A Step Forward on the Carbon Border Adjustment Mechanism
Also — War in Ukraine, 4th package of sanctions, Tech, Energy, Chips, Equality, Crypto, Finance, Trade
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War in Ukraine — A Week, Unpacked
Russian and Ukrainian delegations met virtually for a fourth round of peace negotiations, which seem to be at a standstill, while the war rages on. Ten million Ukrainians are estimated to have been displaced — 3,5 million of whom have now fled the country. EU leaders agreed to a fourth wave of economic sanctions against Russia, although a ban on Russian gas and oil is not yet on the horizon.
PEACE TALKS • On 14 March, both Russian and Ukrainian delegations met virtually for the fourth round of peace talks. While Russian positions seem to soften, the Ukrainian demands remain unchanged. “Ceasefire, withdrawal of troops & strong security guarantees with concrete formulas,” underlined Mykhailo Podoliak, the Advisor to the Head of the Office of President of Ukraine. The 15-point draft proposal currently under discussion would involve Kyiv renouncing its NATO membership ambition, which would require an amendment to the Ukrainian constitution. It would also forbid any foreign military presence on Ukrainian territory, in exchange for security guarantees from countries such as the US, the UK, and Turkey. It is very unlikely this peace proposal will go anywhere. Russia’s violation of the 1994 Budapest memorandum, which had made Ukraine renounce its nuclear arsenal — the third biggest in the world at the time, in return for security assurances — will not reassure Ukraine.
DEMI-VISEGRAD • On Tuesday 15 March, the prime ministers of Poland, the Czech Republic, and Slovenia met in Kyiv to hold talks with the President of Ukraine, Volodymyr Zelensky. The symbolic meeting between the four leaders involved discussions of the military and humanitarian situation in Ukraine. “Your visit to Kyiv, in these hard times for Ukraine, is strong evidence of support. We really appreciate it,” said the Ukrainian President during the meeting. On the same day, the Polish prime minister, Mateusz Morawiecki, underlined in a Facebook post that the EU should offer membership to Ukraine, as it represents and defends European values.
COHESION FUNDS • On Wednesday 16 March, the Council approved a legislative proposal to use cohesion funds to address the current migration crisis. Joël Giraud, French minister for territorial cohesion and relations with territorial communities, announced that the EU will accelerate the unblocking of cohesion resources to provide urgent help for people fleeing the war in Ukraine. The proposal will amend the 2014-2020 home affairs funds by extending its implementation period by one year, and the 2021-2027 asylum, migration and integration fund by providing access to the unspent amount that had been allocated to other objectives.
FRONTEX IN MOLDOVA • On Thursday 17 March, the Council adopted a decision to sign an agreement with Moldova to allow Frontex to provide the country with operational support. The agreement will be applied provisionally, and the European Parliament will have to give its consent to the agreement. Importantly, it will allow Frontex to assist Moldova with its border management, for example by deploying border teams to help with border checks, registrations and surveillance.
TPD GUIDELINES • On 18 March, the Commission presented operational guidelines to clarify the application of the Temporary Protection Directive it initially enacted on 10 March to give Ukrainian refugees immediate and temporary residence and work permits in the EU. The Directive will give refugees ‘a consistent and effective level of rights’ and ensure that the Commission supports member states at every stage of the process – from arrival to integration. The guidelines are constantly being updated to reflect the circumstances and the changing needs of the states.
WAR OR RULE OF LAW? • On Friday 18 March, the Commission issued guidelines on the application of the Rule of Law Conditionality Regulation, which enables the EU to cut common funds in case of democratic backsliding. Before the war in Ukraine started, one of the hottest battlegrounds in the EU was the rule of law. The CJEU dismissed in mid-February the actions brought by Poland and Hungary against Regulation 2020/2092.With a bigger crisis taking place in the EU’s neighbourhood, officials fear that the EU may prioritise Ukraine over the rule of law crisis, and that Poland could “use this war in Ukraine as a smokescreen for the final assassination of the rule of law in Poland”, – as Judge Mateusz Mazur has warned.
