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News and Views on Europe – 21 Dec 2018

posted by eucentresg


EU trade deal with Japan and Switzerland’s equivalence regime
Last Wednesday, 12th December, the European Parliament ratified the EU-Japan trade deal, creating the world’s biggest free trade zone, covering 600 million people. It is the biggest trade agreement ever negotiated by the EU and was approved by 70% of European Parliament lawmakers. The two economies together account for almost a third of global gross production. Being the second largest market for EU companies in Asia, European firms export over 58 billion euros in goods and 28 billion euros in services to Japan each year. The deal will further strengthen economic relations between the two blocs, removing over 1 billion euros of duties per year paid by EU companies, in particular for food products such as cheese, beef, pork and wine. Tariffs for industrial products such as chemicals, plastics, cosmetics, textiles and clothing will also be abolished.

The trade deal is also a reaffirmation of the EU’s and Japan’s commitment to rules-based trade amid rising protectionism. Both the EU and Japan have been negatively affected by Trump’s tariffs and his unilateral approach towards trade. For instance, Japan was a part of the Trans-Pacific Partnership (TPP) that Trump withdrew from shortly after coming to office, while the EU’s Transatlantic Trade and Investment Partnership (TTIP) negotiations with the US hit the ground in 2016.

A Portuguese lawmaker, Pedro Pereira has called the EU-Japan deal a “progressive agreement” as it does not concern itself with just trade barriers but also with “sustainable development, environmental concerns, consumer protection and labour rights”. The first of its kind, the EU-Japan trade deal refers to the Paris Agreement as a legal framework for environmental standards.

At the same time, the European Commission has also decided on Monday, 17th December, to extend Switzerland’s existing “equivalence” regime. Switzerland has been integrated into the EU market but is not an EU member. Under the equivalence regime, Swiss financial firms are able to operate in the bloc. The equivalence is expiring at the end of this year, but the European Commission and Switzerland have yet to conclude a new treaty. Hence, the Commission has extended Switzerland’s equivalence for another six months, hoping to come up with a treaty by June next year.

The treaty would help Switzerland adopt EU rules more smoothly and give the EU Court of Justice a final say on the application of EU laws in the country. However, the pro-EU left and anti-EU far-right parties in Switzerland expressed concerns that the treaty would infringe on Swiss sovereignty.

Conclusions from the last EU Council Summit in 2018
The European Council held its last summit for the year from 13th-14th December. Key issues discussed besides Brexit included EU’s external relations, migration, the EU’s long-term budget and eurozone reforms.

Brexit was discussed on the first day, with EU-27 leaders stepping up the planning for a no-deal scenario. While Juncker applauded May’s tenacity, he made it clear that there will be no renegotiation. The EU-27 seemed to agree on summit conclusions in Ireland’s favour, but with a backstop for the UK government. It has been suggested by UK media reports that MPs will vote on the Withdrawal Agreement and political declaration agreed by May and the EU on 14th January.

In common foreign and security policy, EU leaders discussed preparations for the upcoming summit with the League of Arab States in February 2019. They also decided to continue with the economic sanctions against Russia given that there has been no progress on the implementation of Minsk agreements, and the recent escalation of tensions in Kerch Straits and Asov Sea.

The Council also took the opportunity to discuss the implementation of its comprehensive approach to migration. The approach consists of more effective control of the EU’s external borders. However, tensions ran high over the EU leaders’ inability to agree on proposed initiatives. Commission President Jean-Claude Juncker was visibly frustrated, berating leaders for their “hypocrisy” in criticising Brussels for lack of effective policies while refusing to implement policy changes. He pointed out in particular that member states had spent years asking for reinforced borders protection, yet they did not agree on the initiative to add 10,000 new border guards to patrol the EU’s external borders.

The current EU Presidency has also been working on plans for the 2021-2027 Multiannual Financial Framework (MFF). The Council applauded the Presidency’s efforts thus far and called on the incoming Presidency to continue the work and prepare for the next stage of negotiations. EU leaders are looking to achieve an agreement on the MFF in the Council by autumn 2019. The Council has also decided to continue advancing the Single Market agenda, calling for the removal of barriers and for more coherence among national governments. It also pushed for implementation and enforcement at all levels of government.

Nonetheless, the EU’s long-term budget is seeing several roadblocks. The first of which is Brexit, as the departure of a major net contributor to the budget will leave a big hole in the EU’s coffers – approximately 12-13 billion euros a year. The EU’s future relationship with the UK is also uncertain, adding to the trickiness of budget negotiations. Other roadblocks come in the form of disagreements among EU countries, over issues such as agricultural reforms, linking EU payouts to respect for rule of law, and France’s Eurozone proposal.

Eurozone reforms and breakthroughs in national budgets
In terms of Eurozone reforms, during the summit, EU leaders concluded a year-long discussion to bolster the Eurozone by approving extra money to resolve failing banks and additional powers for the European Stability Mechanism. France scored a victory when the 19 Eurozone countries agreed for the first time to create a Eurozone budget. French President Emmanuel Macron has been the most fervent advocate for the budget, which would be a first step towards a fiscal union. Eurogroup President Mario Centeno applauded the EU for going from impossible to likely in a few months on the budget idea.

Nonetheless, the EU countries have not agreed to implement the stabilisation mechanism sought by Paris, a cornerstone of Macron’s original plan. A dozen countries, led by the Netherlands, remain sceptical and opposed additional fiscal transfers within the Eurozone as they perceived that some countries had to get their budgets in order first. The Eurogroup will begin work to produce a Eurozone budget proposal by June 2019, shortly after the May European elections.

