CEPS World Economic Forum Feed

Framing the Circular Economy as an EU recovery opportunity

2020-12-23T08:18:29+01:00

Recovery from the Covid-19 crisis presents an important and unique opportunity for the EU to accelerate its transition towards a climate-neutral and circular economy. While there is little dispute about the opportunities offered by the funds available for the low-carbon and circular economy, the longer-term impact on Europe’s decarbonisation trajectory will depend on the choices made in the National Recovery and Resilience Plans and on how the overall policy framework is adapted. After describing the EU recovery plan, this paper discusses various policy instruments – both new and existing – to create demand for circular materials and lower-carbon products, illustrated by examples of four resource and carbon-intensive sectors, namely construction, steel, textiles and plastics. Acknowledging the immediate need for short-term economic recovery and employment creation, opportunities to accelerate the transition are there, for example in future-proof infrastructure, no-regret projects, and in industry and construction, even if the short-term employment effects may not be significant. Investment will need to be coupled with reforms that enable new circular and low-carbon value chains to develop. A major challenge is the continuous monitoring of the sustainability impacts of the Plans, drawing lessons from the last global financial crisis where monitoring of the environmental effects of stimulus programmes was for the most part absent.

A quantum of possibilities

2020-12-17T14:51:22+01:00

“Geography is changing – even though we cannot change geography”, were the words of Norway’s then Foreign Minister, Jonas Gahr Støre, almost 10 years ago when he succinctly captured the essence of Arctic change – from the impact of global climate change to increased awareness of all matters pertaining to the region. A decade later, Støre’s analysis is more pertinent than ever. The Arctic is still in a complex state of flux. Be this because of the extraordinary rate of change, evidenced by extreme warm air temperatures in the Eurasian Arctic, Russia’s militarisation efforts, China’s increasing regional interests or the tweets of a particularly polarising (former) US President. In steps the European Union. A complicated creature that has also had to contend with multiple crises and their resulting challenges and calls for change. A Union that is currently in the process of defining what kind of security and defence actor it wants to be. A Union that is also reflecting on its Arctic presence, interests and influence. Over the last 10 years, security has received little attention in the EU’s Arctic considerations, and neither did the Arctic play a role in broader European reflections on security and defence. But is this about to change? Strategy and security are forever Lately, the EU has felt the need to adapt its posture on the increasingly conflicted world stage, either due to emerging great power rivalry, the changing transatlantic relationship, a more assertive China or the Union’s continuous clashes with Russia. To align the different strategic cultures of its member states and to work towards a mutual understanding of threats and capabilities, the EU is currently developing a Strategic Compass, which should be adopted in early 2022. The Global Strategy of 2016 already changed perceptions of the EU; it was now becoming more of a power broker, keen to defend its own interests and protect the Union and its citizens. Yet the Global Strategy also impressed with its vagueness about how to actually respond to all crises and conflicts globally, not to speak of those in Europe’s periphery. The Strategic Compass should thus bring some light into this strategic darkness. Although it is unlikely to remedy all the ills confronting EU security and defence, the Compass could be a useful tool to narrow the member states’ differences in threat perception and strategic outlook, and foster agreements on a few priority areas for crisis management, capability and partnership development. In a first step, a comprehensive yet classified threat analysis – the very first of its kind – just identified near future threats that affect the Union’s security the most. Among others, these challenges concern a slowdown of globalisation, great power (economic) rivalry, climate change, regional instabilities and a broad range of hybrid risks emanating from state and non-state actors. All have direct Arctic relevance. But does the region even fit into the mould of European strategic considerations, threat perceptions and security and defence implications? The Union that ignored me Over the past decade, the Arctic region has barely figured in any discussions concerning a strategic outlook, lack of capabilities or means for crisis management. On the one hand – and for good reasons and the lack of an official 'competence' – the European Union itself has rather timidly covered Arctic