September 5th, 2018                                                                                                                          Thomas Tindemans

Political Analysis

The EU is entering the last year of its five year political cycle. In May 2019, there will be elections for a new European Parliament. Thereafter, a new European Commission will be appointed to take office by 1 November 2019, with a new President of the European Council to be appointed shortly after. This implies that from a legislative and policy development point of view, the work of the European Institutions will concentrate on finalizing the current agenda, without major new initiatives by the Commission to be expected, unless events force them to act. And from April to November 2019, the EU policy machine will focus on the parliamentary elections and new appointments to the Commission, including negotiating majority support for the priorities of the next five years and the confirmation process of the candidate commissioners.

Before these institutional changes kick in, with the Brexit date set on 29 March 2019, finalizing an agreement on an orderly Brexit (or not) will occupy a large part of the EU agenda.

On the legislative front, a number of proposals in the digital single market area (such as copyright and digital contracts), on environmental issues (the plastics agenda), on tax related matters (VAT and corporate tax, following OECD recommendations) and on energy (security of supply, electricity market) should still be adopted before the end of term.

Legislative agenda

The European Parliament and Council will step up their efforts to complete as much legislative files as possible before the May 2019 European elections. With several urgent, symbolic or highly mediatised legislative files receiving priority treatment in the legislative process, the following topics are expected to dominate political agenda’s in the months to come:

The legislative proposals regarding the completion of the Digital Single Market (DSM) will require a great deal of attention by EU policymakers. The DSM was presented as one of the main priorities of the Juncker Cabinet, with 24 legislative proposals tabled since May 2015. To date, only a fraction of those proposals has been adopted by the co-legislators. With the deadline set for the end of 2018, the European Parliament and Council will work hard to find a compromise on key-proposals in this regard, such as the modernisation of EU-copyright and (digital) Contract Law, the Audiovisual Media Services Directive and the E-privacy proposal.

Migration policy is also expected to dominate the agenda’s, as the European Parliament and the Council negotiate the revision of the Dublin regulation, concerning the EU’s asylum system. The Heads of State will discuss the fight against illegal migration during an informal summit which will be held in Salzburg on 20 September 2018. Migration policy is furthermore one of the key-topics for the current Austrian Council Presidency (July – December 2018), which is expected to give negotiations a new dynamic.

The EU’s energy & climate policies is a third topic EU decisionmakers will want to deliver on before the May 2019 elections. After the Paris Agreement on climate change, the European Commission presented, in 2016, the “Clean Energy for All Europeans” legislative proposals. Political agreement has been reached on key proposals such as the Energy Efficiency Directive and the Renewable Energy Directive. However, negotiations on important files such as the creation of an Internal Electricity Market and increased cooperation between EU Energy Regulators are still ongoing.

Similarly, topic of clean mobility, with proposals to reduce CO2 emissions of passenger cars, vans and heavy- duty vehicles currently on the table, is also still on the table. Further to environmental policies, earlier this year the European Commission released a proposal to ban the use single-use plastics. Although the timeline is short, it’s a highly mediatised topic and the Commission expressed the hope that an agreement could be found before the elections.

Finally, addressing the social dimension of the European Union was highlighted as one of the policy priorities for 2018-2019 in a joint statement by Council, Commission and Parliament late 2017. With little progress being made so far, negotiations on the Directive on Transparent and Predictable Working Conditions in the European Union and on the new Employment Guidelines and better coordination of social security systems are expected speed up in the months to come.

The 27 Member States (without the UK) and the European parliament still have to agree on the budget for the multi-annual financial framework 2021-2027.

Furthermore, the most pressing political issues concern the migration crisis and how to overcome the division among Member States on how to cope with refugee influx or illegal immigration.

On the economic and monetary front, the EU took some pride in the continuing economic growth and unemployment reduction, especially in Spain, Portugal and Ireland, who suffered most from the financial crisis. The fact that Greece could leave the bail-out program and return to the financial markets for its government finance needs, is seen as proof of a successful reform in the country. Concerns remain high about Italy’s exposure to financial markets’ pressure, with weak banks and a government prone to increase national debt.

