Biden’s IRA has left Europe blind-sided. And playing catchup could lead to 2 big mistakes

The European Union is working out of the blue to create an unprecedented campaign against President Joe Biden. But it faces two very important issues in preparation.

The EU has, for a long time, asked the United States to act on climate. Biden proposed this with the Inflation Reduction Act. But it has raised concerns for European businesses – which has angered politicians in the region. Brussels has been left to consider how best to respond.

“The US policy will not be passed overnight,” Emre Peker, head of the Eurasia advisory group, told CNBC, adding that the EU could have acted sooner.

“The EU is asleep at the wheel … with 28 representatives in Washington, the Europeans could have done more to fight the IRA before it was approved.”

The US Inflation Reduction Act, also known as the IRA, was approved by US lawmakers in August and includes $369 billion in spending on climate and energy policies.

Among other things, it imposes a tax on consumers who buy electric vehicles made in North America – this may make EVs made in Europe less attractive to consumers because they may be more expensive.

Some European companies have recently announced plans to invest in the US to take advantage of the prospect. And others could follow suit.

“Volkswagen they have big plans for the North American region. “We now have a unique opportunity to grow and expand our electric car in the US,” a spokeswoman for the German company, one of Europe’s largest automakers, told CNBC via email.

Methe Italian energy company, is targeting 85% of its 37 billion ($40.2 billion) revenue between 2023 and 2025 in Italy, Spain and the US.

“Specifically in terms of social assistance policies, the IRA includes unprecedented measures for green technology and we think that it can act as an incentive for the EU to continue in this direction, to support the development of renewable technologies that are important for the independence of our continent,” the company’s spokesperson told CNBC via email.

Luisa Santos, deputy director at BusinessEurope, a group of trade associations, told CNBC that “it’s still too early to say who will invest.” “But it is clear that some companies will invest in the US in any case,” he added, referring to the increase in investment expected in the US – because of Europe.

European officials are currently looking at relaxing state aid rules so that governments have more opportunities to support companies and large sectors.

The European Commission, which is the main body of the EU, is expected to make a decision in the coming weeks.

But this answer may not be good. Countries with bigger budgets will be able to spend more than poorer countries, putting at risk the EU’s single largest market – where goods and people move freely and which counts more than 440 million consumers.

Belgian Prime Minister Alexander de Croo told CNBC that more government aid “is not a good answer.”

“There is a place where they are playing [in Europe]. Belgium is a small market, a very open economy, Germany is a large market. If this is going to be the type of person with the deepest pockets we will all lose and it could lead to a war with the United States,” de Croo said earlier this month.

Several other experts have also expressed concern about reducing public assistance laws. Former Italian Prime Minister Mario Monti told Politico Europe that this is a “dangerous” approach.

In a letter released last month and seen by CNBC, the Head of the European Union Margrethe Vestager said: “Not all member states have the same amount of State Aid. This is a fact. And a risk to the integrity of Europe.”

In addition to the difficulties and relaxation of government aid, time is also at risk.

European officials will discuss and decide how to provide green incentives in the medium to long term. On the other hand, some argue that modern European programs should be sent to these resources. But on the other hand, others say that the bloc will need to find new funds to carry out this huge project.

So, this could be a deep and complicated political issue that could be around for a while.

Paolo Gentiloni, the European economic commissioner, said on Tuesday in Berlin that there are “different opinions” on the table.

“But I am satisfied that there is an intention to engage in these discussions,” he said after talks with German Finance Minister Christian Lindner, who had previously said he would not agree to new public lending.