security matters in its regional policy documents and only discussed security in a general, implicit way. In this discussion, the strengthening of low-level regional and multilateral cooperation, the allegiance to an international legal order and the vision of a cooperative Arctic that is not affected by any spill-over effects. The Global Strategy of 2016 took the same line, highlighting the Arctic as one potential venue of selectively engaging with Russia. On the other hand, the peaceful and stable Arctic of the 21^st century might have provided too few incentives (or security problems related to Russia) to include the region in thorough analyses of matters of security and defence. Yet this might change as the Union is increasingly aware of the Arctic’s changing geopolitical dynamics and the need to address them in light of shifting regional and global security considerations. Both Germany’s updated Arctic policy (August 2019) and France’s Defence Policy for the Arctic (October 2019) specifically responded to the changing security aspects of the Arctic. Recently, Sweden – in its new Arctic Strategy (October 2020) – urged the EU to identify its strategic interest in the Arctic given a changing security policy environment. Similarly, Poland will highlight the rise of political tensions in the Arctic as having consequences for international cooperation and dialogue in their upcoming Polar Policy. Could some of these member states’ individual Arctic security concerns also have found their way into the threat analysis of the Strategic Compass? If so, what role could the contemporary Arctic security environment play for the Union’s strategic security outlook post-2022? A quantum of possibilities Some of the Strategic Compass’ objectives might not be EU-Arctic-compatible, or they are at least overambitious if one takes into account the region’s eclectic peripheral status. In Brussels, the Arctic resides within the realm of ‘soft policy’ – not written into the Treaties, with no distinct budget line and no set rule book on how to protect the Arctic. Yet an updated EU Arctic policy, which should be published in autumn 2021, could serve as an important regional prologue to the Strategic Compass. The Arctic policy update might not even need to specifically and openly address security concerns related, for example, to Chinese investments in the region or Russian attempts to increase control over navigation in its exclusive economic zone. However, the institutional work leading to the update could result in a concrete and comprehensive understanding of the security concerns shared by both the EU and the member states, the definition of strategic goals and potentially a classified assessment of how the Union could address future Arctic security challenges. An Arctic security threat analysis might also reveal the potential for the EU to be at the forefront of developing or refuelling new regional means of cooperation that go beyond the Arctic Council. This could provide impetus to properly manage the growing international interest in Arctic matters and counteract the emerging global geopolitical competition that also affects the Arctic. While the European Union might not have the power or geographical reach to tackle all Arctic-related security problems, it certainly has the ambition and the potential to offer guidelines on how to best manage Arctic development. This being the case, the European Union already has a broad toolbox of regional competences, expertise and initiatives at its disposal. This ‘EU Arctic spectrum of capabilities’ could serve as a framework for the updated policy and – if properly implemented – act as a trigger to a more confident and trustworthy relationship with Russia. A framework that starts with concepts on small but nevertheless important confidence-building measures, such as search and rescue efforts and cross-border environmental cooperation; possibly extending to tougher cooperation nuts to crack, such as the salvage of nuclear submarines. This ‘spectrum structure’ would offer the possibility for the EU to be the region’s honest broker and to act in the Arctic without artificially fuelling conflict narratives or being perceived as an Arctic security actor. The European Union has often been criticised for being reactive rather than proactive, for responding to global events rather than shaping them. The simultaneous development of the Strategic Compass and the policy update for this key – yet often ignored – region on its own doorstep might offer the critics a new perspective. An updated EU Arctic policy needs to reflect on the changing geopolitical realities of and within the Arctic, be they perceived or real. Yet EU actors need to strike a careful balance between expanding their own language on (Arctic) security, without talking up any moves towards an increased securitisation of the region. Andreas Raspotnik, Senior Researcher, High North Center for Business and Governance, Nord University, Bodø (Norway), andreas.raspotnik@nord.no

