The Frugals Are Back
But also — Tanks, Migration, Russian Oil, Bees
Hi! This is Monday, 30 January 2023, and here’s the news you need to start your week. Feel free to share this newsletter with friends and colleagues, and follow us on Twitter and Linkedin.
The Briefing
In the runup to a strategic European Council meeting due to take place in Brussels on February 9–10, some EU Member States are gearing up for a big and bold industrial policy push in reaction to the US Inflation Reduction Act. We recently wrote about how a united front seemed to be emerging on the topic. Cracks are now showing, after several key players in EU politics finally came out of the woods to attack the plan in public.
EU BACKTRACK • Two weeks ago, EU institutions were said to be throwing their weight behind this industrial policy push. European Council President Michel published a Politico op-ed and Competition Commissioner Vestager penned a letter to the EU-27 calling for a relaxation of state aid rules.
A few days later in Davos, the German Chancellor joined the choir and stressed the IRA “must not result in discrimination against European businesses”. It all seemed like Thierry Breton had won, the EU would put together a “European IRA”, the European Sovereignty Fund would be created, and a new era of common borrowing was almost about to start.
But the language has clearly changed in Brussels. The European Commission’s three executive VPs – Dombrovskis, Timmermans, Vestager – penned an op-ed in the FT on 26 January. While recognizing the incentives to relocate to the US created by the IRA, the op-ed cautions against the risk of “self-harm” that a “tit-for-tat” reaction could bring about.
The op-ed goes on to suggest that reforms, training, and deepening of the capital markets union are a better path forward than a “massive surge in subsidies” which would risk fragmenting the internal market.
FRUGAL PUSHBACK • Frugals too are getting more vocal. A group of seven Member States voiced their concerns the same day the Commission’s three executive VPs published their FT op-ed — in a letter signed by the Czech Republic, Denmark, Finland, Austria, Ireland, Estonia, and Slovakia.
Seven Member States oppose new joint borrowing – and instead stress that the EU should use the untapped funds from the NextGenEU recovery fund. In addition, while not on the list of signatories, Germany, the Netherlands, and Belgium, are also against the move.
Dutch PM Mark Rutte noted that the EU’s cost of borrowing is now higher than that of Germany or (even) France – making it more interesting for several EU Member States to borrow on their own rather than through joint debt.
OUR TAKE • The move is a blow to Internal Market Commissioner Thierry Breton, who has championed a proactive European response, and had seemed to have won key allies beyond French President Emmanuel Macron. Breton was in Washington D.C. for a conference at the Center for Strategic and International Studies (CSIS) on 27 January, just a day after the FT op-ed and the letter were released.
The Commission VP’s op-ed was clearly a political signal to frugal Member States. The hodgepodge of watered-down proposals will have surely irritated quite a few capitals, among which Paris and Madrid. One risk is to see a coalition of frugals and high-debt countries emerge — one that could block the attempt to relax state aid rules. Italy recently warned about the negative effects of loosened state-aid rules — rich countries could outspend indebted ones.
While the words of the Commission matter, Member States will discuss the EU’s reaction to the IRA during the upcoming European Council meeting. The Commission’s stance should be seen as an attempt to strike a balance between Member States.
It is true that the EU could still use untapped recovery funds, but the challenge presented by the IRA is much broader. Absent a strong response to Biden’s flagship 369 billion dollars green subsidy plans, the EU’s reaction will end up being toothless. The double whammy of the energy crisis and the IRA could be the nail in the coffin for Europe's aspirational plans to be the world’s green industry leader.
FOOD FOR THOUGHT • We highly recommend you read Martin Sandbu’s exciting piece in the FT, where he argues that the EU “should welcome a green subsidy race.” “The job of EU leaders is to make business confident of a big and growing market for green solutions. There is no reason why the IRA should make that harder”, he concludes.
Also highly recommended is Eric Levitz’s piece in the New York Magazine, where he asks the EU to “stop whining” about the US stealing its jobs after complaining for years about the US’s poor climate policy ambitions. One sobering quote: “It is inconceivable that Congress will revise the IRA to make it less favorable to American business interests. The WTO era is over; the age of green industrial policy has begun”.
