EU Grandees in Versailles in Show of Unity on Ukraine War
Also — War in Ukraine, Sanctions, Energy, SGP, Inflation, Big Tech, Hungary
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War in Ukraine — A Week, Unpacked
EU leaders convened in Versailles on 10 and 11 March. War in Ukraine was the main topic on the agenda — although the summit was initially meant to discuss reform of the EU’s debt-and-deficit rules. Heads of states and governments vowed increased support for Ukraine and further sanctions against Russia and Belarus, while stressing that Europe ‘is not at war’ with Russia. Europe’s political leaders also made it clear that the EU now operates in a ‘new world’, with spillovers in every strategic field from energy security to common defence.
IN BREVI • “The EU and its Member States will continue to provide coordinated political, financial, material and humanitarian support. We are committed to provide support for the reconstruction of a democratic Ukraine once the Russian onslaught has ceased. We are determined to increase even further our pressure on Russia and Belarus. We have adopted significant sanctions and remain ready to move quickly with further sanctions”, the final statement reads.
NEGOTIATIONS • The four rounds of negotiations between Russian and Ukrainian diplomats have not led to any significant progress since the beginning of the war. While some positive points can be highlighted, such as the establishment of humanitarian corridors obtained during the third round of negotiations in Belarus, the Russian forces are pursuing their offensive. Fighting is especially heavy around the cities of Mariupol, Kharkiv, and Sumy. The encirclement of the capital, Kyiv, also continues. However, neither a ceasefire nor a meeting between President Zelensky and Putin are on the agenda.
SLEEPWALKING INTO WAR? • The European Commission had floated the idea of making Russian-made MiG-29s available to Ukrainian forces, which are trained to fly this type of fighter jet. The Polish government offered the US to exchange the jets sent to Ukraine for US-made aircraft (F16). The US declined the Polish deal on 8 March, fearing escalation. The Kremlin has warned that the takeoff of Ukrainian planes from the Ramstein base, on NATO territory, would mean the involvement of NATO in the war.
This comes as Russia has targeted a military base close to the Polish border, in the west of Ukraine. The base was used as a training camp for NATO operations. Executive Vice President and Commissioner for Trade Valdis Dombrovskis warns of the future intentions of Russia, which according to him, could attack NATO in case of victory against Ukraine. He believes that the Baltic countries could be the next to suffer from a Russian invasion. “No option should be ruled out” to sanction the Kremlin. “The aggressor must be stopped by all means,” he added, talking to Politico. Mr. Dombrovskis was born in Latvia into a family with Polish roots.
GUN JUMPING BORRELL • The block’s top diplomat Josep Borrell hinted that EU leaders had agreed to disburse another 500 million euros under the European Peace Facility (EPF).
“We are going to increase with another €500 million our contribution to the military support to Ukraine. Yesterday I proposed this to the [European] Leaders. And the European Peace Facility will double its support with an additional €500 [milllion] more”, Borrell said in a statement on 11 March.
However, the Council still had to give its green light. The proposal was not part of deliberations, and the 500 millions are nowhere in the Council conclusions, notes Politico’s Giorgio Leali, who points to Borrell’s track record of ‘gun-jumping’ — announcing deals before they are agreed by the Member States at the Council. This is made even more embarrassing after Borrell’s claim that the EU, and then some of its Member States, would provide Ukraine with fighter jets — the EU never committed to it and the Polish deal collapsed.
RUBICON • Notwithstanding Borrell’s customary gaffes, the EU really crossed the Rubicon by providing direct support to Ukraine via EU funds, as opposed to just promoting and coordinating efforts made by its Member States. “Some may rue the mobilisation of the EPF as too little, too late – and are even calling for HRVP Borrell’s head to roll over the botched fighter jet promise. Others fear a step towards a warmongering EU beholden to the military-industrial complex or a naïve EU unaware of the long-term strategic effects of such a decision. Regardless, the shift in how the EU now assesses and acts upon threats to European security is undeniable”, writes Dylan Macchiarini Crosson in a blog post for CEPS.
New Round of EU Sanctions Targets Russia & Belarus
On 9 March 2022, further sanctions were imposed against Russia and Belarus in relation to the war in Ukraine. The Council is due to adopt new sanctions on 14 March.
