Covid, Ukraine, and growing protectionism are pushing the European Commission to respond by increasing fiscal flexibility and creating conditions for greater state involvement in industrial strategy.
- The European Commission’s proposed fiscal rules would introduce a more flexible and credible fiscal framework, focused on bespoke debt reduction pathways. If passed, this would limit the risk of conflict with member states over fiscal policy.
- However, while most “frugal” member states are satisfied with the proposals, Germany is not yet on board. Timescales are tight for the new framework to replace the (currently suspended) rules from 2024.
- The European response to the US Inflation Reduction Act will initially focus on relaxing state aid rules and repurposing existing funds to protect the level playing field. It’s unlikely, although still a risk, that an escalating US-EU ‘subsidy war’ gets underway.
Over time the EU will move to more active industrial policy by member states, benefitting green technologies.