Bas van Geffen, CFA, Senior Macro Strategist at Rabobank

Although the European Union is trying to reinvent itself with its pursuit of “strategic autonomy”, no one ever said it would be easy. We certainly have been saying that this would be a challenging endeavour, seeing how Europe does not exactly have a strong starting point when it comes to the required resources, or geopolitical clout. However, if these external weaknesses weren’t providing enough of a struggle, internal division may also throw a spanner in the works.

I’m specifically referring to the news that the German government will not increase its subsidies for a fab that Intel plans to build in the city of Magdeburg. The chip company was already due to receive €6.8 billion in subsidies for the construction of the plant, but has since increased its demand to €10 billion on higher energy and construction costs. Finance Minister Linder told the FT that he opposes such an increase, as the government seeks to consolidate the budget. That sentiment is not shared by the entire government, though. Economy Minister Habeck argues that they should match the subsidies provided by the US CHIPS and Science Act. Chancellor Scholtz is also in favor of more support for the Intel plant, as the company suggested it might then up its own investment spending too.

The German divide illustrates various problems on the road to strategic autonomy. First of all, the necessity to match the subsidies of other governments clearly indicates how the shifting geopolitical tides can lead to a ‘race to the top’, where countries –even allies– all try to outbid each other to increase domestic production capacity.

Moreover, it reveals the structural weaknesses in Europe’s governance when it comes to tackling such big continent-wide projects. Even though Europe has loosened its state-aid rules, and even though a limited amount of European funds have been made available to rejuvenate member states’ economies, a large part of the execution is left to these individual countries.  First of all, this means that countries with deeper pockets will be able to spend more to entice companies to invest in their regions. But that may also be thwarted by their mindset: if these countries prioritize the short-term balancing of the budget over structural improvements in the economy, that could hurt their longer-term prospects, and those of Europe. Of course, I’m not arguing for another spending splurge here, particularly considering the inflationary backdrop, but targeted investments in key areas that structurally improve the Eurozone’s economy should not be foregone due to near-term fiscal concerns.

But the fight for strategic autonomy, and particular chip dominance, isn’t only won by subsidies. Over the past year or so, both the US and Europe have already tightened the thumb screws on exports of the most state-of-the-art semiconductor machinery, including extreme ultraviolet and deep ultraviolet lithography needed to create these high-end processors. Additionally, the Dutch may now limit the risk of technology transfer even further: the Ministry of Education confirmed that it is working on measures that introduce mandatory screening of students and researchers working in sensitive subject areas, like these high-end technologies. The country said the measures will be country-neutral, but they follow the recent line of a toughening stance on the Chinese chip sector. This will likely further escalate the tensions between the Netherlands and China, whose relationship had already been under strain after the Dutch joined the US effort to bar China’s access to advanced machinery.