The European Union Response to the Inflation Reduction Act: An Assessment of the European Council System Beyond Crisis

Over a decade of successive crises has transformed how major policy reforms are dealt with in the European Union (EU), with a more European Council (EUCO)-centred system of governance as a result (Kassim et al., 2017; Smeets and Beach, 2022). Whilst the EUCO's formal role is merely to ‘provide the Union with the necessary impetus for its development and define the general political directions and priorities thereof’ [Article 15 Treaty on the European Union (TEU)], the crises have created the expectation that the EUCO should be much more closely involved in policy discussions on major dossiers. Yet the governance arrangements that were developed out of the need to manage these crises appear to have more lasting impacts post-crisis, as expected by work on ‘crisisification’ and ‘emergency politics’ (Kreuder-Sonnen and White, 2022; Puetter and Terranova, 2023; Rhinard, 2019). This literature provides us with important indicators for how this system works post-crisis. Apart from the crisis-induced speed and urgency, they point to a new, grand narrative of an EU system that is dealing with major, horizontal policy challenges that require a comprehensive (‘packaged’) policy response and that favour a centralized set of political and institutional actors (Rhinard, 2019, p. 617; White, 2015, p. 300). However, this literature does not specify what effects these features might have. Therefore, this article tackles the question of what happens when the EUCO-centred crisis management system is deployed in a post-crisis environment.

The year 2023, arguably, was the first moment in a long time that the EU was not in the midst of a severe crisis. There was still plenty of ‘crisis’ in its environment, first and foremost the Russian aggression in Ukraine. However, this became less a crisis of the EU system. The EUCO summit of 15 December 2022 represented a turning point in this regard. Two days earlier, energy ministers had managed to agree on a second package of measures to deal with the energy crisis, including a long-awaited Market Correction Mechanism (price cap) on gas (Smeets, 2023). Three days later, the Council and European Parliament closed a deal on the central elements of the fit-for-55 package – the Emission Trading Scheme, Social Climate Fund and Carbon Border Adjustment Mechanism – thereby locking in the main targets for the green transition. There was a sense of optimism amongst the leaders. For once, the Union appeared to be on track instead of in the depths of a crisis.

However, major medium- to long-term challenges to the EU remained, the most prominent at the time being the Inflation Reduction Act (IRA), the massive US subsidy scheme to support investments in clean industry and renewable energy that was adopted in August 2022. Whilst the IRA did not trigger an immediate crisis, it was undoubtedly Chefsache, meaning that it constituted a major, horizontal challenge with implications across very different policy areas that needed to be addressed at the highest political level. The IRA served as a wake-up call for EU leaders, who came to realize that energy prices were going to stay higher and that Europe faced a structural disadvantage, compared with the United States and China, in facilitating the green and digital transitions.

The EUCO (2022b) system's response to this challenge seemingly signalled a shift towards a more interventionist – in French, dirigiste – industrial and economic policy (p. 20). This is reflected in a new grand narrative of ‘reducing strategic dependencies’ by ‘mobilizing the necessary European and national public funding’, which had received impetus from the Versailles Summit and Declaration of 10–11 March 2022 (EUCO, 2022a, pp. 21, 24). It was then that leaders came to realize that Europe's dependence on Russia for cheap fossil fuels should not be substituted for a dependence on the United States and China for renewables. In December 2022, the leaders promised to protect and support Europe's clean-tech industries, using any financial and regulatory means they had at their disposal. Moreover, it promised to do all this very quickly, with Commission proposals expected to come out already at the beginning of 2023.

Whilst the EUCO and its institutional support structures (EUCO system) spent the larger part of 2023 looking for a response, there was not the same sense of urgency as during recent crises. The challenge for the EUCO system was not to come up with an immediate political answer but instead to keep track of and provide impetus to machine-room-level processes dealing with different aspects of the IRA. This article uses the theoretical framework of New Institutional Leadership (NIL) (Smeets and Beach, 2022) – which explains how the EUCO-centred mode of policy-making works during crisis reform negotiations – to compare and contrast the post-crisis case of the EU's response to the IRA. Based on an empirical tracing of the causal dynamics of the process, we find that without the speed and urgency of a crisis, the EUCO system's ability to steer major policy developments is more limited.

