Poland Blocks EU Vote on OECD Minimum Corporate Tax Deal
Also — War in Ukraine, Stability and Growth Pact, Rule of Law
Hi! Welcome to What’s up EU, your go-to newsletter to stay on top of the news. Our publication is also available in French, Spanish, Italian, Romanian, Russian, and Ukrainian. Feel free to share this newsletter with friends and colleagues.
War in Ukraine — A Week, Unpacked
UVDL & BORRELL IN UKRAINE • Commission President Ursula von der Leyen and EU High Representative for Foreign Affairs Josep Borrell met with Ukrainian President Vladimir Zelensky in Kyiv on Friday 8 April, reiterating EU’s unwavering support for Ukraine — the very morning a Russian missile attack hit a railway station full of civilians fleeing the separatist Donbas region, killing over fifty people.
Von der Leyen insisted that the EU would “make Putin pay a heavy price […]. Russia will descend into economic, financial and technological decay.” The visit, which also included the city of Bucha, where the bodies of hundreds of Ukrainian civilians were found last week, marks an ever-tightening diplomatic relationship between the EU and Ukraine. Von der Leyen symbolically handed Zelensky the questionnaire which will serve as the starting point for the Commission’s opinion on Ukraine’s membership — “a matter of weeks”, she said. Zelensky encouraged the EU to do more, including a full ban on Russian oil and gas.
SANCTIONS, EPISODE 5 • Following the revelations last week of mass massacres of Ukrainian civilians in several besieged cities, in particular in Bucha, the European Commission proposed a fifth package of sanctions to strongly condemn the Russian army's violations of international law. The Council of the EU adopted it unanimously last Friday — though stark disagreements over a full embargo on Russian oil and gas remain between Member States.
The package notably confirms a full ban on Russian coal, amounting to a 8 billion euros yearly loss for Russia. Russian-flagged vessels will be banned from entering EU ports, whilst Russian and Belarusian freight operators will lose full access to EU roads. Financial sanctions on targeted Russian banks are strengthened, with four Russian banks now completely cut off from EU markets — representing 23% of the Russian banking sector. Finally, other high-profile Russian executives have been added to the sanctions list, including Putin’s two daughters.
Sanctions, though welcomed by EU leaders and Ukraine, fall short of an embargo on Russian gas — a significant financial weapon against Russia, but which would put energy access at risk in a number of European countries, notably Germany. In a Resolution approved by a large majority on Thursday, MEPs called for a “full embargo on Russian imports of oil, coal, nuclear fuel and gas” and an exclusion of Russia from the G20 and other international organisations.
STRATEGIC AUTONOMY • On 5 April, the Council published conclusions on strategic autonomy of the European economic and financial sector.
Driven by the recent developments in Ukraine, the concept has gained even greater importance. The states have committed themselves to building ‘a strong, competitive and resilient’ European financial sector which is also protected from excessive reliance on the financial sectors of third countries. In addition, the conclusions underline the importance of introducing an effective mechanism for managing sanctions.
The conclusions come as a result of the Versailles Declaration of 10-11 March 2022, in which the Member States decided to strengthen their collective sovereignty by reducing their dependencies, including on Russian energy resources.
BORRELL ON CHINA SUMMIT • On the same day, EU High Representative Joseph Borrell criticised last week's EU-China summit during a debate in the European Parliament, calling it a ‘dialogue of the deaf’. The main reason for Borrell’s criticism was the refusal of China to discuss the Russian war in Ukraine. In his blog, Mr Borrell explained that China’s attitude is “one of pro-Russian neutrality”, where the country does not criticise Russian atrocities and supports Russia’s claim that the war has been caused by “Cold War thinking” and the expansion of NATO.