Trade policy is another area of intense activity on many fronts: the EU answer to US tariff increases, the future of the Iran nuclear agreement, sanctions against Russia and other countries, and the negotiations on new EU free trade agreements – with Vietnam, Australia, New-Zealand and others. All these trade policy matters will continue to be high on the EU agenda throughout the coming year. The EU is effectively extending its regulatory footprint through the so-called “new generation” trade agreements, building on the ones concluded with Canada and Japan. They go well beyond the simple reduction of tariff and non-tariff barriers, including a lot more regulatory alignment requirements, such as environmental and climate change elements.

Trade agreements in the EU

1. Concluded trade negotiations under this Commission

EU-Japan

Status: The European Union and Japan have finalised negotiations for a trade agreement. The trade agreement   with Japan will:

• remove barriers for exporting to Japan;
• help us shape global trade rules in line with our high standards and shared values;
• send a powerful signal that two of the world’s biggest economies reject

Financial services: The agreement contains specific definitions, exceptions and disciplines on new financial services, self-regulating organisations, payment and clearing systems and transparency, and rules on insurance services provided by postal entities. Many of these are based on rules developed under the World Trade Organisation, while addressing  specificities of the financial  services sector1. The agreement  is based on principles of dialogue and consultation, not on unilateral action. A bullet point overview can be found here.

EU-Singapore

Status: The European Union and Singapore have finished negotiating a Free Trade Agreement and an  Investment Protection Agreement. Approval of the European Council is required, afterwards it is sent to the European Parliament for consent. The Trade Agreement aims to:

• remove nearly all customs duties and get rid of overlapping bureaucracy;
• improve trade for goods like electronics, food products and pharmaceuticals;
• stimulate green  growth,  remove  trade  obstacles  for  green  tech  and  create  opportunities  for environmental services;
• encourage EU companies to invest more in Singapore, and Singaporean companies to invest more in the

EU-Canada

Status: The European Union and Canada have agreed on CETA (Comprehensive Economic and Trade Agreement). CETA will:

• offers new opportunities for EU businesses of all sizes to export and removes duties on 98% of products (tariff lines) that the EU trades with Canada;
• enable European firms in sectors such as finance, environmental services and telecoms, to access Canada’s market at both federal and provincial

1. Ongoing trade agreement negotiations

EU-Australia

Status: The Council of the European Union authorised opening trade negotiations with Australia on 22 May 2018. The trade negotiations aim at:

• Removing barriers and helping EU firms – especially smaller ones – to export more;
• Putting European companies exporting to or doing business in Australia on an equal footing with those from countries that have signed up to the Trans-Pacific Partnership or other trade agreements with Australia;
• Ambitious provisions on trade and sustainable development, showing a shared commitment to labour rights and environmental protection (including climate change) in trade;
• Protecting distinctive regional EU food and drink products from imitations in Australia;
• Allowing EU companies to better participate in government procurement in Australia;

EU-New Zealand

Status: The Council of the European Union authorised opening trade negotiations with New Zealand on 22 May 2018. The trade negotiations aim to:

• reduce existing barriers to trade in goods and services;
• make sure that European companies compete on a level playing field with businesses from countries that already have a trade agreement with New Zealand;
• promote smart, sustainable and inclusive

EU-Mexico

Status: The EU and Mexico have reached an “agreement in principle” on the main trade parts of a new EU- Mexico association agreement. Negotiations are focused on completing the technical details of the agreement. Negotiators expect to have a final text of the agreement in late 20181. The new deal will:

• scrap high Mexican tariffs on European food and drinks; allow EU firms to sell more services to Mexico;

pledge to protect workers’ rights and the environment.

