Commission Weighs in on SGP Reform
But Also — Vestager’s Court Loss, Twitter and Meta Troubles, Hungary’s Money, Spyware
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Commission’s Proposal on Stability & Growth Pact Reform is Out
On Wednesday, November 9, the Commission published a 28-page communication outlining its proposals for the upcoming reform of the Stability and Growth Pact. The Berlaymont wants to adopt more flexible and country-specific rules.
WHAT IS IT? • The Stability and Growth Pact (SGP) — the 60% public debt rule and the 3% deficit ratio, to cut it short — was temporarily set aside following the Great Pandemic, which caused an explosion of public debt levels in the EU. In 2020, the general escape clause of the Pact allowed these obligations to be lifted in order to deal with the health crisis and avoid subjecting several Member State to the exhausting excessive deficit procedure. Due to the war in Ukraine and the current economic downfall, the escape clause has been extended and is now expected to run until the end of 2024 — after which the Commission hopes to see the birth of a revisited SGP.
CRITICISM• The rules of the SGP are often described as unrealistic, opaque and inflexible. Criticism then became widespread during the Covid-19 pandemic. "A lot has changed since the Maastricht Treaty recognized the need for sound public finances and coordinated fiscal policies. EU countries are now facing much higher levels of debt and deficit, with large disparities between states," Valdis Dombrovskis acknowledged. In 2021, the average debt burden reached 95% of GDP for all eurozone countries, ranging from 18% for Estonia to 193% for Greece.
DRUMROLL... • After lengthy consultations, the Commission's communication seems to bring some flexibility to the European budgetary framework. The Commission wants a "more transparent, simple and integrated" macro-budgetary surveillance architecture that allows for investments in the ecological and digital transition while reducing debt ratios in a more "realistic, gradual and sustained way." An appropriation of the rules by each Member State is also warranted by the European executive, which aspires to cooperate closely with national administrations to ensure better execution and enhanced control.
IN CONCRETO • The Commission is keeping the 3% deficit and 60% public debt rule, but it is removing the obligation to reduce debt and deficit ratios by 5% per year — a rule considered unrealistic in view of current debt-to-GDP ratios. To ensure convergence on a European scale, the Commission will propose reference budgetary adjustment trajectories every four years, which will then be broken down on a case-by-case basis by national plans and annual implementation reports. This echoes the Dutch and Spanish non-paper published in April, in which both countries called for country-specific medium-term budget plans.
In the event that a country deviates from the budgetary path approved by the Commission or exceeds the 3% deficit, the financial penalties would be lower than under the previous system, in which fines amounted to 0.1% of GDP — and lacked credibility because they were never implemented. In the words of Economy Commissioner Paolo Gentiloni: "If you have a nuclear bomb you have it not to use it. If you have a rifle, maybe you can use it".
SENSITIVE • These new proposals are above all a sign of Brussels' desire to give the States more control over budgetary rules. Under the new regime, they will engage in political discussions with the Commission and will be able to benefit from more individualized treatment by the EU’s executive branch.
These new principles, as well as the flexibility sought by the Commission, could be strongly disapproved by Berlin, whose Finance Minister Christian Linder has already declared that "a unified currency union also needs unified fiscal rules" with regard to the Commission's proposals. Berlin fears that bilateral negotiations between the commission and member countries will undermine transparency and fair treatment of eurozone countries.
Conversely, countries such as France and Spain are leaning towards the Commission's side — Economy Minister Nadia Calviño has welcomed the guidelines — but are likely to criticize some aspects of the proposals, including the fact that the adoption of financial sanctions would now be almost automatic.
WHAT NEXT • After these initial guidelines, the Commission should present legislative proposals. The ball will then be in the court of the Member States. Germany's concerns are well known, and an agreement can only be reached if Berlin is assured that these new rules will really be able to move towards greater fiscal sustainability. The Commission nevertheless hopes that these new rules will be operational by 2024.
In Case You Missed It — Vestager’s Court Loss, Twitter and Meta Troubles, Hungary’s Money, Spyware
VESTAGER FALLS FLAT ON FIAT • Competition Commissioner Vestager suffered a blow in Court on 8 November as the European Court of Justice (ECJ) struck down the Commission’s finding that Luxembourg had granted carmaker Fiat 30 million euros in illegal state aid. The Commission’s 2015 decision had previously been confirmed by the General Court, whose judgement is now being overturned by the ECJ. While she noted the ruling was a “big loss for tax fairness”, Vestager stated that “the Commission is committed to continue using all the tools at its disposal to ensure that fair competition is not distorted in the Single Market through the grant by Member States of illegal tax breaks to multinational companies”.
The EU Member States lack the political will to harmonise corporate tax rates, — as a tax matter — requires unanimity at the Council. Hungary is still vetoing an EU-wide participation in an OECD deal that would introduce a global minimum tax rate for multinational companies. Vestager has instead pursued cases against preferential tax treatments under EU state aid rules, which prohibit unfair selective tax advantages.
This latest court setback is not the first loss in Vestager’s quest to push back against ‘sweetheart’ tax deals via state aid rules, and could spell further trouble ahead. In 2020, the General Court annulled the Commission’s decision to require Apple to pay back Ireland 14,3 billion euros in unfair tax advantages. In 2021, the Commission also faced a setback in its case against Amazon when the General Court annulled its decision to order Luxembourg to pay back 250 million euros in illegal state aid.
