EU Weekly | The Eurozone Is Worried
Also — Ukraine, French Elections, Brexit, Taxonomy, OECD, Banking Union, Anti-Disinformation Code, Meta, Qualcomm
Welcome to What’s up EU, your go-to newsletter to stay on top of the news. Today is 9 June 2022 and here’s everything you need to know to stay sharp and smart.
In The Spotlight — The Eurozone
Memories of market sell-offs, rising spreads and emergency meetings are still quite acute in the eurozone’s collective psyche. These bad dreams might come to haunt eurozone leaders’ nights again. The ECB’s 15 June emergency meeting sent shivers through financial markets, days after the Governing Council announced its first rate hike in a decade.
EMERGENCY MEETING • The European Central Bank (ECB) navigates uncharted waters as it tries to increase interest rates amidst record high inflation while trying to avoid fragmentation in borrowing costs among the eurozone members.
The ECB’s Governing Council met on 15 June to “exchange views on the current market situation”. The extraordinary meeting added stress to already fickle bond markets — as the spread between German and Italian bonds was widening. The ECB recently significantly revised downwards its 2022/2023 growth forecasts for the eurozone.
“The recent widening in Italian and other spreads is not just driven by irrational investor panic. Italy has low potential growth, large fiscal deficits and a huge, possibly unsustainable public debt that has grown during the pandemic”, commented Nouriel Roubini (NYU Stern) in the FT.
RATE HIKES • The ECB’s Governing Council met in Amsterdam on 9 June to announce it will go forward with the ‘normalisation’ of its monetary policy — a rise in interest rates in July by 25 basis points and the phasing out of the ECB’s net asset purchases under the Asset Purchase Programme (APP). This is the first rate hike in a decade, amidst record high inflation in the eurozone. Inflation should settle at 6,8% in 2022, while core inflation — excluding energy and food — should hit 3,3% in 2022.
The ECB hinted at a new possible rise in interest rates for September. The ECB lags behind the US Fed and the Bank of England (BoE), which have already raised interest rates amidst record-high inflation, driven by structural factors in addition to the energy market situation. This is the ECB’s first rate following a decade of low — even negative — interest rates. The current deposit rate is at -0,5%.
FRAGMENTATION • Many see a risk of normalisation leading to fragmentation, as the economies of the countries that share a common currency — and hence a common interest rate — have asymmetrically been affected both by the COVID-19 and Ukraine crisis.
The ECB put it that way in its 15 June press release : “The pandemic has left lasting vulnerabilities in the euro area economy which are indeed contributing to the uneven transmission of the normalisation of our monetary policy across jurisdictions”.
As Warren Buffet famously said, “it's only when the tide goes out that you learn who has been swimming naked”.
Interest rate hikes are ‘one size fits all’ policy which could leave some countries in a bad place, because of the ECB’s rate rises but also because of sovereign bond selloffs, which increase the yield that a country is required to offer to attract debt investors.
PEPP FLEXIBILITY & ANTI FRAGMENTATION INSTRUMENT • As bond markets started to go wobbly, the ECB announced its intention to “act against resurgent fragmentation risks” by applying “flexibility in reinvesting redemptions coming due in the PEPP portfolio”. In other words, the ECB is ready to twist its current Pandemic Emergency Purchases Programme (PEPP) to help close the spreads in the eurozone.
The ECB also announced it would mandate several committees to work on the launch of an ‘anti-fragmentation instrument’, while stressing “how determined [it is] to address fragmentation”. Christine Lagarde told eurozone ministers gathered in Luxembourg on 16 June that the ECB’s anti-fragmentation tool could be put to work if the yields of the weaker eurozone countries shoot up too fast.
Christine Lagarde had previously stated that the ECB was ready to use existing or new instruments in case of dangerously divergent borrowing costs in the eurozone. The central bank had been quiet about this possibility, for fear of a self-fulfilling prophecy and to avoid creating a conflicting narrative with the ongoing normalisation of monetary policy. A new ‘anti-fragmentation instrument’ would allow the ECB, in case things go awry, to ‘regionalize’ its monetary policy.
“I see no contradiction but rather complementarity in the ECB tightening while preparing an anti-fragmentation tool: the former raises rates to fight inflation, the second can avoid, if needed, disproportionate tightening in some countries. Good assignment, I would say”, commented Francesco Papadia, chair of Prime Collateralised Securities (PCS) and Senior Fellow at Bruegel.
