December 2022

By Lucie Gonçalves, Mathilde Defarges

French President Emmanuel Macron was in the United States from November 29 to December 2 for the first State Visit by a foreign Head of State under President Joe Biden’s administration. A year after the recall of the French Ambassador to Washington following the AUKUS crisis, the visit was meant to warm up and reaffirm the strong relationship between the two countries. President Macron intended to rekindle relations between France and the United States and “resynchronize the American and European agendas.”

In particular, he planned to address the simmering tensions between Brussels and Washington, from Europeans feeling they shoulder too much of the price of sanctions against Russia, and in particular that their ally charges them too much to import gas, to persistent dissatisfaction with the American Inflation Reduction Act (IRA).

Words of Love

President Macron found that this state visit was a success “with a lot of positive outcomes,” as both countries confirmed their total alignment on the Ukrainian situation, had a fruitful and in-depth discussion on the IRA, and converged on climate change, health, and security in Africa.

On December 1, both countries issued a joint statement that seemed to confirm that assessment. Following the meeting between President Biden and President Macron, they reaffirmed their common desire to address global issues including climate change, energy transition, and the resilience of critical value chains, and to “capitalize on our most promising opportunities together.” They also stressed that the “bilateral investment and trade relationship between our nations is longstanding and deep” and pledged to reinforce bilateral cooperation in security and defense, space, and cybersecurity.

Further suggesting that transatlantic cooperation on trade, technology, and innovation was on the right track, the EU-US Trade and Technology Council (TTC) met on December 5 in Maryland. The EU and United States agreed to help grow transatlantic trade, in particular in the fields of digital connectivity, emerging technologies, semiconductors. Both sides also launched the Transatlantic initiative on Sustainable Trade to support the transition to a low-carbon economy and to increase trade and investment of “green” goods and services.

Concessions?

However, Macron and Biden’s lofty rhetoric could not mask deeper issues in the transatlantic relation. Indeed, Europeans consider that the United States is taking advantage of them over gas imports prices and worry about the consequences of the IRA for European industry. Paris in particular believes that recent US actions call for European unity and demand a firm response from the European Union.

Since the Russian invasion of Ukraine began, soaring energy prices, risks of shortages, and rising inflation have affected the EU particularly severely. Like most European leaders, Macron faces the prospect of a winter of discontent due to high energy prices and a looming recession. Even though the involvement the United States as alternative gas supplier has softened the blow in the short-term, some EU leaders have voiced concern about an excessive reliance on the United States, especially as they question the fairness of the rates Washington is offering. Macron himself slammed the United States for exporting gas at a price 3-4 times higher than the domestic rates.

The Inflation Reduction Act is another irritant. The bill, with its $370 billion in major tax and investment incentives for clean energy, is likely to have a transformative effect on the global economy. Europeans fear that the IRA’s massive incentives, coupled with lower energy prices in the US, are going to lead to a manufacturing exodus away from the EU, and to significant job losses, in an already fraught economic landscape. In fact, the EU has envisaged the possibility that the US bill may fall foul of WTO provisions. Macron relayed this dissatisfaction towards what Europeans see as US protectionism and a continuation of the previous administration’s “America First” mindset. He stated that the measure constituted “unfriendly behavior” while the French Economy Minister reacted to IRA this November by explaining that “on the European industrial response, there can be no limits. We must defend our economic and industrial interests.”

At the French Embassy in DC, Macron told the audience that “the United States is primarily looking after the United States. And then looking to their rivalry with China, making France and Europe an adjustment variable.” President Macron therefore stressed the “need to move forward hand in hand” with the United States, hoping to obtain exemptions to the IRA provisions for European industries.

In this regard, Biden was conciliatory, conceding that there were “glitches” in the IRA and explaining that “tweaks (…) can fundamentally make it easier for European countries.” However, he also added that “we’re going to make sure that the United States continues (…) not to have to rely on anybody else’s supply chain.” Given this caveat, and the fact that the IRA was a rare moment of bipartisan consensus in today’s fractious DC landscape, it remains to be seen how, if at all, the White House will actually address European complaints on the landmark measure.

Not to be discouraged, Macron highlighted both sides’ commonalities after his meeting with Biden. A US-EU Inflation Reduction Act Working Group has been set up to further strengthen the US-EU clean energy and climate partnership and the French leader said he expected IRA-related disputes to be settled by the first quarter of 2023. European Commissioner for Trade Valdis Dombrovskis also struck a carefully hopeful tone after leaving the December 5 TTC meeting “slightly more optimistic” on the IRA question.

 Two Can Play This Game

However, the Europeans, and the French in particular, will not be content with just waiting on their partner to maybe grant them some relief. In his speech at the French Embassy in DC, Macron explained that he intended “to push Europeans to do more and faster to gain energy sovereignty [and] to build tools that are at least as powerful as those recently passed by the US.”

As to what these tools might look like, the French Economy Minister called for “a European IRA” while head of the European Commission Ursula von der Leyen has suggested that the EU set up a “European sovereignty fund” to compete with the IRA and support industrial projects. The European Commission also intends to unshackle industry from red tape and plans to “facilitate public investment in the environmental transition” by reviewing the framework for State aid.

In support of these measures, France is pushing for the 27 Member States to raise money jointly. But several other Member States, including Germany and The Netherlands, oppose the measure. The Dutch Finance Minister declared that the EU “already [has] a lot of money on the table” to support businesses and should first “see how it can be redistributed or refocused.” More broadly, member states who have greatly benefitted from trade liberalization over the past decades worry that the protectionist consequences of a European IRA would jeopardize the source of their prosperity. Those voices fear that a subsidy race with the US would distort competition. For instance, the Confederation of Swedish Enterprise recently stated that EU State subsidies were sufficient at their current levels. President Biden’s conciliatory tone in Washington is likely to empower those voices and further slow down Paris’ campaign for a “Buy European Act.”

European Commissioner for the Economy Paolo Gentiloni announced on December 5 that the EU executive would make a proposal “in the coming weeks.” In the meantime, European Union leaders are calling the European Commission to come up with an ambitious new industrial policy plan in early 2023.

For all the pronouncements of friendship that were uttered in Washington and despite equivocation from his European partners, Macron seems intent on an EU response to the IRA. A French MEP close to the French leader recently summarized the EU’s quandary by explaining that it “must review its own dogmas in a context where there is no fundamental political agreement among Europeans.” He concluded by saying that this review of EU dogmas was “complicated, but essential.”