This section serves to assess the applicability of the theoretical framework of NIL to a post-crisis environment. The NIL theory was based on a series of in-depth, empirical case studies on the Eurozone, migration, Brexit, Covid-19 and energy crises. Whilst these crisis reform processes had unique elements in every case, the NIL framework is an attempt to synthesize the shared elements of the causal dynamics of how the EUCO-centred system works in linking the recognition of a crisis and the acknowledgement that some form of reform is required to fix it (causes) with major policy reforms being adopted (outcome). NIL specified the causal roles played by various institutional actors in managing these processes at different levels (Beach and Smeets, 2020; Smeets and Beach, 2022). The analytical focus is on the institutional triangle of the EUCO, the Commission and the Council of Ministers.

With regard to the levels of decision-making, NIL introduced a crucial distinction (or ‘gap’) between the control room, which consists of the EUCO itself and the political levels within the Commission and Council, and the machine room, which consists of the technical/administrative levels within the Commission and Council Secretariat and designated representatives of the member states (Sherpa's, Coreper Ambassadors), that structure and manage the policy-making process on behalf of the leaders. As the EUCO cannot adopt legislative proposals and does not have the resources to negotiate intergovernmental agreements on its own, there has to be some form of delegation to the machine room. However, the control room is formally separated from the machine room, thus creating challenges for the EUCO to maintain some form of control and inject urgency into machine room proceedings. NIL shows how the driving role of the EUCO in crises paradoxically resulted in increased autonomy and discretion for the unseen bureaucratic hands of an informal network of institutional actors from the Commission, Council Secretariat and cabinet of the President of the EUCO (PEC) by linking control and machine room proceedings and managing machine room negotiations. The term NIL refers to the greater influence over the process that institutional actors have in EUCO-centred crisis negotiations.

NIL unpacks the causal dynamics of a typical crisis reform negotiation process into five sequential steps, depicted in Figure 1. The process typically starts with one or more institutional actors (the Commission, the PEC cabinet and the Council Secretariat) starting to develop potential solutions to the crisis. This step can occur before or after tasking (Step 2) has occurred. In some cases, the EUCO formally tasks the Commission to develop a solution in the EUCO Conclusions, whereas in other cases, institutional actors start developing potential fixes even before they are asked. Further, the activity typically recurs throughout the process. The potential solutions are often tabled in the form of a package of proposals that provide a comprehensive and ambitious answer to the horizontal policy challenges at hand (see also Puetter and Terranova, 2023).

The next step involves some form of mandate-giving by the EUCO to institutional actors. Without a mandate, major reform proposals from institutions would typically be rejected at the machine room level out of hand. However, the exact form and timing of this mandate were different in every crisis. Tasking by the EUCO is a political signal of the importance that the heads of state and government attribute to resolving the crisis-related problem. This signal can then be used by institutional actors in the machine room to shield negotiations as well as help them bridge institutional divides. During a crisis, there is a need for shielding negotiations through the use of more informal modes of decision-making between smaller groups of key actors. Shielding reduces the risks of deadlock, delay and the lowest-common-denominator dynamics that often plague high-salience issues. Second, speed and urgency in a crisis help facilitate the bridging of institutional divides, specifically between the intergovernmental (EUCO, Council) and supranational (Commission) sides. Using a mandate provided by the EUCO, the Commission can provide concrete policy proposals and use the political signal from the highest level to impel negotiations forward in the machine room, using arguments like ‘the Heads want this’.

Given the combination of a need for speed and the high salience of the issues (Chefsache), there is a need to keep the EUCO informed and closely associated with machine room processes. This requires vertical linkage between the control and machine rooms, which can be provided by actors such as the Commission President, who has a seat at both levels. In order to propel negotiations further, the EUCO needs to be provided with the opportunity to provide its blessings to the policy solutions that the machine room has come up with and to propel the process onwards through re-mandating.

In the final episode, major policy reforms tend to be formally agreed upon in control room proceedings – typically a final EUCO summit. During a crisis, final solutions need to be endorsed by the leaders themselves. Here, institutional actors typically take a backseat, but they can help grease the wheels of compromise through the provision of creative fixes on otherwise intractable issues.

