The EU wants to build tomorrow’s technologies. Will countries pay for it?

EU officials are vowing to craft a fund that will ensure the technologies of tomorrow are made in Europe. They just don't know where the money will come from.

The latest battle is playing out over the so-called "EU sovereignty fund," a proposal European Commission chief Ursula von der Leyen first touted last year but that is now facing headwinds.

With citizens battling a cost-of-living crisis and inflation remaining stubbornly high, EU countries aren’t keen to offer up extra money for the scheme, which is aimed at strengthening Europe’s homegrown industrial base and green tech production. And with the EU only a few years removed from its controversial decision to take on massive amounts of joint debt to finance a pandemic recovery fund, the appetite for accumulating more debt is negligible. 

The situation has put the EU in a bit of a Catch-22. Most countries agree Europe must move fast to keep up with the U.S. and China as they funnel massive amounts of subsidies into manufacturing clean technologies. And at the same time, numerous countries are concerned about EU plans that would require more euros or debt. 

“Politically, it will be a hard sell,” said an EU diplomat from one of the dozen or so member countries traditionally wary of splashing the EU’s cash. “The idea that the EU needs more money when citizens are feeling the pain is difficult.”  

The stakes, however, are high: Russia’s war in Ukraine has driven home how vital it is for countries to ensure their energy and technology supply chains aren’t dependent on combative capitals like Moscow or Beijing. And while Europe has unwound many links to Russia, it is still heavily reliant on China for key next-generation technologies.

Building the future … in Europe

Von der Leyen, the EU’s top executive, first unveiled her pitch during a State of the Union address last fall. 

The EU sovereignty fund, she declared, would ensure “the future of industry is made in Europe,” pledging a proposal for the summer.

The announcement came in response to concerns the EU was falling behind on its industrial prowess, particularly when it comes to developing the climate change-reducing products of the future.

China has invested heavily in the sector, while the U.S. last summer startled the EU with its own Inflation Reduction Act, a bill that earmarked nearly $400 billion in clean-tech subsidies to lure in companies that agree to make products locally.

The proposal for a sovereignty fund is just the latest stage in the Commission’s efforts to beef up local industry and compete globally on everything from microchip production to critical raw materials to the use of hydrogen.

It follows measures like the Chips Act, aimed at shoring up the chip manufacturing shortage, and the Net-Zero Industry Act, which is designed to scale up the EU-based production of clean technologies. Brussels has also moved to temporarily ease state aid rules to let countries strategically buoy homegrown companies.

But the new fund would also back strategic projects at an EU level — everything from hydrogen to semiconductors and biotechnologies.

As the summer deadline approaches, however, the Realpolitik challenge of building support for that plan is proving difficult.

Divisions are falling along familiar lines — both inside the European Commission, the EU’s executive arm, which will first have to propose the plan, and among the EU’s member countries that will have the final say.

As usual, some of the traditionally “frugal” northern countries are resisting anything that would require them to pony up more cash. They’re especially wary of any suggestion that the EU might take on more joint debt, given interest rates are on the rise and payments on the EU’s existing debt are already growing.

Conversely, there are powerful constituents in favor. France, which holds considerable sway in Brussels, has been one of the strongest voices calling for more EU instruments to kick start European manufacturing. 

Von der Leyen also has strong support for her plan within the Commission, including heavy hitters like Single Market Commissioner Thierry Breton and Paolo Gentiloni, the economy commissioner.

Gentiloni stumped for the proposal at a conference in Florence earlier this month, arguing that the EU needed to unify its approach to propping up local companies.

“I think it’s quite clear that we need it,” he said. “We can’t participate in this global industrial race only having 27 different ways of subsidizing businesses. We need at least to unite our forces to support common projects that need European scale, and that have a clear European added value.”

Not a priority

With von der Leyen committed to proposing a new fund, discussions on how it will be financed are intensifying. 

Talks on how to finance the sovereignty fund are tied up with a broader review of the EU's regular, long-term budget, which runs from 2021 to 2027. Budget Commissioner Johannes Hahn has been doing a tour of EU capitals to sound out opinions on what changes they may want. 

Already, there is a smorgasbord of competing priorities — not least of which is how to pay for Ukraine’s reconstruction and the EU’s growing military aims. A new sovereignty fund may not be top of the list for everyone.

“There is clearly a need for clean-tech investment, but the fact that it is not technically a crisis will reduce the appetite of member states,” said one Commission official close to the discussions, who like other officials spoke on the condition of anonymity to explain the sensitive talks.

One outcome may be the classic EU fudge: redirecting current spending streams for the new fund rather than asking for new cash. 

Some Commission officials have been managing expectations, suggesting that this summer’s offering will not be particularly large. Gentiloni hinted at this earlier this month in Florence.

“I think if we introduce this — even not with an enormous amount of money — this will represent a big change for the union,” he said.

Another official cautioned that if the Commission limits itself to repurposing existing funds from the EU's long-term budget, officially called the Multiannual Financial Framework (MMF), it will inevitably constrain any new “sovereignty fund.” 

“The MFF has limits, and we’ve already stretched those limits, so there’s a danger of making too much of what the fund will be," the official said.

For the fund’s biggest proponents, the lack of ambition is a mistake. 

“We are facing huge challenges and at the same time, we see an enormous investment gap. We cannot afford to be stingy if we want to make our economies fit for the future,” Green EU lawmaker Rasmus Andresen told POLITICO.

“We will not reach the objectives of the Green Deal with austerity. On the contrary; we need money for a socially just green transition. That's why we need a sovereignty fund as part of the EU budget.”