Mésentente Cordiale Across the Rhine
But also — Elon’s Twitter, Benvenuti Giorgia & Rishi, Ciao Combustion Engines, Another Rate Hike, Cars, Instant Payments
Hi! This is Monday, 31 October 2022, and here’s the news you need to start your week. Feel free to forward this newsletter to friends and colleagues, and follow us on Twitter and Linkedin.
France and Germany Aren’t Getting Along. Same Goes for the EU and the US.
On 26 October, the meeting between Emmanuel Macron and Olaf Scholz at the Elysée Palace did not end with a joint declaration. German commentators were also upset that the French presidency had kept the Bundeskanzler’s car waiting outside the gates of the Elysée Palace. While the franco-german rift is a cause of concern within EU circles, the bloc is gathering support against the United States, whose Inflation Reduction Act is accused of unfair protectionism.
DAS RHEINGOLD • The list of topics on which Paris and Berlin disagree is getting longer — the energy crisis, defence, relations with China, or the stance on Eastern Europe, to name a few. On 21 October, Emmanuel Macron told the European Council that Germany had "isolated itself" in its opposition to the idea of a price cap on gas. A few days later, the cancellation of a Franco-German summit — for different reasons on both sides of the Rhine — underlined the difficulties the two countries have in reaching agreement.
COUPLE THERAPY • The EU’s most glamorous couple have been almost systematically at odds in the Council over the last few weeks. Along with other Member States, France has been concerned about the effects of Germany's 200 billion euro plan to protect households from high energy prices, pointing to Germany's unilateralism at the EU level and possible negative spillovers on the common market. While opposing a reform of the Stability and Growth Pact at the EU level, the German Bundestag voted on 21 October to suspend its own constitutional debt brake to get the energy relief package through parliament.
Also yesterday, after having given in to the idea of a temporary price cap on natural gas prices, the German executive again criticised the possibility of raising debt at European level: "We shouldn't be raising the idea of more common borrowing by the EU at every opportunity, whenever we need more investment," German Finance Minister Christian Lindner told the FT.
France also criticises Germany for its defence investments, viewing the purchase of US equipment negatively at the expense of European — and French, of course — industry. For its part, Germany has not digested French opposition to the Midcat pipeline project — which will not see the light of day and was seen by Berlin as a an important moment in energy geopolitics.
INFLATION REDUCTION ACT • However, common ground does exist. Last August, Olaf Scholz explained that he wanted a "sovereign" and "geopolitical" Europe — terms that echo the vision of the EU that Emmanuel Macron has been defending since his speech at the Sorbonne in 2017. Biden's Inflation Reduction Act (IRA), which was unveiled this summer, could considerably titl the market towards American industry, notably through generous tax breaks for the purchase of electric cars produced in the United States. The significant losses of competitiveness for EU producers, who are also suffering production costs inflation, has created a European front against the IRA.
BUY EUROPEAN ACT • The French government estimates that the relocations to the United States that would result from this plan could cost France 8 billion euros in investments. The Franco-German leaders agreed on this point during their lunch at the Elysée Palace.
"You have China protecting its industry, the United States protecting its industry, and Europe being open to all winds. We have to change. (...) We must have a Buy European Act. This is one of the things I discussed this morning with Chancellor Olaf Scholz (...), we had a real convergence to move forward on the subject" — declared Emmanuel Macron, interviewed on French TV on 26 October.
German Finance Minister Christian Lindner however believes that it is above all important to create better conditions for investment within the single market, judging that the adoption of a European aid mechanism in response to the IRA measures would not be an adequate response.
STRATEGY • While a WTO complaint appears to be a potential solution for the EU, the preferred route is still negotiations. "We want Washington to apply the rules in a generous way. This is our best scenario," the Financial Times reports. Last Wednesday, Ursula von der Leyen, her head of cabinet Bjoern Seibert and Mike Pyle, US deputy national security advisor, discussed the subject in Berlin.
The following day, the Commission launched the US-EU Task Force on the Inflation Reduction Act, which will examine the issue with a view to "close coordination to support sustainable and resilient supply chains across the Atlantic region, including building a clean energy economy".
TTC • The first meeting of the task force will be held this week. The US and the EU have already launched a cooperation forum to discuss trade and technology issues — the Trade and Technology Council — whose next meeting is scheduled for December.
In Case You Missed It — Elon’s Twitter, Benvenuti Giorgia e Rishi, Ciao Combustion Engines, Another Rate Hike, Instant Payments
ELON • "The bird is free", enthused — on Twitter of course — the future owner of the social network, Elon Musk. Thierry Breton almost immediately tweeted back: "In Europe, the bird will fly by our [European] rules", followed by the hashtag #DSA. Tesla’s technoking turned Twitter Chief Twit shared with his 112 million followers his plans to relax content moderation and increase advertising revenue.
Musk might however face the opposition of the EU, which also has plans on how content should be policed and data handled. Brussels has the regulatory muscle to push digital regulation, but most importantly it has a 450-million-people strong internal market to make its claims to set global regulatory standards reality.