We had a conversation about the current situation with Ivanna Klympush-Tsintsadze, chair of the Ukrainian Parliamentary Committee on Integration of Ukraine to the EU, and former Vice-Prime-Minister for European and Euro-Atlantic Integration of Ukraine. You can find the interview here.
Fourth EU Sanctions Package Adopted on 15 March
The fourth package of EU sanctions against Russia was adopted by the Council of the EU on Tuesday 15 March, following the informal meeting of EU Member States on 10-11 March in Versailles, France.
WHAT’S NEW • New measures include bans on transactions with certain state-owned enterprises and on new investments in the Russian energy sector. Moreover, the EU has introduced new restrictions on the import of iron and steel and the export of luxury goods. Additional individuals and entities, including Chelsea FC-owner Roman Abramovich, are now subject to travel bans and asset freezes bringing the total to 877 people and 62 entities currently subject to restrictive measures. The Commission has also announced that Russia`s funding through international institutions such as the IMF, World Bank and OECD will be suspended.
OIL & GAS • In spite of this new wave of sanctions, bans on Russian gas and oil do not seem to be on the table for the moment — with notable pushbacks from Russian-energy-dependent Germany. The Netherlands, in an unprecedented move, has announced that it stands ready to ban the use of shell companies with links to Russia regardless of the EU response, even though the Dutch economy is one of the most exposed in Europe with annual foreign direct investment from Russia totalling 27 billion euros. Expect oil and gas-based sanctions to be at the heart of conversations at the next EU leaders meeting on 24-25 March.
Council agrees on Carbon Border Adjustment Mechanism
On 15 March, the Council of the EU agreed on a ‘general approach’ on the Carbon Border Adjustment Mechanism (CBAM). This marks the start of further negotiations between the Council and the European Parliament.
AGREEMENT • The Council’s approval of a ‘general approach’ on the CBAM closely follows the original proposal made by the Commission in July 2021 to ease the EU decarbonization process by preventing asymmetric competition from outside firms that are subject to less stringent environmental regulations. Until now, European firms at risk from unfair competition and carbon leakage — mostly energy-intensive industries — were allocated free emission permits through the EU Emission Trading System (ETS). The implementation of CBAM should bring free allowances to an end and introduce a levy on high-emitting imported goods in order to account for the costs borne by European industries in the ETS. Described by French economic and finance minister Bruno Le Maire as “a victory for European climate policy”, this general approach will serve as a basis for the Council’s negotiations with the European Parliament.
CLARIFICATIONS • The Council’s position gives a clue to what the scheme could look like in practice. Where relevant, a centralised governance of the system could be preferred — for example, the registry of CBAM importers could be administered at the EU level. To avoid administrative headaches, the Council also envisions exemptions from CBAM obligation for consignments which are worth less than 150 euros.
ELEPHANT IN DA ROOM • A few thorny issues were nonetheless passed over by the Council. “There is one big elephant in the room: when and at which pace will CBAM replace the free allowances?” declared Dutch MEP Mohammed Chahim, the rapporteur for the CBAM adoption procedure,. The phasing out of free allowances is indeed crucial to incentivise the industry sector to adopt ambitious decarbonization measures, but also to make CBAM compliant with WTO rules. Other questions remain unanswered — such as the use of revenues originating from the scheme — and the Council did not go further than the proposal regarding potential support of vulnerable countries — which the Jacques Delors Institute regrets. The importance of enhanced international cooperation was however noted by the Council, and could take the form of a climate club in parallel to CBAM.
NEXT STEPS • The final form of CBAM will be determined by future negotiations between the Council and the Parliament. EU lawmakers are still working on the Parliament’s official position on the matter. A first draft report on CBAM was issued by the rapporteur in December 2021, proposing a broadening of the scope of CBAM, an inclusion of indirect emissions and a tightening of the implementation deadline (the current deadline for a fully-operational CBAM being 2036) — none of which were mentioned in the Council’s General Agreement. These differences will certainly impact the negotiation process between the two institutions, and, ultimately, the final form of the mechanism.
Tech Watch — Amazon/MGM Gets Green light; Microsoft Cloud Services Faces Complaint; Meta Slapped with €17m for Privacy Breaches
This week, our tech column features Amazon, Microsoft, and Meta, antitrust probes, privacy fines, and movies.