HUMANITARIAN HELP • The EU is stepping up its efforts to provide for the basic needs of Ukrainian refugees. The “Stand Up for Ukraine” global campaign to raise funds for internally displaced and refugees closed on Saturday with a 9,1 billion euros pledge from governments, companies and individuals from across the globe — the European Bank for Reconstruction and Development announced it would add another one billion. European ambassadors also agreed last week that they would give Member States immediate access to more funding from the post-pandemic recovery programme REACT-EU to provide refugees with emergency help. Finally, the European Commission published a recommendation on the recognition of academic and professional qualifications of Ukrainian workers, with the intention of giving refugees easier access to the EU labour market. Bruegel, a think-tank, warns of the risks of a significant fiscal burden on frontline European countries in a paper published this week.
Warsaw Blocks EU Vote on OECD Minimum Corporate Tax Deal
The EU is trying to sign up to the OECD agreement reached in October 2021 which would make 15% the global minimum corporate tax rate for large businesses — but Warsaw opposed the deal at an ECOFIN meeting in Luxembourg on 5 April.
OECD • An ECOFIN meeting of the EU finance ministers discussed the proposed Directive which would make it mandatory for Member States to implement the 15% baseline tax rate into domestic law. “The aim of the directive is to transpose into EU law the two-pillar reform of the rules on international corporate taxation, as agreed by the global OECD/G20 inclusive framework on base erosion and profit shifting (BEPS). This international agreement, which brings together 137 countries and jurisdictions, constitutes a major milestone towards an effective and fair system of profit taxation”, the press release reads.
POLISH VETO • Warsaw opposed the move at the Council, where tax matters require a unanimous vote from all 27 Member States. Finance Minister Magdalena Rzeczkowska, who cast Poland’s veto, argues that it is a question of timing. Under the first pillar, the taxes levied on the world’s 100 largest companies are expected to be shared among countries. The second pillar is the global minimum corporate tax rate which signatories are meant to introduce. The main difference between the two pillars is that the tax sharing agreement is an international treaty, while the minimum tax rate is a directive, pursuant to EU law.
Warsaw insists that it cannot agree to the second pillar without sufficient guarantees that the first one will enter into force around the same time. “We should be mindful of the inadequacy of placing additional burden on European businesses under Pillar Two, without ensuring the digital giants are fully taxed under Pillar One”, Rzeczkowska said.
FRENCH EYE ROLL • French finance minister Bruno Le Maire, who chairs the ECOFIN meetings until June, was visibly irritated by the Polish veto, according to Politico’s Bjarke Smith-Meyer. Bruno Le Maire underlined that the Council had already addressed the Polish concerns by making it clear that both pillars worked as a package. Opposition to the agreement by other EU Member States had dwindled, with Estonia, Hungary, Malta, and Sweden eventually throwing their support behind the OECD deal.
MOTIVATIONS • Poland's opposition to the directive is “a mystery”, said Bruno Le Maire. The Polish government is adamant that the veto has nothing to do with the European Commission withholding EU funds in the rule-of-law spat which opposes Brussels and Warsaw. Poland is entitled to 36 billions euros under the Next Generation EU package, but the Commission has not unlocked the funds, amidst concerns about the Polish judiciary. The European Commission is also currently deducting EU cash destined to Poland due to the failure to comply with rulings by the Court of justice of the EU. Poland’s attempts to leverage the humanitarian situation to soften the Commission’s stance on rule-of-law has failed so far, with Brussels refusing to link the two issues.
Odd Couple Emerges as Joint Spanish-Dutch Paper on SGP Reform Published
Spain and the Netherlands have presented on 4 April a joint paper “calling for a renewed fiscal framework that is fit for current and future challenges, a roadmap to complete the Banking Union, and a strengthened Capital Markets Union”.
FUNNY COUPLE • The French, who hold the rotating presidency of the Council of the EU until June, have been pushing to reform the EU’s debt-and-deficit rulebook — the Stability and Growth Pact (SGP) — with carve-outs for green and digital investments from debt accounting.
The Netherlands and Spain have traditionally held conflicting views on the topic. Yet things change: the ‘frugal’ Dutch and the ‘Club Med’ Spaniards have shown rare agreement over the future of EU economy and finance. Madrid and The Hague have presented a joint non-paper, a common document destined to influence the debates at the EU level penned by “two countries traditionally identified with divergent positions in this area”, which “underlines the need to find consensus”, the press release reads.
