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As demonstrated by farmers’ protests this week, subsidies are addictive and create inefficiency. Still, the biggest economic transformation since the industrialisation might not work without them.
All this week, farmers in Germany have been protesting against planned cuts in subsidies for agricultural diesel, announced by the government in December as part of its budget compromise.
In other news, the European Commission on Monday gave the green light to €902 million in state aid for a battery factory in Germany, using the option to “match” US subsidies for the first time. It also approved a French €2.9 billion tax credit scheme for producing renewable energy components, bringing the total amount of French state aid approved in the last month to €8 billion.
While these issues may seem unrelated, they are part of a bigger story.
The German farmers’ protests show how difficult it is to phase out subsidies once they have been established because the beneficiaries come to calculate with them and, therefore, continue to expect them or face an uncertain future.
German economists, many of whom are rooted in the ‘ordoliberal’ school of thought, like to call them “sweet poison”.
In fact, many farmers are not paid enough on the food markets to survive without subsidies.
“The core problem for the sometimes low prices is overproduction, which has been fuelled by years of subsidies,” Justus Haucap, an economist at Heinrich Heine University in Düsseldorf, told Euractiv.
So would it be better not to use subsidies at all, making the billions of euros announced this week a terrible mistake? It’s not that easy.
If we are to take climate goals seriously, we must undertake a huge transition that will affect almost every aspect of the economy.
This will create losers, and another lesson from this week is that when a group is set to lose from a political decision – and it is well-organised – it can easily mobilise society against that decision.
The farmers, a well-organised group, were immediately able to take to the streets to protest against a measure that will cost an average farm ‘only’ €2,900 per year (a small proportion of their recent profits).
Polls show that large sections of German society support their position.
Similarly, while most of us like the green transition in principle, the support stops when it comes to lower wages. And unlike the digital transition, which is likely to change our economy at a similar pace, the green transition is ultimately caused by political decisions, so there is someone to direct the protest at.
Because people are more likely to sympathise with other groups in society than with perceived out-of-touch governments, discontent can also quickly spread beyond those directly affected.
Therefore, many politicians, especially those who want to speed up the transition, are counting on subsidies to make it palatable to people who would otherwise oppose it.
The French government loves to talk about a green “reindustrialisation” (and spend accordingly), while Germany, full of steel-dependent car and machinery manufacturers, wants to show that it can still produce at least some steel at home (or batteries, for that matter).
And then, of course, there is international competition.
You can’t be a herbivore in a world of carnivores, as Economy Commissioner Paolo Gentiloni likes to say, justifying why Europe, too, should spend more to help companies make the transition.
None of these concerns can be easily dismissed. Betting on subsidies is, therefore, not crazy but a balancing act.
The economic inefficiencies it creates cannot be ignored – but neither can public sentiment.
Probably the biggest problem is that if you base your policy choices on who is best organised to articulate their discontent (farmers, manufacturers, industrial trade unions), you will miss the millions who are not.
Chart of the Week
If you don’t like subsidies, there might still be some good news for you this week.
Under the “Temporary Crisis and Transition Framework”, the relaxed rules for state aid initially implemented as a response to the energy crisis, much less state aid has actually been used by member states than was initially approved, according to new numbers by the European Commission.
As the graph shows, for the period between March 2022 and June 2023, of €730 billion in approved state aid, only €141 billion was actually granted to companies.
One reason for this might be energy prices returning to lower levels quicker than expected, but it also seems likely that politicians wanted to spread confidence by announcing overly large numbers of available aid.
Think about the €200 billion “doubly whammy” of German chancellor Olaf Scholz (SPD/S&D), large parts of which will remain unused.
Graph: Esther Snippe. You can find all previous editions of the Economy Brief Chart of the week here.
Economic Policy Roundup
Hungary might lift its Ukraine aid package veto but with strings attached. The Belgian EU Council presidency was given a partial negotiating mandate to start talks with the Parliament to establish the Ukraine Facility, a new single dedicated instrument to support Ukraine’s recovery, and the Strategic Technologies for Europe Platform (STEP) on Wednesday (10 January), four diplomats confirmed to Euractiv. EU leaders want to address the issue at a special European Council meeting on 1 February 2024, but the threat of Hungary raising obstacles has not faded. Read more.
EU-Mercosur: Scholz and Milei want swift conclusion. While the EU-Mercosur trade deal could not be agreed last year because, among other things, of a last-minute intervention of outgoing Argentinean president Alberto Fernández, the new Argentinian president Javier Milei has now expressed his support for the deal. On Tuesday (9 January), he had a phone call with German Chancellor Olaf Scholz (SPD/S&D), where both “agreed that the negotiations on the agreement should be finalised swiftly,” German government spokesperson Steffen Hebestreit said. French president Emmanuel Macron said in December that he was against the agreement.
Farmers’ protests: German Greens put blame on supermarket chains. As farmers continue to stage massive traffic-blocking demonstrations across Germany, a growing number of voices within the Greens, who are part of the ruling three-party coalition, are blaming major supermarket chains’ pricing policies for many farms’ dire economic situation. “The market power of supermarkets is particularly high in Germany,” Green MEP Anna Cavazzini, head of the European Parliament’s internal market committee, told Euractiv, adding that this would lead to “price squeezes and undercutting competition”. Read more.
Literature corner
2023 in EU economic policy: The year Germany went French – and back
Electricity pricing is Europe’s hidden industrial policy
How sensitive are Europeans to income losses related to climate policies?
[Edited by Théo Bourgery-Gonse/Alice Taylor]
Read more with Euractiv