AMAZON / MGM • The European Commission approved Amazon’s acquisition of the media company Metro Goldwyn Mayer (MGM) on Tuesday 15 March, without conditions.
Amazon hopes the 8,45 billion dollar deal will help it fight the ‘streaming wars’. Amazon Prime, the second largest streaming platform by subscribers behind Netflix, will gain access to an extensive film and TV series catalogue — which it can exclude from rival platforms. The Commission did not consider the acquisition to pose competition issues. MGM’s content is not a ‘must-have’, MGM faced strong competition in movie production and in box office, and so did Amazon in the streaming market.
The streaming industry is fast entering a phase of consolidation, as investors worry the end prize is smaller than expected. Readers with an Amazon Prime subscription may be disappointed to learn that they will not be able to watch many of MGM’s pre-1986 movies, like “The Wizard of Oz”, which belong to the soon-to-be-merged Warner Bros. Discovery.
OVH / MICROSOFT • The French-based cloud company OVHcloud filed a complaint with the European Commission against Microsoft in the summer of 2021 for anticompetitive practices, the Wall Street Journal reported on 16 March. This is the second complaint Microsoft faces in the cloud market, following similar allegations by German-based Nextcloud. Microsoft is facing intense antitrust scrutiny on different fronts, including its proposed acquisition of video-game firm Activision Blizzard.
OVH — in a similar fashion to the Slack case — argues that Microsoft may make it more expensive for businesses to use cloud services besides Microsoft Azure and that other cloud services are unable to compete because its software does not work as well when used on their platforms. For the complaint to be successful, the Commission would need to prove that Microsoft products are part of different markets and that consumers are forced to acquire them together — a rather complex and lengthy process.
It is not clear whether the Commission will engage in the investigation, or instead use the soon-to-be-approved Digital Markets Act (DMA) to tackle Microsoft’s conduct. Indeed, the DMA’s regulatory proposal includes cloud services and, when enacted, may force Microsoft to allow the installation and effective use of third party software applications for ‘gatekeeper’ companies that control the access to these essential bricks of the digital world. The proposal for the DMA is entering trilogue meetings next week and is expected to come into force before the end of the year.
META SLAP • Meta was fined 17 million euros by Ireland’s privacy watchdog — the Data Protection Commission (DPC) for failing to address a series of data breaches that affected 30 million Facebook users in 2018. Under the EU’s General Data Protection Directive, which came into application in 2018, fines can go up to 4% of annual turnover in the most serious cases. It is “the first final decision from Ireland on a GDPR investigation against Facebook itself since the regulation began being applied nearly four years ago”, noted Natasha Lomas from TechCrunch.
EU Energy Trade Body Calls for Cash Support
The European Federation of Energy Traders (EFET), which represents companies like BP, Shell, and commodity traders Vitol, has urged EU Member States and Central Banks to provide “time-limited emergency liquidity support to ensure that wholesale gas and power markets continued to function”, the Financial Times reported on 16 March. The plea is a response to the continued disruptions in the commodities markets caused by the war in Ukraine.
MARKET INTERVENTION • The EFET argues in its letter that ‘the overriding objective [of a liquidity support scheme] is to keep an orderly market for futures and other derivative energy contracts open’. Several EU Member States, including Greece, Italy and Spain, have already called on the EU to introduce price caps on electricity prices – currently pegged to gas prices – and consider reforms of the electricity market. This interventionist call was further endorsed by French President Emmanuel Macron, who argued as part of his presidential campaign announcements that EU rules on energy prices need changing, while the French state would stand ready to regain control of parts of the energy sector – including the full nationalisation of French electricity utility company EDF.
DUTCH PUSHBACKS • The Netherlands have taken a different take on the matter. The Netherlands’ climate and energy minister, Rob Jetten, said that putting caps on energy prices is a way of diverting money away from renewables investments, which he believes are key in weaning the EU off Russian gas. Referring to Southern countries’ appetite for interventionist measures, he encouraged countries such as Spain and Portugal to use solar power “to become the green hydrogen producers of Europe”.
