German carmaker latest to be wooed by US incentives

German carmaker Volkswagen looks to be the latest enterprise to be partially tempted out of Europe by incentives offered under the United States' Inflation Reduction Act.

The auto giant, which is Europe's largest carmaker, said this week it will hold off on building a battery plant in Eastern Europe.

Instead, the company known as VW will develop something similar in North America, where it will qualify for US government incentives worth 10 billion euros ($10.5 billion) thanks to the controversial act known as the IRA.

The Financial Times newspaper quoted an unnamed source with knowledge of VW's decision-making as saying: "Plans in North America have moved forward faster than expected and overtaken decision-making in Europe."

Sources at the European Union were disappointed and said it was another example of the IRA's use of US government money to create an unfair advantage for US companies, and attract investment that would otherwise be headed elsewhere.

The EU has said it may appeal to the World Trade Organization over the IRA because it believes it breaches rules on fair competition. The bloc has, in the meantime, been trying to get the US to amend the legislation, to make it more Europe-friendly. And it has been developing similar legislation, as a last resort.

Brussels is set to publish that proposed legislation, the Net Zero Industry Act, next week. It will likely include more state aid and possibly even subsidies. However, the legislation is in the early stages and will not be ready for several months.

The FT said the EU's competition commissioner, Margrethe Vestager, met with the bosses of several battery makers in Brussels last week to talk about steps it may take to counter the IRA. But the paper said she could not offer specifics.

One unnamed manager who attended the meeting told the FT: "It looks pretty bad. There was an absence of concrete measures."

Thomas Schmall, the head of VW's components unit, who also attended, wrote on LinkedIn Europe could lose "billions of investments that will be decided in the coming months and years".

The IRA, which is already in operation, is a $369-billion package of subsidies, tax incentives, and loans Washington is offering enterprises deemed helpful to the US transition to a green economy. But critics say it is just a way for the US to use government money to attract investment.

The lobbying organization Transport and Environment said the IRA could persuade Europe's battery makers to reconsider two-thirds of the projects they had planned for Europe.

Reuters noted VW insists it has only put its planned European battery plant on hold and may reactivate it if the EU offers something similar to the incentives offered by the US.

The IRA will likely be discussed this week, when US President Joe Biden welcomes Ursula von der Leyen, the European Union's top official, to the White House.

An EU spokesperson told broadcaster CNBC: "We want to achieve as much non-discriminatory treatment for EU products and companies as possible, avoiding distortions of the level playing field."