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1 March 2024

Rule of law? Or political nepotism?

The rule of law procedure has predictably turned into a Doomsday Machine for European integration. It is nothing what the name says, but a political procedure to penalise one's opponents. The EU has now unblocked the funds from the EU budget and the recovery fund to Poland on the grounds that Donald Tusk had given assurances that everything will be ok. As FAZ wonders this morning in a headline: Does the EU apply a different measure to Tusk? If so, one should probably start to apply the rule-of-law procedure to the EU itself. This would be a form of political corruption.

A lot of money is at stake: €76.5bn in funds from the ordinary EU budget, and a further €60bn from the recovery fund, including €25bn in grants. The criticism relates to the recovery fund. Didier Reynders, the justice commissioner, said repeatedly that the funds would only be released if Poland changed the justice laws. With the election of Tusk that requirement suddenly fell. Now, they decided to give the money to Tusk even though he only promised the reforms. Tusk has a problem on his hand. He cannot deliver the reforms himself. President Andrzej Duda is blocking them. At the same time, he only gets the money because he is a member of the centre-right EPP, by coincidence the same family as Ursula von der Leyen. 

FAZ noted, politely, that the European Commission had some difficulty explaining the U-turn. The argument put forward is based on Tusk's recognition that he would accept the priority of European law. FAZ concluded that it had the impression that the Commission decided on the release of billions of euros based on political expediency. Whether this is factually true, or not, is irrelevant. We have no means to judge people's intentions. What matters is the outward appearance of political nepotism. 

Viktor Orbán has learnt how to play this game to his advantage, whereas the PiS government was never quite ruthless enough to do this nearly as effectively.

We are not surprised to see that the rule-of-law of procedure has turned into such a farce. If you want to salvage this monster, take it out of the Commission and the European Council, and place it into the Court of Justice, and let the court order a freeze of funds, and the lifting of the freeze. This would obviously require treaty change. There are limits of the things you can do inside of the current treaty.

29 February 2024

Russia's trade routes to Iran

There are some renewed efforts to put together a new Black Sea deal to allow grain shipping a safe passage. Recep Tayyip Erdogan announced that Turkey and the UN are pursuing a new safety mechanism for commercial vessels just days ahead of Sergey Lavrov’s visit to Turkey. This latest attempt comes after Russia withdrew from the original Black Sea Grain Initiative last July. Since then, land routes have been used more extensively and the ships that did leave Ukrainian Black Sea ports have been using Romanian, Bulgarian, and Turkish waters. But safe passage for commercial ships requires a military presence, which may no longer be possible to deliver if US Congress does not pass the bill for Ukrainian support, Volodymyr Zelensky tells CNN.

Al-Monitor writes that the new mechanism would be much less comprehensive than the original one, which involved Russian, Ukrainian and international inspectors to inspect ships going from and to Ukraine. It also may offer more concessions to Russian grain exports, one of the key demands from Moscow.

We also note that business between the two most sanctioned countries in the world, Russia and Iran, is thriving. Iran’s exports to Russia have surpassed the $2bn mark last year according to Iran's ambassador to Moscow. This is a considerable jump from the figures the previous years, and a 30% rise throughout the year, according to the Tehran Chamber of Commerce. The total value of bilateral trade between the two in volume reached $4.9bn in 2023 according to Iran’s official statistics. A Russian economic delegation with 170 representatives was in Tehran this week as the two countries held the 17th round of their joint economic commission. The two sides have pledged to increase trade tenfold over the coming years.

What facilitates their trade is their own banking solution, which the two countries set up last year to circumvent the dollar. The two central banks managed to connect Iran’s Sepam national financial messaging service to Russia’s SPFS messaging service, its equivalent to the Swift system. In connection with this new system, Russian banks started operating offices in Tehran, and offered credit lines to ease exports from Russia to Iran. There are similar plans in Iran for exports towards Russia. Intensifying trade with Russia is part of Iran’s Look to the East strategy that aims to neutralise the effects of US sanctions by expanding into new markets.