EU-Mercosur

Status: The EU is negotiating a trade deal with the four founding Mercosur states – Argentina, Brazil Paraguay and Uruguay. The goal of the new EU-Mercosur trade deal is to1:

• Remove barriers for exporters and potential investors and help EU firms to export more;
• Strengthen people’s rights at work and environmental protection, encourage companies to act responsibly, and uphold high food safety standards;
• Protect quality EU food and drink products from

Although national elections in Member States saw new political movements emerge, with sometimes very vocal anti-EU rhetoric, the Juncker Commission found support for the overwhelming majority (up to 85%) of its proposals from the governments of the Member States and the European Parliament since its entry into office. The supporting coalition of Christian-democrats, social-democrats and liberals that was formed when Mr. Juncker’s team took office, stayed well in tact during this term. The much publicised right-wing, nationalist and protectionist anti-EU tendencies did not prevail.

But increasingly EU defiant governments create tension with the Brussels Institutions. Poland, Hungary, Italy, Slovakia are some of the rebellious countries that openly challenge EU enforcement of the Treaty based fundamental rights. The independence of the judiciary, the acceptance of political refugees from Muslim countries, the budgetary discipline in the euro-zone, are all topics of divergent views between a legalistic EU sticking to the Treaty and some governments claiming national popular support to contest those.

Brexit

The main Brexit issue with direct impact on business that remains to be resolved is the conclusion and ratification of an orderly withdrawal agreement between the UK and the EU. That needs to be agreed upon by the end of 2018, to allow for ratification by the UK and the European Parliament before the Brexit date of 29 March 2019.

Outstanding issues include:

• a no-friction border settlement in Northern Ireland – which is politically extremely sensitive;
• elements of the UK leaving the Euratom Treaty with possible consequences on the free movement of nuclear materials between the EU and the UK post Brexit;
• some VAT rules to be applied post Brexit;
• the protection of mainly food products with a geographical indication;
• the registration of intellectual property rights that will move from EU agencies to future UK authorities;
• ongoing judicial cooperation proceedings in criminal matters;
• ongoing law enforcement cooperation proceedings, police cooperation and exchange of information;
• jurisdiction, recognition and enforcement of judicial decisions;
• protection of personal data;
• pending judicial and administrative cases;
• administrative cooperation on customs and on tax;
• a future dispute settlement

A first deadline to settle the legally binding withdrawal agreement, including a transition period from 29 March 2019 until 31 December 2020, during which the UK would continue to abide by EU law without taking part in the EU decision making process, was set for the European Council meeting of 18 October 2018.  In addition to the withdrawal agreement, the Council was expected to issue a political declaration on the future trade relations between the EU and the UK. But that deadline seems difficult to meet.  An extra-ordinary European Council could be convoked in November to deal just with Brexit. Another European Council of heads of government is scheduled for 14 and 15 December 2018, and that could well become the final deadline for any orderly withdrawal agreement.

Both the EU and the UK have been frustrated with the slow and insufficient progress of the negotiations. With recent developments surrounding Theresa May’s cabinet, both sides are increasingly concerned no deal on Brexit will be reached before March 2019 and for this reason, are bracing for a “no-deal Brexit” scenario.

In order to avoid the no-deal scenario, the UK and the EU need to complete the Withdrawal Agreement (especially, but not exclusively, a solution for the Northern Ireland border issue) and have it ratified by the European and UK Parliament by March 2019.

Financial sector

The UK also proposes leaving the EU single market for services, recognizing that will have costs in terms of less market access in the future. London also sees a competitive advantage in the services sector and in the digital economy, and therefore wants to be able to make its own rules in these spaces, diverging from the EU in some instance. In financial services the UK is giving up on its idea of mutual recognition and instead seeks an equivalence framework, while at the same time it also wants to retain the power to make autonomous decisions. This is evident in the documents published by the UK government on the matter so far: a White Paper on the “Future relationship between the United Kingdom and the European Union” published in July 2018, followed by a policy paper in August, titled “Framework for the U.K.-EU partnership: Financial Services.”

The documents are just proposals for the moment, but will be a part of the Withdrawal Agreement and Future Framework Brexit negotiations. On the whole, the EU is sceptical of the idea that on the one side the UK can accept an equivalence model, but at the same time, it can also retain the power to make autonomous decisions which could in turn, result in decisions that contradict the established equivalence. In such a scenario, the European Commission, which holds the authority to decide on equivalence, could rule that the equivalence provisions no longer apply.