FRANKFURT’S LINE • Isabel Schmabel, Member of the Executive Board of the European Central Bank (ECB), added a monetary policy perspective to the conversation, arguing in a speech on 17 March that the ECB will stick to its primary mandate of upholding price stability, while aligning its policies with the Paris agreement, in order to provide incentives to accelerate green energy transition. Yet, there is neither inflation adjustment on the horizon, nor is the ECB expected to exclude energy prices from central banks’ measures of inflation.
WAY FORWARD • To ensure EU energy security in the future, the Commission announced on 8 March its REPowerEU plan to “make Europe independent from Russian fossil fuels well before 2030”. In the short run, the plan sets out a gas storage policy, which entails filling up gas storage across the EU by at least 90 percent by October 1 each year. In the medium term, the EU will turn its efforts into delivering on its energy efficiency agenda.
Chipmaker Intel to Invest €33 billion in the EU
Intel, the US-based chip manufacturer, announced on 15 March its plan to invest up to 30 billion euros in the EU.
MEGA FAB • The plan includes 17 billion euros earmarked to set up a ‘mega-fab’ in Germany. This would be a cutting-edge chip factory that produces the latest generations of chips — of down to 5 nanometers and less.
CHIPS ACT • On 8 February, the Commission adopted a proposal for a European Chips Act, which aims to increase the EU’s share in the global semiconductor market from 10 to 20 per cent by 2030. The Commission claims the EU Chips Act will mobilise more than 43 billion euros of public and private investments. The figure is intended to match the 52 billion dollars offered by the US’s Build Back Better (BBB) plan.
The EU’s industrial policies have a poor track record. The Commission already presented a similar microchips plan in 2013 with the ambition of doubling Europe’s chip production to 20% of global production by 2020. This target was not reached.
EU CASH • Billions in subsidies will be handed out for greenfield investments, or ‘first of a kind facilities’, such as Intel’s — which left companies grumbling about a US-based corporation benefiting too much from EU cash.
Intel’s other EU investments which are not for ‘first of a kind facilities’ — brownfield investments basically — will not benefit from the same largesse from the EU and its Member States. States compete worldwide to attract chipmakers, given the strategic nature of such operations. Making the EU’s ‘strategic autonomy’ in chips requires public cash, up to 30-40% of costs according to Intel.
BRETON VS VESTAGER • Internal Market Commissioner Thierry Breton has been a leading apologist for a strong-willed EU-wide industrial policy. Competition commissioner Margrethe Vestager wants to reassure free-marketeers that subsidies will be “targeted and proportionate”. The EU’s antitrust tsar is adamant that the Commission is not tweaking State aid rules but relying on existing carve-outs for ‘Important Projects of Common European Interest’ (IPCEI).
EU Speeds Effort to Get Women on Corporate Boards After Decade-Long Pushback
The Council of the EU and the European Parliament agreed to move forward on draft legislation to strengthen the gender balance on listed companies’ corporate boards in the EU. On 14 March 2022, employment and social affairs ministers gathered at the Council agreed on a ‘general approach’ on the ‘Women on Board’ directive. The Parliament followed suit, and backed further negotiations with the Council on 16 March.
AGREEMENT • The proposal will require companies to meet a minimum target of 40% of non-executive director positions to be held by women, or 33% if all board members are included, by 2027 — leaving it to Member States to choose between these two goals. Companies which have not yet reached these targets will be required to work towards introducing rules for the selection and appointment of female non-executive board members, and to explain which other measures they have taken in order to meet those targets in time. Member States will also need to ensure that companies give priority to women when choosing between equally qualified candidates.
GLASS CEILING • As of October 2021, 30,6% of board members were women, whilst only 8.5% of board Chairs were women, according to the European Institute for Gender Equality (EIGE). Elizabeth Borne, the Minister for Labour who heads the Council meetings on this subject, explained that a future directive on gender representation would “help to address the glass ceiling with which women are still too often faced in the world of work”.
TIMELINE • The Commission proposal which is now going to be negotiated was introduced in November 2012. A set of — mostly northern European — countries opposed the legislation proposal, preferring instead a voluntary solution guided by relevant Council recommendations. Gender quota laws for company boards have been adopted in nine Member States — Spain, Belgium, France, Italy, the Netherlands, Germany, Austria, Portugal, and Greece.
