EU must boost funding in race for green transition, Paolo Gentiloni warns

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Europe will need to step up its response to Washington’s Inflation Reduction Act as the US programme to finance the industrial green transition is set to be larger than expected, Brussels’ economy chief has warned.

Paolo Gentiloni, the EU economy commissioner, told the Financial Times that the bloc had enough money on the table for the immediate future, thanks to programmes including the €800bn NextGenerationEU recovery fund, which runs until 2026. 

But Brussels will have to boost its financial firepower after next year’s EU elections, he said — potentially via the previously mooted idea of a European Sovereignty Fund that would pump billions into crucial industrial initiatives such as green technologies. 

“You have a global race, and in this global race economic support from the public is part of the race — regulation is not enough,” Gentiloni said in an interview. “The pull factor of the IRA is increasing.”

US programmes including the IRA, which was passed by Congress last summer, proffer hundreds of billions of dollars in subsidies and tax credits for new investments in renewables and green manufacturing, including electric vehicles, hydrogen projects and batteries.

Other governments are rushing to come up with their own green industrial policies in response, pledging subsidies to industry as worries mount that the US incentives will hit jobs elsewhere. 

After months of debate, the European Commission in June announced the Strategic Technologies for Europe Platform (Step), which will allocate €10bn to science and innovation programmes in the coming years to “stimulate investments in critical technologies”. 

But member states have been lukewarm about contributing to the platform, which is part of a contentious midterm review of the EU’s seven-year budget and is a fraction of the size of the US programme. 

The Congressional Budget Office initially estimated the IRA carried a $391bn price tag, but Goldman Sachs estimated it could eventually amount to more than $1tn, given it included uncapped tax credits.

Gentiloni said that if it grew to that kind of scale, the EU would have to come up with a stronger response.

The proposed Step programme should be considered a starting point, he said, as the EU recovery fund only runs until 2026. “We need to build the conditions to have something more substantial.”

This is especially important, he said, given the need to counter political arguments that the EU was suffering from being an early mover on environmental issues.

However, with EU elections looming next year, it is too late to attempt to push through such an initiative, he said — especially given the cash still available from NextGenerationEU and the EU’s focus on agreeing more budgetary support for Ukraine. 

The political argument should not focus on warnings that “the planet will die”, Gentiloni said, but rather that households would prosper from green investments.

“Your family will have advantages. Your children will find better jobs. And if we are late movers the better jobs will be taken by someone else.” 

It was, therefore, “already time to reflect [on] further tools after 2026”, said Gentiloni, a social democrat and former Italian prime minister. 

The current commission took office in 2019 and its mandate ends next year.

Gentiloni was speaking after meetings of finance ministers in Brussels at which they debated plans to overhaul the EU’s fiscal rules. Draft legislation unveiled by the economy chief in April would usher in far-reaching reforms to the labyrinthine Stability and Growth Pact by granting states greater ownership of their national debt reduction plans. 

Germany has led the charge for tougher minimum debt-reduction requirements to be baked into the framework as it calls for tighter discipline.

Gentiloni defended the commission’s legislative proposal, but said it was not “untouchable”. 

If there was an increase in the numerical “safeguards” guaranteeing debt reduction, as Berlin and others have demanded, then this needed to be countered by an increase in the “fiscal space for investment” within the new rules, Gentiloni said. 

“You can improve it . . . but it’s very important not to lose the balance,” he said. He added that he was not pessimistic about the outlook for the talks on the Stability and Growth Pact, despite the fall of the Dutch government and the looming elections in Spain, which holds the EU’s rotating presidency. 

“My impression is there are a lot of conversations, discussions behind the scenes and that there’s an open attitude from everyone,” Gentiloni said.