Energy and the US are EU's Biggest Headaches
But also — Hungary's Money, Migration, Michel in China, Brexit
Hi! This is Monday, 28 November 2022, and here’s the news you need to start your week. Feel free to share this newsletter with friends and colleagues, and follow us on Twitter and Linkedin.
Tensions with the US over Biden’s IRA escalate, as enduring woes of energy crisis to the EU economy lay bare
The EU is having a hard time solving its energy puzzle and figuring out how to deal with the US. While Europe’s households and industry bear the heavy cost of inflated energy prices, Member States can’t seem to agree on a gas price cap proposal that has been dragging on for weeks. Biden’s Inflation Reduction Act is causing major concern in Europe, where efforts to keep factories within the EU and prop up the green transition could be curtailed by massive US subsidies.
COUNTDOWN • The IRA, which was unveiled this summer, is Biden’s landmark 369 billion dollars plan aimed at reducing inflation through strategic federal support in multiple sectors.
The plan has made the EU and its Member States anxious for months, as it could considerably tilt the market towards American industry, notably through generous tax breaks for the purchase of electric vehicles made in the USA — with potential losses of competitiveness for the EU.
The IRA will come into force in less than six weeks. And for now, no agreement with the US is in sight, despite the launch of a US-EU Task Force on the matter in late October.
CHANGING EQUATION • Germany is growing increasingly concerned about the imminent entry into force of the IRA. The economically liberal country, which was initially against any overly interventionist measure to support the EU industry, is reconsidering its position. While a free-marketeer and atlanticist by heart, Germany remains nonetheless the EU’s powerhouse when it comes to the automotive industry.
As it reviews its stances on the issue, Germany slowly warms up to a more interventionist vision — one that France has advocated for in the past weeks. In a joint statement, French and German Economy Minister Bruno le Maire and Robert Habeck have called for a “renewed impetus in European industrial policy”, committing to “coordinate closely a European approach to challenges such as the United States Inflation Act”, while ensuring “that WTO rules are respected by all”.
HOW FAR? • Uncertainty remains, however, on how far Germany will be willing to go. Olaf Scholz wants to avoid a trade war and instead favours a limited trade agreement with the US. Contrary to Germany, France is in favour of a “Buy European Act” to counter US threats to homegrown products. Bruno Le Maire’s words summarise France’s position on the issue:
“We have entered a new globalisation (...) China has been in this globalisation for a very long time with massive state aids that are reserved exclusively for Chinese products. The fact is that the U.S. has just entered this new globalisation before our eyes to develop its industrial capacity on American soil. Europe must not be the last of the Mohicans." — Bruno le Maire
The US basically told the EU to stop whining. Europe should “step up support for its manufacturers” instead of engaging in a tit-for-tat tariff battle, US Trade Representative Katherine Tai told the FT in early November.
DILEMMAS • This is a high stakes decision for the EU. Failure to find a common ground with the US would undermine the transatlantic unity that both sides need to maintain in the face of the war in Ukraine. Furthermore, the EU moving away from liberal trade principles could have significant implications.
As emphasised by Elivre Fabry from Jacques Delors Institute, the EU “risks crossing the Rubicon” on free trade, meaning it will be harder for the bloc to credibly advocate for liberal policies in the future if it snubs them now. International trade represents a much higher share of GDP in the EU than in the US.
In addition to decades-high energy costs in Europe — in part due to the price of US imported LNG —, the IRA is pushing companies to consider concentrating future investments outside of the EU. “The IRA is moving momentum a lot from Europe to the US”, Northvolt chief executive Peter Carlssonn told the FT.
Several firms have put investments in the EU on hold, or even closed their operations in some Member States — such as steel-maker ArcelorMittal, which closed some of its mills in Germany.
TRADE COUNCIL • On 25 November, trade ministers gathered to discuss potential responses to the situation. EU Trade Commissioner Valdis Dombrovskis emphasised the inefficiency and expensive cost of subsidy races, and underlined that the bloc must use green subsidies in a “more targeted and efficient way”.
Valdis Dombrovskis implicitly said that China might ultimately be the winner in case of a EU-US trade war: “The winner might then sit on [another] continent — not in Europe, and not on the American one”, Politico reported. Free-traders such as the Netherlands and Sweden have also voiced concerns about a potential trade war — which they want to avoid.
Solutions could include facilitated, and faster approval of subsidies under the Important Projects of Common European Interests (IPCEIs), especially on hydrogen, batteries and health — a measure suggested by Le Maire and Habeck in their joint statement.
ENERGY COUNCIL • Additionally, Member States still have to find a consensus on the seemingly never ending debate on introducing a price cap for Russian gas. On 22 November, the Commission presented its new price cap proposal, which would be activated only under two stringent conditions — more here if you want to get down to the nitty-gritty. Two days later, Energy ministers gathered in Brussels to discuss updated proposals from the Commission.
Countries in favour of a price cap — including Belgium, Italy, Spain — have argued that the mechanism was designed to never be used, while opponents have emphasised risks for financial stability and supply. On this matter, Energy Commissioner Kadri Simson voiced frustration about seemingly contradictory instructions of Member States: “Price caps entailing no significant risks for energy and financial stability cannot be designed”, she said.
