Tough Times for Corporate Due Diligence
But also — Elections, Defence, Inflation, Competition, Lex
Hello! This is Tuesday 12th March, 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
As the elections approach, the pressure is mounting on institutions trying to finalise negotiations on several key legislative initiatives proposed during this term.
The Corporate Sustainability Due Diligence Directive (CS3D), a directive that the Parliament and Member States have been working on for two years now, is at risk of not being adopted before the elections, which could deal a fatal blow to the proposal.
CS3D • On 14 December 2023, the Parliament and the Council reached a provisional agreement on the Corporate Sustainability Due Diligence Directive (CS3D) which aims at creating due diligence requirements for companies to foster responsible corporate behaviour along value chains.
The task seemed almost all done and dusted: all that was left was the formal adoption of the text by both institutions. However, under pressure from the German Free Democratic Party (FDP), Germany announced in early February that it would not support the final version of the text.
Germany's announcement seems to have emboldened other Member States to express their opposition to the directive, especially Italy, whose industry has made significant lobbying efforts to counter the adoption of the text.
In an impressive turnaround, fourteen Member States — including Sweden, Austria, and Luxembourg — ultimately prevented the adoption of the directive at the end of February. France, which had supported the text since the exemption of the finance sector, also opposed the adoption of the agreement.
Last week, in an attempt to save the CS3D, the Belgian presidency of the EU Council presented a new compromise text taking into account the demands of several Member States. A vote on this proposal was scheduled for Friday, but it was postponed.
In its compromise proposal, the Belgian presidency proposes to narrow the scope of the directive (only companies with at least 1000 employees and €300 million in turnover would be affected, compared to 500 employees and €150 million in the provisional agreement) and to delay the application of the text, among other provisions.
LOBBYING • "To walk back on commitments or come up with more demands shows a flagrant disregard for the European Parliament as co-legislatorr," said Lara Wolters, rapporteur of the text in Parliament.
The Dutch MEP is not alone in criticising the Council’s U-turn. In recent weeks, a large number of associations and MEPs from the left wing of the European Parliament have denounced the behaviour of several European governments.
Some industries in favour of the adoption of the CS3D share the same opinion. This is the case for part of the food industry, which believes that common standards at the European level would facilitate the sale of their products across all Member States.
However, the rest of the European industry seems mostly opposed to the adoption of this directive. The obligations it would create would further burden already high administrative costs and limit competitiveness, industry representatives allege.
The directive requires companies concerned to take necessary measures to limit the risks of negative environmental and social impacts throughout their value chain. The adoption of a plan ensuring that the company's model is aligned with the goal of limiting global warming to 1.5°C is also mandatory. In case of non-compliance with the directive, fines of up to 5% of net turnover can be imposed on companies.
TICK TOCK • The determination of the Belgian presidency may not be enough to save the CS3D. For the directive to be adopted before the elections, the Parliament would need to vote on the Council's version of the text during its final plenary session in April.
But hopes of the Council reaching an agreement on a new version of the text are fading. The postponement of the vote that was supposed to take place last Friday is a bad sign.
According to Euractiv, Lara Wolters, the rapporteur of the European Parliament on the CS3D, would like to save the text at all costs, even if it means reducing its ambition to satisfy the Member States.
The reason is simple: if the directive is not adopted before the elections, its very existence would be in jeopardy. It is expected that the European Parliament will shift to the right after the elections, giving more weight to pro-business MEPs from the centre-right and right to oppose the directive.
In Case You Missed It
ELECTIONS • It is now official: Ursula von der Leyen will lead the list of the European People's Party (EPP, centre-right) for the European elections. She was officially elected by the national delegates of the EPP at the political group's congress in Bucharest. The EPP is currently the largest political group in the European Parliament. All polls indicate that it will retain this position after the elections.
Out of the 737 EPP delegates eligible to vote for the lead candidate, only 499 decided to use their vote. Among them, 89 voted against Ursula von der Leyen. "I am looking forward to fighting with this wonderful party by my side," said Ursula von der Leyen on her new Twitter account dedicated to her campaign.
On the same day, Internal Market Commissioner Thierry Breton (Renew) took a swipe at the candidate on X: "Despite her qualities, Ursula von der Leyen was in the minority in her own party. The real question now: Is it possible to entrust the management of Europe to the EPP for another 5 years, i.e., 25 years in a row?".
"The EPP itself does not seem to believe in its candidate," he added, referring to the 400 votes received by the former German defence minister.
DEFENCE • On March 6, the European Commission presented a communication detailing its European defense industrial strategy. This communication is accompanied by a proposal for a regulation establishing a European Defense Industry Programme (EDIP).
Since the start of the war in Ukraine, the budget allocated by Member States to defence has significantly increased. However, since 2022, 78% of military equipment purchases have been made abroad, with 68% in the United States.
The objective of this new strategy is to enable the EU to boost its defence industry in order to reduce its reliance on foreign purchases. By 2030, the goal is for 50% of equipment purchased to come from Europe — a target that rises to 65% by 2035 — and for Member States to make 40% of their purchases jointly.