RUSSIA • New restrictions have been introduced targeting Russia, especially in relation to product control in the area of maritime navigation and radio equipment. An 160 additional 160 individuals, the members of the Russian Federal Council, oligarchs as well as their family members, were added to the Annex of Regulation (EU) 2022/396. The business people targeted by this new wave of sanctions are at the helm of some of Russia’s largest companies — except for the banking, gas and oil sectors. Most importantly, the amendment includes a clarification on the definition of ‘transferable securities’ with the aim of explicitly including crypto-assets. One of the largest banks in Russia, Sberbank, still has not been included in the SWIFT ban.
BELARUS • Sanctions against Belarus are now mirroring those targeting Russia, with three Belarusian Banks being excluded from SWIFT and the introduction of the prohibition to have transactions with the Belarusian Central Bank. Deposits exceeding 100,000 euros from Belarusian nationals, residents and entities have been banned. According to the Commission, EU restrictive measures in relation to the war in Ukraine currently apply to a total of 862 individuals and 53 entities. These sanctions were extended on the 10th of March for a further 6 months.
EXPLANATION • The EU has almost forty sanctions regimes at its disposal. By unanimity, and on a joint proposal from the EU High Representative for Foreign Affairs and the EU Commission, the Council of the European Union decides on the type of restrictive measures — such as asset freezes, visa bans, and sectoral sanctions — and approves the list of individuals or entities targeted by the sanctions. The vote results in a Decision under the Common Foreign and Security Policy (CFSP) which applies to Member States and a Regulation which applies directly throughout the Union.
The sanctions have the effect of prohibiting any EU citizen or entity registered in the EU from engaging in transactions with the listed foreign individuals or entities. Unlike embargoes, these targeted measures are intended to limit the effects on those not responsible for violations, but the economic consequences are nonetheless significant, since all EU companies must comply.
The EU was able to adopt new sanctions almost immediately following the Russian invasion because it could build upon the sanctions regime which it had put in place after Russia’s annexation of Crimea in 2014. Moreover, the long build-up which preceded the invasion gave Member States sufficient time for extensive coordination.
Energy Security and Joint Borrowing High on Agenda at Versailles Summit
In Versailles, EU leaders outlined three priorities for the continent : bolstering defence capabilities, reducing energy dependencies, and building a more robust economic base.
IN BREVI • Ending the EU’s dependence on Russian gas is expensive. Welcoming refugees fleeing war and developing new defence capabilities will also come at a high cost. The French, who hold the rotating presidency of the Council of the EU, push hard — together with the Italians — to relax the block’s debt-and-deficit rules, and floated the idea of issuing jointly- backed debt to finance new spending.
DECOUPLING FROM RUSSIA • At the Versailles Summit, Member States agreed on the path set mapped out by the Commission in its communication on energy published on 8 March and agreed to end the EU's dependence on Russian hydrocarbons by 2027.
Commission President Ursula von der Leyen has pledged to present a ‘RePowerEU’ plan by mid-May, which should provide alternatives to Russian gas, oil and coal. This package should include proposals to review the functioning of the European electricity market. In the short term, the European Union is expected to reduce its imports of Russian gas by two thirds by the end of the year. To this end, von der Leyen has announced the establishment of a task force that will work on ensuring gas stocks for the coming winter.
“[...] Sanctions on Russia could be setting in motion a potentially large fall in global oil supply that would redraw the global energy map. In the short-term, coping with such a supply shock would require the combined help of global strategic reserves, core-OPEC, Iran, and higher prices to reduce consumption”, notes a report by Goldman Sachs’ Commodities Research team, dated 7 March.
TOUGH CHOICES • The energy issue will again be on the agenda of the next European Council, which will take place on 24 and 25 March in Brussels. Decoupling from Russia will be fraught with difficulties. Germany and Hungary, together with Austria and Finland, are more reluctant to completely cut the use of Russian gas. President Macron has indicated that the situation reinforces his choices in terms of renewable energy and nuclear power.
The Commission advocates massive investment in new renewable capacities and agrees that in the years to come, states may have recourse to nuclear power and coal, and Commission Vice-President Timmermans has stated that there should be “no taboos" despite the high carbon intensity of coal energy.
New announcements are also expected earlier this week to limit the spillover effect of gas prices on electricity prices, including temporary price limits. Last week, the Commission already relaxed the regulatory framework for state aid until December 2022, to help companies cope with soaring gas and electricity prices.
SGP REFORM • The Versailles Summit was initially planned by the French presidency of the Council to discuss reform of the EU’s debt-and-deficit rules, contained in the Stability and Growth Pact (SGP). On 14 and 15 March, the EU’s economy and finance ministers are in Brussels for a Eurogroup meeting.
