Sweden, Finland write to Draghi on competitiveness roadmap. Clash between state aid and sovereign wealth fund reignites

Brussels – Continuing down the path of looser state aid rules would mean fragmenting the European single market “along national borders.” That’s the clear message coming from the premiers of Sweden and Finland, Ulf Kristersson and Petteri Orpo, in a letter delivered Friday, Jan. 19, to former premier Mario Draghi, who was tasked by the European Commission to prepare a report on the future of the European Union’s economic competitiveness.

The timing of the document is not coincidental: on Friday President Ursula von der Leyen was in Stockholm together with the two premiers to begin preparing the EU Strategic Agenda (2024-2029), of which competitiveness will be an integral and central part. The report commissioned by the former ECB man is expected to arrive after the European elections in June and will serve as the basis for the legislative proposals of the next legislative term and the future commission. “We firmly believe that competitiveness should be at the heart of the future strategic agenda and the future commission,” the document reads.

Letter from @SwedishPM and @PetteriOrpo to Mario Draghi on European competitiveness. pic.twitter.com/Uk8Lv3UVcs

— Sweden in EU (@SwedeninEU) January 19, 2024

The roadmap to strengthen the EU’s economic competitiveness should focus on ensuring a “level playing field” among member countries and “public and private investment” on the “twin green and digital transitions,” they write. The two premiers insist that the EU “has been losing ground to other major economies such as the U.S., China, Japan, and South Korea for decades.” They also note that “Europe is facing severe economic difficulties, and the successive shocks of the pandemic and the war in Ukraine have put pressure on the foundations of its prosperity.”

A level playing field between businesses inside and outside the EU “lies at the heart of a healthy, competitive, and productive economy.” But continuing “down the road of loosening the rules” on state aid “would mean that Europe would lose and that our single market would fragment along national borders,” they warn. The two premiers enter the open clash in Brussels between those who support loosening state aid rules to invest in competitiveness and those who argue that it should be done with common European resources.

The debate was abruptly reopened when in August 2022 the United States launched its anti-inflation plan, the Inflation Reduction Act (IRA), the nearly $370 billion green technology investment plan which made the EU worry because it could disadvantage European companies since it provides tax breaks to buy American products including cars, batteries, and renewable energy. Squeezed between Washington and Beijing, Brussels decided to launch a Green Industry Plan in its turn, but it is not comparable in terms of resources to the US one. From there, however, a reflection began on how to make the European Union competitive, which will not lead to results before the next legislative term.

Brussels understands that loosening aid rules risks
fragmenting the single market and creating a rift between states with fiscal
space for state aid (primarily Germany and France) and those that do not, such
as Italy. To compensate for the loosening of state aid, the commission has started discussions on a Sovereign Wealth Fund, readily scaled down to a Clean Technology Platform (STEP – Strategic Technologies for Europe Platform), on whose resources negotiations are underway as part of the multi-year budget mid-term review.

A full-fledged sovereign wealth fund will take months if not years. In the meantime, the message from Sweden and Finland, rather than to Draghi, seems aimed at France and Germany, which are the countries with the most advantage over state aid. Draghi has never been an outspoken advocate of windfall state aid, and when he was prime minister of Italy he first promoted the idea of a sovereign wealth fund for industry. It is hard to imagine that his roadmap on competitiveness would not focus on the need to launch a Made in Europe one, perhaps with common resources.