Cacophony of Corporatism, Subsidies & Inheritance Tax
by T Regenauer, A Landgraf & V Grossmann
History is written by the winners. The Orwellian “memory hole” has long been a reality and could soon lead to subsequent generations no longer being able to develop any awareness at all of what it means to lead a free and dignified life.
Cacophony of Corporatism
The anthem of the new normal is a melange of neo-speak, propaganda slogans, and anti-democratic authoritarian rhetoric. Part 2/2.
by Tom-Oliver Regenauer
[This article posted on 12/21/2022 is translated from the German on the Internet, https://www.rubikon.news/artikel/kakofonie-des-korporatismus-2.]
A harsh tone – that’s the soundtrack of the “turn of the times.” A somber dissonance that hangs over the land like a standing wave. Over all of civilization. An arrangement of destructive disruptive frequencies that carries from cropped debate spaces to the last corners of the ailing civil society sounding board to maltreat the foundations of humanism, enlightenment and sovereign autonomy. Concerted, amplified disruptions whose normative transformation processes no one has been able to escape since the proclamation of the supposed pandemic of the century. Not that this discord associated with an enervating tinnitus, this cacophony of apocalyptic arias is a novelty – the crescendo can be reconstructed over decades, if one follows the trail of money – but many became aware of it only with the establishment of the encroaching COVID infection regime in March 2020, when the deafening silence of Justice and the Fourth Estate could no longer be ignored and tyranny had arrived at home.
Inevitably, the question arises as to how such grotesque conditions could be cemented and why nothing has changed over generations. When should the many have intervened to put a stop to the technocratic neo-feudalism of today dictated by the few?
500 years before Christ, when Solon reformed Attic democracy to make representative rule respectable? Although even in ancient Greece this was little more than a cost-benefit analysis by Athenian elites who wanted to preserve status and power from looming revolutions.
A few centuries later, to break the dominance of clergy, high nobility, hereditary monarchy and colonialism? In the 17th century, when the English royal family granted special rights to rich merchants to form the British East India Company, which was henceforth allowed to enact corporate laws, control the Indian as well as the Pacific Oceans, and enforce Anglo-Saxon economic imperialism with all its brutality?
In the middle of the 18th century, when banking dynasties of unprecedented influence and wealth emerged in Europe, which, out of greed for profit, continue to play politics, economics and society off against each other to the present day, which they document with proudly swollen chests in family archives, for example with regard to the Battle of Waterloo or the censoring Balfour Declaration?
Should Cecil Rhodes have been stopped, the racist colonialist, most powerful man of his time and founder of De Beers, to whom the British colony “Rhodesia” owes its name? After all, his plans for establishing an Anglo-American-dominated world order via round-table groups and a Ponzi central banking scheme, which have been handed down in his will, seem to have borne fruit to date. Renowned historian Caroll Quigley, who taught as a professor at the elite Harvard and Princeton universities, wrote about these mafia-like machinations in his works Tragedy and Hope and The Anglo-American Establishment:
“This junta took control of American political, financial, and cultural life in the first two decades of the twentieth century. (…) This system was to be controlled in a feudalistic way by the central banks of the world, acting in concert (…). The apex of the system was to be the Bank for International Settlements in Basel, a private bank owned and controlled by the central banks of the world, themselves private enterprises. (…) On this originally financial basis (…) a power structure emerged between London and New York in the 20th century that penetrated deeply into university life, the press, and the practice of foreign policy.”
Could the cognitive devolution, the invisible prison to which the habitat of Homo sapiens has since advanced, have been counteracted in 1919, when Howard Scott founded the technocracy movement in New York, which set out to be able to control the planet via the energy consumption of all its systems – which, according to the ideology of the technocrats, includes humans? After all, this is the core goal of the climate apocalyptics, who have been ammunitioned by the Club of Rome since 1972 and who nowadays presume to want to restrict the individual mobility of mankind via CO? tracking.
