Reform of EU’s Budget Rulebook Proves Divisive
Also — NATO-Russia , Lithuania, Climate change, Gazprom
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NATO-Russia Council Meets after Two Years Amidst Frantic Efforts to Avoid Russian Invasion of Ukraine
After bilateral talks between the United States and Russia on Monday did not produce any meaningful results, the NATO-Russia Council convened on Wednesday for the first time in two years.
US-RUSSIA • Last week’s security summitry began on Monday 10 January. Amidst the massive Russian military build-up near Ukraine’s eastern border, the Russian Deputy Foreign Minister Sergei Ryabkov and the US Deputy Secretary of State Wendy Sherman met for an eight-hour talk. Although Sherman proposed to limit missile deployments and to make military exercises more transparent, the US pointedly refused to accept Russia’s demand that Georgia and Ukraine would never be allowed to join NATO. In return, Russia threatened to take military action in order to defend its security interests.
WHERE’S EU ? • A week before, on 5 January, the EU’s High Representative for Foreign Affairs and Security Policy (HRVP), Josep Borell, had protested the de facto exclusion of the EU from the talks, while rejecting Russia’s attempt to create a sphere of influence in Eastern Europe. ‘‘We are no longer in Yalta times’’, he said. On 10 January, the Financial Times opined that “rather than complaining in public about their own irrelevance, European leaders [...] should work harder in private to fix the problems that have pushed the EU to the sidelines of talks”.
NATO • The NATO-Russia Council, which followed on Wednesday 12 January, did not advance much further. Jens Stoltenberg, the Secretary General of NATO, noted that it ‘‘is a positive sign that all NATO Allies and Russia sat down around the same table, and engaged on substantive topics’’, and that ‘‘the NATO Allies are ready to meet again’’. However, the NATO allies also ‘‘reaffirmed NATO’s Open Door policy’’, and thereby rejected one of Russia’s most important demands. The restart of the NATO-Russia Council is significant in another respect, though, since it provides a forum to discuss European security without the EU.
OSCE • With Russia’s other demands looking equally infeasible, the OSCE meeting which followed on Thursday 13 January took place in a gloomy atmosphere. Indeed, the Polish foreign minister affirmed that the risk of war in Europe is now greater than at any time in the past thirty years. The US Ambassador to the OSCE, Michael Carpenter, added for his part that the "drumbeat of war is sounding loud and the rhetoric has gotten rather shrill".
CYBERWARFARE • While Russia continues its military build-up, Ukrainian government institutions have been the target of repeated cyberattacks. US intelligence services believe that Russia is preparing a false flag operation to legitimize a potential invasion of Ukraine. The EU, which is not formally represented in any relevant talks, strongly condemned the cyberattacks and threatens severe economic sanctions against Russia in case it makes good on its threats.
THE BLAST OF WAR • In the meantime, Russia has amassed more tanks near Ukraine than the German army possesses in total, involving some 100,000 soldiers. NATO, in turn, says it is ready to take any measure if the dialogues with Russia and the US fail. Moscow’s next moves are unclear and experts are sceptical about the possibility of a full-scale Russian invasion of Ukraine. For Russia, taking control of Ukrainian-speaking areas in the country would be much more ambitious than its current operations in the Donbas, which is controlled by Russian-backed separatist forces.
Divisions Laid Bare as Council Discusses Overhaul of EU’s Budget Rulebook
The future of the Stability and Growth Pact (SGP) — the block’s debt-and-deficit Tablets of Stone — is being discussed this Monday at a Eurogroup meeting, where the euro area finance ministers meet on the eve of the Economic and Financial Affairs Council meeting (ECOFIN). In October 2021, the Commission began reviewing the block’s economic governance model, taking into account the consequences of the coronavirus pandemic.
Eurogroup meeting and Economic and Financial Affairs Council of 17 and 18 January 2022
“Macron and Draghi Lead Effort to Reform EU Budget Rulebook” — What’s up EU, 4 January 2022
HAWK HAHN • European Commissioner for Budget and Administration, Johannes Hahn, took a fiscally hawkish stance on the future of the SGP in a recent conversation with the Financial Times. Hahn, an Austrian member of the EPP, pushed back against the idea of public debt “carve outs” for climate or digital spending, and reverted to tautology as he declared that “at the end of the day, debt is debt”. As it stands, the EU’s rules do not differentiate between long-term investment and everyday spending. However, he signaled his support for “country-specific” debt and deficit limits, a proposal aired by the Italian Commissioner for Economy, Paolo Gentiloni.
DOVE LE MAIRE • France aims to leverage its presidency of the Council of the EU to push forward discussions on SGP reform. A special summit is planned for March 2022. In an interview with Les Échos, Bruno Le Maire — who chairs the ECOFIN meetings during France’s presidency of the Council — called for a wider debate about the right balance between necessary investments and sound public finances.