The European Council’s compromise on the Rule of Law Regulation

2020-12-17T13:56:31+01:00

At its last meeting for this year, the European Council managed to unblock the New Generation EU (NGEU) project and the budget for the next seven years by agreeing on a two-page declaration regarding the application of the rule of law mechanism. This compromise has elicited much praise for unblocking a crucial project, but also much criticism, with headlines such as Merkel caved in, and Hungary and Poland had won already. Yet, these negative reactions seem to be based on an unrealistic, politically motivated expectation of what the rule of law mechanism could achieve. And also on an over-estimation of what the European Council has actually changed with respect to the agreement with the European Parliament that had been reached before Hungary and Poland suddenly appeared to be willing to veto the entire process, including the MFF and the NGEU funding. The agreed rule of law mechanism, with all its limitations and maybe a minor delay,[1] represents a small, but potentially important step in the integration process long term. Misplaced expectations The expectation that a tough rule of law mechanism could somehow subvert the dominance of Victor Orbán in Hungarian policies was in any case misplaced. There is widespread dissatisfaction across the political spectrum in the European Parliament with the lack of an effective mechanism to enforce the rule of law in member states. There is also a palpable reluctance among net budget contributors to send more EU funding to those member states captured by corrupt governments. Hence the repeated call to the German rotating presidency of the Council that ‘something must be done’. It bears repeating that the EU is a community of law. Many, perhaps even most, member states disagree with the policies pursued by the ‘illiberal’ regime in Hungary and the attempts of the Polish government to control its judges. However, a political disagreement is not enough to justify stopping regular budgetary transfers to a member state. To the extent that it can be proved that there have been violations of criteria for EU membership or EU law (protection of the separation of powers at national level, fundamental rights (media, education, LGTBI, etc.), infringement procedures before the ECJ should be (and some have already been) started. If the Court finds infractions of EU law it can impose heavy fines. But this is different from cutting normal budgetary transfers to member states (or rather their beneficiaries). The existing Treaties simply do not provide stronger mechanisms to ‘punish’ a member state, which, in the opinion of the others, deviates from the principles of the rule of law. Action has now been taken, however. A regulation has been agreed among the co-legislators (the Council and the European Parliament) that will enter into force on 1 January 2021.[2] The key limitation: protecting the financial interests of the Union The so-called rule of law mechanism was born out of the argument that countries whose governments interfere with the rule of law at home do not deserve large transfers from the EU budget. This argument has strong political appeal. But the EU itself is also subject to the rule of law. It can only cut the funding to all of a member state’s beneficiaries[3] if there is a concrete Treaty-based procedure to do so. The only legal base that can justify the Regulation that has just been adopted is the need to protect the financial interests of the Union itself. This is why the ‘rule of law’ regulation is directly linked to the need to protect the financial interests of the Union, not to the value of the rule of law itself. Some parts of this Regulation adopt a very wide view of the principles underlying the rule of law. But Article 3 of the Regulation stipulates clearly that measures can only be imposed if there is a clear link to the financial interests of the Union: “Conditions for the adoption of measures ... Appropriate measures shall be taken where it is established according to Article 5 that breaches of the principles of the rule of law in a Member State affect or seriously risk affecting the principles of sound financial management of the EU budget or the protection of the financial interests of the Union in a sufficiently direct way.“ The key element here is that the financial interests of the EU must be affected “in a sufficiently direct way”. This means that it is not enough that the Commission and a qualified majority of member states think there are breaches of the principles of the rule of law, they must also prove that these breaches directly affect the financial interests of the EU. In practice, this will be difficult to establish. When a government tries to gain more influence over the appointment of judges and their careers, its aim is mostly not to defraud the EU, but to use the judiciary for internal political purposes. The causal link between the erosion of the rule of law and a danger for the EU’s financial interests will in most cases be tenuous and difficult to uphold in court. In practice it could well be the case that an illiberal regime represents less of a danger to the financial interests of the EU than a country in which the judiciary is completely independent, but inefficient. The misuse of EU funds could very well be more prevalent in southern Italy or Bulgaria than in Poland or Hungary. It was a mistake to frame this Regulation as being directed against two countries in particular. Has the European Council ‘neutered’ the substance of the Regulation? The Council Conclusions could not (and did not) affect the fact that the Regulation has been agreed and will enter into force on 1 January 2021. No single article has been changed. One might well ask, why all the fuss? Most of the European Council Conclusions of 11^th December just re-state the obvious, for example that the Regulation must be applied in an impartial way and that the EU respects the constitutions of its member states, etc. Most critical attention has focused on one line in the Council Conclusions “Until such guidelines are finalised, the Commission will not propose measures under the Regulation.” This line must raise the eyebrows of constitutional lawyers. The Commission is an independent institution. It is thus supposed to apply the Regulation from January 2021 in an impartial way. Lawyers can discuss at length what it means that the European Council ‘agrees’ that the Commission will not propose measures before it has drawn up guidelines for the application of the Regulation. It will be up to the Commission to show its independence in its key role as guardian of the Treaty. This ‘agreement’ in the European Council is thus a mere political declaration if the Commission does its job properly. Many apparently now expect that the Commission will not do its job properly, at least not for a few months.[4] Yet it would not be the end of the world if the Commission really did wait a few months more before it launched its first procedure under this new Regulation. The procedure now established by the mechanism is meant to constitute a permanent addition to the EU’s legal order. The overarching priority must be that it operates on a solid basis, with evidence that is accepted by the European Court of Justice. Conclusions The overall conclusion is clear: the Regulation now agreed represents the utmost of what can be done within the existing legal order of the Union. The mechanism had to be limited to the ‘defence of the financial interests’ of the Union. This also means that it could never serve as a useful instrument to defend the principles of the rule of law in general. It seems that many of the critics of the European Council ‘compromise’ have not accepted this reality. [1] It is widely assumed that this delay was crucial for Victor Orbán, assuring his re-election in 2022. But this is just an assumption. Maybe the Commission could have proposed withholding funds under the Regulation before the election, but the reaction of the Hungarian electorate might have been to rally round the flag. A delay in the application might rob the governing party of the image of a foreign enemy. [2] Shortly after agreeing to the Council Conclusions the governments of Hungary and Poland announced that they would challenge the Regulation in the ECJ. It is of course their right to fight for the annulment of the Regulation. But in this case it could also be seen as a violation of the duty of sincere cooperation with the EU institutions (Article 4(3) TEU) to agree to an interpretative declaration within the EUCO and then to turn around and contest the underlying EU legislation. It will be up to the Court decide this issue. This action for annulment should be welcomed in a longer-term perspective as it will make future actions in the context of the Regulation more difficult. [3] Some have claimed that under this Regulation the government against which measures have been taken would still be obliged to pay out the same amount to its national beneficiaries. But this only shifts the burden onto taxpayers. [4] It has been reported that during summit the President of the Commission agreed (in response to a direct question by one Prime Minister) with the interpretative declaration and that the Commission would not take action until it had drawn up its guidelines for compliance (which usually takes months). The Commission President is a Member of the European Council. She can thus not dissociate herself from its Conclusions. It remains to be seen whether this statement just reflected an objective need to have some general guidelines (like the ones the Commission has for state aid) before starting a procedure against any particular country, or whether it represented a willingness of the President of the Commission to put aside at least temporarily its duty as guardian of the Treaty.