The Commission commits to allocate €1.5 billion to the EDIP by 2027. As for the rest, it is up to Member States to dig into their pockets. However, the Commission makes several proposals, such as using cohesion funds or pushing the European Investment Bank (EIB) to change its lending policy so that it can finance investments in the defence sector — something it is not currently allowed to do.
The idea of new common borrowing is also on the table, as is using profits from Russian assets. But Member States would need to agree on these — very divisive — measures.
The Commission wants to involve Ukraine as much as possible in this new defense push. For example, it suggested that Kiev could participate in joint purchases by Member States.
The Council and the Parliament must now adopt their position on this strategy and regulation.
INFLATION • Inflation in the eurozone dropped to 2.6% in February, down from 2.8% in January, according to Eurostat. This level is still higher than economists predicted for February (2.5%, according to a Reuters survey).
Core inflation (which excludes the high variability of food and energy prices) also decreased less than economists expected, dropping from 3.3% in January to 3.1% in February.
On March 7, the Governing Council (the ECB's principal decision-making body) decided to leave the three key interest rates unchanged. However, the ECB's inflation projections have been revised downwards, especially for 2024, when inflation is now estimated at 2.3%.
We are making good progress towards our inflation target and we are more confident as a result. But we are not sufficiently confident. We clearly need more evidence and more data. We will know a little more in April, but we will know a lot more in June," said Christine Lagarde, suggesting a potential rate cut in June at the earliest.
COMPETITION • Since March 7, online platforms designated as "gatekeepers" under the Digital Markets Act (DMA) must comply with the obligations created by this regulation, which aims to make digital markets fairer and more contestable.
As a reminder, there are 6 gatekeepers: Amazon, Apple, Alphabet (Google), Meta, Microsoft, and ByteDance. They must comply with a number of technical obligations aimed at ensuring that digital markets remain open.
Among the rules is the obligation to allow third-party app stores on smartphones. This already caused a stir last week when Apple announced it was blocking the developer account of Epic, the publisher of the Fortnite video game who wants to launch a competing app store to the App Store on the iOS system.
On March 7, the Commission contacted Apple. The next day, Internal Market Commissioner Thierry Breton announced that the tech giant was reversing its decision. "The DMA is already yielding very concrete results!" he said on X.
Last week started badly for Apple: the Commission announced that it was imposing a fine of €1.8 billion on the company for abusing its dominant position in the market for streaming music apps for iOS users.
Following an investigation into Apple's practices, the Commission concluded that Apple imposed restrictions preventing streaming app developers from fully informing iOS users of cheaper subscriptions available outside the app.
Apple is thus accused of violating Article 102 of the Treaty on the Functioning of the European Union, which prohibits abuse of dominant position.
LEX • In recent weeks, significant progress has been made on several legislative initiatives.
1. The plenary session of the European Parliament held from February 26 to 29 was marked by several important decisions, including the final adoption of the Nature Restoration Law with 329 votes in favour, 275 against, and 24 abstentions.
The regulation aims to push Member States to implement measures promoting the return of biodiversity in at least 20% of land and sea areas by 2030, and to restore at least 30% of certain habitats by the same date (60% by 2040 and 90% by 2050).
Despite numerous concessions that significantly reduced the scope of the text during negotiations with the EU Council, the European People's Party (EPP) decided, on the eve of the vote, to join forces with the European Conservatives and Reformists (ECR) and Identity and Democracy (ID) parties to oppose its adoption.
The text still needs to be formally adopted by the EU Council.
2. On March 4, the European Parliament and the EU Council reached a provisional agreement on the Packaging and Packaging Waste Regulation (PPWR). The two institutions agreed to reduce packaging by 15% by 2040, with interim targets of 5% by 2030 and 10% by 2035.
According to the provisional agreement, certain packaging formats would be banned as early as 2030, such as miniature packaging for toiletries or packaging for food and beverages consumed on-site in restaurants.
Specific rules also apply to different types of products, and packaging reuse is encouraged.
The text must now be formally adopted by the Parliament and the Council.
3. On March 5, the European Parliament and the EU Council reached a provisional agreement on the proposal for a regulation on forced labour. According to the agreement, any product manufactured using forced labour will be prohibited in the EU market, regardless of company size or country of origin.
Parliament insisted on creating a list of economic sectors where forced labour imposed by the state exists. This list will be used — along with other criteria — to determine whether opening an investigation into a company's supply chain is necessary.
The agreement still needs to be approved by the Council and Parliament.
What We’ve Been Reading
The 2004 enlargement is one of the EU's great successes, which deserves to be a source of pride, explain Michael Emerson and Daniel Gros of CEPS.
Andrew Duff and Luis Garicano present their proposal for a reformed European budget, at two levels, in a report for the EPC.
Bruegel has published a policy brief by Zsolt Darvas et al. on the path available to Ukraine to become a member of the EU.
This edition was prepared by Augustin Bourleaud, Maxence de La Rochère and Hana Rajabally. See you next week!