Perhaps Huxley’s “Brave New World” was already a de facto reality when Richard Nixon visited Mao Zedong in 1972, whose rise to “paramount leader” was financed by the elite U.S. university Yale – and whom the cadre school refers to as “alumnus” in its in-house Yale Daily News post to this day. For what Nixon and Kissinger offered the mass murderer was not an economic “opening to the West” but the technocratic model of rule. Even before the first trade agreement with Beijing was concluded, U.S. corporations began building the appropriate infrastructure in the Middle Kingdom to make China a pilot project for the glass society of the future.
“Inventions for people are suppressed, inventions against them are promoted,” Bertolt Brecht already mused. In 1998, the Washington Post took up the issue when it became known that U.S. companies were illegally transferring secret space technology to the People’s Republic. The following year, the U.S. Foreign Trade Administration delivered a detailed study on the security risks of clandestine technology transfers and the astronomical sums that U.S. corporations and international oligarchy shifted to China. Spearheading these activities was the Rockefeller dynasty, which also spearheaded the creation of the United Nations (UN), the World Health Organization (WHO), and the Council on Foreign Relations (CFR). Even the filet property on New York’s East River, where the UN headquarters stands today, was a “donation” from the banking family.
The Rockefeller empire stretched its tentacles toward China far ahead of any political envoys. The German-born family, whose roots date back to 1590, has been conspicuously committed to the “democratic dictatorship of the people” since the beginning of the 20th century. This is evidenced by archives of the Rockefeller Brothers Fund. As early as 1917, the industrial magnate John D. Rockefeller, who of course also had excellent connections to Yale, donated a school to China. He first made a name for himself in the world’s third-largest country at precisely the time when the Communist Party was founded. Accordingly, the impeccably reputed scientific publication The Lancet states in a May 11, 2013 article that no one has had more influence in the field of “global health” over the past 100 years than the Rockefeller Foundation. The same, meanwhile, is true of many industries. The archive of the discreetly operating foundation, which goes back to 1910, shows the immense spheres of influence it has acquired within a century.
“Some believe we are part of a secret compound working against the best interests of the United States; they characterize my family and me as internationalists and claim that we have conspired with others worldwide to establish a globally integrated, political-economic structure (…). If that is the charge, I plead guilty, and I am proud of it” (David Rockefeller, Memoirs – Memoirs of a World Banker, 2002).
Accordingly, should excessive wealth simply have been prevented? Or could the illiberal present still have been foiled in 1930, when the Bank for International Settlements (BIS), residing in Basel on extraterritorial territory, was founded by a network of international high finance strategizing across generations? Or in 1944, when the same clique conceived the current fiat financial system at Bretton Woods, the International Monetary Fund (IMF) and the World Bank were created, and unleashed “economic hit men” set out to monetarily subjugate the world? Since then, the international banking cartel has unmistakably demonstrated its deterministic negotiating agenda. That this course will change little, au contraire, is suggested by various activities of the BIS. For example, Project Helvetia, a proof of concept in the area of central bank digital currency (CBDC), or Project Viridis, a platform for climate-related risk management to be used by financial authorities in the future.
Be that as it may, no one has yet countered the aforementioned developments with sufficient force. So the human family probably has the governments it deserves, as Joseph de Maistre put it. Quod erat demonstrandum. What used to be called clergy, nobility, aristocracy or feudalism still exists. In the form of capital accumulation, non-transparent participation structures, technocracy and corporatist global governance, disguised in philanthropic camouflage. Modern pseudo-democracy is a Trojan horse. A Potemkin village. Fantasy – like the vision of free, humane living in smart cities, where predictive software finally relieves Homo demens of the burden of informed decision-making. Yes, the opponent of freely organized civil societies known as the Deep State may currently be the ostensible actor – the Beelzebub – bureaucrats, the judiciary and the executive the henchmen, the World Economic Forum the PR and project management department. But there is every reason to believe that the long-term planning, the “roadmap” of geopolitical tyranny continues to be defined by circles that do not care about political currents. By circles that do not think in electoral cycles.