THE NON PAPER • Notably, the joint non-paper supports “country specific medium-term fiscal plans”, a position shared by EU Economic and Finance Commissioner Paolo Gentiloni. The non-paper also stresses the need for a “simpler”, more transparent and credible rulebook that promotes investment and equal treatment among Member States. It also reaffirms the need to move forward on completing the banking and capital markets unions.
While recognising the importance of incorporating country-specific circumstances and increasing national ownership, appropriate safeguards should also exist to ensure minimum standards to make sure fiscal strategies contribute to the core objective of the SGP framework. Furthermore, a level playing field is important to safeguard transparency and equal treatment for all Member States. When ownership and compliance do not materialise, the system should have clear safeguards to ensure that the Commission and the Council take the necessary action in the enforcement of the rules.
ESCAPE GAME • The EU’s debt-and-deficit rulebook, which contains the 60% public debt and 3% deficit ratio rules, has been temporarily shelved following Covid-19, a virus that caused public debt to balloon in the EU.
The ‘general escape clause’ of the Stability and Growth Pact (SGP) was activated in 2020 to cope with Covid-19 — and to avoid putting any Member State through the gruelling excessive deficit procedure. The escape clause is expected to be deactivated as of 2023, according to the Commission’s communication on fiscal policy guidance for 2023, published on 2 March 2022.
War in Ukraine struck another blow to those who prayed for the escape clause to be ditched sooner rather than later. Before the Versailles Summit of 10-11 March, initially scheduled to discuss SGP reform, several Member States from Central and Eastern Europe made a push to exclude defence and security spending from the SGP.
Shifting away from Russian energy and spending on defence will come at a high price for the EU. “These developments will require immediate and long-term spending, affecting the fiscal reform debate dramatically as EU leaders need to figure out how to finance the challenges ahead”, says Lucas Resende Carvalho in a paper for the Bertelsmann Stiftung.
Asked about a further extension of the escape clause, dutch finance minister Sigrid Kaag said: “We are realists. One could expect that the Commission would opt for an extension of the general escape clause...Current circumstances would warrant that. I can't imagine this to be a topic of significant debate”, according to Bloomberg’s Jorge Valero.
Commission Takes Steps to Cut EU Funds to Hungary After Orbán Win
On 5 April, Ursula von der Leyen stole the show in the European Parliament as she announced that the European Commission will launch the rule of law mechanism against Hungary, the first time the procedure is set in motion since its adoption in 2020.
BUDAPEST • The statement came two days after Viktor Orbán won the Hungarian parliamentary elections with 53% of the votes and two-thirds of the parliament’s majority for the fourth time in a row. The result of the mechanism would hurt Hungary financially, as it could deprive the country of more than 40 billion euros in funding from the Multiannual Financial Framework (MFF, the EU’s seven year budget) and the pandemic recovery funds.
TIMING • The European Parliament criticised the Commission for not triggering the mechanism earlier, but the Commission wanted to avoid making steps before the Hungarian elections. The decision to start the procedure was denounced by Hungarian ministers, warning the Commission not to follow the path of the Hungarian opposition and not to punish the Hungarian people for its decision on 3 April. The Hungarian PM was milder in tone and said that a compromise could be reached regarding corruption concerns.
ORBAN LANDSLIDE • On 3 April, Hungary held parliamentary elections, which ended in a landslide victory for Orbán’s Fidesz party, reaching its most successful result in the party’s history. The governing party Fidesz won 135 mandates out of 199 (more than 3 million votes were cast to Fidesz, which is a record number), reaching a comfortable two-thirds majority for a fourth consecutive time. The united opposition of six parties collapsed not only in the countryside but also in most larger cities. It could only achieve success in Budapest and eventually won 57 mandates.