This section traces empirically how the EUCO system attempted to shape and steer the EU's response to the IRA and the broader process of reducing strategic dependencies through the mobilization of EU and national funds. As the IRA is first and foremost a subsidy scheme (through various tax credits and tax deductions), we focus here on the financial side of the EU's response: the promise ‘to mobilize all relevant EU level tools’, specifically through a European sovereignty fund. Even with this focus, we obviously cannot reconstruct the entire process through which the EUCO system tried to steer the EU machinery, specifically through its lengthy debates and Conclusions of March, December 2022, February, March, June and October 2023. An overview of the EUCO debates and Conclusions is provided in Appendix S1. These debates and conclusions show a clear trend. The Versailles Summit and Declaration of 10–11 March 2022 laid the foundations for a dirigiste agenda that took centre stage at the Summit of 15 December 2022.

We now move to the financial side of the EUCO system response. The year 2022 had been very much devoted to dealing with the immediate consequences of the energy crisis. However, in the run-up to the meeting in Versailles, the French Secretary of State for European Affairs, Clément Beaune, had already made an initial, informal pitch for a second Next Generation European Union (NGEU) to help Europe cope with the consequences of the Russian invasion of Ukraine, the energy crisis and defence (author's interview, March 2022). At the time, there were no takers. The frugal countries were adamant that the first NGEU was a one-off. More importantly, the Commission did not jump on this occasion. At Versailles, the leaders agreed to list its strategic dependencies whilst not (yet) talking about financing needs (EUCO, 2022a, pp. 14–22).

When President Biden signed the IRA on 16 August 2022, the EU had more urgent matters to deal with. On Friday, 26 August, gas prices reached a peak of over €300/MWh. The immediate focus was on bringing energy prices down. However, there was an indirect effect of the energy crisis on the subsequent debate about the IRA. Due to the energy crisis, many member states developed national measures to support businesses and households to cope with high energy prices. Notably, the German support package of 200 billion drew a lot of negative attention at the time (Euractiv, 2022), which would temporarily handicap the German government in its opposition to new EU-level funds in response to the IRA. These EU-level funds would, after all, compensate for the limited ability of less wealthy member states to use state aid to support their key industries.

It was at the December 2022 EUCO Summit that the initially rather French agenda became commonplace. European leaders called upon the rest of the machinery to do ‘what-ever it takes’ to protect and support Europe's net-zero industries (tasking). Even the liberal prime minister, Rutte, acknowledged that there were limits to openness and globalization.

In the first months of 2023, the European machinery went into overdrive in laying out tracks for this response. On 1 February 2023, the Commission presented its Green Deal Industrial Plan (GDIP), which on the regulatory side included the Critical Raw Material Acts (CRMA), the Net Zero Industry Act (NZIA) and a reform of electricity market design (EMD). Whilst important, the three proposals did not alter the approach that Europe had opted for. They represented more targets, more dialogue, an easing of administrative burdens and faster and easier permitting (Commission, 2023a). On the financial side, next to promises to reawaken the long-dormant project of a European Capital Markets Union, the most innovative element was the idea for a European sovereignty fund, which was to complement the loosening of state aid rules by the Commission as part of the Temporary Crisis and Transition Framework in March 2023.

Commission President Ursula von der Leyen (2022a) had, rather autonomously, launched the idea for a sovereignty fund in her State of the Union speech of September 2022, after which her services were to figure out the size, purpose and modalities of such a fund. In the run-up to the December 2022 EUCO Summit, von der Leyen (2022b), however, decided to put the idea on ice by suggesting that it would be presented as part of the mid-term review of the Multiannual Financial Framework (MFF), which the Commission planned to present in the summer of 2023. The EUCO (2020), for its part, had stated categorically already in July 2020: ‘there shall be no mid-term review of the MFF’ (annex 6). The Commission nevertheless proceeded with its preparations for its mid-term review. In spite of direct warnings that not a single member state was keen on having a mid-term review, von der Leyen put her two most trusted lieutenants, Chef de Cabinet Björn Seibert and Director General of Directorate-General (DG) Budget Stéphanie Riso, to work on it.

