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8 December 2020

Europe's hypocritical Magnitsky Act

The EU officially adopted a global human-rights sanctions regime, modelled after the US' Magnitsky Act. It will, in theory, allow for travel bans and asset freezes of individuals responsible for genocide, torture, extrajudicial killings or crimes against humanity. This would give the EU a potentially important tool to take action against China and Russia, among others. But will the EU actually use it, and if so against whom? We see some parallels with the way the German presidency is currently addressing the rule-of-law issue by trying to reassure Hungary that the mechanism will never be used. 

At a press conference after the EU foreign affairs council Josep Borrell, the EU's high representative, dodged questions on whether the EU will move to impose sanctions against Chinese officials involved in human rights abuses in Hong Kong and Xinjiang. He said sanctions would be triggered when a member state puts forward a proposal to do so. For the time being, no one has done it. As Stuart Lau of the South China Morning Post pointed out, Borrell failed to acknowledge that he himself is allowed to propose sanctions.

It could fall to the Netherlands to take a principled stand. According to Lauren Norman of the Wall Street Journal, the Netherlands was a driving force behind the push for the new regime. The Dutch parliament had told its government to get the EU to adopt a Magnitsky act or they would do it at home. Stef Blok, the Dutch foreign minister, raised concerns over Hong Kong and the Uighur Muslims in Xianjing when Wang Yi, his Chinese counterpart, visited the Netherlands in August. Blok celebrated the new sanctions regime yesterday, tweeting that it was nothing less than a milestone. At the same time, the Netherlands is the second-largest EU exporter to China after Germany. UN Comtrade data shows that Dutch exports to China doubled between 2010 and 2019 to surpass $14bn.

Expect the issue to become more pressing in the coming months. Yesterday also saw the US impose financial sanctions and a travel ban on fourteen Chinese lawmakers over their involvement in Hong Kong's national security law and ongoing human-rights crackdown. But the EU foreign affairs council did not discuss taking any new measures on Hong Kong. 

7 December 2020

US hardens pipeline sanctions

The annual US defence bill is not usually a lead story on Eurointelligence, but it has made our top slot for two years running because of the embedded sanctions against Nordstream 2. The big development is that the US Congress has now produced a final draft of the 2021 defence bill widening the scope of sanctions to include companies that are indirectly involved, like insurance companies and certification providers.

The Akademik Cherskiy, a Russian pipe-laying vessel, has reached the construction site to resume work on the pipeline project. It is interesting that German officials believe it is inconceivable for the pipeline not to become operational while Americans believe the exact opposite.

As we reported last week, both sides are in a gloves-off fight, with the European side using every trick in the book to circumvent US sanctions. The widening of the scope of sanctions in the 2021 defence bill was foreseen. It now includes service providers, like insurers and certification providers. Pipelines require a lot of service infrastructure, especially safety certification.

DNV GL, a Norwegian risk management and quality assurance company, has suspended its work on the project because it fears it could be subjected to US sanctions. Certification appears to be a weak spot, as there are not many alternative suppliers. The question is whether Denmark, which is where most of the remaining pipeline will be deployed, will accept a Russian technical certifier. That seems to be the European plan B.

The bill will be signed into law by Donald Trump. News reports keep citing European officials saying that Joe Biden would take what they call a more pragmatic approach to Nordstream 2. We think this is highly unlikely. On the contrary, the Biden administration is likely to be tougher than the Obama administration on Russia, and more focused than the Trump administration. The rejection of Nordstream 2 belongs to the small universe of things that unify Republicans and Democrats.

We also do not see a Nordstream vs Huawei trade off. The smoke-and-mirrors compromise reached by the German government on Huawei’s 5G bid keeps the Chinese company very much in the game. The Biden administration will continue Trump's policy on 5G. We see the new Biden foreign policy team applying more consistent and effective pressure on Germany than the Trump administration did. Merkel correctly identified Trump’s threat to withdraw from Nato as a hoax, but Germans are scared of secondary sanctions. The latest defence bill contains no sanctions against governments but, if Germany continues down on this road next year under Merkel’s successor, we would expect a sharp deterioration in the bilateral relationship. We detect a certain naivete in Europe about the Biden administration, and about US policy generally, going forward.