In Case You Missed It
BIG THREE IN KYIV • French President Emanuel Macron, Italian Prime Minister Mario Draghi and German Chancellor Olaf Scholz, along with Romanian President Klaus Iohannis supported Ukraine’s candidate status to join the Union on a symbolic visit to Kyiv, the first since the beginning of the war. The meeting was intended to show unity and respond to the Ukrainian concerns about the slow pace of weapon supplies provided by European partners.
“Europe is by your side, and will remain so for as long as necessary, all the way to victory,” concluded Emanuel Macron during a joint press conference. He also pledged six more state of the art pieces of artillery to address the calls for more weapons to Ukraine. However, the President of Ukraine, Volodymyr Zelensky, suggested that more deliveries are still needed. “Every day of delay or delayed decisions is an opportunity for the Russian military to kill Ukrainians or destroy our cities,” he noted.
ASSOCIATED TRIO • On 17 June, the European Commission presented its opinion on the EU candidate status of three Eastern partnership countries — Ukraine, Moldova and Georgia. The Commission concluded that all three countries have “a solid foundation” for democracy, rule of law, human rights and protection of minorities.
Still, the opinion underlines that there is a need for further legislative approximation and structural reforms, while the candidate status is conditional on progress in these areas. Next step is for Member States to unanimously approve granting the candidate status to the partnering countries. The decision is expected to be taken during the European Council on 23-24 June.
QUALCOMM v COMMISSION • Last week, the EU General Court quashed the chipset manufacturer Qualcomm's 997 million euros antitrust fine. The fine was imposed in 2018 by the European Commission (EC). The judgement strongly criticises both the Commission’s procedure — the Commission had failed to inform Qualcomm of several meetings with third parties — and its substantive assessment.
EU competition law prohibits a company in a dominant position from engaging in practices that produce foreclosure effects on competitors considered as efficient. In this case, Apple had no technical alternative to the applicant's LTE chipsets and therefore could not turn to competing suppliers. Qualcomm was therefore not able to foreclose competitors since there were none in this market.
The General Court criticises the Commission for relying on economic assumptions, not reality, to determine the effects of Qualcomm's alleged practice.
Professor Nicolas Petit wrote on Twitter: “The silver lining is that we're seeing the awakening of a careful, economically minded, and facts-intensive system of judicial control”
THE FRENCH VOTE • The French electorate gave Emmanuel Macron a relative majority on 19 June in the parliamentary elections, which saw Jean-Luc Mélenchon’s left wing coalition and Marine Le Pen’s Rassemblement National. The result comes as a shock for the Presidential party, whose ability to pursue its reformist agenda will be hampered by the need to strike deals in parliament to get bills voted. Europe Minister Clément Beaune will stay in place, after a narrow victory in a hotly contested election in Paris.
BREXIT • On 15 June, the European Commission launched an infringement procedure against the UK before the Court of Justice of the EU. A few days earlier, on 13 June, the UK Government unveiled its draft Northern Ireland Protocol Bill, following months of rising tensions at the border. The bill will allow the UK to disentangle itself from the agreement it signed with the EU and which rules how trade flows occur between Northern Ireland and Great Britain.
London wants to make a distinction between trade flows destined only for Northern Ireland and those which can be reexported, including to the Republic of Ireland. The two categories of trade flows would be subject to different customs checks, and the EU’s top court would lose competence on trade flows between Northern Ireland and Great Britain.
TAXONOMY • On 14 June, members of the environment and economy committees adopted an objection to the Commission’s proposal to label specific nuclear and gas activities as environmentally sustainable in the EU Taxonomy. The Commission’s proposal has already created significant controversy, with scientists and investors asking the Commission not to diverge from a science-based approach in the face of policy-related interests.
“For us, it is not acceptable to qualify gas and nuclear as ‘sustainable’. (...) That is not saying that we will not need gas and nuclear in the next years, but we are of the point of view that we should not misuse sustainable finance to do so”, MEP Christophe Hansen (EPP) explained during a press conference organised by the cross-coalition alliance behind the objection.
The objection – which was adopted by a small margin in the committees – will be voted on by MEPs during the next EP plenary on 4-7 July. If adopted by the EP, gas and nuclear activities would be withdrawn from the list of sustainable activities suggested by the Commission in the delegated act.