In the face of these circumstances, freedomism and actionism challenge each other fruitlessly when supranational technocratic corporatism is to be stopped by means of representative democracy at the national level. No parliament, no party, and no opposition movement will significantly change the system with tools it provides. If democratic processes or elections could do that, they would be banned. Thus, the hypothesis that “history teaches men that history teaches men nothing” (Mahatma Gandhi) is substantiated at the outset. They allow themselves to be duped. Although the seizure of power by fascist triumvirates in Europe, the historical correlate to the present, was less than a century ago, nonchalant forgetfulness of history is rampant. “Reason is the ability to think objectively,” Erich Fromm noted – but many fellow human beings seem to have given that up. It is all the more urgent to find out how the “spiritus liber” can wriggle out of the clutches of a model of domination when it can no longer be escaped by simply crossing a national border, when freedom no longer simply waits behind a wall in the West.
When collectivism usurps the individual, ideology eliminates reason, double standards replace ethics, and humanism is assassinated by do-gooderism, new solutions and forms of organization are needed. One must escape the system not spatially, but mentally – by boycotting predictive thought patterns and life designs. By following irrefutable convictions instead of cognitive dissonances in the intellectual basement. By living digital abolitionism. Detox – not revisionism. As a hasardeur of one’s own plot. “One should not want to foresee the future, but make it possible,” Antoine de Saint-Exupéry demanded. This should be the focus of resistance in the grip of the “turn of the times” – on establishing alternatives to fiat money, facade democracy, socialism, communism or fascism. For the bottom line is that all of these concepts stand for one and the same thing: tyranny.
They are “equal brothers with unequal caps,” Hannah Arendt stated. Wherever the journey leads – in the direction of grassroots democracy on the Swiss model, to a society based on private law, to a lean minimal and welfare state, to decentralized anarchy or agorism – it must under all circumstances lead to the “autonomy of the sovereign individual” (Friedrich Nietzsche). Not into the utopia of the few, which promises dystopia to the many. That is a categorical imperative.
Because history is written by the winners. And in times of total digitalization, the civilizational kamikaze course to the periphery of a Third World War harbors unprecedented risks. After all, the Orwellian “memory hole” has long been a reality and could soon lead to subsequent generations no longer being able to develop any awareness at all of what it means to lead a free and dignified life. “Big Brother” makes them successively forget what it is worth loving and suffering for. But freedom was never granted, it was always fought for.
Editorial Note: This article first appeared under the title “Cacophony of Corporatism Part 1 of 2.” in TUMULT Magazine – Quarterly for Consensus Disruption, Winter Issue 2022/2023.
Tom-Oliver Regenauer was born in 1978. After completing a business education, he worked in various industries and roles, including as an operations manager, corporate and management consultant, and international project manager with assignments in more than 20 countries. Since the mid-1990s, he has also been active as a music producer and lyricist and runs an independent record label. The German-born author has lived in Switzerland since 2009. His most recent publication was “The Elephant in the Room: The Second Year ‘New Normal’ Independently Commented.” For more information, visit regenauer.press.
On the myth of the economically harmful inheritance tax
by Volker Grossmann | Published on December 12, 2022
[This article posted on 12/12/2022 is translated from the German on the Internet, https://www.netzwerk-steuergerechtigkeit.de/vom-mythos-der-wirtschaftlich-schaedlichen-erbschaftssteuer/?cn-reloaded=1,]
Guest article: Prof. Dr. Volker Grossmann* (University of Fribourg / Switzerland; CESifo, Munich; IZA, Bonn)
The current inheritance and gift taxation system in Germany does not exploit the potential of reducing wealth concentration, even though it could make the majority of society better off. The current system mainly privileges recipients of large inheritances without any economic justification. In particular, the most extensive equalization of business assets and other assets could be implemented with accompanying measures that protect the substance of productive family businesses.