4 December 2020

A clever plan

FAZ writes this morning that the European Commission found a way to exclude Poland and Hungary. The preferred option is modelled after the recently-agreed unemployment reinsurance system, which goes by the acronym of Sure. Under the plan, the €750bn next generation EU programme of loans and grants would be taken out of the EU budget and pursued as an off-budget policy on the basis of voluntary guarantees by member states. That would work with qualified majority voting, which means that Poland and Hungary would not have a veto.

The article says that enhanced co-operation is another possibility. This is the officially foreseen procedure for member states to circumvent a veto, but the Commission doubt whether a eurobond can be legally integrated into this mechanism. The option that is definitely excluded is an inter-government treaty. We agree that this is not a realistic option at this stage. Our own preference is for enhanced co-operation. The downside is that it would face numerous procedural hurdles and delays. The attraction of the Sure method is speed.

The big question now is how Poland and Hungary will react to these developments. Had they foreseen this? We know the Polish governing party is internally split on the veto. Mateusz Morawiecki, prime minister, is a hard-liner. But Jaroslaw Gowin, his deputy, has signalled willingness to compromise. Reuters reports Gowin saying that Poland could drop the veto if it obtained a binding declaration from the European Council to limit the rule-of-law mechanism only to cases where the use of EU funds itself is subject to rule-of-law violations.

As we wrote yesterday, we do not rule out that the EU is making the enhanced co-operation threat with the goal of forcing a compromise with Poland. We initially assumed that Angela Merkel would also find it attractive to solve the problem through a declaration. The problem is that the rule-of-law mechanism would be weakened if the Council promises not to use it. We are not sure that Mark Rutte, for example, is minded to compromise on this point. This is especially true since the EU now seems ready to seek an alternative route.

There are obvious parallels to the UK/EU talks. There is a year-end deadline, preceded by an EU summit next week where binding decisions have to be made. In both cases, agreement would require people to cross red lines. If Viktor Orbán were to settle for a summit declaration, it would invariably be seen as a diplomatic defeat.

4 December 2020

Can Costa pick up the pieces?

António Costa assures that there is no plan B for the European budget. If there is no agreement on the EU budget at next week's European Council, it will fall to him and the Portuguese EU presidency that starts in January to continue budget and recovery-fund diplomacy.

This is going to be tricky. Last year, Portugal took a critical position in the EU council, as Público revealed this week, citing likely delays as a result of linking the rule of law to the budget. What will be their position in January if no framework is agreed?

Philippe Lamberts, the co-leader of the Greens in the European Parliament, already attacked Costa for defending the dissociation of budget and rule of law, suggesting that this position raises doubts about the Portuguese presidency. Would Portugal really be in a worse position to negotiate a way out of the veto? This depends also on the German diplomacy and how far they will go to get Poland and Hungary to give up their veto. After all, Germany has interests at stake in Hungary too, as reported earlier.

Portugal's concerns last year about delays would be addressed by an off-budget recovery fund combined with a separate vote on rule of law. If Hungary continues its hard-nosed negotiating strategy, Portugal might be in a better place to negotiate with Hungary, that is if the EU decides to move ahead and separate the recovery fund and the rule of law mechanism. All those years of negotiations are coming to this. 

3 December 2020

How not to think about Biden

Strategy is deciding what you want and how to get there. We find the European Commission’s strategy on the future transatlantic relations to be clear but wrong-headed on the former, and weak on the latter.

FAZ has obtained a copy of the European Commission’s seven-page transatlantic strategy. The most substantive proposal is for discussions with the Biden administration to create a transatlantic digital zone. Climate change and the pandemic are also on the list. But, then again, they are on every list these days. Joe Biden will sign up to the Paris accord on his first day in office, but this is likely to remain a symbolic act if the Republicans remain in control of the Senate. There is no point in a joint strategy until January 5, when two Senate run-off elections are due to be held in Georgia.