Critics of the SGP hope Covid-19 and war in Ukraine will provide an impetus for reform, while Berlin and The Hague are pushing back against excessive fiscal laxity. The Commission’s decision to extend the pandemic-induced relaxation of state aid rules, which prohibit Member States from dishing out subsidies to national companies, is a sign that fiscal profligacy will go on for a little longer.
Days before the summit, nine Member States, mainly from Central and Eastern Europe, called for the exclusion of defence spending from deficit calculations, in a push prior to the Versailles summit. Before the war broke out, some were asking for carve-outs for green and digital investments.
NGEU, EPISODE 2 • As if calling for a rewrite of the 60% debt-to-GDP ratio and 3% of public deficit rules was not enough, EU leaders are talking about issuing joint debt to foot the dual bill of defence and energy. Prime Minister Draghi said on 11 March that the EU could raise between 1,500 and 2,000 billion euros on the bond market to finance required investments in energy, defence, and climate.
This discussion takes place merely two years after the EU agreed on a 800 billion euro recovery fund to be financed by common EU debt — ’eurobonds’ —, an unprecedented measure to weather the Covid-induced economic shock. While talks of ‘eurobonds’ caused instant apoplexy in Berlin, The Hague, or Vienna before the 2020 U-turn, it merely causes mild tachycardia nowadays. “I am not at this stage agreeing with a NextGenerationEU mark two”, said Mark Rutte prior to the Versailles Summit
Fiscally conservative Member States stress that the EU can already tap into unused funds — approximately 200 billion euros — in the 800 billion euro-strong NGEU package. The Versailles Declaration refers to building a more ‘robust economic base’ for the EU, but makes no reference to joint debt. President Macron, whose country holds the rotating presidency of the Council of the EU, seemed to kick the can down the road — giving priority to the most pressing issues.
EU Membership Applications Examined by Council Face Pushback
EU leaders gathered in Versailles examined Ukraine's bid for EU membership. The day before the Summit started, on 9 March, Ukraine’s foreign minister Dmytro Kuleba took up his pen to call for immediate membership in the Financial Times — calling the EU leaders to “make history”.
VERSAILLES DECLARATION • “The European Council acknowledged the European aspirations and the European choice of Ukraine, as stated in the Association Agreement. On 28 February 2022, exercising the right of Ukraine to choose its own destiny, the President of Ukraine submitted the application of Ukraine to become a member of the European Union. The Council has acted swiftly and invited the Commission to submit its opinion on this application in accordance with the relevant provisions of the Treaties. Pending this and without delay, we will further strengthen our bonds and deepen our partnership to support Ukraine in pursuing its European path. Ukraine belongs to our European family”, the statement reads.
FROSTY RECEPTION • Following Ukraine’s application to join the EU on a ‘fast-track procedure’, the European Parliament passed a historical resolution calling on the EU institutions to grant Ukraine EU candidate status on 1 March. Moldova and Georgia followed suit, calling for the EU to follow a ‘fast track’ procedure.
Zelensky’s call has been met with lukewarm responses in several EU capitals. The Netherlands and Germany questioned the idea of a ‘fast-track membership. They underline the importance of the accession criteria outlined in Article 49 of the Treaty on European Union (TEU) — Ukraine’s endemic governance problems and corruption would not make this an easy ride.
“At this stage, the discussion about Ukraine’s membership perspective may be regarded as a largely symbolic – albeit historic – political gesture supporting Ukraine in its ‘European choice’ and self-defence against Russia”, note Guillaume Van der Loo Peter Van Elsuwege in a must-read policy paper for the European Policy Centre (EPC).
Before the Versailles Summit, French president Emmanuel Macron stressed that while accession could not be granted to a country at war, the EU should be wary of closing the door to Ukraine’s bid. Sceptics also contend that the EU further provokes Russia by providing the possibility of membership to Ukraine, an idea fiercely rebutted by Ukraine’s foreign minister in his FT op-ed. Russia is “fixated on our NATO aspirations, not on our accession to the EU”, Ukrain’s Kuleba stressed.
THE HAGUE • The Dutch prime minister Mark Rutte has been a vocal sceptic, pointing to the fact that there is no such thing as a ‘fast-track procedure’. His position is just another example of a difficult relationship between the Netherlands and Ukraine. In a 2016 non-binding referendum, 61,1% of Dutch voters voted ‘nee’ against the newly struck Association Agreement between Ukraine and the EU- although a boycott by Dutch proponents of the Association Agreement arguably skewed the results. Only a year after, the association agreement was ratified by the Dutch parliament. Two thirds of all senators approved the proposal with the far-left and far-right being in the opposition.