1 High inheritances, wealth concentration and lack of equal opportunities
Wealth is distributed very unequally among the inhabitants of the Federal Republic of Germany. For example, about 30% of net wealth falls to the richest hundredth of the population, while the poorer half of the population owns only about 3% (WID, 2022). Inheritances play a major role in this. For example, the share of inherited wealth in total wealth in Germany has risen from around 20% to a good 50% since the 1970s. More recently, annual inheritances amounted to a good 10% of net national income (Brülhart et al., 2018), about 300 to 400 billion euros annually. Inheritances are similarly concentrated as wealth. For example, one-tenth of the recipients receive almost 50% of the transferred assets, while the bottom half of the recipients receive only a total of 7% of the inheritances (Baresel et al., 2021, fig. 1). Moreover, the higher the household net income, the more frequent the receipt of inheritance or gift (Baresel et al., 2021, fig. 3). This is an expression of the fact that social origin shapes economic opportunities to a large extent at the individual level, not least with regard to education.
John Stuart Mill – arguably the best-known exponent of liberal economics – saw inheritances in conflict with the overall social interest as early as the mid-19th century and advocated substantial inheritance taxation (Mill, 1848; Ekelund & Walker, 1996). However, the fact that high inheritances undermine both equality of opportunity and incentives for heirs to perform, and thus run counter to the core tenet of liberalism, is regrettably no longer a consideration in self-proclaimed (economic) liberal circles today. In view of rising inheritances and the high proportion of wealth acquired without benefits in Germany, this insight is more important than it has been for a long time. Thus, in economically unequal societies, where individual well-being is largely dependent on the parental home, there are undesirable political consequences in the form of (right-wing) populism (Guriev & Papaioannou, 2022) and low social cohesion (Vergolini, 2011). Examples include xenophobia, skepticism about science, low trust in state institutions, and conspiracy theories of various kinds. Targeted campaigns by state and non-state actors to reinforce these tendencies fall on fertile ground, especially in a society characterized by high wealth concentration and fears of social decline. A more equal society, on the other hand, would strengthen the acceptance of democratic values and state institutions.
Although it is precisely the high inheritances that are problematic in terms of distribution policy, the current inheritance tax legislation in Germany contains many exemptions that tend to favor heirs of very high wealth. The reason for this, and at the same time the linchpin in the long-running debate on inheritance tax, is the treatment of business transfers. To be sure, this debate is understandable for several reasons. From an individual point of view, an entrepreneur wants to pass on his business to a successor generation and, moreover, successful businesses are socially desirable. However, it should be noted that high wealth inequality is also associated with the creation and inheritance of successful businesses. Moreover, as a result of tax privileges for business heirs, inheritance and gift tax in Germany has generated an annual average of just 0.87% of tax revenue (€5.9 billion) over the past decade (from 2011 to 2020) (own calculation based on BMF data, 2022).
Thus, the central challenge is to reform the inheritance tax system in such a way that wealth inequality is reduced and, at the same time, jobs and entrepreneurial success in family businesses are not jeopardized. To achieve the first sub-goal, it would be necessary to treat transfers of businesses largely in the same way as other assets. This article explains why it is a myth that this would conflict with achieving the second sub-goal of not endangering the substance of productive family businesses.
Section 2 sets out what privileges exist in current inheritance and gift tax law for the transfer of business ownership and the reasons given for this. Section 3 discusses the current inheritance tax system in Germany in light of the literature on welfare-optimal taxation. In particular, it addresses the questions of how high inheritance and gift tax rates should be and why the privileged treatment of business assets is problematic from an economic perspective. Section 4 presents a catalog of measures that would allow the most far-reaching equal treatment of asset types in inheritance and gift tax law and thus reduce wealth inequality without jeopardizing investment and jobs. Section 5 contains concluding remarks.
