The EU's Plan on Economic Security
But also — Nature restoration, Budget, Sanctions
Hi! This is Monday, 26 June 2023, and here’s the EU news you need this week. Feel free to share this newsletter with friends and colleagues, and follow us on Twitter and LinkedIn.
The Briefing
On 20 June, the European Commission and the EU High Representative for Foreign Affairs published a joint communication on a European strategy on economic security.
This is the first time that the Commission attempts to outline a common strategy on this sensitive subject. Nonetheless, convincing Member States that new tools are needed will be a difficult task.
CONTEXT • Inherited from the Cold War, the concept of "economic security" was brought back into the spotlight by the trade war between the United States and China, before being taken up by many countries in the wake of the Covid-19 pandemic and the war in Ukraine.
The EU now seems inclined to make the link between security and the economy more explicit, both on paper and in its policies.
The dependencies revealed by the Covid-19 crisis, Russia's invasion of Ukraine, and China's economic coercion of Lithuania have given rise to a new awareness at the European level.
Caught in a vice between Washington and Beijing, Brussels appears to be adapting to this new geopolitical order, in which free trade is no longer the only obvious answer. Within the EU, de-risking is now the watchword, with a semantic nuance compared to US decoupling.
"Global integration and open economies have been a force for good for our businesses, our competitiveness, and our European economy. And that will not change in the future. But we also have to be clear-eyed about a world that has become more contested and geopolitical.", said Ursula von der Leyen on the subject of the communication.
DEJA VU • In its communication, the European executive focuses first and foremost on the identification of risks associated with supply chains, critical infrastructures, technological security and economic coercion.
The Commission mentions three areas on which to focus in order to strengthen the EU's economic security:
Promoting competitiveness within the single market.
Protecting the EU from economic risks.
Establishing partnerships with the widest possible range of countries — with the Critical Raw Materials Club, for example.
As far as promoting competitiveness is concerned, there is nothing new: to boost the industry, the European executive intends to rely on its single market, the capital markets union — which it intends to deepen — the NextGenerationEU plan and the cohesion funds.
The Critical Raw Materials Act, the European Chips Act and the Net-Zero Industry Act are also mentioned as vectors of economic security, as they encourage production on European soil in these key sectors.
In terms of protecting the EU from economic risks, the Commission intends to rely on the instrument for combating economic coercion, the regulation on the screening of direct foreign investments made in Europe, the law on cyber-resilience and the regulation on the control of exports of dual-use goods — which it also intends to reform.
WHAT'S NEW? • This communication is therefore closer to a re-articulation of pre-existing texts around a new rhetoric than to an announcement of new legislative proposals to come.
However, one new element seems particularly important: the Commission has announced its intention to regulate foreign investments made by European players. This would complement the control of investments by foreign players within the EU, and cooperation on the control of exports to third countries.
The European executive's aim is to prevent the leakage of technologies that could benefit its rivals, both economically and strategically. Quantum computing, advanced semiconductors and technologies linked to artificial intelligence are all mentioned. Although China is not directly mentioned, it is very much targeted here.
However, it is not certain that Member States will all welcome the Commission's move. The 27 want to move forward cautiously on the subject, and have shown in recent weeks that they expect a better analysis of the risks so as not to simply align themselves with the United States.
WALK THE LINE • Aware of the concerns of the Member States, Ursula von der Leyen is taking a measured approach to her interpretation of de-risking. "The vast majority of trade and economic relations with (...) China will not be affected", she declared.
Even the Netherlands, which recently announced that it was going to restrict the export of machinery used in the production of electronic chips to China, is cautious on the question of filtering European investments in third countries.
"It's a very cumbersome instrument", Dutch enterprise minister Liesje Schreinemacher told the FT, insisting on the importance of proof that such a tool is necessary.
DE-RISKING • From one Member State to another, the meaning of de-risking varies considerably.
In Germany — where China is the country's biggest trading partner, with direct foreign investment set to reach €110 billion by 2022 — Olaf Scholz is struggling to find a balance within his coalition. Considered too soft on China by his allies in the Liberal Democrat Party (FDP) and the Greens, the German Chancellor met Chinese Premier Li Qiang on 20 June, under fire from critics.
France, for its part, would like to see a more aggressive trade policy towards Beijing, particularly with regard to electric vehicles. "We must not rule out the use of tariffs", Bruno Le Maire said last month, referring to China's massive subsidies to support its car industry.
On the German side, the issue is more sensitive: car manufacturers such as Volkswagen and Mercedes have a significant presence in the Chinese market, and need to be able to invest there to compete with Chinese producers. France, on the other hand, is more vulnerable in its domestic market, as it is not much involved in the Chinese car markets.
