EU neighbors eye German state aid bonanza

As Germany prepares for major investment plans, its neighbors are warming to a long-term relaxation of EU state subsidy rules, believing their national industries stand to gain from Berlin’s significant spending plans.

Belgium, Czechia, Denmark, and the Netherlands have typically approached the EU subsidy race cautiously, fearing they would be overwhelmed by the budgets of larger and more financially powerful countries.

But four EU diplomats told the Financial Times that this stance is beginning to change, as EU member states anticipate a cross-border “potential windfall” from the new German government’s €1 trillion spending plans for defense and infrastructure.

“We are not going to complain because the German locomotive is moving again,” one EU diplomat said.

EU rules on state aid, also known as subsidies, are intended to prevent government spending from giving unfair advantages to favored companies or protecting struggling sectors from competition.

Brussels softened its approach to overseeing state subsidies following the war in Ukraine and now wants to extend this until 2030, making it easier for member states to channel money into clean technology and strategic infrastructure projects.

Although some defense projects have long been exempt from state aid restrictions, the relaxed regime will make it much easier for the Friedrich Merz government to quickly allocate public funds to a wide range of infrastructure projects.

EU member states are expected to adopt a softer approach in June. Sander Tordoir, an economist at the Centre for European Reform, said that Germany’s support for its own industry would create “downstream demand” for suppliers in other European countries, which are being shaken by Chinese competition and the threat of US tariffs. He added that smaller countries could ask Germany to encourage its industry to set up factories in other parts of Europe.

Bernd Weber, managing director of the think tank EPICO KlimaInnovation, also argued that although the fund would be directed towards German industry, it should benefit others “because supply chains are very interconnected.”

Smaller member states benefit more from German state subsidies compared to France, which often focuses on protecting or attracting investment within its own borders. France’s strained public finances limit its ability to increase incentives like Germany.

Recent figures from the European Commission show that the use of state aid as a % of GDP is higher in some of the EU’s smaller member states. Hungary, Croatia, and Malta rank in the top three respectively when it comes to % of GDP. These countries are followed by Poland, Slovenia, and Denmark.

Some EU capitals are wary of Europe’s shift towards public aid. According to three officials briefed on the meeting, Belgian Prime Minister Bart De Wever criticized German and French leaders at an EU summit last month for channeling so much state aid into their economies.

A spokesperson for the Belgian business federation also said that fair competition must be guaranteed and that they regretted the potential extension of relaxed EU state aid rules.

Victor Van Hoorn, EU director at Cleantech for Europe, said that Germany’s spending spree was a “promising signal” for clean technology startups.

On the other hand, Hoorn added that Brussels should focus on simplifying state aid rules, as they are often “very complex” and difficult for companies to navigate the system.