EU Money for Missiles
But also — ECB, DMA, Pharma
Hi! This is Tuesday, 9 May 2023, and here’s the EU news you need this week. Feel free to share this newsletter with friends and colleagues, and follow us on Twitter and Linkedin.
The Briefing
On May 3, the European Commission announced its intention to allocate €500 million to support arms production in Europe in the context of the war in Ukraine. The following day, nine Member States issued a statement in favour of switching to qualified majority voting in common foreign and security policy (CFSP). These two announcements represent an important step in the architecture of European security and foreign policy.
ASAP • On May 3, the Commission adopted a proposal for a regulation called ASAP — for Act in Support of Ammunition Production. The proposal, which must be supported by the Parliament and the Council, provides:
Financial support of 500 million euros to strengthen the production capacities of the European Defence Technological & Industrial Base (EDTIB).
A mechanism to map out the risks of supply shortages.
A temporary regulatory framework to remedy the shortage of supply of ammunition and missiles.
CONTEXT • Since the beginning of the war in Ukraine, the stocks of weapons and missiles of EU member states have been depleted and have struggled to return to pre-war levels due to the continent's weak production capacities.
The ASAP plan follows the European Council meeting on March 20, which agreed on a three-level approach, inviting EU member states to (i) send ammunition and missiles to Ukraine, (ii) jointly purchase ammunition and missiles to restock their supplies, and (iii) support the expansion of European industrial capacities (via the ASAP plan).
In this context, the Council asked the Commission to present proposals to promote the growth of the European defence industry, where necessary through European funds.
CASH • The money that the Commission proposes to deploy comes from the reallocation of funds from the European Defence Fund and the future instrument to strengthen the European defence industry through joint acquisitions (EDIRPA). The ASAP plan also allows EU member states to use cohesion funds to support their production of ammunition and missiles.
The Commission's proposal poses two difficulties:
On the one hand, European treaties prohibit the Union from financing arms activities through its own budget. Article 41(2) of the Treaty on European Union (TEU) prohibits the EU budget from financing "expenditures related to military or defence operations".
On the other hand, cohesion funds — theoretically intended to reduce development inequalities within the EU — can only be disbursed when they contribute to these objectives.
RUBICON • EU support for Ukraine is indirect. It is indeed a matter of supporting the European industry to expand its production in general — the decision to ship missiles and ammunition rests with Member States, not the EU itself.
The Commissioner for the Internal Market, Thierry Breton, explains that the funding is in line with the Treaties, as it aims to support industry and employment, particularly in disadvantaged regions — an elegant way of circumventing the letter of the European treaties.
In February 2023, the EU Budget Commissioner Johannes Hahn still argued that the EU would support joint purchases but would not go as far as disbursing EU funds for this purpose. The Commissioner argued that such a proposal was impossible under European treaties.
At the time, Johannes Hahn supported the use of the European Peace Facility (EPF) to finance possible support for Ukraine. In the spring of 2022, Europeans took a significant psychological step by unlocking military aid to Ukraine through the EPF. Since the EPF is an intergovernmental treaty, the funds mobilized are not subject to the regular procedures that apply to the EU budget.
Unlike previous initiatives, which were limited to joint purchases or the use of funds managed by a structure outside the European institutions (the EFF), this time it is indeed a European action to support the production of munitions and missiles. While the amount remains modest — Russia fired between 400 and 700 million dollars worth of missiles in a single day on 10 October 2022 — this is undeniably an important step for European security and defence.
QMV • And if that weren't enough, nine Member States want to extend qualified majority voting to common foreign and security policy (CFSP). Currently, CFSP decisions are taken by unanimity, a rule that allows one member to block the whole European machine and use its veto power as leverage to achieve its goals.
Hungary's use — or threat of use — of its veto in the context of the war in Ukraine has rallied many member states in favor of switching to qualified majority voting in CFSP matters.