2020 ECMI Statistical Package

2020-12-22T13:15:37+01:00

Nagesh Kommuri (Research Trainee, ECMI) was responsible for data collection, analysis and visualisation under the supervision of Apostolos Thomadakis and Cosmina Amariei. The contribution of Roberto Musmeci is gratefully acknowledged. The ECMI Statistical Package presents a comprehensive collection of the most relevant data on various segments of European and global capital markets*. It enables users to trace trends so as to highlight the ongoing transformation of capital markets, including the structural changes brought about by competitive forces, innovation and regulation. It represents an important step towards overcoming the existing data fragmentation on the evolution of European capital markets by offering a ‘one-stop-shop’ for market participants, regulators, academics and students. The 2020 version contains data on equity markets, debt securities, securitisation, covered bonds, exchange-traded and over-the-counter derivatives, asset management, mutual funds, insurance companies and pension funds, and global comparative data. Each table is associated with a corresponding illustrative figure, giving a visual overview of the most important trends. A user-friendly navigation is embedded in the programme allowing users to explore the comprehensive package in an easy and purposeful manner. Click here to download the table of contents, a full description and sample figures. * The ECMI Statistical Package retrieves, compiles and analyses data from publicly available sources and reports as follows: Section 1: WFE, FESE and trading venues; Section 2: BIS, ECB, ECBC, AFME, WFE, FESE and trading venues; Section 3: BIS, WFE, FESE and trading venues; Section 4: BIS and WFE; Section 5: EFAMA, OECD, Pensions Europe and Insurance Europe; Section 6 to 8: Eurostat, IMF and World Bank.

Creating a common safe asset without eurobonds

2020-12-10T10:39:39+01:00

Europe needs a capital market that is sustainably integrated and as single as possible. This will not be achieved without a broad and solid foundation. The international position of the euro is stagnating close to historical lows, while the lack of a European-wide common safe asset highlights the fragmented nature of national government bond markets. Although collective issuance of government debt by member states through eurobonds seems to be unattainable for political reasons, there are other ways to arrive at a common safe asset. Debt issuance by the European Central Bank (ECB) and the European Union could play a constructive role here. By financing the European budget through bond issues and at the same time allowing the ECB to issue short-term money-market paper, Europe could tackle multiple challenges in one fell swoop.

The EU in Libya

2020-12-04T15:03:44+01:00

Peace in Libya is within reach, but not without a concerted effort by Europe. The UN-backed Libyan Government of National Accord (GNA) and the Tobruk-based Haftar-led Libyan National Army (LNA) met within the 5+5 Joint Libyan Military Commission format on October 23^rd, and agreed to a “permanent” ceasefire. Building on this momentum, on November 9th, UN-endorsed peace talks began, bringing together 75 Libyan stakeholders. The UN's interim special envoy to Libya Stephanie Williams stated that "the road will not be paved with roses and it will not be easy" to definitively put an end to a civil war that has ravaged Libya since 2011. These recent developments were spurred in part by political divides within the LNA-protected House of Representatives and the LNA’s strategic failure to capture Tripoli in 2020. Because malign foreign interference will continue to threaten efforts to end the conflict, the EU and its member states should increase their engagement to ensure that this does not happen. In order to build on recent momentum and most effectively combat Turkish, Qatari, Egyptian, Emirati and Russian interference, EU member states must: i) rigorously apply the EU Common Position on arms exports, including ii) through the potential adoption of the EU-style International Trade in Arms Regulation (EU ITAR), as well as iii) establish a CSDP joint disarmament and post-conflict stabilisation mission for which local buy-in could be incentivised through iv) a ‘guns and oil’ scheme making oil and gas exports contingent upon large-scale disarmament. From off-the-mark policies ... The EU has sought to carve out a role for itself in Libya through a vast array of actions, ranging from launching CSDP military and civilian operations to participating in frameworks for dialogue such as the Berlin Process. Yet, unfortunately, the EU has not improved its reputation as an ineffective international actor with regard to Libya, mainly because member states have been unwilling to collectivise their interests, with two major players, France and Italy, supporting different sides in the conflict. Most significant has been the EU’s failure to effectively combat Libya’s arms proliferation, ranging from light weapons to heavy equipment and advanced military technology. Already plagued by Gaddafi’s ‘Cultural Revolution’-inspired arms stockpiling to the tune of a (conservatively) estimated 700,000 small weapons and one million tonnes of military materiel – in a country counting just over six million inhabitants, the influx of arms from abroad since the beginning of the civil war has only served to prolong and aggravate the brutality of the conflict. In fact, it has been amply reported that Turkey (with Qatari financial support), on one side, and the United Arab Emirates and Egypt, on the other, have supplied a significant amount of arms to the conflicting parties, contributing to the militarisation of the country and indirectly causing at least tens of thousands of lives to be lost. Turkish arms have been directed towards the UN-recognised Government of National Accord (GNA) while the UAE has supplied the Haftar-led Libyan National Army (LNA). Russia, via the Wagner group’s intervention on Haftar’s side, has been a major player in Libya as well. In 2020, EU member states replaced EUNAVFOR MED Operation Sophia with EUNAVFOR MED Irini, thereby decoupling politically sensitive migration from the objective of enforcing a UN-sanctioned arms embargo and stemming arms proliferation in Libya. IRINI’s primary objective of enforcing a UN-sanctioned international arms embargo has been criticised as unbalanced, given its focus on maritime deliveries from Turkey, on which the GNA largely depends. The LNA depends primarily on land and air supply of arms from the UAE via Egypt. Furthermore, it lacks the necessary aerial and satellite assets to monitor arms embargo violations from above. Yet, EU member states’ own approaches have been inconsistent with Operation Irini’s mandate and, at times, are completely contradictory. While attempting to enforce the arms embargo by sea and air with limited equipment, some EU member states have been indirectly complicit in the Libyan civil war through their arms exports to significant regional actors in the conflict, among which the UAE and Turkey.

