Germany and France have warned that European businesses will need investment on an almost unprecedented scale to keep up with U.S. and Chinese companies as the countries modernize their economies to make them more climate-friendly, Bloomberg reported.

German Chancellor Olaf Scholz and French President Emmanuel Macron met Sunday in Paris to discuss how the European Union should respond to the U.S. inflation-cutting law, which provides about $500 billion in new spending and tax breaks over a decade to benefit American companies.

The EU argues that the law, which went into effect this year, does not comply with international rules and will encourage investment out of Europe. EU leaders will meet in February to discuss their options, one of which is to file a complaint with the World Trade Organization.

"The first thing is to make sure that we, as the European Union, are treated no worse than our immediate neighbors, such as Canada and Mexico - this is unacceptable, Scholz said at a joint press conference with Macron at the Elysee Palace.

Subsidy race

The U.S. law subsidizes the energy of the future, from hydrogen to batteries, wind and solar, and seeks to make production self-sufficient and ensure that the country is not dependent on China or other countries.

Germany and France have called on the U.S. to change the law to give European companies more flexibility in using the credits offered. But officials in the EU are increasingly skeptical that Washington will make changes and have begun outlining ways to protect European industry.

The EU's response is likely to include giving member states more freedom to invest in their own companies and redirecting existing EU money to firms in need.

European Council President Charles Michel is proposing several steps to strengthen the bloc's economy, including a new bond program to equalize the varying financial positions of EU member states.

France to transport about 10 percent of the EU's hydrogen needs by 2030.

The European response

The U.S. climate law and Europe's evolving response have raised fears of tit-for-tat subsidies and new protectionism that splinters the global economy and raises prices for consumers. But Scholz said he did not think the law would cause a trade war among transatlantic allies.

EU competition chief Margrethe Vestager warned that too much national support for companies could disadvantage smaller, poorer countries with less financial means. Germany and France, two of the EU's largest economies, have benefited the most from the European Commission relaxing existing rules to help companies cope with high energy costs.

Six countries - Denmark, Finland, Ireland, the Netherlands, Poland and Sweden - have already urged the European Commission to be more cautious in changing the EU's crisis timeframe. They have warned of the risks of domestic market fragmentation, harmful subsidies and weaker regional development.