WHAT NEXT? • The next Energy Council will take place on 13 December. Regarding the IRA, Valdis Dombrovskis said the next EU-US Trade and Technology Council (TTC), which takes place on 5 December, will be “a good time to take stock on how the task force is doing and then decide on what are the next steps”. By then, Member States will have to come up with a more precise idea of what they can and cannot agree on.
In Case You Missed It — Hungary update, Migration policy, Rishi’s Brexit, Michel in China
HUNGARY • The European Parliament is increasing pressure on the Commission not to unblock EU cohesion funds destined to Hungary amidst accusations of corruption and concerns over the handling of public procurement. The resolution, passed by 416 in favour, 124 against, and 33 abstentions on 23 November, calls out the Commission for being too soft on Orban.
The remedial measures negotiated between Brussels and Budapest to unlock the funds are “not sufficient to address the existing systemic risk to the EU’s financial interests”, the MEPs contend. Hours before the resolution was voted, it was reported that the Commission would recommend withholding the funds, given Hungary’s failure to meet the milestones that it set as a condition for the disbursement.
In September 2022, the Commission proposed that 7,5 billion euros in EU cohesion funds be frozen under the Conditionality Mechanism, a regulation which allows to withhold funds when rule of law concerns threaten the EU’s financial interests. The mechanism was triggered against Hungary in April.
The EU is also withholding 5,8 billion euros in NGEU grants over similar concerns. Hungary has blocked several major EU initiatives at the Council, such as the 18 billion euro macro-financial aid to Ukraine and the OECD deal on a global minimum tax rate. The European Parliament is concerned that the Commission would give in to Hungary’s blackmail tactics.
It is not the Commision that takes the final decision to block the funds or not, but the Council, based on a Commission proposal — which it can adopt, amend, or reject. The Council has until 19 December to take a decision on whether to release the funds or not to Hungary. The vote will take place by qualified majority.
MIGRATION • On 25 November, Home Affairs ministers met in an emergency session to discuss the current situation along migration routes. The meeting was convened against a backdrop of escalating tensions between Italy and France over the taking in of 234 rescued migrants.
Earlier this week, the European Commission presented its Action Plan on the Central Mediterranean. The plan proposes to further strengthen the capacities of North African countries to prevent migrants from crossing the Mediterranean and to increase cooperation between Member States, Frontex and NGOs involved in search and rescue activities. It also aims to accelerate the implementation of the Voluntary Solidarity Mechanism.
Ministers welcomed the plan and suggested developing a similar proposal for the Western Balkan route. Some experts, however, called the plan “another reshuffle of old ideas that do not work” and criticised it for its reinforced externalisation of migration management to repressive states.
Ministers will continue their discussions in a regular meeting taking place on 8 December. The goal is to agree on “one single framework based on EU law”, according to Vice President Margaritis Schinas.
BEIJING TRIP • On 1 December, Charles Michel will be travelling to Beijing to meet with Xi Jinping, the European Council announced on 24 November. He will be the second leader — after Olaf Scholz — to visit China after the country partly reopened its borders.
Many were very astonished by the announcement, made at such short notice. Member States have been “kept in the dark” about this visit, as Politico reported. Michel will also be in China while major protests are taking place against the government’s zero-covid policy — which increases the chance of a diplomatic mishap as Member States have had little time to come up with a — hard to define — common position prior to Michel’s visit.
This trip takes place as the EU is trying to define its stance and future attitude towards China. In preparation for the EU-ASEAN Commemorative Summit on 14 December 2022, the EU Council already held a strategic discussion on the EU’s relations with China on 20 and 21 October.
RISHI’S BREXIT • Relations with the EU have once again inflamed the British political scene after a Sunday Times article revealed that senior members of the government are considering negotiating a Swiss-style relationship with the European bloc to increase the flow of trade.
The Office for Budget Responsibility (OBR) expressed concern in its November 2022 outlook about the "significant adverse impact" that the Brexit has had on the volume of trade between the UK and the rest of the continent.
The revelation has sent euroskeptics from the European Research Group (ERG) into a tizzy. The Trade & Cooperation Agreement has been in force for a very short time, and a Swiss-style solution means less control over immigration and more jurisdiction for the EU Court of Justice.
What we’ve been reading this week
For the Institut Montaigne, Michel Duclos ponders whether the time for negotiations with Russia has come.
In Notes from Poland, Samuel Tchorek-Bentall reflects on the historical significance of Polish support for Ukraine, alluding to their fractious shared history in the last century, often little-known in Western Europe.
In a brief for Bruegel, Thorsten Beck et al. make proposals aimed at completing the European banking union.
For the ECIPE, Fredrik Erixon et al. have published a report offering a roadmap to the restoration of European competitiveness and growth.
This week’s newsletter is brought to you by Paul Benedikt Müller, Judith Benk, Marine Sévilla, Maxence de La Rochère and Augustin Bourleaud. See you next Monday!