Of particular concern is France’s recourse to arms exports as a foreign policy tool to advance its interests in Libya, with significant exports of manned and unmanned aircraft, along with bombs and artillery systems to the UAE and Egypt in recent years. Italy too has profited from the conflict and regional tensions in the Middle East writ large, predominantly selling similar weapons of war to Qatar. This has occurred even while, since 2013, member state arms export denials for the Middle East and North Africa (including Turkey) are the highest in the world. As such, member states have clearly recognised the threat posed by arms proliferation. Yet, they must increase their arms export licensing denials in view of their spill-over effects, particularly where they have fallen short in the past on bombs, torpedoes, rockets, missiles and other explosive devices. EU member states’ arms transfers should be viewed within a broader context of alliances that have become consolidated under the impetus of Libya’s civil war. A prime example of this is the November 2019 agreement between Turkey and the GNA on maritime borders in the Eastern Mediterranean. While the GNA is at present incapable of enforcing the agreement, its consequences have been significant, with Turkey using it as pretext to (further) violate Greek and Cypriot territorial waters. The tendency is worrisome and indicates that geopolitics in the Mediterranean and MENA region are heightening tensions. This set off a chain reaction of Turkey-Libya, Italy-Libya and Greece-Egypt maritime border agreements and provided the impetus for the Greek-Cypriot-Emirati-French ‘3+1 formula’ and Italian-Qatari defence cooperation. As such, regardless of how the current ceasefire plays out, alliances have been forged and EU member states have taken sides, with France and Italy, in primis, pursuing contrasting interests. …To course correcting and a sustainable peace for all Libyans The window of opportunity presented by Berlin Process-inspired peace talks gives France and Italy a chance to correct course and save face. But they will only be able to do so by engaging coherently, especially at the EU level. A first step in this direction has been the Council’s September 2020 decision to impose restrictive measures on two Libyan individuals responsible for human rights violations and three entities based in Turkey, Jordan and Kazakhstan in violation of the UN arms embargo. Beyond this, the EU can move beyond vague declarations and positively contribute to a sustainable peace in Libya in three concrete ways: First, member states should comply fully with the EU Common Position’s provisions on arms exports. More specifically, exports to the UAE, Turkey, Egypt and Qatar risk undermining Criteria 1, 2, 3, 4, 6, and 7 of the Common Position, particularly if the transfers are treated in conjunction with those countries’ roles in the Libyan civil war. Member states have a duty to set a higher bar to avoid further proliferation. Ways to improve the Common Position’s implementation abound – including by adding requirements on maintenance and training reporting. But member states should demonstrate good will and follow through on existing provisions. Second, EU member states should consider leveraging the EU’s lawfare capacities by adopting an EU International Trade in Arms Regulation similar to that currently in force in the US. It should include a requirement that capabilities developed, partly thanks to EDF funding, be subject to more stringent export controls, as well as provide for DG DEFIS authorisation of re-exports of military equipment produced in the EU or containing components produced in the EU. Furthermore, the Commission should continue its efforts to strengthen controls where it can on exports of dual-use items. In line with the EEAS’s 2014 Political Framework for a Crisis Approach for Libya, a prerequisite to peacebuilding is effective Disarmament, Demobilisation, Reintegration (DDR). Here, the EU should consider establishing a CSDP mission centred on joint disarmament, ceasefire monitoring and post-conflict stabilisation in Libya that would complement the work underway by Operation Irini. To incentivise local buy-in and compliance, the EU should undertake a ‘guns and oil’ scheme making Libyan oil and gas exports contingent upon effective disarmament, alongside increased humanitarian aid and development cooperation. Furthermore, by slowly increasing production, Russian fears about plummeting global oil and gas prices can be assuaged. While ideological and economic tensions within Libya will persist, including on the distribution of the National Oil Corporation’s revenues, it is essential that the conflict is disarmed, and that UN-led political dialogue prevails. While the incoming Biden-led administration may remain disengaged on the ground, the EU should seek the US’ increased support for the UN-led peace process, along with its CSDP/DDR efforts and in line with Biden’s professed multilateral vocation. The EU can lead by the power of example, demonstrating that win-win solutions require a cooperative approach and concessions on all sides.