Le Maire fell short of calling the whole SGP obsolete, arguing instead that only the debt rule needs a radical rethink. The French Economy Minister also advocates a “Growth & Stability Pact'', putting the emphasis on growth before stability. The interview follows Macron and Draghi’s common Christmas push to convince EU leaders to relax the debt and deficit rules.
TAILWINDS • While opposition from traditionally fiscally conservative Member States will likely keep dominating the fiscal debate, recent political changes seem to favor change. In his recent inaugural speech, the new German Finance Minister Christian Lindner signalled his willingness to let green investment fall outside the scope of the country’s infamous debt brake. This change of heart from Berlin didn’t come alone, as The Hague also recently espoused fiscal profligacy, albeit with Dutch characteristics.
The Economist pointed out in October 2020 that the EU now spoke French when it came to the economy. Yet the German Finance Minister’s comments before the Eurogroup meeting sounded very German. Lindner stressed that the SGP had proven its flexibility during the Pandemonium. He expects the real debate to start in June, when the European Commission makes its proposals publics — which, incidentally, is when the dovish French will not chair the Council of the EU anymore.
Lithuania Campaigns to Rally EU Countries in Feud Against China
Lithuania’s Foreign Minister, Gabrielius Landsbergis, spoke to the Financial Times as tensions with China are europeanizing.
CALL FOR UNITY • Lithuania’s Foreign Minister Minister explained to the FT that Chinese sanctions threaten not only Lithuania, but the whole EU, speaking on the sidelines of the informal meeting of Foreign Affairs Ministers — dubbed Gymnich — on 13 and 14 January in Brest, France. “Now there has to be a very clear answer from Europe”, said Landsbergis, pointing to China's “unprecedented harassment of other countries”.
IN CONTEXTO • China applies restrictions on imports from Lithuania, or products containing Lithuanian components, which takes its toll on many other EU companies — infuriating the Federation of German Industries, a lobby group for the country’s powerful export sector. Tensions escalated as a diplomatic quarrel between Lithuania and China over Taiwan’s status grew increasingly bitter — as we explained in last week’s issue.
$1B ON THE TABLE • After unveiling a 200 million euro fund to support the microchip sector in Lithuania last week, the Taiwanese Minister of the National Development Council announced a new one billion dollar investment to support joint projects with Lithuania, primarily oriented to the microchip sector. Lithuania thus becomes the first European host of TSMC, the powerful microchip producer which holds 54% of the world’s market share.
TALK IS CHEAP • Despite the strong language, few expect EU Member States to act. China’s Global Times, which stands under the auspices of the Communist Party, noted that the “meeting will only come up with ‘verbal support’ for Lithuania, rather than any tangible outcomes”. “Brussels isn’t going to risk a full-blown tariff war with China over the restrictions on Lithuania”, noted Politico’s Barbara Moens and Giorgio Leali. The French President’s diplomatic advisor, Emmanuel Bonne, visited China last week and stressed France’s willingness to communicate, which does not suggest escalating tensions at the Council over Lithuania.
ANTI-COERCION • Options are limited. The European Commission is preparing a lawsuit at the WTO, which could drag on for years. The Anti-Coercion Instrument — a new trade mechanism designed to slap tariffs on third countries wielding pressure on EU Member States — seems just the suitable weapon. “In the future, it will hopefully deter the likes of China from bullying EU states such as Lithuania”, notes the FT’s Alan Beatie. However, it has not been adopted yet. Negotiations should last several more months.
Netherlands Takes the Torch in Environmental Litigation Move to Courts
After last year’s courtroom victory of Friends of the Earth (FoE) Netherlands, known as Milieudefensie, over Royal Dutch Shell, the environmental group is now targeting an additional 29 Dutch multinationals — including national icons such as KLM, ING bank, and Ahold Delhaize.
OR ELSE • Flaunting the court order against Shell to cut its emissions by 45% by 2030, Milieudefensie calls on a club of heavy emitters to come up with a plan to align their businesses with global climate goals.
In the letter addressed to the CEOs, FoE director Donald Pols writes that “action must be taken now […] to prevent the worst impacts of climate change.” He continues that “system players, such as your enterprise, bear a special responsibility”. He set a deadline for the corporations to respond with a climate plan by 15 April, barely three months away. The letter also states that the NGO hopes to persuade these companies to work with the renowned New Climate Institute, which would critically assess and rank their climate plans.
PRECEDENT • The warning shot echoes the landmark case of private citizens holding Shell liable for breaching its (unwritten) duty of care by not reducing its emissions in line with the 2015 Paris Climate Agreement. The Court of Appeals interpreted Shell’s duty of care in the light of widely recognised international soft law, such as the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises.
EUROPEAN IMPLICATIONS • By recognizing the immediate legal consequences of these instruments for businesses, the Court may have set a potent precedent for courts in other Member States, as these documents are part of their legal order as well. Although courts in other jurisdictions may not have the same (unique) margin of appreciation as Dutch civil courts, they may still rely on the interpretation which conceives of this international soft law as binding.