ASSOCIATION AGREEMENT • The EU and Ukraine already have an Association Agreement, which entered into force in 2017 and includes a deep and comprehensive free trade area (DCFTA). If EU membership is “not for tomorrow”, as French Europe Minister Clément Beaune suggests, the block has other ways to cooperate and deepen ties with Ukraine. The EPC policy paper referred to above stresses: “Paired with an unprecedented assistance package and new forms of sectoral integration in key EU policies [...] the current EU–Ukraine Association Agreement remains the most appropriate instrument to develop this bilateral relationship further”
MOLDOVA, GEORGIA • Less attention is given to Moldova and Georgia’s accession pleas in the Versailles Declaration. “The Council has invited the Commission to submit its opinions on the applications of the Republic of Moldova and Georgia”, the statement reads. Moldova and Georgia are members of the Eastern Partnership (EaP) initiative of the EU. In 2014, they signed the Association Agreement with the Union and have currently in place a visa-free regime with the EU. They also benefit from strong financial support from the EU.
ECB Faced with Conundrum over War in Ukraine and Inflation
President Christine Lagarde warned on 10 March that the invasion of Ukraine, along with the sanctions imposed on Russia, will have a “a material impact on economic activity and inflation through higher energy and commodity prices, the disruption of international commerce and weaker confidence”.
APP • While Russia’s invasion of Ukraine increases financial volatility and raises uncertainties in the economic growth outlook, the ECB nonetheless decided on 10 March to accelerate the phasing out of its Asset Purchase Programme (APP), while leaving itself some flexibility before raising interest rates in its latest monetary policy decision.
The Frankfurt-based institution set out a plan to reduce its purchases of government bonds more quickly amidst rising inflation. Under the previous plan, monthly asset purchases would be reduced from 40 billion to 20 billion euros in October. This reduction has been brought forward to June. Net asset purchases would then conclude in the third quarter if the medium-term inflation outlook does not weaken after the end of net asset purchases under the APP.
RATE HIKE AHEAD? • According to the Financial Times, some analysts have interpreted this as leaving open the possibility for an interest rate hike before the end of 2022. While the central bank has not closed the door on a rate hike before the end of 2022, there is nothing to suggest that it will do so in its monetary policy decision. Notably, although the ECB's previous decisions had included a commitment to end asset purchases 'shortly before' it would raise interest rates, this commitment has now been dropped.
CONTEXTO • Frederick Ducrozet, a strategist at Pictet Wealth Management, said on Twitter that “inflation worries dominated” the Governing Council’s decision. Russia’s invasion of Ukraine has certainly given a new impetus to inflation in the euro area, which had reached a record level of 5,8% in February, mostly driven by higher energy and commodity prices. In its latest staff projections, the ECB slashed its growth forecasts and sharply raised inflation forecasts for this year. Some analysts warn that the rise in oil and gas prices, combined with rising commodity prices, triggered by the Ukraine conflict and Western moves to punish Russia, has raised the prospect of a stagflationary shock that would curb growth and raise inflation.
HAWK • The ECB’s policy shift surprised financial markets with the decision to wind down asset purchases faster than previously announced, which was interpreted as more hawkish than expected. According to Reuters, euro area bond yields soared right after the decision was published as investors expected a more accommodative tone from the central bank. Bond yields in Italy surged over 20 basis points and the German 10-year yield hit a three-week high, before edging down on Friday.
Google’s and Meta’s ‘Jedi Blue’ Agreement Under EU Scrutiny
On 11 March, the European Commission, in parallel with UK Competition and Markets Authority (CMA), launched an antitrust probe into the ‘Jedi Blue agreement’, concluded in 2018 between Google and Meta — formerly, Facebook.
IN BREVI • Following an antitrust lawsuit in the US, led by the state of Texas, the Commission investigates whether the agreement weakened competition in the market for online display advertising services — ultimately favouring Google’s Open Bidding technology over a competing ad system, called header bidding. Both Google and Meta fervently denied wrongdoing and called the agreement pro-competitive.
JEDI BLUE, EXPLANATIO • The bulk of Google’s revenue derives from its advertising technologies services, such as the ‘Open Bidding’ programme, which intermediates between publishers, who sell online display advertising space known as ‘inventory’, and advertisers, who purchase such inventory via real-time auctions. Meta, through its ‘Meta Audience Network’, participates in auctions for third party publishers’ advertising space using Google’s and rivals’ advertising technology services.