2 Exemption rules for business assets and their rationale
In the case of inheritance, after taking into account an exemption amount depending on the degree of kinship, the heir pays a tax that depends on the inherited assets as a percentage. Deviating from this basic principle, (exemption) regulations are in force that favor heirs of business assets. The justification often given for the preferential treatment of business assets is that the taxable heirs could draw on liquid assets of the business or even consider selling real capital (machinery, company buildings) in order to pay the tax liability. In these cases, the equity of the transferred companies would decrease and the creditworthiness of the company would suffer, which in turn would make investments more difficult. Alternatively, heirs could pay the tax due through personal borrowing. However, there would be implications for the creditworthiness of the company if company capital had to be used as collateral.
For these reasons, the legislator saw fit to currently grant the so-called Regelverschonung of 85% for inherited business assets of up to EUR 26 million, if the business is continued for at least five years and (from 15 employees) the minimum wage total of 400% is maintained within these five years. In addition, there is the possibility of so-called option relief of even 100%, if the business is continued for at least seven years and the minimum wage sum of 700% is not fallen short of. If the inherited business assets exceed EUR 26 million (so-called large acquisitions), the exemption percentages are gradually reduced, with the full reduction being achieved at around EUR 90 million in business assets. However, in the case of large acquisitions, the legislation provides for the possibility of a so-called exemption needs test. Accordingly, the heir can apply for a tax waiver if he or she cannot pay the tax from the remaining private assets. In this case, only 50% of the non-business assets must be used to pay the tax. In addition, the tax can be waived for an unlimited amount. In practice, the exemption rules mean that heirs are hardly taxed at all, even in the case of substantial transfers of business assets. In addition, it is possible to circumvent the payroll regulations if, for example, temporary workers are used prior to the transfer of the business in the event of employee fluctuations, who are then transferred to regular employment after the transfer of the business. Likewise, there are incentives to temporarily spin off company capital to foreign subsidiaries prior to the transfer of the company in order to be able to cut jobs in the end without losing the privileged treatment in taxation.
3 Optimal Taxation in the Light of Literature
Mill (1848) already stated that leaving an inheritance can be an important motive for saving or for business investment, but did not consider this as a serious argument against substantial inheritance taxation. Indeed, from the perspective of the empirical literature, the impact of an increase in inheritance tax rates on capital accumulation is very small (Piketty & Saez, 2013). Piketty & Saez (2013) calculate (focusing on the U.S. and France) the individual optimal tax rates according to inheritance received, taking into account such effects. In doing so, they assume that inheritance and gift tax revenues are redistributed equally across the population on a lump-sum basis. They conclude that with an allowance of 1 million euros, inheritance tax rates of 40-70% would be optimal for about 85% of the population. These would be far above the usual marginal tax rates in Germany of currently 7-30% in (inheritance) tax class I, which apply from exemption amounts of 500,000 euros for spouses or registered partners, 400,000 euros for children and stepchildren, 200,000 euros for grandchildren and 100,000 euros for parents and grandparents. The highest tax rate only applies to an inheritance of 26 million euros.
Only the recipients of the highest 5-10% of inheritances would lose out from taxation according to Piketty & Saez (2013). Sufficient allowances are crucial for this, which make sense for administrative reasons alone (costs of tax collection).
Grossmann & Strulik (2010) use a macroeconomic model to specifically address the question of how exemption rules for corporate heirs affect investment and jobs. On the one hand, they assume that the quality of corporate governance declines in some of the transferred firms. This is fed by empirical evidence that the average productivity and profitability of firms decline after the transfer of ownership or after the withdrawal of the firm founder from management (Pérez-González, 2006; Villalonga, B. and R. Amit, 2006; Damiani et al., 2018). On the other hand, the study takes into account possible loss of substance in companies if they are not continued due to lack of taxation exemption. The result shows that the current exemption practice in Germany is not only unnecessary, but is even associated with lower wages and lower gross domestic product per capita. This seems surprising at first, but it is easy to see why. The privileged tax treatment of business transfers leads to a situation in which even less entrepreneurially talented company heirs continue to run businesses, thus contributing to the fact that innovative new start-ups by more talented entrepreneurs are sometimes discouraged. In this light, the current exemption practice is therefore essentially patronage policy for company heirs and, from a macroeconomic perspective, counterproductive in the truest sense of the word.
