EU Weekly | REPowerEU To Pull the Russian Plug
Also — SGP, CoFoE, Microsoft
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RePowerEU to Pull the Russian Plug and Fill the Energy Holes
On 18 May, the European Commission unveiled its plan called REPowerEU to cut the EU’s energy dependency on Russia. The Commission intends to rapidly pursue alternative energy sources and promote energy savings to phase out the EU's fossil fuel imports from Russia by two-thirds at the end of 2022. To become completely independent of energy imports from Russia well before the end of the decade, the European Commission proposes to direct around 300 billion euros towards the uptake of clean energy production.
RECYCLED IDEAS • Russia's military aggression towards Ukraine worsened already precarious energy relations in turbulent global energy markets. Energy prices surged in the autumn of last year — gas was three times more expensive in February 2022 compared to 2021 — prompting the European Commission to design an Energy Prices Toolbox that Member States could use to handle the crisis and shield vulnerable consumers. REPowerEU echoes these policy recommendations to a large extent and builds on their contingency planning. A new sense of urgency in the form of a looming Russian oil embargo adds to the pressure to step up.
ENERGY SAVINGS • The Commission considers energy saving the most efficient way to address the current crisis. It has adopted the EU Save Energy Communication with immediate energy saving recommendations for companies and consumers and mid-to-long-term measures for structural changes. “The case for energy efficiency has never been stronger, as lowering energy consumption in households and enterprises means not only reducing energy imports from Russia, but also reducing energy costs for EU citizens and businesses”, the Commission states.
But most of the task rests on Member States.
“A determining factor in the success of REPowerEU will be whether governments switch from universal energy subsidies to targeted measures for poor households and vulnerable small and medium companies, and if they have the courage to ask all others to consume less energy.”, points out Bruegel’s Simone Tagliapietra.
DIVERSIFY • As mandated by the European Council in March, the EU must boost diversification of energy sources and suppliers. In the short term, the EU Member States will initially do so by increasing LNG imports, biogas production and accelerating the rollout of renewable hydrogen. LNG is not a panacea — as infrastructure gaps in the regasification terminals and pipelines to get LGN from South and West to North and East of the EU a thorny issue.
“The failure to build a fully united energy market, in which power, gas and fuel could smoothly flow between all corners of the EU, is now exposed as a clear constraint on democratic Europe’s autonomy of action”, notes Martin Sandbu in the FT.
TRANSITION • The plan looks long term to substitute fossil fuels by advancing the clean energy transition, such as with more offshore wind; a new obligation to place solar panels on the rooftops of certain suitable buildings; swifter regulatory clearing of funding for trans-European hydrogen projects etc. To those who called for a downgrade of the EU’s climate ambitions following the war in Ukraine, the European Commission answers by doubling down its efforts.
INVESTMENT INDUCTOR • The Commission expects that realising the plans of REPowerEU will cost an additional 210 billion euros by 2027. Most of the money, as often, is repackaged — mainly from already existing loans under the Next Generation EU fund. The Commission also wants to auction more carbon-emission allowances of the Emissions Trading Systems (ETS), which sent a mixed message to climate lovers. By reducing/ending imports, the Commission expects to save the EU some 94 billion euros in imports — which is a good deal considering the 210 billion euros investment required.
OIL EMBARGO • Adding to the urgency of preparing for supply disruptions, the EU is currently bargaining a Russian oil embargo. The Commission proposed on 4 May a phase-out of Russian imports of oil by year's end in a sixth sanctions package. Yet, Member States struggle to find the required consensus with Hungary demanding more time for any phase-out and financial compensation. However, it remains to be seen what will happen if the embargo actually will (or can) enter into effect if the EU has insufficiently reduced its dependency on Russia.
Commission Proposes to Suspend Fiscal Rules for Another Year
On Monday 23 May, the Commission proposed a long-awaited extension of the general escape clause of the Stability and Growth Pact when it presented the Spring Package for the European Semester.
