The Commission could derail CRRC
But also — The CS3D directive in limbo, Elections, European defence, Inflation and growth, Russia, Israel
Hello! It’s Tuesday 20th February, and here is your EU news summary for the week. Feel free to share this newsletter with friends and colleagues, and follow us on Twitter and LinkedIn.
The Briefing
The European Commission has launched its first in-depth investigation under the Foreign Subsidies Regulation (FSR). It targets a subsidiary of the Chinese state-owned train manufacturer CRRC in the context of a public procurement in Bulgaria.
CONTEXT • The Foreign Subsidies Regulation came into effect in July 2023. It requires companies — both European and non-European — to notify the Commission of financial contributions received from outside the EU when participating in public procurement or mergers and acquisitions in Europe.
This regulation aimed to fill a legal gap. While subsidies within the EU are controlled by state aid law, the EU had no means of controlling those granted by third countries. Anti-dumping measures apply to goods crossing a border, not to foreign investments or bids in public procurement.
For public procurement, the notification obligation is triggered if the public procurement exceeds 250 million euros and if the company in question has received at least 4 million euros in extra-European foreign contributions in the 4 years preceding the notification. The Commission then determines whether foreign contributions distort the European internal market, either through underpriced tenders or overpriced purchase offers.
BRAVE NEW WORLD • In the context of the Covid-19 pandemic, the FSR was seen as a defence against the possibility of non-European actors buying European companies at low prices whose stock value had greatly deteriorated.
With the Anti-Coercion Instrument (ACI), the FSR contributes to the EU's desire to legally arm itself against the rise of state or quasi-state powers such as sovereign wealth funds. These regulations also acknowledge the failure of international law as a solution to the subsidy problem. While China obviously comes to mind, the FSR will also require companies receiving aid from the United States under the Inflation Reduction Act (IRA) to notify them and, if necessary, be subject to corrective measures.
CRRC • CRRC Qingdao Sifang Locomotive applied for a public procurement launched by the Bulgarian Ministry of Transport for the award of several electric trains, maintenance services, and staff training. The public procurement was estimated at 610 million euros by the Bulgarian public buyer.
CRRC's offer is about half the price of its rival, Spanish Talgo. The Commission will have to determine if the subsidies received by CRRC Qingdao allowed it to undercut prices, and if so, whether it distorts the internal market.
Official Chinese media sees it as a politically motivated decision. The Global Times describes the EU's action as a "witch hunt" and notes that "the trade tool of anti-subsidy investigations now seems to have become a tool for Europe to contain China, rushing to block any sector showing signs of development."
ALSTOM SIEMENS • For context, the European Commission blocked Alstom's acquisition by Siemens in 2019. The Franco-German marriage was seen as a strategy to counter CRRC's global advancement by creating an "Airbus of the rail industry."
The Commission had long questioned the competitive threat posed by CRRC in the European market. It had dismissed the Chinese group as not being a credible competitor for high-speed trains and railway signalling equipment. Alstom and Siemens had — unsuccessfully — tried to explain that CRRC was advantaged by its low costs and that its entry into the European market was credible.
The prohibition decision had caused strong political ripples. In response, Paris and Berlin had published a Franco-German manifesto advocating for a renewed competition law for a 21st-century industrial policy. In a way, this first anti-subsidy investigation against a CRRC subsidiary closes the loop on this Alstom-Siemens saga.
NEXT STEPS • The Commission has until July 2 to make a final decision. It can accept commitments proposed by the company, prohibit the award of the public procurement, or adopt a non-objection decision.
In Case You Missed It
CS3D • Negotiations on the directive on Corporate Sustainability Due Diligence Directive (CS3D) are in deadlock. The directive is supposed to impose reporting obligations on European companies regarding their environmental and human rights footprint and that of their suppliers. The directive also provides for civil liability of companies in case of failure to act in the face of proven risks.
The main stumbling blocks concern the application of the directive to medium-sized enterprises and financial services. Last week, Germany announced its abstention during the vote in the EU Council. This announcement prompted some countries like Italy to come out and oppose a text that was already almost finalised — political agreement was reached in December. It is likely that the directive will not be voted on before the end of the term. Its future following the elections next June is more than uncertain.