Internal Market Commissioner Thierry Breton has said he is in favour of an investigation into Chinese dumping in the electric vehicle market. The medical technology and railway markets are also under the spotlight.
WHAT NEXT? • The economic security strategy put forward by the Commission will be discussed by Europe's heads of state at the next European Council on 29 and 30 June.
The Commission has stated that it wishes to present an "initiative" on the screening of European investments abroad by the end of the year.
In the meantime, the Member States will have to agree on what economic security and risk reduction mean — particularly vis-à-vis China — in finding their own voice amid injunctions coming from Washington.
In Case You Missed It
ENVI • On 20 June, EU environment ministers reached an agreement on the proposed regulation to restore Europe's ecosystems, such as forests, farmland, marine and freshwater areas and urban ecosystems.
The proposed regulation sets binding nature restoration targets for at least 20% of the land and 20% of the sea in the EU Member States by 2030. This proportion is set to increase: the restoration measures that Member States will have to implement concern 60% of the habitats to be restored by 2040 and 90% by 2050.
This is the first European text proposing the introduction of binding measures to restore natural habitats, rather than just to preserve them.
The Council's position aims to give Member States greater flexibility in implementing these environmental objectives, by taking account of derogations relating to renewable energies, military infrastructures, and local social, cultural and economic requirements.
The law on the restoration of ecosystems is the subject of intense debate. Sweden, Finland, Poland, the Netherlands, Italy and Belgium have not approved the text, notably because of concerns about the financing of the measures and their compatibility with other issues such as food production or housing.
The European Parliament's ENVI Committee will vote on its position on 27 June, after which the European Parliament will vote on the text in plenary session in July.
BUDGET • On 20 June, at the mid-term review of the 2021–2027 Multiannual Financial Framework (MFF) — the EU's budget — the Commission proposed a substantial increase in the EU budget.
Justified by the Union's commitment to the reconstruction of Ukraine, the rise in interest rates on the NextGenerationEU recovery plan and the additional cost of the new pact on migration and asylum, this €65.8 billion increase has been met with reluctance from European capitals.
The Ukraine facility will mobilise €50 billion in loans and grants over the period 2024–2027, and €15 billion will be added to the EU budget for migration, crises and natural disasters.
Finally, the Commission announced the creation of the Strategic Technologies for Europe Platform (STEP), designed to promote competitiveness and "the EU's open strategic autonomy" in critical technologies, an objective already announced in September under the heading of a European sovereignty fund. To achieve this, the Commission is asking the Member States to make an additional financial effort of €10 billion.
Against a backdrop of tensions over the future of the Maastricht criteria and budgetary rigour in both Berlin and Paris, this increase in the EU budget has revived the debate on the Union's own resources. To this end, the Commission has proposed to allocate to the EU budget the revenue from the new carbon tax at borders, part of the revenue from the carbon market known as the ETS, as well as a temporary 0.5% levy on the taxation of corporate profits.
Traditionally limited to 1% of GDP, the EU budget is out of step with the expansion of its areas of intervention (defence, health, industry, etc.). While there is a consensus in the Council on financial support for Ukraine, the reluctance of the frugal is unlikely to weaken on the "internal" aspects of this additional funding.
SANCTIONS • On 23 June, the Council adopted the 11th package of economic sanctions in the context of the Russian invasion of Ukraine. The main aim of this package is to combat the circumvention of sanctions against Russia by third countries. From now on, if third countries fail to comply with European sanctions, the EU will be able to impose sanctions on them.
Armenia and Kazakhstan — with which Russia strengthened its trade links after the outbreak of war — now seem willing to comply with European sanctions.
The 27 Member States have had difficulty agreeing on the details of these measures. Germany, for example, feared negative effects on the EU's diplomatic relations with other countries, as well as an anti-European backlash.
The final text therefore contains numerous safeguards, and particular importance is given to the need to exchange information with third countries when sanctions are circumvented.
Finally, 87 entities have been added to the list of those supporting Russia in the war in Ukraine. The Council has also extended the suspension of broadcasting licences to five new media accused of propaganda.
What we’ve been reading
In the FT, Gideon Rachman warns Europeans that they are being left behind by America’s dynamism.
For Bruegel, Simone Tagliapietra, Reinhilde Veugelers, Jeromin Zettelmeyer expound on their critique of the EU’s Net Zero Industry Act, and on their proposals for a rebooted version of it.
This week’s newsletter is brought to you by Luna Ricci, Kimia Vaye, Maxence de La Rochère and Augustin Bourleaud. See you next Monday!