In Case You Missed It
TANKS • Last week, pressure steamed up on Germany to “free the Leopards”. Up until now, the country was reluctant to provide additional offensive weapons to Ukraine, fearing a confrontation between Russia and NATO.
In an address to the Bundestag last Wednesday, Chancellor Scholz confirmed his government would transfer 14 Leopard tanks to Ukraine, following intense negotiations between European and international partners. The United States also pledged to send 31 M1 Abrams, Poland another 14 Leopard, and the UK 14 of its Challengers.
“As of today, numerous countries have officially confirmed their agreement to deliver 321 heavy tanks to Ukraine”, reads a statement by Ukraine’s Ambassador to Paris, Vadym Omelchenko. Delivery dates will vary and remain uncertain — they depend on sending countries and models.
This military equipment is comparatively much stronger and more mobile compared to the Soviet-era T72s. According to Politico, Kyiv has renewed a request for F-16 fighter jets in recent days.
MIGRATION • Migration is back on the EU agenda. On January 13, Frontex — the EU’s border agency — reported a total of 330,000 irregular crossing of the bloc’s external borders in 2022, the highest level since 2016. The Commission and the Council are looking for ways to reduce irregular migrant flows, with the risk of reviving internal divisions that date back to the 2015 migration crisis.
On 24 January, the Commission presented its plan to increase the number of migrants returning to their home country. Among the 342,100 people requested to leave EU countries by national migration authorities in 2021, only 24% returned to a country outside of the bloc, according to Eurostat. Among others, the plan aims to extend Frontex’s reintegration program to more third countries while ensuring states send yearly data on returns to Frontex.
Two days later, the issue was discussed during an informal meeting of EU interior ministers in Stockholm. There, Commissioner for Home Affairs Ylva Johansson underlined the increase of migrants coming from “safe” countries, among which she mentioned Morocco, Egypt, Tunisia and India. She used this argument to justify the Commission’s focus on returns.
After the meeting, Johansson said there was broad consensus among Member States on using “both political and diplomatic tools” to enhance cooperation with home countries. She also mentioned the possibility of using article 25a more extensively — article 25a of the Visa Code allows the EU to apply Visa restrictions to countries that have low rates of migrant returns, to incentivize them to cooperate more on the issue.
RUSSIAN OIL • On 5 February, the G7-backed global price cap on the sale of Russian refined fuel will take effect. According to several analysts, the various price caps set by the EU are already worsening Russia’s budget deficit.
The new measure has the potential to disturb the EU oil market, which is under pressure because of tight diesel supply. EU Member States are among the heaviest users of diesel, and have been particularly dependent on Russian diesel until now. Europe prepares for the blow by diversifying its imports — notably in the US and Saudi Arabia.
A decrease in exports from Russia could coincide with a high demand of refined oil in China as the country reopens, resulting in greater inflationary pressures.
BEES • On 24 January, the Commission introduced the ‘New Deal for Pollinators’ to address the decline of wild pollinating insects in Europe. It comes after the 2018 EU Pollinators Initiative, acting on the belief that a more ambitious policy is needed. Wild pollinators, such as bees, hoverflies, and butterflies, play a crucial role in pollination, with 80% of crops and wildflowers relying on it. The Commission sees the loss of pollinators as a risk to nature, human wellbeing, and food security.
The new deal focuses on not only honeybees but also the many others wild pollinators in Europe. Conservation plans for endangered species will be finalised, and the Commission will work with Member States to establish protected corridors for pollinators, known as ‘Buzz Lines'. Furthermore, reducing the impact of pesticide use on pollinators will be a priority, with the EU aiming to halve pesticide use by 2030.
The European Parliament and the Council are invited to endorse the initiative, which will complement Member States’ National Restoration Plans. The legally binding target is to reverse the decline of pollinator populations by 2030. Commissioner for Environment, Oceans, and Fisheries, Virginijus Sinkevičius, argues that the new deal may inspire policy outside the EU.
What we’ve been reading
To better understand Berlin’s current prevarication in foreign policy, read Matthew Karnitschnig’s piece in Politico on the making of a contemporary German leader.
‘Secular stagnation is not over’, argues Olivier Blanchard in a column for the Peterson Institute.
This week’s newsletter is brought to you by Gautier Parthon de Von, Maxence de la Rochère, and Augustin Bourleaud. See you next Monday!