Over the last decade the proposal was amended to respond to points of contention – notably by the introduction of a flexibility clause (Art. 4b), which would allow Member States to suspend the Directive’s procedural requirements, provided they have taken relevant and effective measures to come close to the set objectives.
GOING FORWARD • The agreement over the General Approach reached on 14 March 2022, almost a decade in the making, marks a milestone in Member States’ efforts to improve gender representation on companies’ boards. The Parliament’s green light is expected to be fully approved in plenary on 23 March, paving the way for future interinstitutional negotiations and marking the start of legislation drafting.
EU One Step Closer to Crypto-Asset Regulation
On 14 March, the European Parliament agreed draft rules on the supervision, consumer protection and environmental sustainability of crypto-assets, as part of work on a future Markets in Crypto-Assets (MiCA) Regulation — paving the way for a uniform legal framework for crypto-assets in the EU.
NEGOTIATING POSITION • The Parliament’s Economic and Monetary Affairs (ECON) Committee draft rules cover a wide array of issues, including provisions on transparency, disclosure, authorisation and supervision of transactions, and measures against market manipulation — applicable to all those issuing or trading crypto-assets. Due to the regulatory complexity of blockchain-based financial transactions, the Parliament highlights that a uniform legal framework will give further legal certainty to crypto-asset buyers and sellers, all the while supporting the development of digital services and alternative payment instruments.
GREEN CONSIDERATIONS • The ECON Committee signalled its willingness to tackle the high carbon footprint associated with blockchain technologies, which is caused by the energy-intensive ‘mining’ process through which a transaction is validated on the blockchain. MEPs have called on the Commission to draft a proposal to include crypto-assets mining activities in its EU taxonomy classification system.
BACKGROUND • In general, crypto-currencies are not covered by EU financial regulation. However, the absence of applicable rules for crypto-assets may leave consumers and investors exposed to substantial risks. Furthermore, some Member States have put in place different national rules, leading to market fragmentation within the Single Market. In an effort to harmonise practices and ensure high levels of consumer protection, the Commission drafted an initial proposal in September 2020.
NEXT STEPS • The Committee agreed to enter into negotiations with EU governments on the final shape of the Bill. The Committee report was presented in the Parliament’s plenary on 17 March, and the Parliament’s position in first reading is expected to be made public soon.
EU Announces Plan to Make Capital Markets Union ‘More Efficient and Competitive’
On 16 March, the European Commission put forward a proposal to amend the Central Securities Depositories Regulation (CSDR) in place since 2014. The changes aim to make the European settlement system simpler and more competitive without compromising the financial stability of the EU.
Capital Markets Union: Commission proposes simpler rules to make settlement in EU financial markets safer and more efficient, Press release, 16 March 2022
BACKGROUND • The CSDR oversees settlement markets in the EU and is a key component of the Capital Markets Union (CMU) action plan. Initiated in 2015 following the financial crisis and revised in 2020, this plan aims to foster access to capital for European businesses, ensure the safety of long-term savers and investors, and help remove barriers preventing cross-border flows. By acting as intermediaries in the settlement of transactions between sellers and buyers of financial securities, such as bonds or equity shares, Central Securities Depositories (CSDs) are instrumental to the functioning of financial markets. As such, they also are an area of strategic importance for a post-Brexit EU. CSDs were one of the two equivalence decisions granted to the UK following Brexit to avoid major disruption in financial trades.
AT STAKE • Last week’s proposals follow the results of a consultation with market participants overseen by the European Securities and Markets Authority (ESMA) and published last year. Among other things, the Commission suggests amending the rules to simplify and make passporting easier – which means ensuring CSDs can provide services in all Member states regardless of registration, facilitate transactions in other currencies and ensure cooperation and convergence between national supervisory authorities. On the competition side, the proposal toughens the rules for third country CSDs, asking that they notify ESMA when providing services in the EU. Such measures, in the words of Financial Stability Commissioner Mairead McGuiness, would make EU CSDs ‘more efficient and competitive’,while ensuring further independence from third-country depositaries. The move is particularly relevant as Euroclear and Clearstream, the two main depositories in Europe, are attracting an increasing share of the settlement volumes on the continent.
