Europe cannot lose its smaller countries to its larger ones
As Brussels prepares to loosen state aid rules in response to American green energy subsidies, a quieter question surfaces beneath the geopolitical competition: what becomes of the smaller nations when the larger ones are freed to spend? Portugal's Finance Minister Fernando Medina has raised this concern at the Eurogroup, warning that without accompanying EU-level financing, the relaxation of these rules could deepen the very inequalities the European project was built to overcome. The Commission has acknowledged the tension, promising a sovereign European fund by year's end — though the details, as ever, remain the contested terrain where solidarity is either made or abandoned.
- The US Inflation Reduction Act is pulling investment westward, and Europe risks watching its green industrial base relocate if it does not respond with comparable incentives.
- Portugal's Finance Minister is sounding a clear alarm: opening state aid to wealthier nations without equalizing mechanisms could fracture the EU's internal market along the fault lines of fiscal capacity.
- Smaller member states lack the budgetary firepower of France or Germany, meaning a simple rule change could entrench competitive advantage at the core of Europe while the periphery is left watching.
- The Commission is moving toward a 'sovereign European fund' tied to the mid-term budget review, but Medina is pushing for explicit protections for SMEs and developing industries before any deal is finalized.
- Meanwhile, Portugal is navigating a broader balancing act — supporting wages and purchasing power in an inflationary environment without letting that support become the very fuel that keeps prices high.
The European Commission is preparing to temporarily relax its state aid rules, seeking to keep European industry competitive against the generous green energy subsidies embedded in America's Inflation Reduction Act. Commission President Ursula von der Leyen signaled the direction at Davos: member states would be given more room to support projects tied to the energy transition and protect sectors vulnerable to relocation. The logic is sound. But Portugal's Finance Minister Fernando Medina is urging Brussels to look carefully at who benefits — and who gets left behind.
Medina's concern is not with the principle but with the execution. If wealthier nations like France and Germany are freed to deploy state aid while smaller countries lack the fiscal capacity to follow, the EU's internal market risks becoming structurally lopsided. The very foundation of European economic integration could be quietly undermined in the name of competing with Washington.
His proposed remedy is direct: any loosening of state aid rules must be paired with EU-level financing mechanisms that allow all member states to participate on roughly equal footing. Von der Leyen acknowledged the concern, pointing to a planned 'sovereign European fund' expected by the end of 2023 as part of the mid-term budget review. Medina welcomed the direction but pressed for specifics — particularly protections for small and medium-sized enterprises and developing industries, without which the benefits risk concentrating in Europe's wealthier core.
Beyond the state aid debate, Medina touched on the EU's broader economic governance framework, signaling Portugal's support for a reformed approach that prioritizes debt sustainability over rigid numerical targets — a shift Portugal is already enacting domestically. And looking to the year ahead, he echoed the Eurogroup's wider message: support household incomes, but do so carefully enough that the support itself does not become an engine of inflation. After last year's painful lesson in underestimating price pressures, European policymakers are navigating that balance with considerably more caution.
The European Commission is preparing to loosen its state aid rules—temporarily, at least—to keep European industry competitive against American incentives. It's a reasonable move on its face. But Portugal's Finance Minister Fernando Medina is sounding an alarm about what happens to the smaller countries in the bloc if Brussels isn't careful about how it does this.
The trigger is the United States Inflation Reduction Act, passed last year, which offers substantial subsidies to companies investing in green energy and climate transition. The EU needs to respond or risk watching its own industrial base migrate westward. Ursula von der Leyen, the Commission president, has already signaled this approach at Davos. The idea: adapt state aid rules to allow member states to support projects that accelerate the energy transition and protect sectors vulnerable to relocation.
Medina doesn't object to the concept. But he's worried about the execution. If the EU simply opens the door to state aid in these specific sectors without ensuring that all member states can actually participate equally, the result could be a widening chasm between the wealthy countries and the poor ones. Smaller nations, lacking the budgetary firepower of France or Germany, could find themselves locked out of the competition entirely. The internal market of the European Union—one of its foundational achievements—could become lopsided.
The solution, Medina argues, is straightforward: any loosening of state aid rules must come paired with EU-level financing mechanisms. In other words, Brussels needs to put money on the table to level the playing field. Von der Leyen acknowledged the concern and indicated that the Commission would push for increased EU funding. By the end of 2023, she suggested, a "sovereign European fund" would be established as part of the mid-term review of the EU's long-term budget. This fund would theoretically ensure that smaller member states aren't left behind in the race to attract green industry.
But Medina is pressing for more precision. The devil, as always, lives in the details. If the new rules don't explicitly include pathways for small and medium-sized enterprises, or for developing industries, they risk funneling all the benefits to the wealthy core of Europe. "The idea is good," he told reporters after the Eurogroup meeting. "We need to work through the details and have a say in how they're defined." He emphasized that Europe cannot afford to lose industrial capacity to the United States—especially in the critical green transition sector. But it also cannot afford to sacrifice its smaller members in a race between its own larger economies. That would be self-defeating.
The Finance Minister also touched on the broader economic governance framework that the EU has been debating. Those rules have been suspended during the pandemic and recovery, but they're coming back. Medina signaled Portugal's support for the Commission's proposal, which would place greater emphasis on the sustainability of public debt and the trajectory of debt reduction. It's a shift that Portugal, which has been working to bring down its debt levels, is already implementing.
Looking ahead to 2023, Medina noted that the EU's general economic guidance aligns with what Portugal has been doing: supporting incomes without fueling inflation. Last year brought an inflation surge that policymakers initially dismissed as temporary. It wasn't. So Portugal adjusted course mid-year. For 2023, the government is continuing to recalibrate its wage and income policies, having reached two significant wage agreements. The broader message from the Eurogroup was consistent: support people's purchasing power, but don't let that support become a vehicle for runaway prices. It's a delicate balance, and one that will define European economic policy through the year ahead.
Notable Quotes
Europe cannot run the risk of deindustrialization to the US, but it also cannot afford to lose smaller countries to larger ones in a competition that would make no sense to open or intensify— Fernando Medina, Portuguese Finance Minister
The idea is good. We need to work through the details and have a say in how they're defined— Fernando Medina
The Hearth Conversation Another angle on the story
Why does Medina think smaller countries are at risk here? They can still apply for state aid, can't they?
The issue isn't access on paper—it's capacity. A country like Luxembourg or Slovakia doesn't have the same fiscal room to match subsidies that France or Germany can offer. If Brussels just says "okay, you can all give state aid now," the wealthy countries will outbid the poor ones, and the investment goes where the money is.
So he's saying the EU needs to fund this directly, from the center?
Exactly. If Brussels creates a European fund and distributes it fairly, then a smaller country can offer competitive incentives without bankrupting itself. It levels the field.
But doesn't that just move the money around? Doesn't it still come from somewhere?
It does. But the point is that it's a deliberate choice to keep the EU functioning as a single market, not a collection of competing economies where size determines everything.
Von der Leyen agreed with him, though. She said they'd create this sovereign fund.
She acknowledged the risk, yes. But Medina's pushing harder—he wants the details locked in now, not promised for later. He's seen how these things can get watered down in implementation.
What about the smaller companies? He mentioned those too.
Right. If the rules only benefit large industrial projects, small and medium enterprises get nothing. That concentrates power even further. Medina wants to make sure the rules are written to include them from the start.