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The European Union is in emergency mode and is preparing large subsidies to prevent the destruction of European industry by American rivals, two senior EU officials have told POLITICO.

Europe faces a double blow from the US If it wasn’t enough for energy prices to remain permanently much higher than the US thanks to Russia’s war on Ukraine, US President Joe Biden is now launching a $369 billion industry subsidy program to support green industries under Inflation Reduction Act.

EU officials fear that businesses will now face almost irresistible pressure to shift new investment to the US rather than Europe. EU industry boss Thierry Breton warns that Biden’s new subsidy package poses an “existential challenge” to the European economy.

The European Commission and countries, including France and Germany, have realized that they must act quickly if they want to prevent the continent from turning into an industrial wasteland. According to two senior officials, the EU is currently working on a contingency plan to divert money to key high-tech industries.

An initial solution now being prepared in Brussels is to counter US subsidies with its own EU fund, two senior officials said. This would be the ‘European Sovereignty Fund’ already mentioned in Commission President Ursula von der Leyen’s State of the Union address in September to help companies invest in Europe and meet ambitious green standards.

Senior officials said the EU must act very quickly as companies are already deciding where to build their future factories for everything from batteries and electric cars to wind turbines and microchips.

Another reason for Brussels to react quickly is to avoid individual EU countries spilling emergency cash themselves, officials warned. The haphazard response to the gas price crisis, to which EU countries responded with all sorts of national support measures that threatened to undermine the single market, is still a sore spot for Brussels.

European Commissioner Breton in particular led the pack in ringing the alarm bells. at meeting with EU industry leaders on Monday, Breton issued a warning about the “existential challenge” for Europe posed by the Inflation Reduction Act, according to those in the room. Breton said it was now of the utmost importance to “reverse the ongoing process of deindustrialisation”.

Breton echoed the calls from business leaders across Europe, warning of the perfect storm for manufacturers. “It’s a bit like drowning. It happens quietly,” said Fredrik Persson, President of BusinessEurope.

The Inflation Reduction Act is a particular problem for car-producing EU countries – such as France and Germany – as it encourages consumers to “buy American” when it comes to electric vehicles. Brussels and EU capitals see this as undermining global free trade, and Brussels wants to strike a deal so that its companies can enjoy the same American benefits.

As a diplomatic solution seems unlikely and Brussels wants to avoid an open trade war, the subsidy race looks increasingly likely to be a contentious Plan B.

To do so will require the support of Germany and more economically liberal commissioners such as trade chief Valdis Dombrovskis and competition chief Margrethe Vestager.

at Meeting of EU trade ministers on Friday, Brussels hopes to get more clarity from Berlin as to whether they are willing to break the subsidy taboo.

France has long called for a counteratt*ck against Washington by funneling state funds to European industry to help industrial champions on the continent. This idea is also gaining ground in Berlin, which has traditionally been more economically liberal.

On Tuesday, German Economy Minister Robert Habeck and his French counterpart Bruno Le Maire issued a joint statement call for “an EU industrial policy that will enable our companies to thrive in global competition, especially through technological leadership”, adding that “we want to closely coordinate the European approach to challenges such as the US Inflation Reduction Act”.

In addition to the Friday meeting of trade ministers, the idea will be discussed informally, among others in competition ministers next week. One official said European leaders would also discuss it in passing Western Balkans Summit December 6 and at European Council middle of December.

Hans von der Burchard, Giorgio Leali and Paola Tamma submitted their reports.

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