MUSK IN BRUSSELS • Musk’s radical shakeup of Twitter is giving shivers to advertisers, who have massively held back spending on ads, causing a crash in Twitter’s advertising revenues. Twitter’s new Chief Twit is also introducing a sweeping series of changes to the platform — from content moderation to privacy— which could collide with the newly voted Digital Services Act.
“Elon puts rockets into space, he’s not afraid of the FTC”, said Twitter head of legal Alex Spiro, as engineers are increasingly under pressure to self-certify that new products and product features comply with the Federal Trade Commission’s Consent Order. Chief privacy officer Damien Kieran, chief information security officer Lea Kissner and chief compliance officer Marianne Fogarty all announced they resigned, as Platformer first reported.
In November 2021, the public hearing of Facebook whistle-blower Frances Haugen showed that the European Parliament knows how to put on a show. Now MEPs want Elon Musk to testify before the European Parliament. In a letter to EP President Metsola, the Renew Europe Group of liberal MEPs demands a “parliamentary hearing with MEPs (…) on the reforms he is implementing and the EU’s regulatory approach”.
Sophie in't Veld, who sits on the EP Committee on Civil Liberties, Justice and Home Affairs, said
"The bird might be free, but European values and laws must still apply to Twitter. Elon Musk might be the world’s wealthiest man, but no one is unaccountable. A hearing with Mr Musk in the European Parliament would be the opportunity for European lawmaker’s to scrutinise his actions and intentions. The direction of travel is worrying; free speech, yes, but we won’t tolerate breaches of EU law or a return to the wild west”.
ORBAN’S CASH • Hungary is offering new commitments about the independence of its judiciary to the European Commission in an uphill struggle to unlock the roughly 6 billion euros in grants flagged for Budapest under the NGEU recovery plan. The Commission is adamant that Hungary should comply with rule-of-law milestones to get the EU’s money. In addition to NGEU money, Brussels has also activated the Conditionality Mechanism under which it could withhold up to 7,5 billion euros in regular EU funds, under rule-of-law concerns. In both cases, Brussels is concerned by Hungary’s democratic backsliding and that Orban’s government would mishandle EU cash, given the country’s shaky record in public procurement and the sudden riches of Orban protégés in the last decade.
In a veto-for-veto deal, Orban could agree to dropping his veto on a deal to introduce a minimum corporate tax for multinational companies. Hungary’s aggressive use of its veto right in the Council, whether about financial support to Ukraine or the EU’s energy response against Russia, has raised eyebrows in Brussels and triggered a push for qualified majority voting — instead of unanimity — in several areas of the EU’s external action.
So far, the European Parliament has been very vocal in pushing the Commission to take strong action. The EP has even threatened several times to sue the European Commission when it — according to the EP — failed to confront Budapest. Several Member States have turned hawkish on the matter, including Belgium, Ireland, The Netherlands, and Germany. Germany’s coalition partners are pushing for a hard line too, asking Chancellor Scholz to veto any payments in case there are no sufficient guarantees that reforms will be implemented in Hungary.
META’S TROUBLES • The European Commission is about to send Meta a statement of objections, containing new charges over its Marketplace platform practices, according to Politico. The EU’s DG Competition initiated proceedings in June 2021 in this case. The statement of objections is the first formal step in an EU antitrust investigation, where the Commission informs the company in writing of the objections raised against them.
Meta is suspected of abusing its dominant position in social media to prop-up its position in its classified ads on Facebook Marketplace. The EU’s antitrust top cop would also want to investigate how Meta uses data gathered on advertisers through Facebook to tilt competition on Facebook Marketplace. The EU is conducting a similar investigation with Amazon’s use of third-party resellers data, and has received commitments from Amazon to address antitrust concerns.
SPYWARE SURVEILLANCE • The European Parliament special committee investigating the use of surveillance software by Member States advises in a report published last Tuesday a moratorium on the practice. It comes in the wake of a proposal by the Commission to ban digital surveillance of journalists.
A scandal in Greece has put the spotlight on so-called spyware. The phone of a politician from the opposition was revealed by the University of Toronto’s Citizen Lab to have been hacked by Predator, a product of the company Cytrox. But Greece is far from the only government facing accusations of using, if not illegal, then questionable surveillance techniques. The special committee also examined cases that have engulfed the governments of Spain, Cyprus, Hungary, and Poland. Sophie In’t Veld, the Dutch MEP who authored the report, told Politico that “all member states have spyware at their disposal, whether they admit or not”.
The report does not ask for a complete ban on government use of surveillance software. It says selling and using spyware, in strict accordance with the law, can sometimes be justified. Instead, the moratorium should be in place until a common framework regulating their use has been agreed on. Countries could then be allowed to end the moratorium once strong guarantees regarding oversight have been given, including oversight by the EU, and if exports of software that are deemed inappropriate are banned.
The publication of the report has led to strong criticism, in particular from Greek members of the EPP. The European Parliament will vote next year on the final version of the report, but it won’t be legally binding.
What we’ve been reading this week
In the Financial Times, Tony Barber criticises the Greek government for its role in the phone surveillance scandal of opponents and journalists and for its failure to respond with transparency to explain events.
In a blog post for the Peterson Institute, Cecilia Malmström encourages the EU to deepen its trade ties with Asian and Pacific countries. In particular, she urges the EU to consider joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
This week’s newsletter is brought to you by Marine Sévilla, Maxence de La Rochère, and Augustin Bourleaud. See you next Monday!