However, Grossmann & Strulik (2010) implicitly assume that it does not matter to firms whether investments are financed with equity or debt. Similarly, they neglect the possibility that any borrowing by corporate heirs to pay taxes could undermine corporate creditworthiness. Thus, flanking measures might be necessary if the current tax exemption rules are abolished.
4 Accompanying measures to the current tax exemption rules
In a simulation study, Thiemann et al. (2021) calculated that abolishing the existing tax privileges in Germany’s inheritance and gift tax would raise annual tax revenues by around EUR 9-13 billion. However, if tax rates were moderately reduced at the same time, the additional revenue would be significantly lower or non-existent. The often-heard demand that a broadening of the tax base should go hand in hand with a reduction in tax rates is thus not conducive to a more performance-oriented tax system. So what could and should be done instead to avoid the undesirable side effects of broadening the tax base on family farms?
First, tax payment could be accompanied by generous deferral options, so that the heirs of successful (and worthy of protection) businesses in particular could pay the tax liability from future earnings. Whether investments are then nevertheless reduced by taxation depends on the interest on loans in the case of debt financing. Similarly, a corporate heir will want to finance the tax payment by borrowing only if the rate of return on equity exceeds the rate of interest on the loan.
Therefore, beyond deferral options, second, government institutions such as the Kreditanstalt für Wiederaufbau (KfW) could offer taxable business heirs concessional loans for a certain window of time (e.g., for 5-10 years) for both tax payment and investment financing.
Moreover, as Bach (2022) points out, third, the state could step in as a partner in the firm in case of liquidity problems of the taxable heir, if so desired. In this way, the equity capital would be preserved and the creditworthiness vis-à-vis banks or other lenders would not change. The company could therefore remain active and jobs untouched.
In the case of inherited company shares in the form of stock, it can still be stated that a sale of the shares to pay inheritance tax would only result in a change in the ownership structure, but not in a reduction of the company’s equity. Nevertheless, the aforementioned proposals could also apply to stock corporations if the testator or donor held a significant direct interest in the company and the company heirs so desire. Thus, the choice of the corporate form would not be influenced by tax law.
5 Concluding remarks
The German Federal Constitutional Court (BVerfG) has stated that only compelling, macroeconomic considerations can justify unequal treatment of assets under inheritance and gift tax law. Thus, in December 2014, the BVerfG rejected the exemptions that were legally enshrined at the time on the grounds that they violated the principle of equal treatment enshrined in the German Basic Law (Article 3 GG) and demanded a new regulation. This was enacted in 2016. However, the basic features of the tax exemption practice have not changed significantly. In view of the even potentially negative effects of the Verschonungsregelungen on the overall economy, the question of their constitutional compatibility thus remains. In the event of a renewed lawsuit, it would be important to demonstrate that the substance of productive family businesses would be preserved by the aforementioned alternative measures and that it does not make sense from a macroeconomic perspective to promote the continuation of unproductive businesses through tax privileges.
On a political level, it would be equally important to emphasize that the general population does not benefit from tax privileges for corporate heirs (but may even be harmed) and is not affected by the inheritance and gift tax even after a reform because of the allowances. Thus, the lack of popularity of the tax among the population seems to be explained essentially by two misconceptions. On the one hand, by the myth of economically harmful inheritance taxation, which is perpetuated by massive lobbying by business associations. And on the other hand, by the fear that transferred residential real estate will lead to a noticeable tax burden. However, this fear is largely unfounded. For example, there is a complete tax exemption for spouses, partners and children if they occupy the residential property themselves (limited to a living space of 200 square meters for children). If this does not apply, in practice there will still be no significant taxes due to the exemption amounts, except for very valuable properties. However, it would be worth considering increasing the allowances for inheritance and gift tax in view of the recent increases in the value of real estate and inflation.