FISCAL GUIDANCE • Here is the paragraph of interest to us:
“The Commission considers that the conditions to maintain the general escape clause of the Stability and Growth Pact in 2023 and to deactivate it as of 2024 are met. Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Ukraine, unprecedented energy price hikes and continued supply chain disturbances warrant the extension of the general escape clause through 2023. The continued activation of the general escape clause in 2023 will provide the space for national fiscal policy to react promptly when needed, while ensuring a smooth transition from the broad-based support to the economy during the pandemic times towards an increasing focus on temporary and targeted measures and fiscal prudence required to ensure medium-term sustainability.”
SGP REFORM • The Commission will define "guidelines on possible changes to the economic governance framework". In the institutional game, it is up to the Commission to make a proposal to amend the regulations — which is why the Member States are positioning themselves upstream to make their positions known. Overall, there is consensus on the extension of this derogation period. But the underlying debate — reforming the Stability and Growth Pact — is being debated between those who think that the 'flexibilities' of the tool have shown the use of the existing rules, and those who consider that the rules need to be rewritten.
BERLIN, FISCAL WATCH • Berlin spoke out both in favour of extending the general exemption clause and in favour of reducing public deficits in the EU. On 21 May, Finance Minister Christian Lindner recalled that the extension of the derogation regime was no excuse to let go. "The fact that member states are now able to deviate from the Stability and Growth pact doesn't mean they actually should do that," he said in an interview with the FT on the sidelines of the G7 meeting in Königswinter.
This is a form of call to order by the German Government, which recalls that the return of fiscal discipline must not be postponed until the End of the Year. Germany has indicated that it will reinstate its constitutional brake — the Schuldenbremse —, which limits public deficits to 0.35% of the GDP, as early as 2023. From a political point of view, the finance minister, who comes from the FDP, is sending signals to his electorate very speech touting fiscal discipline in a country that recently announced 100 billion euros for the army and 60 billion for the green transition.
EXPLANATIO • The Stability and Growth Pact — the rule of 60% public debt and the 3% deficit ratio — has been temporarily set aside as a result of Covid-19, a virus that has caused the explosion of public debt in the EU. The "general escape clause" of the Stability and Growth Pact was activated in 2020 to deal with Covid-19 – and avoid subjecting a Member State to the exhausting excessive deficit procedure. The opt-out clause was to be deactivated from 2023, according to the Commission Communication on fiscal policy guidelines for 2023, published on 2 March 2022.
SPIRIT OF VERSAILLES • The war in Ukraine dealt another blow to those who wanted the escape clause to be deactivated as soon as possible. Ahead of the Versailles summit on 10-11 March, originally scheduled to discuss SGP reform, several Central and Eastern European member states lobbied to exclude defence and security spending from the SGP.
In April, the Netherlands and Spain took the pen with four hands for a non-paper in which the two member states — usually divergent positions on the subject — called for the establishment of country-specific medium-term budgetary plans, an idea shared by Economy and Finance Commissioner Paolo Gentiloni.
Microsoft Anticipates DMA
On May 18, Brad Smith, Microsoft's president, was visiting Brussels. He announced that the US giant would improve the licensing terms of Azure, its flagship cloud computing service, to make it more compatible with competing or related services.
"As a major technology provider, we recognize our responsibility to support a healthy competitive environment and the role that trusted local providers play in meeting customers' technology needs. We thought it was important to start taking meaningful action within weeks, rather than months or years, and we set a goal internally to do so by today, a day when I'm in Brussels" — Microsoft responds to European Cloud Provider feedback with new programs and principles - EU Policy Blog
The move comes as many (EU) companies accuse the company of linking the service to its wider product suite and denying interoperability to its competitors.
Specifically, "Microsoft will help cloud providers to offer Windows and Office directly as part of a complete desktop solution that they can build on, sell and host on their infrastructure." This could allow Microsoft to partially escape further scrutiny by the Directorate-General for Competition (DG COMP) with respect to its cloud practices.