WHAT TO EXPECT • In an interview with the Financial Times in December, Roger Cox, the lawyer representing FoE, said he foresaw an “avalanche” of duplicate lawsuits against large companies. This is already happening in France, where a similar case is pending against Total and its compliance with their “duty of vigilance”.
NEXT GEN LITIGATION • These developments can be considered the next generation of climate litigation, after a series of successful lawsuits against European Member States for failing to take adequate mitigating measures (or planning to do so). Dutch judges showed the way in the Urgenda-judgment of 2019 that ordered the Dutch government to reduce emissions by 25% before the end of 2020 (relative to 1990 levels).
FOLLOWING SUIT • In February 2021, the Administrative Court of Paris ruled that the French government was in breach of French regulations that set climate change mitigation goals. Also in Germany, the Federal Constitutional Court ordered the legislator in March 2021 to revise the Federal Climate Change Act because it did not specify the emission reduction targets beyond 2030, which it considered a violation of virtually all fundamental rights.
Gazprom Faces Fresh Antitrust Action from EU Competition Tsar
Last Thursday, Competition Commissioner Margrethe Vestager announced that she had launched a preliminary analysis of potential anti-competitive behavior by gas suppliers in the EU, specifically targeting the Russian giant Gazprom.
TAP OFF • Gazprom’s tightening of gas deliveries to the EU as demand is soaring has raised eyebrows. It prompted Poland and MEPs to call for an investigation into abuse of a dominant position in October. During a press conference, Vestager called Gazprom’s actions “rare behavior” in the marketplace.
KEEPING IT TIGHT • Last Wednesday, the head of the International Energy Agency (IEA), Fatih Birol, accused the Kremlin of manufacturing this supply crunch.
“We believe there are strong elements of tightness in Europe's gas markets due to Russia's behavior”
Fatih Birol — 12 January 2022
Moscow points to the EU’s excessive reliance on short-term contracts. In a letter to the FT, Jonathan Stern, from the Oxford Institute for Energy Studies, underlines that the EU chose to abandon long-term contracts and move from “oil-linked to market prices”. “For 10 years the gas market model benefited European consumers. For the past year the opposite has been the case and Gazprom (and all other suppliers) has reaped the benefits. Such are the swings and roundabouts of commodity markets”, concludes Stern, who served as EU speaker for the EU-Russia Gas Advisory Council between 2011 and 2015.
UKRAINE • The geopolitical agenda is of crucial importance. Berlin has twisted itself to frame Nord Stream 2 as a “commercial project” — with no ties to politics. Yet, Poland and the US feel that Nord Stream 2 is much more than a commercial enterprise. In their view, it increases the EU’s reliance on Russia, and would allow Moscow to cut off countries such as Ukraine from the energy grid — in the event of a war for instance — while preserving its gas supplies to Germany. German Defence Minister Christine Lambrecht warned that “we should not drag [Nord Stream 2] into this conflict”.
The EU’s High Representative for Foreign Policy and Security (HRVP), Josep Borrell, begged to differ. He was quoted on 13 January saying that the fate of Nord Stream 2 was tied to current developments in Ukraine. The HRVP added “you cannot imagine we are thinking on one side of imposing sanctions [on Russia] just in case, and, on the other hand ... to open infrastructure”.
OLD STORIES • Relations between the Commission’s Directorate General for Competition (DG Comp) and Gazprom have been strained for several years. An investigation in 2015 ended in 2018 with Gazprom escaping a fine. Currently, another case is pending before the Court of Justice of the EU. It concerns the application of an amendment to the EU's 2009 natural gas directive which extended the application of European competition law to foreign suppliers.
What we’ve been reading this week
The French Dispatch, curated by Julien Hoez, for a weekly update on the French Presidential elections, in English.
Two recent issues of Adam Tooze’s Chartbook, one focusing on Draghi’s potential bid for President, the other on Putin’s challenge to western hegemony.
The Economist’s last Special Report focusing on the return of the “Bossy State”, with interesting developments on antitrust and industrial policy.
The European Policy Centre’s Monika Sus takes a Polish view on Germany’s position in the EU after Merkel in a very interesting piece.
Two articles on US antitrust : Casey Newton for Platformer focusing on why Meta’s antitrust problems are only beginning; and a broader outlook by Matt Stoller for BIG on how monopolists are starting to lose ground.
R. Daniel Kelemen and Tommaso Pavone share a condensed version of their 84-page-long paper demonstrating the European Commission’s increasingly laxer approach to using its law enforcement powers in a piece for Politico.
Thanks to those who helped put this edition together — Giovanni Medici-Tornaquinci (welcome!), Roemer Sijmons (welcome!), Ghislain Lunven, Briac de Charry, Hélène Procoudine-Gorsky, Maxence de La Rochère (welcome!), Rogier Prins, Leon Holly, Agnès de Fortanier and Thomas Harbor. See you next week!