Foreign Subsidies in the EU's Radar
Also — ECB, Boone, New-Zealand, MiCA
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Focus — The Foreign Subsidy Regulation
On 30 June, the Council of the European Union and the European Parliament reached a provisional political agreement on the Regulation on foreign subsidies distorting the internal market.
The EU's trade policy will soon have a new weapon, necessary in a world profoundly changed by Covid-19, the war in Ukraine, the rise of China, and the latter’s usage of trade policy for geostrategic purposes.
CLOSING A LOOPHOLE • The regulation aims to close a loophole in the EU’s legal protection of its internal market. Currently, goods subsidised by non-EU countries can be targeted by anti-dumping duties. Yet, foreign subsidies to companies operating in the EU’s single market which have the effect of facilitating mergers/acquisitions or public procurement bids, escape these duties.
This gives non-Member States an unfair advantage, since Member States are strictly bound by European state aid law in these areas. This loophole was especially problematic during the Covid-19 crisis, when many companies could be bought up for relatively low prices.
TOOLBOX • Foreign subsidies can take many forms: capital injections, loans, tax incentives or exemptions, and the forgiveness of debts. The regulation targets foreign subsidies that distort the internal market: subsidies which allow foreign buyers to pay more for a target firm, or to offer a higher price during public procurement procedures.
Companies will have to notify the Commission of financial contributions they receive from non-European public bodies for large concentrations (M&A) and public procurement procedures above certain thresholds. The Commission will also be able to launch market investigations when it suspects that certain foreign subsidies distort the internal market. The Commission will then have the power to correct distortions where they occur, using remedies inspired by antitrust procedures.
"The EU procurement market corresponds to around 14% of our GDP. It is not acceptable that it is distorted by foreign subsidies to the detriment of the competitive firms that play by the rules. This innovative tool will fill a legal gap and entrust us with new means to promote equal treatment and fair competition in the Single Market." - Internal Market Commissioner Thierry Breton
THRESHOLDS • In the case of concentrations, companies receiving subsidies from outside the EU will only have to notify the Commission if they amount to an aggregate of more than €50 million during the three calendar years prior to the notification, and if the acquired undertaking or one of the parties to the merger exceeds the threshold of €500 million in aggregate turnover in the Union. In the case of public procurements, their value would have to be equal or greater than €250 million, and the foreign financial contribution would have to amount to at least €4 million.
LEGISLATIVE FINETUNING • During the negotiations, the Council and Parliament crossed swords over the level of the thresholds – the Parliament wanted them lower, the Council higher – and eventually reverted to the Commission's original proposal. The level of the thresholds has a strong impact on the number of notifiable transactions, and therefore on the administrative burden that will fall on companies (including European ones) that receive foreign subsidies, and on the teams of the Commission, which is solely responsible for the implementation of this new control tool.
The trilogues also resulted in the explicit inclusion of public undertakings in the text. MEPs also obtained that the Commission publish guidelines on the methodology used to assess the distortion of competition caused by foreign subsidies, a point that was of great concern to professionals concerned with legal certainty. Drawing the line between "legitimate" foreign subsidies related to industrial policy and "illegitimate" subsidies that distort the market can be complex.
BRAVE NEW (TRADE) WORLD • The last important Regulation which aimed to protect the single market, the Foreign Direct Investment (FDI) Screening Regulation of 2019, restricted itself to issues of public order and security.
The Regulation on foreign subsidies is indicative of two important developments: the increasingly unilateral nature of trade defence initiatives in a stalled multilateral context and the cross-over between trade defence tools and competition law.
Officially, this text is part of the EU's efforts to bring its state aid law to the WTO level, but few experts favour this route to concrete results on a subject as sensitive as subsidies. The cross-over between trade and competition law also evident. Although the text is formally a trade tool (Article 207 TFEU), it applies concepts from state aid law. Three Directorates-General of the European Commission will be involved in the implementation: DG COMP, DG TRADE, and DG GROW.
"This is not a matter of protectionism, but of fairness: we need all operators on the internal market to compete under similar conditions. Together with the international procurement instrument, this regulation is a vital part of our expanding toolbox." - Bernd Lange (S&D), responsible for negotiating the text on behalf of the European Parliament.
The foreign subsidies regulation is not the only instrument in the EU's legislative pipeline. The International Procurement Instrument (IPI) aims to foster reciprocity in global procurement markets. The instrument will allow the Commission to introduce limitations on access to European public procurement markets for companies from third countries whose governments "do not offer similar access to public tenders to EU companies seeking business".
The anti-coercion instrument (ACI) proposed by the European Commission in December 2021 aims to combat the use of economic coercion by countries outside the EU. This instrument was proposed in the context of tensions between China and Lithuania over the issue of the latter’s implied recognition of Taiwan.
COCORICO • This text is the last major piece of legislation under the French Presidency of the EU Council.