28 February 2024

How to get from here to there

If the late Jacques Delors had been asked to draw up a fiscal union for the EU, he would have come with a similar construction as the one he proposed for the euro: a detailed multistage plan with targets and deadlines. A fiscal union will eventually require a treaty change. But there is a lot we can do already. 

The EU has exhausted virtually all alternatives, from the failed Lisbon agenda under Barroso, to Juncker's investment plan - a headline number with no substance - all the way to the recovery fund. The latter is based on existing treaty laws that allow the EU to raise money on behalf of member states. But it is not a sovereign debt instrument because the member states are ultimately in control of whether they honour the debt or not. This dichotomy is reflected in the pricing of EU-issued bonds. 

We reported on Mario Draghi's intervention at the Ecofin in Ghent, in which he warned about the massive financing needs for the next ten years. This cannot be achieved through more fiscal tricks like the recovery fund, which is a political Doomsday machine that relies on intra-governmental transfers. The EU needs a sustainable way of funding.

While a treaty change will ultimately be necessary, there is a lot the EU can do already under existing treaty laws. Andrew Duff and Luis Garicano have come up with the idea of a two-tier federal budget the EU could already adopt for the next seven-year budget period from 2027-2034. The lower of the two tiers would be essentially the same as the current funding mechanism from national contributions based on gross national income. This is the tier that would deal with the common agricultural policy and structural funds. The higher tier would be more flexible, and used for macroeconomic stabilisation, climate change investments, digitalisation (still a thing in the EU), defence and security, a functioning bank resolution and deposit insurance mechanism, and the accession of Ukraine. Ursula von der Leyen may give the impression that the EU can do it all, but the reality is that an under-funded hyper-active EU is setting itself up for failure. 

An expanded two-tier budget would constitute an intermediate step towards a fiscal union. It is an old idea. The authors remind us of the 1977 MacDougall report, which foresees a pre-federal budget accounting for some 7% of GDP. Ultimately, we think this is approximately the right target number even today. We are talking about a small fiscal union, not a large state. 

As part of an intermediate solution, the EU could trigger a passerelle clause that would allow the change of a legal procedure:  Ministers could decide to lift the required unanimity for budgetary policies and adopt qualified majority voting. Passerelle is a French word denoting a small bridge. You need unanimity to end unanimity. It may fail for the exact same reason as a treaty change may fail. But it is a technically easier first-stage procedure than a full-blown treaty change.

Technically, this is the way forward. It can happen politically if the urgency is more broadly understood. This is not the case now.


27 February 2024

From manufacturing back to farming

Last week farmers entered Madrid, Athens and Brussels with their tractors in protest. Emmanuel Macron discussed new measures with farmers at the agricultural fair in France. Yesterday, the EU's 27 agriculture ministers welcomed the latest proposals of the European Commission to reduce red tape, plus emergency brakes for Ukraine imports, but called for more ambitious measures. Farmers in Poland continue to be unhappy about the measures taken. Eight train wagons were forced open, with Ukrainian grains spilling on the rails. After the wave of re-industrialisation, are we now seeing the wave of re-agriculturisation?

Ahead of the European elections in June, agriculture has become a campaign topic where conservatives and the far-right are expected to score points. A lot of focus in the current debate is about how to get farmers through tough times and lessen the burden of new environmental norms on them. There are a lot of specific local issues that only regional or national governments can deal with. At EU level, there is the medium to long-term future of the Common Agricultural Policy. The CAP needs reform if we are serious about the green transition and about Ukraine as a future member of the EU. EU trade deals would have to be reconsidered if the farmers’ demand for mirror clauses were to be implemented. Inside the EU, the biggest topic for the new European Parliament and Commission will be how to bring agriculture and the green deal together. Imposing more norms won’t do it this time. The question will be how to incentivise farmers, rather than constraining them.

Can the environmentalists and farmers talk to each other? It's difficult to see at the moment. Macron’s plan for a conference with both stirred up new protests at the agricultural fair, so that plan had to be abandoned. Farmers have to see some results first from the promises that politicians have made.

