France, Germany urge firm response to U.S. inflation law

© Reuters. FILE PHOTO: French Minister for Economy, Finance, Industry and Digital Security Bruno Le Maire leaves following the weekly cabinet meeting at the Elysee Palace in Paris, France, October 26, 2022. REUTERS/Sarah Meyssonnier/File Photo

PARIS (Reuters) - France and Germany sought on Tuesday to pave over differences on economic policy with ministers saying they agreed Europe needed a strong response to the U.S. administration's plans for government support for some American industries.

European governments are alarmed that Washington's Inflation Reduction Act (IRA), signed into law by President Joe Biden in August, could put European firms at a disadvantage on account of tax breaks it creates for U.S-manufactured goods.

"When we look at the IRA, the status quo is unthinkable, a trade war would be irresponsible," French Economy Minister Bruno Le Maire told journalists after talks in Paris with his German counterpart Robert Habeck.

"Europe has to defend its interests as a priority," Le Maire said, adding that the European Union could create a "buy European act" in response.

Habeck said that measures to strengthen European industry should be explored if negotiations with the Biden administration proved fruitless.

Since the IRA has already become law, French officials acknowledge that there is little prospect of reversing parts of it and say instead EU governments should seek exemptions for their companies in the short term and boost their own industries in the longer term.

State subsidies can also be mobilised on a large scale in the EU for cross-border projects, but getting such initiatives approved by the European Commission can often be long and complicated.

"If we look at what distinguishes the U.S. Inflation Reduction Act from the European incentive programme, the amount of money is not at all at the forefront," Habeck said, adding: "It is the length of the decisions."

In a joint statement issued after their meeting, the two ministers said industrial policy should be pushed at a European level to allow EU companies to remain competitive in the midst of Russia's war against Ukraine and soaring inflation.

Franco-German relations have suffered recently from differences ranging from energy policy to defence procurement and anti-inflation relief measures.