WHAT’S NEXT • In a post-Brexit context, and with a Covid recovery focused on green and digital investments, strengthening the Capital Markets Union is more important than ever. The current war in Ukraine also stressed the importance of harmonisation across the EU, as CSDs were instrumental in blocking transactions on Russian accounts and in ensuring the enforcement of sanctions. The Council and European Parliament are now due to review the proposal.
Getting Serious on Reciprocity in International Procurement Markets
Ten years after the European Commission's first proposal, the European Parliament and the Council of the EU — which represents Member States — concluded a provisional agreement on the International Procurement Instrument (IPI). The Instrument aims to protect EU bidding companies from competition from countries which are less open than the EU.
WAKING UP • The negotiations on setting up the IPI quickly got stuck in EU quagmire after the Commission presented a draft legislation in 2012. Free traders resisted, fearing it was another Trojan horse for the more protectionist Member States. The mood has since changed substantially. This was prompted by a combination of Donald Trump’s mercantilist trade policy and bombastic rhetoric towards the EU, China’s financial distortive support to its own state owned enterprises — Beijing was officially dubbed a ‘systemic rival’ by the EU in a 2019 white paper —, not to forget Covid-19.
“Currently, European procurement is broadly open to companies from third countries, but European companies do not always have reciprocal access to public procurement in those countries”, said French trade minister Frank Riester.” “While the EU has kept its public procurement market open, the same cannot be said for many third countries, where our companies still face unfair barriers“ stressed Trade Commissioner Valdis Dombrovskis,. “A level playing field is vital for competitiveness,” he added.
HOW DOES IT WORK • Under the IPI, the Commission will assess whether a third country discriminates against EU companies in their access to procurements. If so, the Commission will engage in dialogue with the government. If dialogue fails, two options will be possible to restrict access to European public markets. The Commission may impose a penalty on the tendering company — from 50% up to 100% of its bid in the most serious cases, or, alternatively, the EU’s executive arm could decide to bar foreign companies from tendering in the concerned Member State and sector.
NEXT STEPS • The IPI agreement now has to be approved by the Council and the Parliament before going through the formal adoption procedure.Two other important pieces of legislation are to follow in 2022, on illegal distortive subsidies and coercive practices.
What’ve been reading this week
Russia does not have to keep countries friendly to prevent them from fully exiting the orbit of her influence. Debilitating them is enough, writes Pierre Mirel for the Robert Schuman Foundation, making the future of the Eastern Partnership more uncertain than ever
How far to go with sanctions? Much further, and don't be squeamish about it, argue Tinatin Akhvlediani and Willem Pieter De Groen for the CEPS. They handily suggest a list of additional measures, including more aggressive moves against the Russian financial sector
Sanctions entail a heavy price, and political risks, for Europe as well as Russia. For Egmont, Tobias Gehrke looks at Europe’s dependence on imports of raw materials from Russia and Ukraine
Germany’s much heralded geopolitical awakening will find exposure to trade disruptions to be among the most pressing issues the country has to face. Markus Jaeger of the German Council on Foreign Relations (DGAP) examines the first steps Germany can take to mitigate risks
Thanks to those who helped put this edition together — Giulio Preti, Augustin Bourleaud, Marianna Skoczek-Wojciechowska, Hélène Procoudine-Gorsky, Nicolas Tselikas-Bouzeau, Ambroise Simon, Briac de Charry, Lorenza Nava, Andreea Florea, Cyril Tregub, Andrei-Bogdan Sterescu, Maxence de La Rochère, Rogier Prins, Théo Bourgery, Agnès de Fortanier, Thomas Harbor. See you next Tuesday !
* A special welcome to Augustin Bourleaud, Giulio Preti, Marianna Skoczek-Wojciechowska, and Théo Bourgery who are joining What’s up EU. Théo is taking over the role of News Editor.
**Articles do not have individual authors, the views expressed in this publication do not reflect the personal views of those credited.