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A summit of EU leaders in Brussels on Thursday ― where Germany was represented by outgoing Chancellor Olaf Scholz because the next governing coalition has yet to be formed ― didn’t delve into the topic, with the focus firmly on how to build up the continent’s defense capabilities.
But the issue already shows signs of causing disquiet throughout the bloc, and within the European Commission, which polices government subsidies ― which it calls “state aid” ― with several diplomats from across Europe signaling their concerns to POLITICO.
Widening the gap between Europe’s two largest economies
Because the extra spending ― which is expected to reach as much as €1 trillion over the next decade mainly on defense, infrastructure and green energy ― will ease pressure on Germany’s regular budget, this will enable greater expenditures elsewhere. Some of this is already being earmarked for subsidies for industry, which risks giving German companies an easier ride than their competitors in other parts of the EU.
“We’ve got to watch out when it comes to productive investments in Germany,” said a former government minister in France, the EU’s second-biggest economy after Germany, speaking on condition of anonymity due to the sensitivity of the issue. “It can help us, it can pull our own economy in the right direction. What’s good for the German economy is good for us. It means more markets for French companies. But it could worsen the productivity gap between the two countries. We’ll need to keep up [with Germany].”
France has led a group of governments, which also includes Italy and Spain, the bloc’s third- and fourth-largest economies, that has repeatedly called for the EU to come up with new ideas to smooth out what they call potential “distortions” of the single market, such as through pooled borrowing by all EU nations. This, however, is something Germany rejects.
Subsidizing ‘strategic industries’
“The issue of potential distortions is something that we need to address,” said a diplomat from a southern European country. The diplomat added that it remained to be seen what subsidies Germany’s new government would agree on in its final coalition treaty,
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