Under the Jedi Blue agreement, Meta’s Audience Network was allegedly favoured in Google’s Open Bidding programme. “That’s a giant problem”, notes Competition Commissioner Margrethe Vestager, adding that “what we suspect here is that there may have been an agreement between Google, and then Facebook, only to use Google services and not competing services.”
TECHLASH • Not a week goes by without new developments in the EU’s techlash chronicles. Google’s conduct in the ad tech market is already under the scrutiny of the Commission in a pending probe which started in June 2021.
This latest antitrust probe is remarkable because it suggests, rather exceptionally, that a case might be brought under the rules prohibiting anti-competitive agreements, in lieu of the far more commonly applied rules against the abuse of a dominant position. Nonetheless, Vestager cautions that the degree of cooperation between Meta and Google, which determines the applicable antitrust instrument, remains a sticking point of the investigation.
TWIN PROBE • In addition to the substantive novelty of the case, equally striking is the institutional dynamic of the twin probe. In June 2021, the Commission and CMA had already launched a parallel investigation into Facebook’s anticompetitive conduct.
This time, the Commission and the CMA publicly describe their parallel investigation as a ‘close cooperation’, using rather diplomatic language. However, as more antitrust authorities begin to focus their enforcement efforts towards the same conducts of Big Tech, the ambition to cooperate is likely to give way to a competition in time and resources to start Big Tech probes, see them through and conclude them with effective remedies — the coveted prize being the title of top Big Tech antitrust enforcer. And with the CMA, which in the aftermath of Brexit has channelled great resources into developing a strong Digital Markets Strategy, the Commission might have just met its match.
Ukraine Remains Hot Topic in Hungary Election Race
In the run up to the election on 3 April, the focus of the campaign still revolves around the war in Ukraine.
NEW PRESIDENT • On 10 March, the Hungarian parliament elected Katalin Novák as the new president of Hungary for a five-year term. She is a former vice president of Fidesz, a former minister in the Orbán cabinet and a close ally of the PM. Novák is the first female president of Hungary and is expected to assume office in May.
MOSCOW CONNECTION • In a video made by telex.hu, a Hungarian news outlet, several MPs of the governing party — Fidesz — were asked whether friendly relations with Russia should be reconsidered. They were either reluctant to clearly distance themselves from Russia or refused to answer.
RESOLUTION • The opposition called for an extraordinary parliamentary session on the war in Ukraine. The goal of the sitting was to pass a parliamentary resolution on condemning Russia. Due to the absence of a quorum — as the members of Fidesz were absent — the vote could not take place. At the same time, earlier that day, the parliament voted for a political statement condemning Russia and supporting the sovereignty of Ukraine, but this text was somewhat softer in language than the one proposed by the opposition.
What we’ve been reading this week
Amid calls for granting Ukraine a fast-tracked accession process to the Union, Guillaume Van der Loo and Peter Van Elsuweg contend in a joint European Policy Centre-Egmont Institute paper that the existing EU–Ukraine Association Agreement remains well-suited to the task of providing a comprehensive and adaptable framework for bilateral relationships
Can Europe wean herself off Russia’s exports? The International Energy Agency offers a 10-point plan to reduce gas imports by a third within a year
In his newsletter Chartbook, Adam Tooze analyses the economic challenges faced by Ukraine’s and Russia’s closest neighbours
As NATO’s bulwark in the region, Poland has found herself at the centre of the West’s response to the war, a position that offers opportunities for the country after years of conflictual relations with her European partners, writes Michal Kranz in Foreign Policy
For the IFRI, Carole Mathieu takes a look at what it will take for the EU’s Carbon Border Adjustment Mechanism (CBAM) to reach its goals
In a paper published by the Centre for European Reform, Elisabetta Cornago argues for ensuring social fairness is central to the EU’s Emissions Trading System
Future of the euro: in a paper published in Vox EU, Roel Beetsma, Jacopo Cimadomo, and Josha van Spronsen introduce a new model for a central fiscal capacity for the eurozone
Thanks to those who helped put this edition together — Giancarlo Piscitelli (welcome!), Briac de Charry, Adam Zagoni-Bogsch, Eloise Couffon, Lorenza Nava, Andreea Florea, Cyril Tregub, Andrei-Bogdan Sterescu, Maxence de La Rochère, Rogier Prins, Agnès de Fortanier, and Thomas Harbor. See you next Tuesday !
*Articles do not have individual authors. The opinions expressed in this publication do not reflect the views of those whose name appear in the credits.