Transatlantic Negotiations on Energy
But also — Fiscal policy, Mercosur, Security, Migration, Energy efficiency
Hi! This is Monday, 13 March 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
This has been an energy-intensive week. After a visit to Canada, Ursula von der Leyen went to Washington to discuss the Inflation Reduction Act (IRA) and strategic independence from China with Joe Biden. On the other side of the Atlantic, the Commission is moving quickly to implement its Green Deal Industrial Plan with a reform of state aid.
CONTEXT • The visit of the President of the European Commission to the US is only the latest episode in the tense negotiations between the EU and the United States on the IRA.
As a reminder, the IRA is the US’ $369 billion plan to accelerate the energy transition through massive subsidies and tax credits, particularly in the field of electric mobility and renewable energy.
For almost half a year, the EU has been issuing warnings to its transatlantic partner about the risks that the plan poses to European industry. The old continent fears that Washington's tax incentives will encourage European companies to relocate their production to the US.
After months of negotiations — notably through the Trade and Technology Council — Member States have decided to adopt the European equivalent of the IRA, the Green Deal Industrial Plan.
CHALLENGES • However, negotiations with the US are far from over. And European anxiety is not letting up: on March 8, Volkswagen said it was putting on hold its project for an electric battery factory in Europe. The company declared it was waiting for the details of the European response to the IRA.
During their talks at the White House, Ursula von der Leyen (UVDL) and Joe Biden found common ground on several issues.
AGREEMENTS • First, they agreed to begin negotiations on an agreement on critical raw materials. This would allow critical raw materials extracted or processed in the EU and destined for electric vehicles to benefit from American tax credits.
The two leaders also agreed to create a Clean Energy Incentives Dialogue to coordinate industry support mechanisms on both sides of the Atlantic. The objective is to ensure maximum complementarity of these mechanisms.
"We are working against zero-sum competition," the two leaders said in a joint statement. The Clean Energy Incentives Dialogue will be an integral part of the Trade and Technology Council.
Following the requests of Bruno le Maire and his German counterpart Robert Habeck, the United States and the EU also committed to full transparency on the level of subsidies and tax credits on both sides of the Atlantic.
Finally, UVDL and Joe Biden hope to reach an agreement on aluminium and steel by October 2023. This agreement will aim to remove U.S. tariff barriers for European aluminium and steel exports, and will be open to other countries.
These measures add to previous US concessions on access to the US subsidy regime for EU commercial vehicles.
CHINA • The signal sent by the two leaders is that their common goals outweigh their differences, in stark contrast with the EU's defensive stance in recent months.
Among these common objectives, the rivalry with China over industry and raw materials is central. In recent weeks, the US has alarmed the EU about the risks of China sending arms to Russia. The US seems to want EU alignment on the Asian rival, in return for concessions on the IRA.
In their joint statement, the two leaders pointed the finger at China, pledging to share intelligence on Chinese "non-market policies and practices".
But decoupling from China is a sensitive issue within the European bloc, especially for Germany, which is heavily dependent on the Chinese market for its exports.
While the EU certainly wishes to develop its strategic independence on rare earths — 98% of which come from China — the President of the European Commission favours a "reduction of the risks of dependence" rather than a "decoupling" from China. At least that is what she suggested in Davos last January.
In some respects, however, the U.S. campaign against China seems to be paying off. On March 8, Germany said it was reconsidering its policy toward equipment from Huawei and ZTE. On the same day, the Netherlands decided to limit semiconductor exports to China.
STATE AID • In parallel to this North American visit, the Commission is moving quickly to implement its Green Deal Industrial Plan. This week, two measures concerning state aid were adopted.
On the one hand, the Commission adopted a new "temporary crisis and transitional framework", which modifies and extends in part the "crisis framework" adopted in March 2022 to allow Member States to support the economy in the context of the war in Ukraine.
This new framework — which will run until the end of 2025 — aims to allow Member States to continue to support the measures necessary for the energy transition, in particular through business support schemes.
These new measures take into account concerns of southern European countries, which fear that a more flexible state aid regime would allow the richest countries to subsidise their industry to the detriment of other countries in the bloc.
Thus, before granting aid, national authorities will have to "verify whether there are concrete risks that the productive investment will not take place in the European Economic Area (EEA)". Companies located in disadvantaged regions will also be eligible for higher aid rates.
The possibility of granting higher levels of aid to companies where there is a real risk of investment being diverted outside Europe also features several safeguards, details of which can be found here.
On the other hand, the Commission has approved a modification of the General Block Exemption Regulation (GBER), which provides for situations in which Member States may grant aid without prior approval from the Commission. Here to get down to the nitty gritty.
This loosening of the state aid regime is a cause for concern for some. "In the short term, companies will have an incentive to see who can offer them a better deal, but in the long term the taxpayer will bear the burden," an expert told the FT.
WHAT NEXT? • The US and the EU still need to agree on many issues, including the details of their cooperation on raw materials and exports of European aluminium and steel. Until then, the EU will have to convince companies reluctant to relocate to the US to stick with the old continent.