Financially, there is little member states can afford to do. Not abolishing the diesel tax brakes is a common response of many member states, except Germany. Greece also offered concessions include support for energy costs and lower VAT on fertilisers and animal feed in Greece. The French government promised some €400m, and Macron added some new promises last weekend for extra regional funds for farmers in precarious situations. How will they counter-finance this? Bruno Le Maire started consulting with banks and insurers to see how it can be done without an additional burden on his budget. Easier finance, more environmental incentives rather than prohibitive norms, and price guarantees are supposed to make farming business more viable. Food security is all of the sudden at the top of the political agenda too. The big re-orientation is just about to start.

26 February 2024

Orbán's power gamble

Victor Orbán and Recep Tayip Erdogan know one or two things about the power of keeping someone waiting. The two countries were holding off Sweden’s bid to join Nato, delaying several times for different reasons.

Sweden, as an old Western democracy, had to swallow its pride when its government agreed to adopting its protest and terrorism laws to get the approval from Ankara so that it could join Nato. Prime minister Ulf Kristersson also had to retreat from his earlier insistence that he only would travel to Budapest once Hungary signed off on Sweden’s Nato bid. Instead, Kristersson went to meet Orbán, and chipped in some fighter jets to sweeten the deal so that Orbán would finally give his green light to Sweden’s Nato accession. A deal on defence and military capacities to rebuild trust, as Orbán put it. The deal was to purchase four new Swedish-made Saab Gripen C aircraft and extend its support and logistics agreement for its existing Gripen fighters. which make up the whole of Hungary's small airforce. Kristersson’s visit to Budapest looks to us like the road to Canossa, with Orbán visibly enjoying the whiff of old imperial flair.

The power was on Turkey’s and Hungary’s side, once Sweden decided that it wants to do whatever it takes to get into Nato. One of the tactics employed was that Erdogan and Orbán kept Sweden guessing what was required to get their approval. The list of grievances kept changing. Turkey increased its demands for prisoners to be extradited, or laws to be changed. For Hungary it was first about the respect for Hungary, Sweden’s keen support for rule of law procedures in the EU, and now a visit to Budapest with a military deal in the luggage. One may call this childish, as a Swedish MEP did, but in Erdogan’s and Orbán’s world, this trick helped to signal more power to the outside world and boosts their leaders’ ego. It made Sweden bow to their demands. Don’t expect Orbán to become any easier inside the EU.

23 February 2024

Is Tsipras back?

The Syriza saga has some Greek drama qualities, with clashing protagonists and party styles. The latest turn of events is that Alexis Tsipras showed up after months of silence to call for a new presidency elections to stop the demise of the party. The timing of his intervention was just hours ahead of the party congress and completely changed the scene. Stefanos Kasselakis, the new Syriza leader, had to adapt his opening speech, and other speakers were sidelined. Kasselakis took up the gauntlet, saying find me an opponent and let’s go. He seemingly enjoyed his rock star-like appearance on the stage of the opening of the congress meeting last night. What happens behind the scenes will look more like a fight between strong personas with the daggers pulled out.

In his statement, Tsipras lashed out not only against Kasselakis, who he accuses of wanting a three-year blank cheque without accountability for electoral failures. He also pointed fingers at those who disagree silently in the background, waiting for an election failure to speak for them. Tsipras condemned those who left Syriza too, for seeing Kasselakis as an opponent just because they lost against him in the leadership contest, and for causing with their departure further fragmentation inside the party.

Euclid Tsakalotos, his former finance minister, is one of dissenters. Tsakalotos put the blame squarely at Tsipras's feet. The rot did not start with the election of Kasselakis, he assured, but with Tsipras in 2019, when Syriza lost with a slight gap behind New Democracy. Tsipras failed to produce a plan for how to change the party, tackle the aggressive rhetoric from the conservatives, and address the party’s credibility deficit. It was also Tsipras who changed the election system for its leaders, direct election by the members, which meant someone could show up on election day, pay €2 to register, and vote. This resulted in a party with a rock star-style leader, but without a debate on politics or ideology.