OECD TAX ORDEAL • The EU’s position on the OECD’s 15% minimum corporate tax rate for multinational companies was expected to get a green-light. Poland announced it would not veto the deal after the Commission agreed to unlock its Recovery and Resilience Facility (RRF) funds against assurances on Poland’s compliance with the EU’s rule-of-law demands. Although Poland strongly denied using the veto threat on the tax deal to unlock the RRF money, last week’s quid pro quo makes it crystal clear it was the case .
However, in a plot twist, Hungary — not Poland — vetoed the deal. Tax matters require unanimity at the Council of the EU. Now the OECD tax deal hangs by a thread again, and it will be for the Czech Presidency of the Council of the EU to try to hammer out a deal. Hungary’s last-minute veto will add fuel to the argument that unanimity must be ditched as it allows such hostage-taking to arise.
“This continued blockage, made possible by the right to apply a national veto, is yet another stark reminder that we need to get rid of the unanimity rule at European level when deciding on tax matters.” — Aurore Lalucq MEP, S&D spokesperson on taxation and European Parliament rapporteur on the minimum corporate taxation for multinationals
BANKING UNION • Last week the Eurogroup released its latest statement on the future of the Banking Union, falling short of the expectations to provide a clear roadmap for its completion. The Banking Union, created in 2014 following the financial crisis to harmonise prudential banking regulation across the euro area, relies on three main pillars, two of which have already been implemented — the Single Resolution Mechanism and the Single Supervisory Mechanism.
The last pillar, the European Deposit Insurance Scheme (EDIS), has yet to find support across all euro area countries. As German Finance Minister Christian Linder reiterated during last week’s meeting, "for Germany, a full European deposit guarantee is not up for debate". In absence of progress to reach consensus, the president of the Eurogroup Paschal Donohoe instead called on the European Commission to strengthen the existing EU framework for bank crisis management and national deposit guarantee schemes (CMDI).
ANTI-DISINFORMATION CODE • On the basis of the Commission’s Guidance presented in May 2021, by setting a broader range of commitments and measures to counter online disinformation, the new Code of Practice on Disinformation was released on 16 June with 34 signatories. The Big Tech companies joined this initiative, a first-of-its-kind tool through which relevant players in the industry agreed — for the first time in 2018 — on self-regulatory standards to fight disinformation.
The Signatories elaborated this Code of Conduct according to the efforts that can be done to eradicate disinformation. It contains 44 commitments and 128 specific measures, in the following areas: demonetisation, transparency of political advertising, the integrity of services, empowering users, research, and fact-checking community. For example, companies such as Facebook, Twitter and TikTok will provide country-by-country data on efforts to curb fake news on the Internet.
META COMMITS • The French Competition Authority investigation into Meta’s practices in online display advertising resulted in a commitment decision delivered on 16 June, following a complaint by Critero. This is the first time a Competition authority has accepted commitments offered by Meta in 2021 — and which were followed by ‘substantial improvements’ — to limit the firm’s ability to abuse its dominant position in the display advertising market, in which it boasts a 50% market share in France in 2019.
What we’ve been reading this week
A blog post by the ECIPE’s Oscar Guinea and Vanika Sharma explores the L’Oréal Effect. An interesting piece on the Brussels Effect with a French twist on “how the EU leverages its single market for its trade policy objectives” to mark the end of the French Presidency of the Council of the EU.
How long will Europeans remain united in their response to the Russian invasion of Ukraine? In a post on LSE Blogs, Luigi Scazzieri warns of the potential for mistrust between Eastern and Western states to grow into division. Meanwhile, a poll by the ECFR’s Ivan Krastev and Mark Leonard suggests that a in a majority of European countries surveyed citizens favour an early peace over a complete Ukrainian victory at all costs.
In VoxEU, Mark Harrison lays the case for the futility of an embargo on Russian oil and gas. Sanctions are already working, he contends; that Vladimir Putin’s state accumulates record levels of trade surpluses is immaterial insofar as they can’t be spent on imports.
A paper by Walter Boltz et al. for Bruegel has proposals to strengthen the fledgling EU Energy Platform, which, the authors believe, has the potential to be a fair and effective instrument if Russian gas imports are brought to a halt.
On Verfassungsblog, Mark Konstantinidis gives us a clear synoptic analysis of the Northern Ireland Protocol Bill, which, he argues, makes a mockery of its pretensions to safeguard international law.
This week’s newsletter is brought to you by Hélène Procoudine-Gorsky, Cyril Tregub, Augustin Bourleaud, Viktoria Omelianenko, Marine Sévilla, Ambroise Simon, Maxence de La Rochère, Agnès de Fortanier and Thomas Harbor. See you next Tuesday!