In Case You Missed It
FISCAL POLICY • On 8 March, The European Commission adopted a communication on fiscal policy guidance for 2024. The document helps Member States prepare their budgetary plans for next year — they need the Commission’s green light as part of the EU’s economic governance rules.
The Stability and Growth Pact (SGP) — the bloc’s debt and deficit sacrosanct rulebook — was suspended in 2020. A debate on (whether and) how to rewrite its overly complex and formalistic rules has been going on ever since.
This communication was published as the EU fiscal framework reform is still under debate. While the Commission is expected to table legislative proposals in March, the communication already acknowledges that “a return to the sole implementation of the rules of the existing legal framework would also fail to acknowledge the new post-pandemic reality”.
With inflation and energy prices cooling down, the Commission considers that the era of fiscal largesse should not go on forever. Brussels wants Member States to gradually phase out of the least targeted energy subsidy measures.
As the general escape clause (which put the SGP on hold) will be deactivated at the end of 2023, the Commission will therefore be able to trigger the ‘excessive deficit procedure’ against countries that do not comply with the rules enshrined in the SGP.
MERCOSUR • Hopes of completing a trade deal with the Mercosur are starting to materialise in European capitals. Johan Forssell, the trade minister of Sweden, which holds the rotating EU presidency, declared on Friday that he expects “decisive progress” by July. While negotiations were completed in 2019, the deal has been on hold, officially due to concerns about the state of environmental protections in Brazil. However, the defeat of Jair Bolsonaro by Luiz Inacio Lula in the October 2022 presidential election has renewed expectations that a new agreement can be found.
European agricultural producers are worried that their businesses could suffer if products from South America, where the regulatory environment is less exacting, are allowed into the single market. French President Emmanuel Macron has stated that “mirror clauses” would be necessary to ensure that both producers from the EU and Mercosur abide by the same environmental and health standards. Speaking in September 2022 to the FT, Celso Amorim, a former foreign minister of Brazil and an ally of Lula, explained that Brazil is open to changes that strengthen climate and human rights provisions “as long as this does not interfere with Brazilian sovereignty”. In August, Lula himself stressed that “Negotiations must be something in which everyone wins (...). What we want in the discussion with Europe is to not give way on our interest in reindustrialising [Brazil]”.
Mercosur and EU negotiators met in Buenos Aires on 7 and 8 March. The Commission announced that they agreed to a work schedule for the first half of 2023.
SECURITY • On March 10, the European Commission and the High Representative for Foreign Affairs and Security Policy — Josep Borrell — presented a joint communication and action plan on the EU maritime security strategy.
The last EU maritime security strategy dated from 2014, and no longer seemed adequate to the various threats that have developed since then. The new strategy includes annual EU-wide naval exercises.
The consequences of the war in Ukraine are among the main reasons for this new strategy. LNG — liquefied natural gas, imported from the United States by sea — terminals require a strong maritime defence in order to guarantee the security of gas supplies to the EU.
The attack on the Nord Stream pipeline has also highlighted the need for increased maritime surveillance. Some member states have also reported suspicious activity by Russian vessels at offshore wind farms.
MIGRATION • The UK has proposed a new asylum bill to crackdown on Channel migrant crossings which have reached record levels in 2022. The Illegal Migration Bill proposes sending the majority of asylum seekers back to their home country or to a “safe third country”. People who arrive illegally will not be able to apply for asylum or benefit from UK modern slavery protections.
There has been an international backlash against the plan. European Home Affairs Commissioner Ylva Johansson warned the UK Home Secretary, Suella Braverman, that the plan “violates international law”, specifically the European Human Rights Convention.
As a reminder, migration control is at the top of the EU’s agenda following an increase in irregular migration, with migration ministers promising to agree on a common position on the proposed Immigration and Asylum Pact by June.
The plan was announced shortly before the first Franco-British summit in five years took place in Paris, with Prime Minister Sunak pledging to invest 541 million euros in detention centres and surveillance infrastructure in France. The British PM also hopes to reach an agreement with the EU, after successful negotiations leading up to the Windsor framework.
EFFICIENCY • The bloc continues to refine its strategy for reducing greenhouse gas emissions. The Parliament and the Council have reached a provisional agreement on the reform of the EU's energy efficiency directive.
The agreement sets the EU's energy efficiency target at 11.7% for 2030, which is more ambitious than the Commission's original proposal. "EU countries will be required to achieve new annual savings of 1.49% of final energy consumption on average from 2024 to 2030, compared to the current 0.8%," the Commission explains.
What we’ve been reading
The Institut Montaigne has a policy brief by Georgina Wright and Joseph Dellatte on the future of hydrogen in the context of the green transition.
In a column for Bruegel, Simone Tagliapietra analyses the dilemma Europe is facing as it attempts to balance economic efficiency and ‘geopolitical resilience’.
For the FT, Mats Persson reviews Stefaan De Rynck’s account of the UK-EU Brexit negotiations, entitled Inside the Deal: How the EU Got Brexit Done.
This week’s newsletter is brought to you by Ysabel Chen, Maxence de la Rochère and Augustin Bourleaud. See you next Monday!