The "Friends of the Majority" group includes Germany, Belgium, Finland, France, Italy, Germany, Luxembourg, the Netherlands, Slovenia, and Spain. According to the press release issued by the German Foreign Ministry, "in the context of Russia's aggression against Ukraine and the growing international challenges facing the EU, the members of the group are convinced that the EU's foreign policy needs adapted processes and procedures to strengthen the EU as an actor in foreign policy."
REACTIONS • The bar is high for this proposal to see the light of day. The decision to abandon unanimity will be subject to…a unanimous vote. In a recent paper, the Carnegie Institute notes that no fewer than 25 political initiatives have been undertaken in recent years to extend qualified majority voting to CFSP — usually at the initiative of the Commission, Parliament, or Germany.
Warsaw has already expressed its opposition to the proposal. The Polish Ministry of Foreign Affairs stated in a press release: "The current rules of qualified majority voting, which for obvious reasons favor the interests of states with the largest number of votes, do not guarantee that the objectives of the EU's foreign and security policy will be achieved more effectively or more quickly. In fact, unanimity has already prevented member states from making strategic mistakes with very negative consequences for the EU's security."
In Case You Missed It
ECB • The European Central Bank (ECB) on May 4 slowed the pace of its rate hikes but will maintain a restrictive monetary policy for as long as necessary in the face of still "too high" inflation. This seventh increase brings the key rate to 3.25%, an increase of 25 basis points — the ECB motivating this slowdown by the decline in inflation (ECB).
For its chief economist Philip Lane, speaking at the New Economy Forum in Berlin, "there's a lot of disinflation coming later this year (but) not quite yet", underlining in particular the persistence of food inflation in the months to come. While the ECB expects inflation to fall below 3% by the fourth quarter, a return to normal — the 2% target — could take more than two years due to the inertia of nominal wage growth, in response to the loss of purchasing power accumulated in recent months.
DMA • On May 2, key provisions of the Digital Markets Act (DMA) began to apply fully. The DMA, which came into force on November 2, 2022, introduces rules for large platforms that act as gatekeepers in the digital sector.
Now that the DMA applies, potential gatekeepers that meet the quantitative thresholds established in the DMA have until July 3, 2023 to notify the Commission of their core platform services.
The Commission will then have 45 business days (until September 6, 2023) to decide whether the company meets the thresholds and to designate gatekeepers. After designation, gatekeepers will have six months (until March 6, 2024) to comply with the DMA requirements.
DRUG FIX • A group of nineteen EU Member States, including Germany, Spain, and France, are backing a plan seeking to decrease the continent's dependence on a few external providers for its supply of medicines. The push comes in the context of the ongoing effort by the EU to overhaul its pharmaceutical legislation to create a true single market for medicines.
The perception that the EU is currently in a position of vulnerability when it comes to providing its citizens the drugs they need has become widespread since the Covid-19 pandemic.
The initial deployment of vaccines was slower than governments expected, and many major drugs, such as insulin, have faced prolonged shortages. The non-paper identifies growing dependence on imports from a few countries, including China and India, as leaving the EU exposed to more disruption in an increasingly unstable international environment.
An extensive revamp of pharmaceutical regulations for the EU was recently announced, which addresses some of these concerns. The proposed measures, which must be approved by both the European parliament and member states, seek to establish a single market for medicines and ensure equal access to them across all twenty-seven countries in the bloc.
However, the nineteen Member States’ ambition goes further: they demand a ‘Critical Medicines Act’ which would follow the blueprint set by EU legislation on critical raw materials and computer chips to ensure the secure supply of key medicines.
What we’ve been reading
In Phenomenal World, Roy Cobby tells the story of Europe’s first attempt at a common policy to catch up on the US and East Asia in chipmaking, and draws lessons for today’s would-be central planners.
In the London Review of Books, Tom Stevenson reviews Alasdair Roberts’ Superstates: Empires of the Twenty-First Century, an investigation of the nature of the great polities of our age.
This week’s newsletter is brought to you by Clément Albaret, Marwan Ben Moussa, Augustin Bourleaud and Maxence de la Rochère. See you next Monday!