Divisions cloud latest European Council
Brexit, Environment, Eurozone
The Briefing
On March 23 and 24, EU leaders met for a European Council focused on the Green Deal, the war in Ukraine and the competitiveness of European industry. Nonetheless, Germany’s blockade of a ban on the sale of combustion engine vehicles in 2035 dominated the summit, where an agreement between the Commission and Germany was nevertheless reached at the last minute.
COMBUSTION • During the summit — which had relatively vague objectives — EU heads of state adopted conclusions on the war in Ukraine, the EU's competitiveness and the bloc's energy transition.
Divisions over a key legislation of the European Green Deal nevertheless clouded the summit. Initially scheduled for March 7, final approval of a ban on the sale of combustion engine vehicles in 2035 had been blocked for several weeks by Germany.
With the support of Italy, Poland, Bulgaria and the Czech Republic, Germany wanted a specific plan from the Commission on synthetic fuels — or "e-fuels". These are produced using CO2 captured from the atmosphere and hydrogen produced from renewables.
If CO2 is emitted during combustion, it corresponds to CO2 originally captured from the atmosphere, which would make the technology in theory carbon neutral. But the technology is criticised because it requires more electricity than electric vehicles and e-fuels must be shipped from production sites often located outside Europe.
POLITICS • Germany sees e-fuels as a way to preserve its combustion engine production, which accounts for about 800,000 jobs in the country. Specifically, it is the Liberal Democratic Party (FDP), one of Germany's three coalition parties, that opposes a total ban on the sale of combustion engine vehicles by 2035.
After several local electoral defeats, the FDP sees e-fuels as a way to gain popularity among Germans, 68% of whom remain opposed to the end of combustion engines in 2035, according to a poll.
The liberal-democrat party was able to rally the social-democrat party (SDP) of Chancellor Olaf Scholz to its cause, to the great displeasure of the third party in the coalition, the Greens.
REACTIONS • Specifically, Germany wants to create a credit system for producers of cars that use these alternative fuels, which would be endorsed by the adoption of a delegated act by the Commission. On the other hand, France, Spain, Belgium, Denmark, Ireland and the Netherlands have maintained their support for the initial plan.
The automotive industry has been increasingly critical of the German attitude, accusing the German blockade of causing great uncertainty. In a letter sent to the Commission on March 20, 47 car companies — including Volvo and Ford — called on the Commission to stick to the October 2022 text, citing risks to investment security and the "dangerous precedent" that backing down on the text would represent.
AGREEMENT • Last Friday, several hours after the departure of the European heads of state, Germany and the Commission finally reached an agreement on the subject, said Frans Timmermans, Commissioner in charge of the Green Deal.
The contours of the agreement remain unclear, but according to Politico, the Commission should create a new category exclusively for e-fuels within the Euro 6 automotive classification. This classification should then be integrated into the text on the end of combustion vehicles in 2035 as a technical annex. The Commission might have to reopen negotiations on the text if the Parliament decides to block the addition of the technical annex.
WHAT NEXT • In practice, then, the text will be adopted as is, and the details of how the new classification will be incorporated into the text will be discussed later.
Adding to France's push to integrate nuclear into the EU's energy transition policies — notably on green hydrogen — the German attitude on combustion engines seems to irritate several member states, who feel that France and Germany are undermining the advancement of the EU's climate agenda through their disagreements and individual demands.
In Case You Missed It
BREXIT • It's (almost) a done deal. Rishi Sunak has won a majority of support for the future of the UK's relationship with the EU. With 515 votes for and 29 against, the House of Commons passed the "Stormont Brake", which allows the Northern Ireland Assembly to oppose new EU regulations and directives that apply in the territory.
This is a key vote in the legislative process that should lead to the adoption of the Windsor Framework on the British side. The Windsor Framework received the unanimous support of the EU member states at a General Affairs Council meeting on 21 March.
Maroš Šefčovič and James Cleverly met again on 24 March for a meeting of the EU-UK Joint Committee. The joint statement endorsed the new arrangements for the Windsor Framework — the agreement that is intended to reduce trade friction on the border between Northern Ireland and Great Britain.
ENVI • On 22 March, the Commission adopted two new proposals on consumer rights, one on repairing goods and the other on fighting greenwashing.
Regarding repairs, the Commission proposes to introduce a new "right to repair" for consumers. This would mean that sellers would be obliged to offer a repair unless it is more expensive than a replacement.
In addition to this legal guarantee, the Commission's plan calls for the creation of online platforms to connect consumers with repairers and a European quality standard for repair services, among other things.
On greenwashing, the Commission proposes new common criteria to fight greenwashing and misleading environmental claims. According to a Commission study, more than 50% of environmental claims in the EU are "vague, misleading or unfounded".
The Commission wants bloc-wide rules to prevent greenwashing but also to avoid unfair competition that can result from too many different rules on the issue between member states.
The Commission's proposal on greenwashing has been strongly criticised by consumer associations and environmental NGOs. They accuse the Commission of having produced a text that is too vague to have any real impact.
According to the FT, an earlier version of the Commission's plan provided for the use of a "product environmental footprint" methodology, which environmental groups had seen as a victory. This methodology is absent from the official proposal.
ECO • Christine Lagarde has expressed concern about a potential ‘tit-for-tat dynamic’ between workers and companies, which could increase price pressures by driving up profit margins and wages. On Wednesday, she warned that recent increases in borrowing costs were just the beginning, and that the ECB would need to raise interest rates to ‘dampen demand’ due to persistently high inflation. The ECB raised rates by 50 basis points on 22 March, bringing its deposit rate to 3%.
Earlier in the week, Lagarde had also cautioned that the recent turmoil in the banking system could exacerbate the current contraction in credit supply, despite eurozone banks having ‘very limited exposure’ to Credit Suisse after it was taken over by rival UBS. Eurozone banks' lending in the bloc shrank by €61bn between January and February, the biggest monthly decline since 2013. Lagarde warned banks to prepare for ‘a potentially less favourable environment’ due to low economic growth, soaring funding costs, and higher defaults.
The ECB’s steadfast commitment to fight inflation by hiking interest rates is echoed by its main counterparts, in the United States, Switzerland, and in Britain, where the Bank of England decided last week to raise its benchmark rate to 4.25%, as consumer price inflation rose to 10.4%.
What we’ve been reading
In a VoxEU column, Jon Danielsson and Charles Goodhart set forth what they call the ‘trilemma of financial policy’: keeping growth strong, inflation low, and financial stability high. Policymakers’ failed attempts to achieve all three objectives, they argue, explains the current banking crisis.
In a brief for Bruegel, Alexander Lehmann and Catarina Martins explain how sustainability-linked bonds (SLBs) could help incentivize climate policies in EU countries, accelerating emission reductions.
The CEPS has published a report by Veronika Movchan et al. on the progress made by Ukraine, Georgia, and Moldova in their efforts to fulfill the conditions for EU accession laid out by the Commission in June 2022.
This week’s newsletter is brought to you by Augustin Bourleaud and Maxence de La Rochère. See you next Monday!