Sep 28, 2023

Sparks Fly in the Franco-German Electricity Battle–And Over the Future of the EU’s Single Market

The German government faces a weighty decision: Should it block France from providing cheap energy to its industrial companies? Or should it introduce its own electricity subsidy for its struggling industrial sector? The decision will show us if Berlin is ready to embrace an economic Zeitenwende.

An illustration of Emmanuel Macron at the Arc de Triomphe
All rights reserved

There is a showdown going on right now between Paris and Berlin. It’s about the acronym ARENH—French for “regulated access to historic nuclear energy.” Now, before you flick to the next article, because the never-ending Franco-German dispute on the virtue of nuclear energy bores you to death, bear with me.

This column is about a crucial question: whether Europe’s industry can get back on its feet. And the question behind the question is: Does the German government think that France or perhaps now rather the United States and China are the prime competitors for its industrial companies? The response will tell us if Europe faces another series of lost years, with France and Germany fighting over which one of them gets to eat crumbs, while the rest of the world is baking cakes.

The EU is currently entering the last mile on its reform of the electricity market. For Paris, the major ask is that it would like its state-owned power company EDF to continue selling electricity to local industry at cheap, regulated prices. The European Commission, then led by José Manuel Barroso, granted France an exemption to deviate from market prices in 2010. But that ARENH exemption expires in 2025. Paris fears that its discontinuation could deal a blow to its industrial sector that under President Emmanuel Macron has started to recover for the first time since 1980s.

The French argument: Look, we’ve spent tens of billions on these nuclear reactors that for most of the past 20 years have helped power the rest of Europe and notably Germany. Thus it’s only fair that a part of these gigantic public investments flows back to the local economy. Moreover, Berlin took the fatal decision to exit nuclear before coal and replace it with “cheap” Russian gas that has turned out to be not cheap at all. Why should France’s industries pay for Germany’s past short-sighted energy policy? Had Berlin not bet big on Russian gas, electricity prices in the EU would be much lower today.

Germany’s Selective Angst

But the German government’s counterargument also has some merit: France running a parallel power price for its industrial sector undermines the EU’s electricity market, Berlin argues. That is the same market that ensured that all EU member states, including France, could keep the lights on last winter, when many nuclear plants were being repaired and France imported power from across the Rhine.

But above all, Berlin fears ARENH disadvantages its industrial sector that is struggling with high energy prices while its French competitors don’t face the same problem. And at times when the German economy is stagnating and France’s has the upper hand in terms of growth, the nervosity spreads. In Berlin one points to Volkswagen’s decision to build a battery factory in Spain instead of Germany, as initially planned, due to the lower electricity prices in the southern European country, as proof of how real the competition is.

Another example of this angst is when a German car lobbyist anonymously tells Politico that French automakers are pushing the EU to impose tariffs on Chinese electric vehicles (EVs) also to hurt their German competitors—illogical, considering Renault is losing market share to BYD, not BMW. But as spin-doctors know, nothing gets a politician’s attention better than the claim that a neighbor is taking advantage of you.

The Romanian-French essayist Emil Cioran once wrote that civilizations start to decay and cooperation starts to break down if its constituent parts are focused above all on not getting duped by the other instead of working toward a common goal. And indeed, when the French were in the economic doldrums in the 2010s, anti-German sentiment and the accusation of Berlin foul-play were widespread. Now, the same narrow-minded reflex that misses the big picture is palpable in conversations in the German capital.

Front Lawn

Now back to ARENH. Of course, there is a way out of the Franco-German stand-off.

Berlin can ask itself whether it is really France and Spain that are eating away at its industrial sector—or state-capitalist China and the newly protectionist US? The stats are relatively clear. Of course, Chancellor Olaf Scholz can focus on preventing Germany’s French brother from steeling a strawberry from the front lawn, while its US cousin is eying the bag of seeds stashed away in the garage and the Chinese are uprooting the apple tree in the backyard.

Robert Habeck, the Green German Vice-Chancellor, Scholz’ Social Democrat (SPD) caucus in the Bundestag, Germany’s parliament, all of Germany’s 16 federal states, the Bundesländer, and most of the industrial companies get this. That’s why they argue that Germany should itself subsidize electricity for its industrial companies until 2030. Scholz and his team at the chancellery, however, are strongly opposed (arguing inter alia that it would open a Pandora’s subsidy box).

Of course, it would cost money that might be better spent on investments, from renewables to trains. But until Berlin really breaks the bureaucratic knot that prevents faster spending, it would help ease the transition away from energy-intensive industries. Natürlich, one would have to ensure that incentives for industry to cut down on electricity consumption are maintained. Et oui, other EU member states would be prompted to subsidize electricity themselves. That’s why Paris would welcome the Habeck proposal.

Macron has realized that for Europe to thrive it primarily needs to be competitive vis-à-vis the world and not Europeans amongst each other. For example, that’s why he excludes Chinese EVs from purchase subsidies in France and limits them to cars “made in Europe.” A step Berlin should consider copying. In the name of reciprocal European solidarity, because it can’t be just French taxpayers subsidizing Teslas built in Brandenburg. But also to convince the European Commission not to impose tariffs on Chinese EVs and risk a trade war, as this column argued in May.

The Adorno Dilemma

Above all Habeck getting his way on the electricity subsidy would signal that Berlin has fully understood that world trade has really changed.

“There is no right life in the wrong one,” wrote German philosopher Theodor Adorno—a dictum turned calendar-saying. You can keep pretending that the world is still like it was in the 1980s, when the EU set up the Single Market, or the 1990s, when it started to push decisively for an EU electricity market. The EU’s rules about competition and its restrictive approach to state aid worked well as long as the US was a free trader and China’s state-capitalism produced Barbies, not cars.

But when the two biggest economies in the world start raising tariffs and subsidizing their own industries, Europe faces a dilemma. Remember that prisoner’s dilemma chart in the game theory class at university? If Europe is the only one still playing by the old rules and refuses to live in a second-best world, it ends up as the big looser.

Therefore, Europe has to update its market for goods, services, and energy, so that it corresponds to the realities of the 2020s. That means making them more hybrid: Deeper within the EU from capital markets union to digital services, while selectively more closed at its borders. Allowing for more state intervention, and if possible not at the national level.

A true Europeanization of industrial policy to maintain the integrity of the EU’s single market should be a priority for Berlin. First, because with the US and China no longer the growth markets for exports, German industry will be all the more dependent on the European home market. Second, because every single EU economy lacks the scale in terms of labor, knowledge, and capital to compete with China and the US. Just like a Volkswagen car can only be produced today because components are shipped “in-time” from Austria to France, Intel producing semiconductors in Magdeburg needs suppliers on the continent.

Former Italian Prime Minister Enrico Letta, now president of the Institut Jacques Delors, has been tasked by European Commission President Ursula von der Leyen with drafting a report on how exactly to solve this urgent “square the circle”-type question. But the electricity subsidy question will tell us much sooner if Berlin is on board or prefers to continue to live in the old “right world” instead of the new “wrong one.”

Joseph de Weck is INTERNATIONALE POLITIK QUARTERLY’s Paris columnist and author of Emmanuel Macron. The revolutionary president.

Read more by the author

Joseph de Weck

Scholz Needs to Stop Copying Macron

Why are Paris and Berlin currently so at odds with each other? The simple answer is: Scholz’ EU strategy is a copycat of Macron’s. But Europe can’t take two Macrons.
Joseph de Weck

Can Macron Save Germany’s Car Industry?

As China’s electric vehicles take the continent by storm, Paris has put forward a balanced proposition for how to save European producers. But to really make it work, Berlin and others have to follow.