The idea of a transatlantic digital zone sounds very attractive from a European perspective, but we struggle to see how the US can be co-opted to take part in it. The EU, of course, has regulatory powers. But the EU is a technological laggard, having failed to invest and failed to generate high-tech champions. The US will probably want the EU to be aligned with its policy towards China, but that was also the case with the Trump administration. On Huawei’s 5G bid, for example, it is our reading that European governments have so far only erected reversible barriers, not closed the door. A high-tech alliance of western democracies would certainly be a good idea, but we see most of the problems on the EU side. The US will be as mercantilist about its high-tech industries as Germany is about its car industries. Whereas the US wants to shield itself from competition from China, Germany wants to sell its cars there.

If we were to draw up a global strategy for the EU, we would start by defining the interests of the EU, rather than with whom we want to pursue them: more investments in digital technologies. Defence technologies would be a good starting point. So would the creation of an artificial intelligence market, and a data protection regime that is consistent with it. The EU could and should also leverage economic tools in the pursuit of foreign policy interests, which would require a capital markets union as a starting point. The pursuit of virtually all of the EU’s global interest start at home, not in transatlantic policy junkets. Once you have done the groundwork, this is the time to co-opt partners.

In other words, we think the EU should act more like the US. US politics has changed this year, as it did in 2016. But it would be folly to make a strategy dependent on a particular party, or rather a particular wing of that party, occupying the White House forever.

2 December 2020

What it means to compromise

The next nine days will be critical for EU diplomacy. The German EU presidency has two large open dossiers: the still ongoing Brexit negotiations and the EU budget standoff. The latest discussions reveal much muddled thinking about what constitutes a compromise.

Angela Merkel said the budget impasse can be resolved if both sides compromise, which sounds great until you realise that rule-of-law conditionality is already a compromise. Merkel is seeking a different compromise that will give effective immunity to Viktor Orbán. We are not strangers to realpolitik, but this does not sound like a compromise to us, since the whole idea of the rule-of-law mechanism is to hold him accountable.

Somebody who vehemently disagrees with our advocacy of delinking the rule-of-law mechanism from the recovery fund and from the EU budget is Lucas Guttenberg from the Delors Centre in Berlin. The argument goes back to the same old policy disagreement we have had with Angela Merkel since she became chancellor in 2005: her principled opposition to integration anchored specifically at the level of the eurozone. This is a new variant of the old policy debate on variable geometry in the 1990s. Back then, the discussions were about treaty change to make it possible. With the expansion of enhanced co-operation in the Lisbon Treaty, that issue was resolved. The debate today is about whether to use the instrument for the purpose for which it was designed.

Merkel will try to avoid this at all cost. But as she herself admits, it is going to be difficult this time. We struggle to follow Guttenberg’s argument that Orbán and Matteusz Morawiecki will eventually fold because of budget pressures. In Orbán’s case, the alleged issue is political corruption. He and his family have more to lose personally from the rule-of-law mechanism than they have to gain from the new spending commitments under the 2021-2027 budget. There won’t be a cliff-edge in January either, because the old budget rolls over. We don’t think that a war of attrition is likely to be successful in this case. Italy, Greece, Spain and Portugal are more desperate to receive appropriations under the recovery fund.

We agree to some extent with the analysis by Wojciech Przybylski, who writes that Orbán’s interests are purely mercenary. For so long as the money flows into the pockets of his inner circle, friends and family, and so long as he can secure his party’s continued dominance in the 2022 elections, he will compromise. The author writes that there is no doubt that Hungary is preparing to withdraw its ultimatum.

We see that too, but wonder whether the EU could or should accept a deal that safeguards Orbán’s power position. The author, perhaps correctly, assumes that the EU will sell its soul to achieve a compromise with Orbán. Merkel would not hesitate for a second to do a dirty deal with Orbán. Fidesz is part of the EPP. Merkel and Orbán are strategic allies. But this is going to be a difficult sell for the European Parliament, and also for several member states, especially the Netherlands. The whole point of the rule-of-law conditionality is to stop the graft. What does it tell us that the rule-of-law compromise would perpetuate existing rule-of-law violations? It would vindicate Orbán’s negotiating position.

1 December 2020

... and on Turkey too

Turkey did it again. They called the Oruc Reis exploration ship back to its port on Monday, less than two weeks before the EU summit that could see sanctions imposed against Ankara. Greece insists it will not fall for this gesture, a view shared by other EU member states. Additional moves from Ankara will be necessary before any exploratory talks can restart, they say.