Germany's U-turn has annoyed many European partners, and exposes the internal divisions within the tricolour coalition, as reported by the FT in an article entitled "EU partners lose trust in Berlin after policy U-turns." Seeing the German foreign minister Annalena Baerbock publicly criticise the German vote is not a good look for the EU member state.
ELECTIONS • During a meeting of the Christian Democratic Union (CDU) earlier this week, Ursula von der Leyen that she intends to run for a second term as President of the European Commission. She is expected to lead the list of the European People's Party (EPP) in the June 2024 elections. For the record, she was not the lead candidate of the EPP in the 2019 elections.
DEFENCE • During an interview with the FT, Ursula von der Leyen announced that the European Commission would present its plan to strengthen the defence industry in Europe by the end of February.
"We need to spend more, we need to spend better, we need to spend in Europe," said the President of the European Commission to the FT. "What is the competence of the commission? It’s industry. This is our core business. We are an enabler, not a buyer," she added.
The Commission's proposal should favour the use of the EU budget to support joint contracts for weapons signed by the Member States. The plan should also ensure that production is actually purchased. These measures are similar to those taken during Covid to support vaccine production in Europe. "We did this for vaccines and for gas," explains Ursula von der Leyen.
According to NATO, defence spending by European NATO members — many of which belong to the EU — increased by about two-thirds between 2014 and 2023, from $230 billion to $380 billion. However, the European market remains fragmented, despite the various initiatives taken by the Commission in the wake of the start of the war in Ukraine.
Last week, Polish Prime Minister Donald Tusk met Emmanuel Macron and Olaf Scholz during a visit to Paris and Berlin. While the leaders did not directly address Donald Trump's recent remarks on NATO, they emphasised the importance of strengthening cooperation and defence spending in Europe.
GROWTH • The European economy is not in good shape. The European Commission has just revised downwards its growth forecasts for 2024 for the third time since last May.
It now predicts that the eurozone's growth rate will be 0.8% in 2024, half of what was announced in May 2023. The announcement came just after Robert Habeck, German Minister of Economy and Finance, stated that the German government expects a growth rate of only 0.2% for 2024. "The situation is dramatically bad," he explained.
INFLATION • Weak productivity growth in Europe could hinder efforts of the European Central Bank (ECB) to reduce inflation.
This is what Isabel Schnabel, a member of the ECB's Executive Board, said in a speech at the European University Institute in Florence. According to the German economist, the slow productivity growth reinforces the effects of wage increases on companies' unit labour costs. In other words, if productivity increases very little (or declines), the current wage increases become a greater burden on companies.
This situation increases the risk that companies have no choice but to pass on wage increases to consumers by raising prices, thereby reinforcing inflation, according to Isabel Schnabel’s analysis.
The solution? The former academic suggests reducing regulatory restrictions that hinder productivity growth and fighting entry barriers that prevent new, more productive companies from competing with current leaders.
RUSSIA • On February 14, Hungary blocked the adoption of the 13th package of sanctions against Russia, which the Commission seeks to adopt symbolically for the second anniversary of the invasion of Ukraine.
According to the FT, Hungary reportedly refused to approve the adoption of the package because of sanctions against Chinese and Indian companies — this would indeed be the first time that mainland Chinese and Indian companies are sanctioned.
Discussions are expected to continue in the hope of adopting the package by February 24, the second anniversary of the Russian invasion of Ukraine.
ISRAEL • Spanish Prime Minister Pedro Sanchez and his Irish counterpart Leo Varadkar have called on the European Commission to "urgently reassess" the trade links between the EU and Israel under the association agreement.
"We ask that the Commission undertake an urgent review of whether Israel is complying with its obligations, including under the EU/Israel Association Agreement, which makes respect for human rights and democratic principles an essential element of the relationship," the two leaders wrote in a letter seen by Euractiv.
What We’ve Been Reading
For Bruegel, Georg Zachmann et al. argue for greater integration of European electricity markets.
Matthias Bauer and Dyuti Pandya advocate for a policy of regulatory liberalisation in a paper for the ECIPE.
This edition was prepared by Augustin Bourleaud, Maxence de La Rochère and Hana Rajabally. See you next week!