Letta to call for US-IRA-style funding, pan-European state aid contribution scheme

Europe must urgently enact measures to push a “competitive industrial strategy” rivalling the US Inflation Reduction Act (IRA), including through an EU-wide state aid contribution mechanism, Enrico Letta will tell the 27 EU leaders in a special report on Thursday (18 April). 

“Faced with strong global competition, the EU must step up its efforts to develop a competitive industrial strategy capable of counteracting instruments recently adopted by other global powers, such as the Inflation Reduction Act,” the former Italian prime minister is expected to say in a high-level report on the future of the EU’s single market.

According to a draft copy of the report, seen by Euractiv, Letta will not shy away from the most divisive questions on the EU’s economic agenda: how to finance the bloc’s green transition while boosting its strategic autonomy as well as its industrial, trade, and market competitiveness.

This means tackling a funding gap that the European Trade Union Confederation (ETUC) recently estimated could hover at around €300-420 billion per year, equal to 2.1-2.9% of the bloc’s GDP.

“It is no longer a question of whether Europe will pursue them but how it will do so,” Letta says in the draft report. “This will certainly be a heated debate.”

Amid growing fears of Europe’s potential deindustrialisation, Letta seems to have fully embraced mounting industry calls for an industrial competitiveness deal to be rolled out in the upcoming legislative term, as high energy prices and massive US and Chinese government subsidies are seen as posing a growing threat to Europe’s industrial base.

“Supporting jobs and industries in Europe, rather than financing our partners or rivals’ industrial development, must be a primary objective when spending public money,” Letta notes in his report.

“In addition, never before has there been such an urgency to develop our own industrial capabilities in order to be autonomous in the strategic domain.”

“Europe cannot, and should not, cede its role as a manufacturing leader to others. At the turn of the century and for much of the subsequent decade, the shift was widely regarded as a feasible and even beneficial option. However, it is now evident that this is no longer the case.”

EU-wide public investment needed to complement private funding

Answering the “how”, the report suggests, will entail addressing three highly controversial and strictly intertwined topics that have recently split the policymakers and business communities into opposing factions: public EU funding, industrial policy, and national state aid.

“We should develop bold and innovative solutions that strike a balance between, on the one hand, the need to quickly mobilise national targeted public support for industry, and, on the other hand, the need to prevent the fragmentation of the single market.”

Letta is expected to say in his report that “whilst the progressive relaxation of state aid in response to the recent crises has contributed to limiting the negative effects on the real economy […], it has also produced distortions of competition.”

The paper warns against the risk that, if protracted over time, this would amplify “distortions of the level playing field within the single market due to the difference in fiscal space available to member states”. 

“A way to overcome this dilemma could be to balance a stricter enforcement of state aid at national level and the progressive expansion of EU level funding support. […] Specifically, we could envision a state aid contribution mechanism, requiring member states to allocate a portion of their national funding to financing pan-European initiatives and investments.”

While it has long been expected that plans to unlock private capital to finance such strategic objectives – mainly by boosting the bloc’s financial markets integration and detailing a roadmap to revive the capital markets union –  would be a cornerstone of Letta’s report, its emphasis on EU public funding plans will be more unexpected to many.

If implemented, an EU-wide investment fund, as suggested by Letta’s wording, would look to counteract the negative effects of the US IRA plan signed off by President Joe Biden in 2022.

The plan, centred around public investment as the primary route to shore up the economy, released as much as $500 billion in new spending and tax breaks into the US economy, laying the groundwork for a strong promotion of domestic US sectors and companies, and attracting European companies looking for capital and investment away from their home markets.

In other words, the draft Letta document entails that “refining [the] approach to state aid will facilitate the creation of the necessary political conditions to unleash […] European public investments” – precisely as a strategy “to alleviate the tension between new industrial approaches and the single market framework.”

Letta’s warnings come as the EU’s statistics office Eurostat reported on Monday (15 April) that industrial production in February was 5.4% lower compared to the same month in 2023, though month-on-month production increased 0.7% relative to January 2024.

Last month, the ETUC, which represents 45 million workers across Europe, published a study estimating that nearly one million manufacturing jobs have been lost across the continent over the past four years.

[Edited by Zoran Radosavljevic]

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