On Tuesday, 18th December, the European Parliament and Council also agreed on a “prudential backstop” for potential non-performing loans (NPLs), i.e. loans that are unlikely to be repaid. The new legislation will mandate that banks set aside funds to cover losses on potential NPLs. The rise of NPLs was particularly concerning during the financial crisis and economic recession in Europe, hindering banks’ ability to lend and slowing down economic growth. Should the ministers of economy and finance endorse the deal, the legislation will be a step forward in risk reduction and completing the Banking Union.

As for country-specific budgetary issues, after an intense back-and-forth the past few months between Italy and the European Council over the Italian budget, the situation has seen a breakthrough. Italy was initially defiant and insisted on its budget deficit for 2019, leading Brussels to threaten sanctions. The Italian government relented last week and submitted a revised plan which has been accepted by the Commission.

After a meeting of EU commissioners on Wednesday, 19th December, it was announced that the EU will freeze budget disciplinary procedures against Italy, subject to the adoption of fiscal measures communicated by Italy to Brussels. Economics and euro commissioner Valdis Dombrovskis says the agreement is a step in the right direction, but is not ideal as Italy’s economic problems still does not have a long-term solution. He also warned that the deadline for the Council to activate the procedure is February 2019, and if Rome deviates from its plans, the Commission could restart disciplinary action. For now, both sides are heaving a sigh of relief as the agreement brings an end to weeks of wrangling that had shaken financial markets.

Greece is also celebrating the approval of its first post-bailout budget, which projects a high primary surplus and increased economic growth next year. Its 2019 budget has been approved by the European Commission, which had at the same time encouraged the country to continue its reforms and remain fiscally prudent.

Compromises for stopping climate change made at COP24; EU passes reforms for electricity market
The 24th Conference on Climate Change (COP24) in Poland yielded a rulebook, agreed to by 197 nations, that aims to cap rising temperatures at 2°C. After two weeks of negotiating, the rulebook was reached as a compromise and is seen as lacking in previously stated ambition. As per the Paris Agreement, countries will update their climate plans by 2020 and use the UN Sustainable Development in 2019 to increase their ambition. There are plans to pick up talks in Chile at the COP25.

One constant hurdle negotiators faced was the unequal power dynamics between developed and developing nations as more equalized framework for contribution to fight global warming was sought by the USA, EU, and Canada. The caveat was that developing countries and emerging economies demanded more financial assistance and other support in return. To promote transparency and trust, the rulebook ensured that the Nationally Determined Contributions (NDC) to reduce emissions set out by the Paris Agreement, would be reported every five years starting in 2020. However, there are “flexibility margins” made for developing countries.

Notably lacking was US leadership in the climate talks, which was taken up by combined efforts between China and the EU. Surprising its commentators, China agreed to the common reporting scheme while also speaking on behalf of developing countries and even drafted the joint text with the EU. Brazil and Turkey presented the main obstacles in the negotiations but their concerns were pushed aside for a later date. The COP24 is also touted as a triumph for multilateralism as the conspicuous absence of the largest economy did not stall a global consensus on a deeply divisive issue.

In the European Union, as one of the several measures taken to address the climate change concern, legislators reached “a political agreement” on Wednesday (19 Dec) to reform the electricity market and phase out coal by 2025. The “clean energy package” will cut coal subsidies by the proposed date but is still insufficient to meet the criteria of keeping global warming under 2°C. While Poland has agreed to comply by the rules in the agreement, they also won a concession clause to protect contracts signed by electricity generators and the government before December 2019. Environmentalists fear that developing countries in the EU will rush to sign contracts before the date but politically, it was deemed to be a “balanced approach”. Europe is also planning to reduce its greenhouse gas emissions by 30% by 2030 with a long term plan reaching beyond that.

May increases pressure on Parliament to vote for her deal while contingency plans are mobilized
It was confirmed on Monday (17 Dec) that Prime Minister May will bring back the Brexit vote to Parliament in mid-January. It is not lost on commentators that this will increase the pressure on British lawmakers to vote for her deal or risk an economically disastrous no-deal Brexit. After surviving a no-confidence vote from her own party last week, May remains undeterred by Labour’s pressing for a similar motion as it fails to gain traction from both Conservatives and May’s Northern Irish ally.

May and many others in Parliament, including Jeremy Corbyn, have rejected the second referendum as an option. This also deletes the option for invoking Article 50 as there is no basis to reverse the Brexit decision reached in 2016. There are still hurdles to passing her deal in Parliament as Labour is set on rejecting it; May has to rally the majority of 117 Conservatives who went against her in the no-confidence vote.

Meanwhile, preparations are being made on both the EU and UK sides in the possible event of a hard Brexit. Brussels has warned that if a no-deal came to pass, UK will not enjoy EU membership nor be entitled to the 21-month extended transition period in the withdrawal agreement. The contingency measures which will expire in 2019 include British commercial planes ceasing operations in the EU27 and hauliers would be subject to tough restrictions. Moreover, contingency plans will be unilaterally decided by the EU to preserve their interests.

In the UK, troops totaling 3500 personnel have been put on standby to assist the government as requested in the no-deal scenario. Businesses will be urged to read the technical advice online and £2 billion will be made available to facilitate the leaving operation. The biggest allocation will go to the Home Office that will oversee border issues. Labour’s Shadow Brexit minister Jenny Chapman said this is not a “viable option” and pledged that they will work to avoid this scenario.

As part of the preparations for a no-deal, Home Secretary Sajid Javid announced that British businesses will be given time to adjust to a temporary “new route” for skilled hiring labour at the end of free movement between EU and UK. Javid also stated that the UK will have more control over immigration after Brexit although it will not be able to cut down the current numbers to the ten thousands.The new route will apply to citizens of “low risk” countries and is geared towards sectors which have depend on labour from the EU. With a deal, free movement will continue until the end of the transition period and the future migration policy will depend on future negotiation

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