The EUCO, specifically the PEC, Charles Michel, was rowing in the opposite direction. The EUCO had tasked the Commission with coming up with proposals to mobilize all relevant EU and national tools already in February 2023, instead of waiting until June. The PEC reminded the Commission of these requests in his Draft Conclusions for the EUCO of 23 January 2023. These Draft Conclusions asked for work to be urgently taken forward on several matters: more room for state aid, more flexibility in using existing EU funds, an equivalent to the SURE (Support to mitigate Unemployment Risks in an Emergency) programme, but most of all, ‘the swift Commission proposal for a European Sovereignty Fund’ (EUCO, 2023a, p. 2a–d). These Conclusions were already discarded at the level of the Coreper Ambassadors. It was the Dutch Ambassador, Robert de Groot, who used the phrase ‘Marx on Steroids’, but behind the scenes, the German Ambassador was equally critical (Politico, 2023). There was no need for new funds, as there was still a lot of money left in the first NGEU fund.

Whilst the PEC retreated, the Commission President pre-emptively decided to cut her losses. The proposal for a European sovereignty fund was dressed down into a Strategic Technologies for Europe Platform (STEP), which was primarily a reorientation and relabelling of existing funds and instruments (Commission, 2023b). The STEP proposal was still presented as part of the mid-term review of the MFF (Commission, 2023c). As STEP was deliberately designed as an empty shell, there was little need for extensive negotiations. The negotiations instead focused on the Ukraine Facility and a cascade mechanism for dealing with the strongly increased interest payments on the NGEU loans. In the end, the leaders dressed down the STEP package even further, until only 1.5 billion for a European Defence Fund remained (EUCO, 2023e, p. 12). In this post-crisis environment, the Commission had been able to operate rather autonomously in laying out the tracks towards a sovereignty fund and mid-term review. However, without a strong mandate from the EUCO behind the work, it did not bring many results.

On the IRA response as such, it was the other way around. The EUCO kept pushing the Commission to come up with various assessments and proposals, but the Commission remained hesitant. The EUCO (2023c) of 29–30 June 2023 formally invited (i.e., tasked) ‘the Commission … to assess the impact of the IRA on investment and the effectiveness of measures taken in response by the European Union’ (p. 19). In the run-up to the EUCO Summit of 26–27 October, the Commission (2023d), somewhat reluctantly, presented this preliminary impact assessment.

All sides agreed that this Communication was devoid of substance (author's interviews, November 2023; February 2024). In the preparatory Coreper discussions, Seibert urged national ambassadors for restraint. Green investments were, after all, a good thing, and Chinese protectionism represented a bigger problem. US representatives, meanwhile, urged the EU to simply do the same (Euractiv, 2023). In fact, Commission representatives had started to plug and frame the existing NGEU fund, with its 37% green and 20% digital investments, as the European equivalent of the IRA. With its Communication of 24 October, the Commission (2023d) had gone from raising the alarm bells to praising the IRA as ‘a welcome development’ (p. 14).

The EUCO, again somewhat reluctantly, followed suit. It invited the Commission ‘to continue work on distortive effects of tariffs and subsidies by global actors’ and ‘to work intensively on mitigating the problematic and discriminatory effects of the US Inflation Reduction Act’ (EUCO, 2023d, p. 22e). However, this could not conceal the fact that the EUCO system's quest for an answer/equivalent to the IRA had basically ended with the EU doing more of the same. The Commission had created an online portal, set up various (clean transition) dialogues with industries (and social partners) and promised measures to simplify regulations and reduce administrative burdens. Meanwhile, plans to strengthen Europe's industrial and technological base were lifted over the 2024 European elections.

In this section, we discuss the empirical observations in light of our theoretical expectations about the impact that a post-crisis environment could have on EUCO-centred decision-making on major reforms, specifically for the five key causal elements in the NIL framework: laying out the tracks, shielding, bridging, linkage and creative fixes.