Of course, to increase the acceptance of a tax reform, there should also be a discussion about the use of the additional tax revenue that would be generated by reducing tax privileges for business assets or even a general increase in inheritance and gift tax rates. Thus, in the debate on reforming the inheritance and gift tax system, one could propose measures that specifically promote equal opportunities in education. Together with better education about allowances, special rules and the economically dubious tax privileges in the case of business transfers, a broader, social consensus could thus be achieved to tax major heirs significantly higher than is currently the case. This would be an important step toward performance-based taxation.
* Volker Grossmann studied economics at the University of Bonn and the University of California at Berkeley (USA) from 1991-1996 and received his PhD from the University of Regensburg in 2000. After a post-doctoral period 2000-2005 at the University of Zurich, he was appointed to the University of Fribourg/Switzerland, where he holds the Chair of Macroeconomics.
Whoever subsidizes wins
U.S. and EU at odds over industrial subsidies
The U.S. is planning billion-dollar subsidies for the electric car industry and renewable energy production, among other things, but large portions of the government aid are to benefit only domestic companies. The EU sees itself disadvantaged by this and is discussing countermeasures.
by Anton Landgraf
[This article posted on 12/15/2022 is translated from the German on the Internet, Wer subventioniert, gewinnt.]
Wer subventioniert, gewinnt
Anton Landgraf: USA und EU streiten sich über Industriesubventionen
When Joe Biden won the U.S. presidential election two years ago against then-incumbent Donald Trump, relief was felt across Europe. Most EU countries were hoping for an improvement in transatlantic relations. Not so much of that can be felt at present. For all the antipathy between Republicans and Democrats, there are still a few cross-party commonalities in the U.S., especially when it comes to economic relations: U.S. economic interests are a priority for both. While Biden’s rhetoric is less confrontational than Trump’s, his policies are no less decisive. Not only is he continuing the so-called trade war against China initiated under Donald Trump, but the economic policy conflict has also flared up again with the EU states.
The reason is a new law of the U.S. government, which bears the harmless name Inflation Reduction Act (IRA) and is supposed to lead to a climate-friendly and sustainable economy. The IRA was passed in August 2022 with Democratic votes in the U.S. Senate and House of Representatives. At the time, many EU policymakers praised the package as an important contribution to addressing the climate crisis.
“Anyone who thinks we’re going to let Germany go broke as an industrial location has done the math without German industry.” Federal Minister of Economics Robert Habeck
Companies in the energy, transport and hydrogen sectors in particular are likely to benefit from the announced aid of 0 billion if they convert their production accordingly. Among other things, electric cars, batteries and renewable energy projects are to be subsidized. A social package worth billion is intended to finance, among other things, cheaper medicines for senior citizens and subsidies for health insurance.
The catch from the EU’s point of view is that many of the subsidized products and the goods needed to manufacture them have to be produced in the USA. While the protectionist conditions are primarily aimed at excluding Chinese imports, they also affect Europe. For example, 7 billion of the total package alone is conditional on the purchase of electric cars only being subsidized if their batteries are produced in the US. If the batteries were manufactured in Asia, which is the case with many European electric cars, their purchase in the USA cannot be subsidized. This is another reason why German corporations are now investing more in Canada; there is a free trade agreement between the USA and Canada (USMCA), and there is also an agreement between the EU and Canada to reduce trade barriers (Ceta).
But this development is just beginning. In the present, there is great indignation in the EU. German Economy Minister Robert Habeck (Greens) called for a “robust response” and his French counterpart Bruno Le Maire demanded “a coordinated, united and strong response vis-à-vis the U.S.” in Handelsblatt. EU Internal Market Commissioner Thierry Breton even threatened to file a complaint with the World Trade Organization (WTO). “The IRA can distort competition, it can jeopardize supply chains and it can lead to a foreclosure of markets,” warned EU Commission President Ursula von der Leyen.
