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News & Insights on Europe

News and Views on Europe – 5 Jan 2018

posted by eucentresg

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Bulgaria takes up six-month EU Presidency
Bulgaria took over as the rotating president of the EU Council from Estonia on 1 January 2018. The presidency, which rotates between different EU member states every six months, will give Sofia the opportunity to chair meetings and set agendas. The Bulgarian Presidency’s slogan is “United we stand strong” – a motto from the nation’s coat of arms. Unity will be a key aim as Bulgaria will have to work hard to steer the bloc around many obstacles to a secure and united Europe in turbulent times.

Sofia’s self-declared priority areas for its first presidency include the future of Europe and its young people; security and stability; and developing the digital economy. Apart from those areas, Bulgaria will handle the extremely complex Brexit process as the EU and UK kick off the second phase of negotiations focusing on future (trade) relationship. It will attempt to bridge the divide between eastern and western Europe over the so-called “migration package” before Austria takes over the rotating presidency on 1 July – because Austria is known for its tough stance on migration. Facilitating potential EU accession of the western Balkan states is also high on the agenda. The country has already planned an EU summit in May that will focus on the bloc’s future expansion and integration.

In addition, geopolitical risks loom large in the background. Bulgaria will be under enormous pressure from the neighboring Turkey and Russia as the two countries move forward the difficult relations with the EU. On the one hand, Sofia is expected to push for normalised ties with Turkey, with which Bulgaria shares a 260-kilometre border, not least to solve the ongoing migration crisis. (EU-Turkey relations have soured dramatically since the failed coup against President Recep Tayyip Erdoğan in 2016.) On the other hand, Sofia will also have to deal with potential Russian interference in the Bulgarian Presidency. While Russia is not mentioned at all in the 42-page Bulgarian Presidency Programme, the Russian agency ITAR-TASS quoted on 1 January Bulgaria’s Minister for the EU Presidency Lilyana Pavlova as saying that Sofia will try to lift the EU sanctions against Russia. Pavlova quickly denied the report, but there is concern that, through such tactics with Bulgaria, Russia will have undue influence on EU governance and internal affairs.

Despite the array of internal and external challenges facing Sofia, a survey conducted in early December 2017 shows that over three quarters (76%) of the surveyed Bulgarian citizens are of the opinion that the Presidency is important for the country. The awareness of the Presidency is high, and the expectations are rather optimistic as well. 85% of Bulgarian respondents know that Bulgaria will assume the Presidency from January 1, and 43% feel that it will be successful.

But to make a success out of the six-month Presidency, Bulgaria must combat corruption, strengthen the rule of law and uphold freedom of speech. The country now is still under EU monitoring for deteriorating rule of law conditions. Anti-corruption agency Transparency International has said Bulgaria is the most corrupt country in the bloc; and Reporters Without Borders ranks Bulgaria as the EU’s worst state for press freedom, describing it as “dominated by corruption and collusion between media, politicians, and oligarchs”. (Bulgaria’s president vetoed an anti-corruption bill a day after assuming the EU presidency on Monday.)

 

EU launches enhanced rules on tax and financial industry regulation
In the first week of 2018, two new sets of EU rules in relation to tax avoidance and financial market regulations took effect.

As of Monday (1 Jan), the EU’s national tax authorities have direct access to information on the beneficial owners of companies, trusts, and other entities, as well as a customer due diligence records of companies. Member states will have to – if not already – transpose the EU’s Fourth Anti-Money Laundering Directive in national law. The new arrangements should give a major boost to tax authorities in the fight against tax avoidance and evasion highlighted in the “Paradise Papers” which sent shock waves across the European establishments.

Two days later on Wednesday (3 Jan), the biggest regulatory re-shuffle since the 2008 financial crisis in the European financial industry went into effect. Mifid II, an acronym short for markets in financial instruments directive II, is ten years in the making and runs thousands of pages long. The massive rulebook containing more than 1.4 million paragraphs of rules is designed to offer greater protection for investors and inject more transparency into all asset classes: from equities to fixed income, exchange traded funds and foreign exchange. Under the Mifid II rules, for example, fund managers are now required to report details of trades within 15 minutes, or face fines. The new law will also overhaul how banks and companies record communications about trading.

Implementing the Mifid II is extremely complex. As one analyst noted, banks and companies “need the ability to identify all the changes — which is impossible to master — and then work out how they track through legally, operationally and commercially.” Europe’s financial services industry had indeed scrambled to be ready for the arrival of Mifid II, which is expected to cost the finance industry more than €2.5 billion to implement, with the largest banks spending more than €40m each on compliance. The Association of German Banks estimated that Germany’s banking industry alone has already spent €1 billion to prepare for Mifid II. And many bankers worked through Tuesday night to prepare for the rules to go into effect the next day.

Despite the preparations, only less than half (11) of EU member states met the deadline to start applying the new rules and the launch was somewhat overshadowed by last-minute reprieves. ICE Futures Europe and the London Metal Exchange were given an extra 30 months to comply with rules related to trading and clearing; Eurex, the Frankfurt-based futures exchange owned by Deutsche Börse, was given a similar delay late on Tuesday by BaFin, Germany’s national regulator. The UK’s Financial Conduct Authority joined BaFin in extending an extension to key exchanges to ensure the “orderly function” of a clearing market that the reforms are designed to open up.

 

UK looks to join Pacific trade group after Brexit
Britain is reportedly exploring joining the Trans Pacific-Partnership (TPP) – now officially known as the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP) – as part of efforts to map out its trade future after Brexit. British trade officials have floated the idea of joining the grouping with Australia, New Zealand and other member nations in recent months, and preliminary talks were already held. The proposal, being developed by Liam Fox’s Department for International Trade, would make the UK the first member of the CPTPP that does not border the Pacific Ocean.

For the UK, joining the 11-member grouping is a perfect alternative to striking criss-crossing and time-consuming bilateral trade deals with individual Asia-Pacific countries while allowing the so-called “Global Britain” to lead the process of world trade liberalisation at a time when the traditional liberal bellwether US turns inwards under President Trump. The UK’s CPTPP membership would buttress the British Commonwealth as six of the 11 CPTPP members (Australia, New Zealand, Canada, Singapore, Brunei and Malaysia) are in the Commonwealth. This is not to mention that joining a trade bloc other than the EU is emblematic of the UK taking back control on trade policy.

For the members of the CPTPP, the prospect of UK joining the agreement is appealing as it would bolster the economic and political clout of the bloc – both weakened by the US withdrawal – and demonstrate to the world that the bloc is truly open to all aspiring countries without any geographical restriction.

While under the existing EU rules, the UK cannot formally start accession talks with CPTPP members and the CPTPP deal itself is still subject to further tinkering before entering into force, the UK’s declared interests in the TPP have drawn intense criticism, for two main reasons among others. First, since the UK’s current trade with CPTPP signatories is significantly smaller than its trade with the EU, membership of the trans-Pacific trade pact would not compensate for leaving the EU’s single market. In total, the 11 CPTPP members accounted for less than 8 per cent of UK goods exports last year, compared to a third that went to just five EU countries: Germany, France, the Netherlands, Ireland and Spain.

Second, critics said Britain’s expressed eagerness to join a distant trade bloc risks distracting the much more important Brexit negotiations. Tim Farron, the former Liberal Democrat leader, said: “This smacks of desperation. These people want us to leave a market on our doorstep and join a different, smaller one on the other side of the world. It’s all pie in sky thinking.” To remainers like Farron, the top priority for Theresa May is to secure a best possible deal with the EU27 and not to eye a slice of the Pacific pie as part of their efforts to search for backup plans.

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