A new role for the EU in Venezuela

2020-12-04T14:19:00+01:00

Venezuela is a failed state, causing the second-largest humanitarian and migrant crisis in the world. The country’s recent history of disastrous administration and economic mismanagement, which started under former President Hugo Chavez, placed it in such a wretched ranking. Before Chavez, Venezuela was known as the Saudi Arabia of South America, thanks to Its oil boom and subsequent economic growth in the 1970s. Under Chavez, a populist and authoritarian regime was installed in an oil-dependent economy, where no reinvestment was made to diversify the economy or to ensure a sustainable reduction in inequality. After Chavez’s death in 2013, Nicolas Maduro was elected president, but his election was a pyrrhic victory for a country already wounded by social and political fragmentation, crumbling infrastructure, unsustainable public spending and underperforming industry. Maduro did nothing to heal these wounds. The fall in oil prices caused spiralling hyperinflation and social collapse. Today, 90% of Venezuelans live in poverty and two-thirds of them cannot even eat three times a day. In 2017, each Venezuelan lost on average 11 kilograms in body weight. In an attempt to escape repression or hunger, 5.5 million people have left the country. Despite two decades of free fall, Venezuela attracted the closer attention of the global community only in 2018, when presidential elections resulted in a wave of political violence and social disruption. The world found itself divided in two factions: the United States and the European Union taking a stance against Maduro, mainly in the form of personal sanctions, an assets freeze and an arms embargo, and its staunch supporters, namely Russia, China and Iran, who offered financial assistance and military supplies. Latin American governments mainly tried to survive the humanitarian crisis by coordinating regional efforts and shouting for international support. Two years down the road, Venezuela still finds itself in no man’s land, with two governments (one led by Maduro, the Constitutional Assembly and the military forces; the other by the self-declared President Juan Guaidó and the National Assembly of Venezuela) both claiming to be running the same country. Parliamentary elections are now scheduled for 6 December 2020, but irregularities are, according to the United Nations, a fait accompli. The EU sent an exploratory mission in September 2020, aiming to stimulate dialogue between the opposing factions, but ended up proposing that the vote be postponed by at least six months. A proposal that was rejected: parliamentary elections will take place as scheduled, without transparency guarantees. And Maduro will claim it was a propitious victory. Given the context, we argue that the EU can and should play a prominent role in the Venezuelan crisis in the months to come. From December onwards, the situation in the country can further deteriorate, leading to its definitive collapse. Although the United States has a role to play and can allocate resources to avoid this eventuality, especially as of 20 January, its strained relations with the internal and external actors involved do not position it as an ideal mediator. For this reason, the European Union is the global power with both the will and the capacity to promote peaceful and sustainable solutions in favour of a population in dire need. So far, EU institutions have reacted by increasing humanitarian aid and promoting dialogue among opposing factions. But overall, the commitment towards Venezuela still pales in comparison to other migration crises of a similar magnitude: note that the Refugee and Migrant Response Plans in 2020 are 4.3 times higher for Syria and the EU contribution is 10.5 times higher for Syria than for Venezuela. As was demonstrated in May 2020 during the International Donors' Conference organised by the European Union and Spain, the EU does have the capacity to mobilise further assistance. Even if it does not engage with additional financial support, it could call for greater efforts from Canada and the United States. The EU has also imposed sanctions as a pressure mechanism, but has not sought to create alliances or weaken opponents to deprive Maduro's regime of the international support it enjoys, which keeps it in power despite an internal approval rating of less than 25%. This is quite alarming, if one considers that one of Maduro’s supporters is China, which has proved to be both friend and foe to the European Union, as increasingly acknowledged by EU officials. Beijing’s aggressive strategy in the country, inspired by the need to access oil, minerals, and agricultural goods, cannot stand in the way of good governance and local development, and as such cannot leave the “geopolitical Commission”, and the EU as champion of human rights, indifferent (Sullivan & Lum, 2020). This call for more forceful action falls in line with the “strategic autonomy” concept being built under Borrell’s term in office: the EU should promote its own narrative of the world, taking advantage of its multilateral know-how. Even if this narrative does not have unanimous support. First, the EU should strengthen its position as a coordinator of humanitarian actions, through a reallocation of resources coming from the Civil Protection and Humanitarian Aid Funds, pushing for urgent action from UN agencies, the United States and Canada and allocating resources to countries like Colombia (where the migration of almost two million Venezuelans is now leading to escalating tensions) and Peru. The latter decision demands a regional consensus, which could be