Threatened by a new U.S. subsidy package that could hammer EU industry, Germany is rowing back on its long-standing objections to schemes like France's "Buy European Act" that would set provisions on buying goods locally.
Berlin's increasing sympathy for the French approach is a stark sign that Germany fears the traditional trade order is melting, as Washington follows China's lead with massive state support for industry. As one of the EU's more commercially liberal nations, Germany has generally opposed French proposals for interventionist industrial strategy, reckoning such measures would break free-trade taboos.
The calculus is now changing, however, ahead of a gathering of EU trade ministers in Brussels on Friday and a meeting between German Chancellor Olaf Scholz and French Prime Minister Elisabeth Borne in Berlin.
America's Inflation Reduction Act, which grants $369 billion worth of subsidies and tax breaks to U.S. green businesses, will be high on the agenda of both meetings. EU countries fear that the U.S. law will suck investment out of Europe, and are fuming about discriminatory provisions that encourage consumers to "Buy American" when it comes to purchasing an electric vehicle.
With the time for peace talks with the U.S. running out amid little hope of an agreement, German officials are now open talking about not only funneling billions of state subsidies into key green technologies like batteries, wind power or hydrogen, but also creating controversial requirements that would, at least to a certain extent, privilege European production.
German Economy Minister Robert Habeck said Thursday that the EU needed a "strong answer" to the U.S. law, telling German daily Handelsblatt that this would involve faster approvals of state aid decisions by the European Commission, more subsidies and also "procurement of local products."
The latter point is crucial, as it edges toward a "Buy European Act" that French President Emmanuel Macron has been calling for, which would give preferences to the use of European components in crucial industries, similar to those the U.S. law offers to American products. However, it's likely to antagonize other trading partners as they would be disadvantaged.
While such local content provisions might help the EU to avoid an exodus of key industries and ensure that the bloc stays in the race to produce next-generation green technologies, including electric vehicles, they are seen as a sacrilege in the international trading system.