22 February 2024

War fatigue ahead of elections

The EU and the US are heading for elections this year with support for Ukraine on the line. Joe Biden and Olaf Scholz seem to have come to the conclusion that the war cannot be won with all of Ukraine's territories reclaimed. It is ultimately for the Ukrainians to decide how to proceed with the level of support they get from the EU and the US.

For a settlement, states would first have to define what a meaningful agreement with Russia looks like. Ukraine would need credible guarantees from the EU and the US to be able to accept any territorial losses. A West Germany scenario as advocated by Ivan Krastev is in discussion, where unoccupied Ukraine would become Nato member, putting red lines up for Russia, while granting it some territorial concessions. Both sides win something.

The mood has been clearly changing in the US and in Europe towards Ukraine. Frontline states, which had been the most supportive for Ukraine at the beginning of the war are now amongst the most sceptical about Ukraine’s chances to win. The support package, which is crucial for Ukraine’s military campaign, has been stalling in the House of Representatives.

An ECFR poll confirms an unsettling war fatigue, with European citizens preferring the EU to push for a settlement in seven out of the 12 EU countries. Poland may still be the keenest military supporter, but only 17% there think that Ukraine can win. And there is no appetite to fill the gap if the US gets out. If Donald Trump were to win the elections and pulls out of supporting Ukraine, a majority of Europeans in nine countries would want the EU to maintain its level of support or reduce it in line with the US.

Then there are conflicting interests inside the EU. Farmers have been protesting for more safeguards against agricultural imports from Ukraine. The EU Council adopted yesterday the European Commission’s proposal to extend the solidarity lanes for Ukraine exports. The proposal had widespread support, except from frontline member states Poland, Hungary, Romania, Bulgaria, and Slovakia. To appease them, the Commission had introduced safeguarding measures: a brake on Ukraine’s exports of poultry, eggs and sugar if they exceed the 2022-2023 level.

But this may not be the last word on those emergency measures. MEPs in the Agriculture Committee (AGRI) have produced 127 amendments to extend the list of products on this list and change the threshold to pre-war trade volumes in 2021 instead. How many of those proposals will be taken up by the trade committee is the next question. The Commission will have to negotiate with parliament to get this draft legislated. Protests, meanwhile, continue. At the Polish-Ukrainian border they escalated on Tuesday with a near-total blockade, prompting Kyiv to call on the Commission to take action.

21 February 2024

Syriza's Captain America

What happened inside Syriza over the past couple of days is a clash of different political cultures. Here is Stefanos Kasselakis, coming from Florida with his mission to change Greece, after winning the party's leadership contest on the back of a short PR campaign. Now he is finding that his party decision-making body is not willing to join him on his quest.

An emergency meeting was called by the political secretariat on Monday after Kasselakis sent out a questionnaire to all party members asking for their opinion about the party’s identity, logo and name without consulting the secretariat. Basis democracy is not for a party that works in a clearly defined institutional decision-making structure. Tensions escalated after Kasselakis, who spoke at the London School of Economics rather than attending their meeting , sent a letter from there accusing them of a conspiracy against him. Last night another meeting, this time with Kasselakis, produced a truce. They confirmed their mutual trust after Kasselakis challenged them to present a contender while a censure motion was on the table. In return, he retracted his letter and the questionnaire. The loss of allies in the secretariat is real though. The truce will hold for now as everyone has an interest for the party not to implode ahead of the European elections. But after that, the knives will come out.

How the party is to be reorganised is one of the main tenets of Kasselakis's battle. He told the LSE audience that if Syriza structures had worked properly, he would not have been elected as its president last year. He may be a successful businessman, but that does not mean that he is a good politician. Where was Syriza, for example, when Greece’s conservative prime minister got a same-sex marriage bill through parliament with a sound majority, the first Orthodox country ever to acknowledge the rights of same-sex families? Unless Kasselakis manages to make a mark on Greek politics, he and Syriza are heading towards a divorce. With his can-do attitude, he won’t give an inch to resistance inside the party - the irresistible force is about to hit the immovable object.