obtained through dialogue between the International Contact Group, mostly representing European states, and the Group of Lima, representative of Latin-American countries. The communication channel between these groups already exists, and the EU supports the Quito Process, so there is common ground to pursue this discussion. Second, the EU should foster enhanced multilateral dialogue on the issue of external financial and military support to the Maduro administration, to avoid the definitive collapse of democracy in Venezuela. The EU has had growing experience of handling and promoting peace mediations (Bergmann, 2017): in this case, a coalition with Latin American governments and Canada, which includes the National Assembly of Venezuela, could identify available negotiation channels, and may also enjoy the support of a more enlightened US administration. This will also require bilateral approaches with Russia and China; countries that have so far backed the regime, and with Iran, a country that publicly states its support for Maduro, exhorting him to withstand US sanctions in the name of an “alliance of pariah states”. EU leadership in this domain may help to mitigate the anti-American rhetoric behind foreign support, which brings no tangible benefit to the people of Venezuela, and condemns them to starve in a failed state, or to add their names to the millions who have already fled the country in recent years. Jorge Guzmán, Ph.D. in Political Science specialised in Global Politics, former Advisor of the Ministry of Foreign Affairs of Colombia and former Advisor to the Ambassador of Colombia in Venezuela. Mónica Rico Benítez is a Consultant at CEPS' GRID Unit and a former junior diplomat of the Ministry of Foreign Affairs of Colombia. This article is inspired in a webinar organised by CEPS that took place on 5 November 2020. Based on the presentation of panellist Jorge Guzmán, it aims to offer an academic analysis of the topic, collecting some of the main discussion points, and addressing some of the questions from the audience during the conference. The views expressed in this report are nevertheless those of the authors writing in a personal capacity and do not necessarily reflect those of CEPS or any other institutions with which they are associated. References Bahar, D. and Dooley, M. (2019), “Venezuela refugee crisis to become the largest and most underfunded in modern history”, The Brookings Institution, 9 December (www.brookings.edu/blog/up-front/2019/12/09/venezuela-refugee-crisis-to-become-the-largest-and-most-underfunded-in-modern-history/). Bergmann, J. (2017), “The European Union as a Peace Mediator”, Oxford Research Group - Breaking the cycle of violence, 17 June (www.oxfordresearchgroup.org.uk/blog/the-european-union-as-a-peace-mediator). Castañeda, J. (2020), “Colombia Is Dealing With a Terrifying Refugee Crisis. Will Wealthy Nations Step Up to Help?”, The New York Times, 10 March (www.nytimes.com/2020/03/10/opinion/international-world/venezuela-colombia-refugees-crisis.html). European External Action Service (2019a), Venezuela: Meeting of the International Contact Group and the Lima Group - Joint Statement, New York City, 26 September (eeas.europa.eu/headquarters/headquarters-homepage/67934/venezuela-meeting-international-contact-groups-and-lima-group-joint-statement_en). European External Action Service (2019b), International Contact Group on Venezuela: Ministerial Declaration, Quito, 28 March (eeas.europa.eu/headquarters/headquarters-homepage/60358/international-contact-group-venezuela-ministerial-declaration_en). European Commission (2019), EU-China – A strategic outlook, JOIN (2019) 5 final, Strasbourg, 12.3.2019 (ec.europa.eu/commission/sites/beta-political/files/communication-eu-china-a-strategic-outlook.pdf). European Commission (2020c), EU mobilises international donors to support Venezuelan refugees and migrants and countries in the region, Brussels, 26 May (ec.europa.eu/international-partnerships/news/eu-mobilises-international-donors-support-venezuelan-refugees-and-migrants-and-countries-region_en). European Parliament (2020), “EU diplomatic mission in Venezuela in view of possible elections”, debate in the European Parliament, 7 October (www.europarl.europa.eu/doceo/document/CRE-9-2020-10-07-ITM-008_EN.html). Guzmán, J. H. (2020), “Una nueva aproximación a la crisis de Venezuela” [A new approach to the crisis in Venezuela], Vanguardia, Bucaramanga, Colombia. INFORM (2020), “INFORM Severity Index”, European Civil Protection and Humanitarian Aid Operations (ec.europa.eu/echo/resources-campaigns/online-databases_en). OCHA (2020a), “Syria Refugee Response and Resilience Plan 2020”, Financial Tracking Service (fts.unocha.org/appeals/943/summary). OCHA (2020b), “Refugee and Migrant Response Plan 2020 for Refugees and Migrants from Venezuela”, Financial Tracking Service (fts.unocha.org/appeals/944/summary). Rodriguez, F. and Batmanghelidj, E. (2020), “Sanctions Are Driving Iran and Venezuela Into Each Other’s Arms”, Foreign Policy, 17 September (foreignpolicy.com/2020/09/17/iran-teaching-venezuela-maduro-how-to-withstand-us-sanctions/) Sullivan, M. P. and Lum, T. (2020), “China’s Engagement with Latin America and the Caribbean”, Congressional Research Service, 12 November (fas.org/sgp/crs/row/IF10982.pdf). UNHCR (2020), “Global Trends of Forced Displacement in 2019”, United Nations High Commissioner for Refugees, Copenhagen (https://www.unhcr.org/5ee200e37.pdf). Universidad Católica Andrés Bello (2020), Encuesta Nacional de Calidad de Vida 2019 -2020, Venezuela [National Survey on Quality of Life], Proyecto ENCOVI, Caracas (www.proyectoencovi.com/informe-interactivo-2019).