RUBLES • After the Hungarian elections, the Hungarian PM said that Hungary is ready to pay in rubles for Russian gas. Commission President Von der Leyen reacted in a statement shortly afterwards and warned the Hungarian government that this step would breach sanctions imposed on Russia. Foreign Minister Péter Szijjártó said in a Facebook post that Hungary can pay in rubles without violating EU sanctions. This standpoint was reiterated by Zoltán Kovács, the international spokesperson of the Hungarian government, in a CNN interview. In the meantime, Orbán announced that sanctions on Russian oil and gas imports is a red line for Hungary, and that Hungary would not support such measures.
UKRAINE • In his victory speech on Sunday night, Viktor Orbán said that he never thought that his party would reach its most successful election result when everybody conspired against them. In his list of conspirators, he mentioned Ukrainian President Zelensky, who was accused by the Hungarian government of having secretly collaborated with the opposition to pull Hungary into the war. After the elections, the Foreign Ministry summoned the ambassador to Ukraine and Foreign Minister Szíjjártó called upon Ukraine to “stop insulting and accusing Hungary”.
WARSAW DODGES THE BULLET • Poland currently seems to be spared. First, it is politically delicate to attack Poland when it is at the forefront of the management of the Ukrainian crisis, in particular by hosting the largest number of refugees on its territory. Unlike Viktor Orbán, who became persona non grata because of his close ties to President Putin, the Polish Government has clearly distanced itself from Russia. This difference in attitude towards the Russian neighbour even seems to undermine the traditional Visegrad alliance. At the end of March, a meeting of the defence ministers of the V4 was cancelled.
The second reason for sparing Poland is probably more technical and relates to the particularities of the conditionality mechanism. To pull the trigger, the Commission must prove the existence of a causal link between the rule of law violations of and the risk for EU’s financial interests. While this causal link is easily established in corruption cases (Hungarian scheme), it is difficult to quantify, in financial terms, the costs of an infringement on the independence of the judiciary (Polish scheme). Poland is therefore for the moment outside the sights, but remains under close surveillance by the Commission, as evidenced by the refusal to approve the Polish recovery plan under the Next Generation EU programme.
What we’ve been reading this week
The thunder of Russian artillery can still be heard in vast swaths of Ukrainian territory, yet Tymofiy Mylovanov and his co-authors, writing for the CEPR, are already looking towards the future. In their Blueprint for the Reconstruction of Ukraine, they take inspiration from historical precedents, such as the postwar rebuilding of Europe, to show what a path to prosperity could be for the former Soviet state. While accession to EU membership is part of the plan, the authors insist on Ukraine’s responsibility in managing its recovery and in building the foundations for long-term economic growth.
In Foreign Affairs, historian of the USSR Stephen Kotkin puts the invasion of Ukraine in the perspective of a long Cold War which has not ended, only seeing the centre of geopolitical gravity move to Asia as the fortunes of China and Russia have taken opposing paths.
The view from Moscow: for The New Statesman, writer and former Portuguese politician Bruno Maçães meets Sergey Karaganov, a former confidant of Boris Yeltsin and Vladimir Putin, who explains his country’s rationale for the invasion.
Beijing’s game in the Ukrainian conflict is forcing Europe to reassess what she should expect from China, writes Grzegorz Stec for the Mercator Institute for China Studies (Merics), who believes confrontation can still be avoided. Meanwhile, a policy brief from Clingendael argues that to meet the Asian giant on equal terms, and avoid paying the costs of disunity, the EU should launch a 27+1 Forum as the main avenue for exchange with China.
For the European Centre for International Political Economy, Oscar Guinea and Vanika Sharma take a close look at the extent of Europe’s dependency on trade. They find that critical imports are few, and consequently advise against basing the Union’s industrial policy on a generalised suspicion of international trade. They push instead for focused efforts on insuring Europe against risks to the supply of those products on which its dependency is real.
Thanks to those who helped put this edition together — Cyril Tregub, Alexandra Philoleau, Adam Zagoni-Bogsch, Lorenza Nava, Andreea Florea, Dana Fedun, Maxence de La Rochère, Rogier Prins, Théo Bourgery, and Thomas Harbor. See you next Tuesday !
*Articles do not have individual authors, the views expressed in this publication do not reflect the personal views of those credited.