Furthermore, these proposals by the UK adopt a “sector-by-sector” negotiating approach, which is also something the EU will probably oppose. Brussels has underlined that the integrity of the EU Single Market should not be breached. As a result, the EU has criticised the UK’s plans to remain in the EU Single market for goods, while leaving it for services and freedom of movement.

Whether a conclusive Withdrawal Agreement can be reached and ratified remains utterly uncertain. Even if the UK government and the Commission negotiators were to reach a last minute deal, then the hurdle of parliamentary ratification is becoming more and more difficult. The UK government has only a thin majority with support of the Northern Irish DUP. Prime Minister May’s Conservative Party has to reckon with an important group of dissidents who would not hesitate to scupper the deal. The European Parliament is more likely to support an agreement reached, if the EU governments support it massively.

Should no agreement be reached, or should it not be ratified, then an abrupt Brexit will occur on 30 March 2019, with a lot of legal uncertainty as to trade in goods and services between the UK and the EU. A degree of chaos is expected in such case, since neither customs nor other officials and regulatory agencies on the EU and the UK side are fully prepared to handle such situation. Logistics of UK-EU transport may well become a nightmare, if customs controls are introduced and tariffs applied. Every day risks revealing new incidents at EU-UK borders. A few months of constant legal uncertainty can be predicted.

Financial and monetary markets may also react violently to a brusque Brexit and subsequent legal uncertainty caused by incidents, such as border closures or long delays for delivery of goods. The European Central Bank and the Commission are putting in place contingency plans, should market volatility run out of control.

Both the Commission and the UK government have issued warnings to industry to prepare for such a situation. Member States and the UK government are issuing guidance on how to cope with the situation, but these messages tend to create much confusion as they leave many questions from economic operators unanswered.

Institutional changes

During the fall of 2018, the major European political parties will hold their conferences to adopt manifestos and to appoint their leading candidates in preparation of the European elections in May 2019. A lot of these documents will outline views on the future of the EU, a debate launched by the Commission. It remains to be seen whether the important EU reform plans advocated by President Macron at the Sorbonne in September 2017 and the more timid ones endorsed by Chancellor Merkel stand any chance to become political reality.

Whereas in 2014, during the previous election campaign, the need to redress the economy and to create jobs in the aftermath of the financial and economic and Greek crisis, was the dominant political theme, this time the priorities seem to be: immigration, security, Europe’s role in the world post Brexit, and how to cope with the disruptive politics of President Trump.

There will be a high degree of uncertainty as to the composition of the new Parliament, because of the emergence of new political movements that were until now not or weakly represented in the European Parliament. President Macron’s political movement “En Marche” did not exist 5 years ago and is now seeking allies in other Member States. And with radical parties in power in Italy (Lega and 5Star) and the popularity of nationalistic tendencies, one can expect a higher percentage of Eurosceptic or anti- EU MEPs to pass the post, such as the AfD in Germany. Until now, such anti-EU parties never could form a solid cross-border bloc, because of their reciprocal enmities, but some believe that they might unite this time and could become a real political force at EU level.

Whether the EPP (Christian-democrats and conservatives) remains the largest political group in the newly elected parliament and therefore the frontrunner to appoint the president of the Commission is a key question. The coalition that supported Mr. Juncker in that role (EPP, S&D and ALDE) will no doubt weaken in light of the expected loss of the social-democrats, who will no longer count British Labour in their ranks post Brexit and who are weak in France, Italy and Poland, countries with large populations.

New political groups may emerge and existing ones may disappear (such as the ECR, home to the UK Conservatives). So the configuration of a future coalition that can support the new Commission and shape priorities and a legislative agenda is what observers are most nervous about.

The pre-electoral atmosphere and the subsequent Commission changes will put most of the EU decision making in the hands of the Council of ministers during the transition period. The Commission activity will be reduced to enforcing competition law and settling trade disputes. For the rest, the EU will be in care-taker mode for the best part of 2019.

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Please contact Eleni Constantinidi for more information.