank capital requirement rules for fossil fuel lending. Ahead of a crucial vote in the European Parliament’s economic committee, NGOs focused on environmental and finance policy like Finance Watch, E3G, and others, sent an open letter to committee members asking them to take a hard line on bank lending for new fossil fuel projects. As the committee is set to vote on its position on the bank capital requirements directive and the capital requirements regulation, the NGOs argue that a one-for-one rule should be introduced, meaning that banks would have to back 100% of the bank loans for new fossil fuel projects by their own capital. This would make fossil fuel financing more expensive, but NGOs argue that it would also increase financial stability, reducing the risk of stranded assets.

European billionaires see increase in wealth, Oxfam report shows. According to the NGO’s report, published each year during the World Economic Forum in Davos, billionaire wealth rapidly increased in 2022 due to the rising food and energy profits. In the EU, the richest 1% has 4.5 times more wealth than the bottom 90% of citizens, Oxfam said.

EU signs MoU with Ukraine over macro-financial assistance. On Monday (16 January), after months of wrangling among member states, and particularly with Hungary, the EU signed a memorandum of understanding with Ukraine over the €18 billion in macro-financial assistance that the EU agreed to provide to help finance the Ukrainian government. While the first €3 billion are paid out unconditionally, the rest of the money is attached to conditions. Read more here.

Economy news from the Capitals

Insolvency figures soar by 50% in France. In 2022, some 42,500 French businesses shut up shop, accounting for an almost 50% insolvency increase compared to 2021, according to a report by data analytics consultancy Altares. Read more.

Brexit cost 330,000 drop in UK labour force, new research finds. According to new research published on Tuesday, Brexit has resulted in the loss of 330,000 workers from the UK economy. Read more.

Polish food smuggling to Kaliningrad flourishing despite sanctions. The food smuggling business is thriving between Poland and the Kaliningrad Oblast as Russian citizens grow increasingly frustrated over the lack of access to Western products because of sanctions, according to Polish media reports. Read more.

Ukraine needs more money than we expected, admits Czech minister. The EU sent Ukraine the first €3 billion from the €18 billion loan package, but some EU member states already see that this amount will not be sufficient, admitted Czech Finance Minister Zbyněk Stanjura (ODS, ECR) on Tuesday. Read more.

Economists warn pay raises risk Slovenia’s fiscal stability. The recent increase in the minimum wage and mounting demands for higher pay in the public sector, most of which are being heeded, risk throwing the country’s public finances in disarray amidst a slowdown of economic growth, warn Slovenian economists. Read more.

Portuguese teachers strike after failed negotiations. Eight unions led a teachers’ strike on Monday that will last 18 days after the Education Ministry pushed back negotiation dates on the deadline to withdraw some proposals presented in previous negotiations. Read more.

Finnish education system fails to improve performance. The once internationally applauded Finnish education system has deteriorated, according to a new report published by the country’s Ministry of Education and Culture on Thursday. Read more.

Hungarian oil giant MOL to sue Slovak government for windfall tax. MOL and its Slovak subsidiary Slovnaft are working on a lawsuit against the government for the new windfall tax, which was approved by the National Council in December which aims to raise funds to help with expensive energy for more affected industries and households. Read more.

Bulgarian parliament floats EU COVID recovery plan renegotiation. Bulgaria should start renegotiating its post-COVID Recovery Plan, specifically the part about reducing carbon emissions from coal-fired power plants, which should be allowed to operate until 2038, a huge multi-party majority in parliament decided on Thursday. Read more.

Literature corner

A guide to the ‘legal fictions’ that create wealth, inequality and economic crisis. In this podcast episode of the Ezra Klein Show, law professor Katharina Pistor discusses the legal system that built the modern economic system.

[Edited by Benjamin Fox/Alice Taylor]

Read more with Euractiv

EU lawmakers warn against loosening state aid rules

EU Parliament lawmakers fear large EU countries like France and Germany could gain a competitive advantage if national state aid rules are relaxed across the bloc, and are pushing for an EU Sovereignty Fund to be adopted.