"The French Presidency of the Council of the European Union was built on the principle of economic sovereignty. Economic sovereignty depends on two key principles: investment and protection. The agreement reached on this new instrument will make it possible to combat unfair competition from countries that grant massive subsidies to their industry. This is a major step towards protecting our economic interests," said Bruno Le Maire.
NEXT STEPS - The political agreement between lawmakers must be formally approved by the Council and the European Parliament. The regulation would then enter into force in 2023.
In Case You Missed It
MONETARY STRESS • The ECB is due to raise its key interest rates on 21 July. Faced with the risk of fragmentation — of divergence of borrowing costs within the euro zone — the ECB met at the Forum on Central Banking in Sintra, Portugal on June 27-29. ECB President Christine Lagarde spoke about the central bank’s proposed toolkit to address fragmentation in the eurozone, and avoid a new eurozone debt crisis.
The anti-fragmentation tool should allow the ECB to buy eurozone government bonds when their yields rise suddenly and uncorrelated with their financial fundamentals. The Governing Council of the ECB is due to consider this tool on 20-21 July. The interest rates at which Italy borrows on the financial markets are currently at the highest since the eurozone crisis. In addition, the ECB announced that it would act flexibly in sovereign bond reinvestments under the Pandemic Emergency Purchase Programme (PEPP).
The ECB faces a complicated task: to convince the financial markets of its willingness to fight inflation by raising rates and ending net asset purchases on the one hand, and to avoid an explosion in the borrowing costs of the most fragile countries of the euro area on the other.
The President of the Bundesbank says he is worried about the disagreements within the ECB on this subject. Joachim Nagel fears that these measures will be tantamount to monetary financing of public debts by the ECB, prohibited by Article 123 TFEU. German legal activism on the issue suggests the string of cases before the Court of justice might continue.
BOONE AFTER BEAUNE • Laurence Boone is appointed French Secretary of State for European Affairs, succeeding Clément Beaune, who led Team France until the end of the French Presidency of the Council of the EU, as the Czech Republic takes over.
Laurence Boone is an economist. She was an advisor to François Hollande from 2014 to 2016 and was a regular at European summits. Having worked for Barclays, AXA and Bank of America Merrill Lynch, Laurence Boone has been Deputy Secretary-General of the OECD since January 2022.
A very economic-driven profile for the Junior Ministry for European Affairs was chosen as a potentially troubled sequence opens with the expected rise in interest rates by the ECB on 21 July, the economic consequences of the rise in energy prices, and the opening of negotiations on the future of the Stability and Growth Pact.
NZ • On June 30, the EU and New Zealand finalised a trade deal, which is expected to lead to a 30 percent increase in bilateral trade according to the European Commission. The agreement includes environmental commitments, including compliance with the Paris Agreement, and provisions on fundamental labour rights.
The parties may sanction non-compliance with the Paris Agreements with customs duties. Agricultural subsidies and protected geographical indications were important points of friction between the EU and New Zealand. The agreement still needs to be validated by the European Parliament and all EU Member States.
SANCTIONS • The European Commission is considering the creation of an EU sanctions authority, on the model of the Office of Foreign Assets Control (OFAC) in the United States, reports the FT. The main concern expressed by Financial Services Commissioner Mairead McGuinness concerns the uniform application of European sanctions by Member States. According to some MEPs, the European Anti-Money Laundering Agency (AMLA), which is due to be set up soon, could be given supervisory powers in terms of sanctions.
CRYPTO • The EU is moving forward on the regulation of crypto-assets. A provisional agreement was reached on 30 June between the Parliament and the Council on the draft MiCA (Market in Crypto Assets) regulation to trace crypto-assets and combat money laundering and financing of terrorism (AML/CFT). To enter into force, the agreement still needs to be approved by the Parliament's ECON and LIBE committees, before being approved by the Parliament as a whole.
What we’ve been reading this week
Jürgen Habermas’s appeal to prudence in reacting to the conflict in Ukraine has pushed Timothy Snyder to pen a response, in which he denounces what he considers to be Germany’s inability to understand the war from the perspective of Ukraine. Benjamin Tallis sees a country unable to talk about anyone else than herself.
Writing for the CEPS, Erwan Fouéré has harsh words for EU diplomacy in the Balkans.
The EPC has published the first volume of a of a compendium of essays on EU-China relations.
The IIEA has a handy guide to the priorities of the Czech Presidency of the Council of the EU, courtesy of Alexander Conway.
The CER’s John Springford calls for a new fiscal regime to guarantee the independence of the ECB.
Bruegel has a paper by Georg Zachmann that makes the case for a renewed approach to competition and regulation to achieve the goals of the green transition.
This week’s newsletter is brought to you by Rogier Prins, Maxence de La Rochère and Thomas Harbor. See you next Tuesday!