This business decision also anticipates Microsoft's compliance with the Digital Markets Act (DMA), recently approved by the Council. The DMA provides that gatekeepers — Microsoft is one — are required to allow their services to be interoperable with other related services. They must also refrain from technically limiting users' ability to switch from one software service to another.
Some News on Treaty Change
While Eurovision had a greater impact on the EU’s citizens than the conclusions of the Conference on the Future of Europe (CoFoE), the latter were listened to with an attentive ear by the EU institutions — no doubt thanks to the memorable dance performance that served as the first part of the show in the European Parliament.
A LETTER • The last piece in the debate: the publication by Germany, Belgium, Italy, Luxembourg, the Netherlands and Spain of a letter, which Politico has obtained and which pronounces itself in favour of a recast of the Treaties. Beyond the content of a reform itself, it is a question of finding enough support and political consensus to set in motion interinstitutional dialogues.
ACTION PLAN • As soon as the Conference was concluded, the European Parliament announced on 4 May, in a resolution, its intention to trigger the procedure for revising the Treaties provided for in Article 48 of the Treaty on European Union. As for the French President, on the occasion of Europe Day in Strasbourg, he also mentioned the need to "reform our texts". Following the adoption of its resolution, its Committee on Constitutional Affairs — designated as the committee responsible for examining the procedure for revising the Treaties — immediately examined the matter.
If, on the Parliament side, most MEPs seem to agree on the revision and the need to arm the Union to fight against unprecedented crises — the health crisis, the war in Ukraine — consensus is limited in scope. In the Committee on Constitutional Affairs, the centre-right, represented by Sven Simon (EPP), advocated a limited scope for revision in order to secure the Support of the Council, which is essential for the completion of the procedure. For other MEPs, such as Pascal Durant (Renew), Parliament should not censor itself, on the pretext that the Council will not follow.
RELUCTANCE • However, the Council's resistance is not to be minimised. As early as 9 May, 13 Member States made their reluctance to rewrite the Treaties public by declaring in a letter that "the objective of the Conference has never been revision". In response, 6 Member States stated that they were not opposed "in principle" to a revision, while at the same time making it possible to distinguish between issues which can be settled under the current Treaties and those requiring revision.
Nevertheless, we must be clear-eyed that certain measures, by their nature, are likely to be the subject of debate. This is the case with the end of unanimity in the Council, particularly in the field of the common foreign and security policy, or concerning the organisation of a referendum at European level – this question being traditionally of a "constitutional" nature.
WHAT NEXT? • This question of the revision of the Treaties follows a precise political timetable. The stated objective is for the Parliament to adopt its position at the next plenary so that the subject of the revision can be discussed during the European Council of 23 and 24 June, still under the French Presidency.
What we’ve been reading this week
A report for the European Centre for International Political Economy by Fredrik Erixon et al. takes a critical view of eight defensive trade policy instruments of the EU.
Also at the ECIPE: Hosuk Lee-Makiyama’s unsentimental examination of the Trade and Technology Council uncovers the EU and the US’ motives for trying to reach an agreement.
Meanwhile, the ECFR’s Julian Ringhof and José Ignacio Torreblanca urge the EU to adopt a digital diplomacy strategy, which they handily outline.
Bruegel’s Simone Tagliapietra argues that REPowerEU is a step in the right direction, even if a successful response to the energy crisis will ask everyone to make sacrifices.
The Commission’s fifth edition of the EU Blue Economy Report, written under the coordination of Jann Martinsohn and Frangiscos Nikolian, takes a deep dive into marine economics and their significance for Europe.
This week’s newsletter is brought to you by Roemer Sijmons, Augustin Bourleaud, Alexandra Philoleau, Giulio Preti, Maxence de La Rochère, and Thomas Harbor. See you next Tuesday!