20 February 2024

Nearly united on Rafah

The red line for Western countries’ support for Israel is Rafah, where 1.5m Palestinians are kettled in with nowhere to flee except Egypt. If Israel were to enter Rafah, it would lose Western support. The US demands credible plans for evacuating civilians before it would give its green light to such an operation. The EU countries are united on Rafah like they were never before, even if they have yet to put their economic leverage behind those words. The operation may not even happen, despite all those political announcements from Israel.

Amongst the Europeans, Victor Orbán is the last one holding out against the EU mostly unified position for Israel to spare Rafah. Both Hungary and the Czech Republic have a history of vetoing EU criticism of Israel, dating from long before the Hamas attack. Both also vetoed sanctions against settlers in the West Bank. But the Czech Republic changed its position on Rafah, and is expected to change its veto on the settlers' sanctions too. On Rafah, the EU thus ended up with an informal joint declaration backed by 26 out of 27 member states. It is not an official position, which would require unanimity, but it is a significant change.

Not being in a hurry to act allows leaders to choose. Despite the strong rhetoric, neither Benjamin Netanyahu nor the IDF are showing signs of preparing to go into Rafah. It would need more troop mobilisation and planning, and hostage negotiations are running in parallel.

In Europe, Orbán is holding out not only on Israel. Hungary is also the only country left that has yet to approve Sweden’s Nato accession bid. This is not technically a negotiation. The reason for another delay this month is also the fallout from a domestic political scandal that has nothing to do with the Nato bid. Nevertheless, time plays into Orban’s hands. The Swedish prime minister will travel to Budapest to meet Orbán and to explore what cooperation the two countries could come up with. This role suits Orbán well.

19 February 2024

Human rights and trade agreements

When it comes to Israel’s war in Gaza, Ireland, Spain and Belgium are the most outspoken of all EU member states, warning Israel severely about the disproportionate response to the terror attack of 7 October. Two of them have now taken the institutional route inside the EU.

The Irish and Spanish prime ministers sent a letter to the European Commission last week, requesting an urgent review of whether Israel is still in compliance with human rights obligations under international law in its trade agreement with the EU, and asking the Commission to propose appropriate measures in case Israel is found to be in breach. 

Israel signed an Association Agreement with the EU in 1995. It cancelled the associated annual talks in 2013 in protest at an EU decision to differentiate between Israeli settlements on the West Bank and the rest of Israel in all agreements.

We do not expect that Israel will be deterred in its immediate actions in Gaza or Lebanon by such an investigation, nor do we expect Ursula von der Leyen to risk her re-election bid by opening up this chapter. But it should be a moment for Europe to reflect on its own inconsistencies. The request for an investigation into the Israel-EU agreement comes at a time when EU member states are to vote on a revised version of the Corporate Sustainability Due Diligence Directive, which is imposing due diligence obligations for big companies to both actual and potential adverse impacts on the environment and human rights violations in their supply chains. The draft the Commission published last week hit the wall after Germany, Italy, Estonia, and Finland signalled they would abstain. But this is not the end of it, and a revised version will be presented in the coming weeks. When talking about human rights abuses, actual and potential, how can companies be held accountable for human rights abuses in their supply chains if governments are not?

Ireland and Spain both have their own experience with terrorism, and are thus familiar with moral dilemmas and the question of proportionality. In their letter, they had no doubt that given the death toll of 28,000 Palestinians, with 70% of amongst them women and children, is impossible to consider that Israeli actions comply with the mandatory principles of distinction, proportionality and precaution under international law.

Their letter was signed by 78 MEPs from the EPP, the S&P, Renew, the Left group, and the Greens.  If the Commission were to take up the case, it would be an investigation for after the European elections and anyway a matter up to the member states to decide.