The Digital Services Act, which was published in the EU's Official Journal last week, will regulate the operation of very large online platforms such as Twitter by 2024, from their use of personal data to their systemic impact on electoral systems. Musk already had the opportunity to discuss these issues with the EU’s internal-market-technoking Thierry Breton last May.
“You want to enter into Europe? These are our rules”, Thierry Breton told Bloomberg Television, asked about Musk’s vision of free speech. In case of infringements to the DSA, companies can be fined up to 6% of the annual worldwide turnover. The word VLOP does not ring a bell? We have just what you must read to get up to speed on the DSA.
GIORGIA • During her maiden speech to the Italian Parliament, Giorgia Meloni sought to reassure international circles about Italy's commitment to the EU and NATO. Meloni made it clear she is not soft on Russia, while several of her coalition buddies are seen as being a bit too close to Putin.
She vowed to work constructively with EU partners, and met with France’s Emmanuel Macron. Mario Draghi’s successor praised the Next Generation EU recovery plan and defended the suspension of the EU’s debt-and-deficit rulebook, the Stability and Growth Pact, whose future is currently hotly debated within EU circles.
RISHI • The UK, or Britaly for The Economist readers, also has a new leader, Rishi Sunak. The UK’s new PM declared that Jacob Rees-Mogg’s EU Law Bill, which would result in a bonfire of EU regulations in the UK, would be shelved by the new Tory government.
The proposed bill suggests that any piece of EU legislation that has not been reviewed, replaced or kept by the end of 2023 will be automatically erased from the . It is therefore potentially aimed at switching off around 2,400 retained EU laws covering multiple policy areas, such as the environment, workers’ rights, or consumers’ safety. So don’t plan on burning EU directives on Guy Fawkes Night too quickly.
NO COUNTRY FOR OLD CARS • The writing may be on the wall for cars and vans running on combustion engines. On 27 October, a political agreement was reached by the Member States, the Parliament and the Commission, under which automobile manufacturers will be required to decrease the CO2 emissions of their vehicles by 100% by 2035. Sales of diesel and gasoline cars will thus become prohibited.
The agreement is part of the Fit for 55 package, which aims at reducing the EU's greenhouse gas emissions by 55% by 2030. Cars today account for 12% of the CO2 emissions in the EU. The agreement is designed to give time to automobile manufacturers to transition to zero emissions. They will have to achieve a reduction in emissions of 55% for new cars sold by 2030. The Commission will have the possibility of drafting additional regulations permitting the sale of vehicles powered by carbon-neutral fuels after 2035.
CHRISTINE • The European Central Bank (ECB) announced on 27 October its third consecutive interest rate rise of the year, amidst soaring inflation. The ECB’s benchmark interest rate went up from 0.75% to 1.5% — a level not seen since 2009. It comes after 50 and 75 basis points hikes in July and September.
In the meantime, the Frankfurt-based institution is also reducing its support for banks, by changing the terms and conditions of its targeted longer-term refinancing operations, or TLTROs. They provide European banks with attractive borrowing conditions, designed to incentivize lending. The ECB stated that they have to be “recalibrated” to continue to counter price instability, since the situation is different from during the pandemic.
Another pending issue is the massive size of the ECB’s balance sheet, now standing at 8,800 billion euros, as reducing it would trigger a major quantitative tightening process. The ECB’s Governing Council are expected to discuss the matter in December.
INSTANT PAYMENTS • Banks in the EU and EEA will be required to offer competitive instant payment services in euro 24/7, 365 days a year, under a draft regulation published by the European Commission. Instant payments allow people to transfer money at any time of any day within ten seconds. In comparison, traditional credit transfers are only processed by payment service providers during business hours and can take up to three days.
The proposed regulation will require payment service providers to ensure the price charged for instant payments in euro does not exceed the price charged for traditional, non-instant credit transfers. Only 11% of all euro credit transfers in the EU were instant at the beginning of 2022.
What we’ve been reading this week
The FT has a portrait by Laura Noonan of Verena Ross, the Chair of the European Securities and Markets Authority. Her extensive remit includes building up Europe’s capital market union as well as dealing with the thorny issue of the future of euro clearing.
Also in the FT, Guntram Wolff reviews the strategic priorities Chancellor Olaf Scholz will have to keep in mind as he heads to Beijing to meet President Xi Jinping.
For Bruegel, Jeromin Zettelmeyer surveys several proposals for the reform of the eurozone fiscal rules.
For the Jacques Delors Institute, Laura Estrella Blaya examines the future of European debt from a legal perspective. In particular, the paper discusses the level of prudence the EU should adopt when resorting to such operations, and also addresses the issue of the future of borrowing for expenditure.
This week’s newsletter is brought to you by Matteo Gorgoni, Gaëtan du Peloux, Maxence de La Rochère, Brían O’Donnaile and Augustin Bourleaud. See you next Monday!