We have seen that policy-making continued to be centralized around the EUCO, but also within the Commission, with the Commission President and centralized services (Secretariat General) playing a prominent, co-ordinating role around the new narrative of reducing strategic dependencies. However, we have also seen that the EUCO system struggles to link such grand narratives to concrete policy output. The EUCO can make a lot of noise (in terms of meetings) and spend a lot of words (in its Conclusions) on grand horizontal challenges, but its ability to guide and steer machine room dynamics quickly diminishes post-crisis. The reason is that without the crisis-induced speed and urgency, crucial elements that drive the EUCO system are unable to perform their causal role, as a result of which the system as a whole loses traction in propelling major reforms forward.

One key difference post-crisis is the absence of shielding of decision-making from regular, institutionalized action channels. This shielding in turn allowed for the bridging, that is, the creation of informal networks of key representatives across institutional divides, that developed and pre-discussed key responses to the crisis at hand. In a post-crisis environment, there is less need and thus legitimacy for shielding and bridging, as a result of which institutional representatives fall back into their designated roles. Inter-institutional co-ordination still takes place, but along more routinized lines of communication, and it therefore becomes less influential.

The analysis of the EU response to IRA reveals the EUCO's continued dependence on the Commission for laying out the tracks towards eventual policy responses. In fact, we contend that this dependence is only enhanced post-crisis. The French Presidency was able to use the crisis to anchor a dirigiste policy agenda at the control room level. The PEC had far more difficulty making sure that this agenda was acted upon at the machine room level. For practically all of its key points in the EUCO Conclusions, the PEC relied heavily on Commission input, whether in the shape of communications, analyses or proposals. This Commission input often came very late and was difficult to anticipate for the EUCO. The main way for member states to upload their national policy preferences was via the Commission, not via the EUCO Conclusions.

However, the Commission's role in the EUCO system was also weakened in one important regard. In a crisis environment, the Commission could be reasonably sure that its policy ideas and proposals would, at some point and in some way, be acted upon. In a post-crisis environment, this certainty is no longer there. The Commission can rather autonomously lay out tracks, but it is even more dependent on the member states who decide how far they want to travel along a certain track. This is because there is less need for urgent decisions at make-or-break meetings. Negotiations are more dominated by normal machine room dynamics.

The Commission was seemingly aware of this. This might explain why it opted for a rather prudent approach in launching the idea of a European sovereignty fund, not jumping on the first occasion but linking it to a revision of the MFF. The Commission was able to anchor their idea in various EUCO conclusions (February, March and June 2023). Furthermore, by reframing the sovereignty fund into STEP, the Commission modified its ambitions and put a lot of time, effort and expertise into the mid-term revision of the MFF. Nevertheless, apart from the agreement on the Ukraine Facility, which was a victory for most national leaders and for the PEC, the mid-term review as a whole represented a loss for the Commission.

The main reason was that there was never an urgent need to agree on a sovereignty fund. The IRA did not allow for creative fixes, like a European Financial Stability Facility (EFSF), European Stability Mechanism (ESM), Recovery and Resilience Facility (RRF) or even banking union. After the reframing of the first NGEU as the de facto equivalent to the IRA, the protection and enhancement of European clean energy production became part of a broader European policy agenda that touched upon many elements of competitiveness, economic policy, the Single Market and even skills and training.

Although it is still too early to fully assess the impact, we contend that the handling of the EU response to the IRA reflects a new institutional balance in EU policy-making. We make three observations. First, there is still a huge interdependence between the institutions, the EUCO and the Commission in particular, but this interdependence hinders, rather than helps, progress in the process. Second, the EUCO still represents the highest level of authority in a centralized EU system that is continuously dealing with major, horizontal policy challenges. However, what is different is that the EUCO system needs to work hard to make sure that its requests continue to be acted upon. As one insider succinctly put it, ‘We cannot keep reminding them of what we asked. And we cannot keep saying: guys you are not doing what we said. That would make the EUCO look weak’ (author's interview, July 2023). Third, this shows that a crisis does not only bring speed and urgency but also provides for various occasions to re-emphasize priorities or concerns. More than other parts of the EU machinery, the EUCO system's reach and grasp are determined by events (Van Middelaar, 2019, p. 13). In a post-crisis environment, such events become sparse.