For Germany, much is at stake in the conflict. The U.S. is the most important export country; last year alone, German companies shipped goods there worth around 121 billion euros. China and European countries follow at a greater distance. Conversely, Germany imported US goods worth 71 billion US dollars in the same period. The glaring German trade surplus has been causing displeasure in Washington for some time. Four years ago, President Trump railed against Germany’s extensive exports and threatened high import tariffs on cars.
The German economy has been focused on exports for decades and has repeatedly achieved record results, often at the expense of other countries. There, trade deficits are rising, debt is increasing, and entire industries are going under because they are being outcompeted.
Representatives of the EU and the U.S. want to seek a solution to the conflict in a joint “task force,” but so far it does not look as if the U.S. government will accommodate the wishes of the EU’s industry, and thus of Germany in particular.
Just last week, a meeting of the Transatlantic Trade and Technology Council on the campus of the University of Maryland near Washington, D.C., ended with virtually no results. “The talks on the Inflation Reduction Act were disappointing from the perspective of German industry,” Siegfried Russwurm, president of the Federation of German Industries (BDI), said in a press release issued by the association. The BDI would like to see U.S. guidelines that do not put European companies at a disadvantage. EU representatives want to see an existing exemption for Canada and Mexico extended to European electric cars.
Meanwhile, the EU Commission and EU governments are strenuously considering how they might respond if no agreement is reached. In return, France wants to provide more support to EU companies and have a “Buy European Act” with comprehensive subsidies introduced in the EU area. EU Commission President Ursula von der Leyen last week floated the idea of a “European sovereignty fund” that could be financed by loans taken out by the EU, i.e. with joint debt. A suggestion that German Finance Minister Christian Linder immediately rejected. EU rules restricting state industrial subsidies in individual countries are also to be further relaxed – although in the absence of a community fund, this would enable richer EU states to give their own locations an advantage over other EU states through higher subsidies.
German Economics Minister Robert Habeck also announced decisive action. “Anyone who believes that we are letting Germany go bust as an industrial location has reckoned without German industry,” he said at the “Industry Conference 2022” hosted by his ministry in Berlin at the end of November. Habeck is considering subsidizing German and European companies more heavily. Specifically, he is proposing a “European program for the promotion of transformation technologies,” according to an internal Economics Ministry paper quoted by Handelsblatt late last week. But Habeck has a hunch that Germany can hardly win a subsidy race at the moment, especially since the so-called debt brake must be adhered to. He now wants to relax the strict EU state aid law, which is supposed to prevent subsidies that distort competition. This would allow existing funds from different subsidy pots to be reallocated in a more targeted way.
“A trade war would not be in Europe’s interest,” warned Gabriel Felbermayr, former president of the Kiel Institute for the World Economy, on Deutschlandfunk radio. Finance Minister Lindner pointed out that the German economy is closely linked to the U.S. market. Germany could therefore have no interest in a trade war, he said, but must use economic diplomacy.
The restraint is probably due above all to the fact that the EU is currently in a weak position. The Eastern European EU states in particular do not want to get involved in a long-term trade conflict. Latvian EU Trade Commissioner Valdis Dombrovskis, for example, recently warned “of the danger of conflating the Inflation Reduction Act with our broader relationship with the United States,” referring to Russia’s war of aggression against Ukraine, in which U.S. support is crucial.
The EU also does not have the resources to sustain a protracted trade dispute with the United States. Many EU countries are having to spend huge sums in response to ongoing energy shortages, and there is no end in sight to high prices. In the USA, on the other hand, companies are benefiting from significantly lower energy costs. As it stands, the U.S. government is currently sitting on the longer end of the stick in the trade conflict.