Ten days ahead of the summit there is still no consensus on sanctions. France advocates harsh sanctions on Turkey's economy, which could lead to the suspension of the EU customs union with Turkey. The most ardent opponent of such a prospect is Spain, as the country's banks and insurance funds are heavily exposed to the Turkish economy, writes Kathimerini. Germany's role is once again pivotal. Are they ready to confront Turkey? We have our doubts.

As it stands we could end up in the worst of both possible worlds: even if Europeans all agree that Turkey's latest move is just a scam, they cannot decide to act decisively and launch a robust response using sanctions. Turkey seems set to win this round too. 

30 November 2020

Still no adequacy agreement on data

Data is a somewhat overlooked area in the future relationship between the EU and the UK. But an adequacy agreement for data transfers between the two has yet to be reached, meaning UK companies could be paying significantly more in compliance costs from 2021 onwards.

Last week the New Economics Foundation and University College London released a report that found UK firms could be forced to pay up to £1.6bn in compliance costs if the UK fails to reach an adequacy agreement with the EU that would allow data flows to continue as they are now. Such an agreement would be separate from the ongoing EU/UK trade talks.

The report is based on interviews with more than 60 legal professionals, data protection officers, business representatives and academics. It found that if an adequacy agreement is not reached, average compliance costs for British businesses would range between £3000 for micro-businesses, to more than £160,000 for large businesses. The economic implications of no adequacy decision would also include increased risks of fines under the General Data Protection Regulation, a reduction in EU-UK trade and digital trade, reduced UK business investment or business relocation.

The UK’s 2018 data protection act enacted the EU’s GDPR into UK law, but the UK will become a third country outside the EU in 2021. Euractiv reported that even if the UK agrees and ratifies a post-Brexit trade agreement with the EU, the European Commission will still need to approve a data adequacy decision for cross-border data flows to continue. The article noted that digital and tech services account for nearly 15% of all UK service exports. An adequacy decision from the EU is needed but not guaranteed.

UK security and surveillance laws pose a problem. Surveillance and privacy concerns have already seen two data transfer agreements between the US and the EU struck down by the Court of Justice of the European Union. Like the US, UK laws give authorities far more scope for privacy and human-rights violations than EU laws. This could be a major sticking point for the Commission.

In July this year, the CJEU’s Schrems-II decision struck down the EU-US Privacy Shield agreement. This was established in 2016 to replace an earlier agreement, Safe Harbour, which the court had also struck down. Privacy advocate Maximilian Schrems brought the cases that invalidated both agreements, with the argument that neither adequately protected EU personal data. Privacy Shield did not require the US to change its surveillance laws, and the CJEU ruled that US law-enforcement and national-security powers conflict with EU requirements to ensure citizens’ privacy rights follow their data globally.

The UK’s departure from the EU charter of fundamental rights means the Schrems II decision poses two risks to the UK. Similar principles could be used to deny an adequacy decision, and more stringent conditions for transfers could complicate any alternative mechanisms. Furthermore, the UK is a member of the Five Eyes intelligence network, and is currently negotiating a separate data regime with the US. Any such agreement could be perceived as a backdoor for onward transfers of EU citizens’ personal data to the US. 

Schrems himself spoke with Thierry Breton, the EU’s internal-market commissioner, last week. At an event organised by Bruegel, Schrems said he did not plan to challenge any potential adequacy agreement because the UK’s security laws are so intrusive that he expects someone else will do it.

As with Brexit trade deal negotiations or financial regulatory equivalence, there has been little movement on a data adequacy decision in recent weeks. This prompted John Whittingdale, the UK media and data minister, to warn on Friday that time is running out. Whittingdale urged UK businesses to look for alternative legal mechanisms, meaning costly standard contractual clauses.

As the New Economics Foundation argued, adequacy is in theory an administrative decision independent of the new EU-UK trade and security agreement. But it is a political decision in practice, and any acrimonious no-deal scenario would not be conducive to the Commission granting a favourable decision. The costs are adding up. 

27 November 2020

How economists lose the argument

You may have heard the joke about the difference between knowledge and wisdom. Knowledge is when you know that a tomato is a fruit. Wisdom is knowing not to put it in a fruit salad. 

