The US is luring in European businesses that cannot exist in an energy crisis. No end in sight
The US has even legitimized its desires. Germany and France promise to respond in kind. Who will win in this unfolding confrontation between Europe and the New World?
Washington has never made any secret of its economic claims on Europe. Previously, it has explicitly stated that it wants to sell its LNG to Europe and expel Russian gas, but now it also openly wants to capitalise on the woes of European industry.
How? The US has passed the “Inflation Reduction Act”. Under it, the US will cut taxes and provide energy incentives to businesses that open in the US. The law has caused a storm of indignation in the European Union, as it hits European industry. German Chancellor Olaf Scholz and French President Emmanuel Macron believe this is unfair competition from the US and even intend to hold talks with the US on the issue, Politico reported.
If talks with Washington fail, the EU is ready to “strike back”. By this strike, it is meant that the EU will also have to subsidise its European enterprises within the EU to offset the unfair competitive advantage of the US.
Germany and France are absolutely right that the main aim of the US law is not to reduce inflation, but to lure European factories back to theirs.
Inflation in the US is indeed at record highs; Americans are not used to it. But the law itself will not actually help to reduce price rises.
“The aim of the law is not to reduce inflation in the US but to reduce the budget deficit by attracting businesses from all over the world to the US economy, to stimulate economic growth and to implement Biden’s green agenda by overtaking China in this matter.
For instance, the Congressional Budget Office is of the opinion that the legal act would indeed reduce the federal budget deficit by $100 billion, but would have only a “negligible effect on inflation,” explains Artem Deyev, head of the analytical department of AMarkets.
In his opinion, the title of the document pursues only propaganda purposes, as the congressional elections are imminent and Biden’s party cannot lose. “In fact, even in the US itself, renowned economists doubt that the law will actually lead to a reduction in inflation. But it will raise a lot of money to decarbonise the economy, collect taxes and replenish the budget,” says Deyev.
But the much sadder news for Macron and Scholz is that their “retaliatory” subsidies are unlikely to change the situation dramatically.
For one thing, the difference in energy prices in the US and EU is colossal. “In Europe as a whole, energy costs have risen fivefold this year, while BASF in Germany is claiming an eightfold increase in costs and threatening to move production to the US,” says Deyev. In the US, prices have also gone up, but certainly not as much.
Secondly, prices aren’t even the main thing. “The US now has a fairly large supply of energy on the domestic market. Although the situation is different, for example, there is a lot of gas in West Texas and a diesel crisis in the Northeast. But objectively the situation in the US is quite good. Unlike Europe, where the main problem isn’t even the high cost of energy resources, but the fact that they are physically scarce. And in the next year or two, this situation cannot be solved,” said Sergey Kondratyev, deputy head of the Economic Department of the Institute of Energy and Finance.
Subsidies alone to investors in new projects will not be enough to decide to settle in the EU. What is the point of opening a new production facility in Europe if the investor does not know whether he will be able to connect to the grid and contract the necessary volumes of gas?
“Europe has really already lost new projects. Because investors see that the situation is very uncertain and it is easier for them to go to the US even without any additional subsidies. Canada, Australia and the Middle East are also attractive sites for new projects. Europe is unattractive and subsidies will not fix that. What is the point of discussing subsidies if Germany does not fully understand how it will survive next winter in terms of resource availability? Even if an investor is willing to pay a high price for energy resources, but not a super high one, it will be discouraged by the problem of where to get these additional energy resources,” Kondratyev explains.
“The EU is expecting one to three years of severe shortages of all energy resources, which will be very hard to endure. It will be characterised by a reduction and limitation of energy consumption, which is what we are seeing now. The situation will be somewhat better in the next few years. But the EU as a whole will be in a difficult situation for at least the next five to eight years.
This is a very long time for modern investments,” Kondratiev forecasts.
We are talking about shortages of all energy resources: gas, electricity and, most likely, oil and oil products. The EU has not yet been able to fully assess the consequences of the oil embargo, because the oil embargo will not come into force until the beginning of December this year. Meanwhile, the situation in the EU is already critical.
“Many Western European countries are saying for the first time since the war that they may have a winter blackout. This already speaks volumes, even if it doesn’t happen. These are clear signals to investors and citizens. Because Europe will not only lose new projects, but also new attractive jobs. This means that qualified, educated people may start leaving Europe in larger numbers than before the current crisis,” the interviewee concludes.
Olga Samofalova, VZGLYAD