The same goes about international trade theory. The theory would suggest that the smaller country has a relatively larger benefit than the large country. Wisdom is not to rely on international trade theory when you negotiate trade deals, and to take into account the peculiarities of your situation. 

Lack of wisdom, not lack of knowledge, is why economists are losing the big debates. We noted an angry exchange yesterday between a journalist and an economist that exemplifies this point quite well. The UK broadcaster Andrew Neil made a speculative point that the UK's trade deficit with the EU may improve in a no-deal scenario. The economist Jonathan Portes retorted by saying that Neil lacks basic economic understanding. Even an A-level student should know better. 

This exchange is indicative of the state of the debate. Economists are doing themselves no favours by dismissing people they disagree with as economically illiterate. That might give rise to applause in your bubble - other economists, the fanboys of economic journalism and the Davos crowd. But you are losing influence among the 99.9% of the population who don't happen to have an economics A-level. Given the record of economic forecasting, the part of economics most visible to the public, we find this arrogance astounding.

We would also question, as we have done from the start, the wisdom of casting aside the trade deficit as a factor in the EU/UK trade relations. If trade imbalances are structural, as they are for example in the case of China and the US or the EU and the UK, some of the simplified linear results of international trade theory do not apply. There can be circumstances in which trade tariffs bring welfare benefits if they discourage anti-competitive behaviour, for example. If trade liberalisation leads to kangaroo panels of lobbyists dressed up as judges to dislodge domestic law courts, economic distortion of a kind not foreseen in the A-level curriculum of international trade theory might ensue. In any case, none of this informs us about how the EU and the UK should conduct their negotiations. Of course the deficit is a factor.

If you want to persuade people outside your profession of the merits of an argument, start by recognising the difference between knowledge and wisdom and, maybe also from time to time, allowing doubt to intrude. 

26 November 2020

Who is afraid of Erdogan?

Recep Tayyip Erdogan is testing the resolve of the EU. Do EU countries have what it takes to show unity at the summit on December 10-11? Germany, Italy, Spain and Hungary were among those member states that opposed sanctions in October, arguing for dialogue instead. Will it be different this time? After all, Turkey has continued its provocations despite EU sanctions warnings. The German government's plan to give in to Viktor Orbán by effectively neutering the rule-of-law mechanism is not exactly filling us with hope. Euroactiv is more optimistic, writing that there is a change of position among countries that opposed sanctions last time, since Erdogan has shown he has nothing positive to bring to the table. What if he does produce some positive narratives at the very last moment? The promised economic and judicial reforms, perhaps, and a tactical retreat of the Oruc Reis ship, even if only for a couple of days? Will the EU still have the stamina to toughen its position? Or kick the can down the road again? The latter would be a good enough result for Turkey.

Erdogan is a master of smoke-and-mirrors tactics and timing. Within days of the latest incident, Erdogan sent his close adviser Ibrahim Kalin to Brussels. He publicly affirmed that Turkey belongs to Europe. At the same time, Turkey issued three Navtexes for the Aegean sea, ostensibly due to Greek militarisation of six islands as a reason, and blocked an Irini operation after German forces already boarded a Turkish carrier ship suspected of weapon transport to Libya. Different signals, different audiences, but part of the same narrative of Turkey being the good-willed victim. 

The details from the Irini operation also give a more detailed picture of what happened and why it matters politically. Ankara was informed of the operation 4 hours ahead of the inspection, and even got an extra hour to reply. Under international law, countries can refuse inspection of their ships. There was no response from Ankara, which is highly unusual, according to Euractiv. Only after the German forces already entered the ship in accordance with international procedures and started their inspection, did Ankara refuse to grant permission. Until that moment no weapons had been found on the ship. In Brussels, meanwhile, many suspect that Ankara used this incident for its own political purposes. 

Erdogan does not perceive European patience as a virtue but a sign of weakness. He pursues his provocations to test the waters and see how far he can get. For the EU, the list of reasons not to confront Turkey is long, be it for the Turkish diaspora in Europe, refugees, arms exports, Turkish drones or geopolitical considerations in general. Eventually EU member states have to draw red lines, with all the risks and consequences that come with it, and call a bluff a bluff.