Is Europe’s Capital Markets Union now in sight?

2020-12-02T17:45:47+01:00

The Covid-19 pandemic has served as a brutal reminder of the urgency to strengthen societal resilience as a whole. The extent of the socio-economic fallout has yet to be fully understood, however. But the Capital Markets Union (CMU) project has now taken on new relevance. Mobilising private funding for recovery coupled with sustainable and digital finance strategies is sorely needed. To this end, the ECMI annual conference brought together policymakers, supervisors, academics and industry representatives to exchange views on the continuation of the CMU, namely how to deliver the best outcomes for companies, investors and citizens in the coming years. It also featured a special debate on the evolving role of credit rating agencies.

Disclaimer: This report includes the main conclusions from the 10th ECMI Annual Conference that was held virtually on 5 and 6 November 2020. Its content should be attributed solely to the rapporteurs. A detailed overview of the proceedings is available here.

The Biden presidency is a last call for Europe

2020-12-03T12:06:47+01:00

The presidency of Joe Biden heralds an opportunity for Europe, and more particularly the EU, to revive its relationship with the US. But it may also be its last chance. The EU will have to demonstrate tangible progress in the areas of defence, trade and global policy stances generally to ensure the good will of the new American administration. After very strained EU-US relations over the past four years, the election of Biden and his early statements have produced a huge sigh of relief among many policymakers in the EU, and Europeans at large. The stances of President Trump and his closest advisers were unprecedented in the history of transatlantic relations: from the open attacks on the EU and some of its leaders, to support for extreme-right Eurosceptic parties and governments, and threats and attacks on the security and trade front. To some degree, the Trump administration was only pointing to issues others had already raised tacitly before: the asymmetries on many levels in the transatlantic relationship had to end. Europe has sheltered for too long under the security umbrella of the US, and not taken enough responsibilities of its own. Despite warnings that date back to the end of the G.W. Bush administration, defence budgets have hardly increased (see the Dutch Advisory Council on International Affairs (AIV) report). On the goods trade side, where the EU has a huge surplus of more than €150 bn (2019), the US often applies lower tariffs on EU imports than vice versa. The obvious example is the most important EU export product, cars, where the US places a 2.5% tariff on EU vehicles, while the EU applies a 10% on US ones. This has insulated the EU market from competition, which is why it is behind others on electric cars, for example. The US security umbrella has already folded in Europe’s south-eastern neighbourhood, and will not reopen, nor has it been replaced by European security. Notwithstanding the calls for a geopolitical Commission, Europe has been absent while Russia, and in the second instance Turkey, is becoming the hegemon in the region. As Russia brokered deals in Armenia, Syria (Idlib) and Libya, and extended its influence, Europe was nowhere to be seen. The void left by the retreat of the US has been filled by a former Cold War enemy. Europe’s precarious security situation became apparent under Trump; without NATO it has no real actionable security or crisis intervention structure, and is thus very vulnerable without the US. Most recently, EU plans for a more advanced security cooperation (PESCO), started under the previous legislature, have been overshadowed by uncertain proposals to include the UK’s defence capacity in a structure above the EU, in a European security Council. In the meantime, taken collectively, European member states that are allies of NATO do not meet the 2% defense spending as a percentage of GDP objective set by NATO, but stick on average to around 1.6%. This means that Europe lacks core operational capacities, such as the air transport capacity to move troops to crisis-hit regions, for example. EU countries should agree urgently on a division of competences and local specialisation, as part of a European defence agenda, as the Dutch Council for International Affairs argued in its recent report. The EU will only be taken seriously by the US – and also by President Biden – if it takes on more tasks itself. On the trade front, it will take a long time to re-establish EU-US cooperation to the level where Obama left it. Biden has not yet mentioned TTIP as one of the engagements he would restore, although he will allow the WTO to function again. In the meantime, the EU has advanced with important bilateral trade deals, most importantly with Japan, but also with Canada and Mercosur, while specific trade agreements with China are progressing, such as an investment agreement. The current US Trade Representative, Robert Lighthizer, saw this web of bilateral trade deals as the resurrection of “the system of colonial preferences that prevailed in the pre-GATT era”. These deals do not advance liberalisation, he argued, but force countries to adopt protectionist measures such as ‘geographic indications’. WTO member states should therefore recommit to market reform and most-favoured-nation status, he advised in a piece in the WSJ in September. This is what Biden has already announced, to remove Trump’s tariffs and bring the WTO back to the centre, which the EU should be fully aware of. Looking at it from an economic standpoint, the incoming administration may take a pragmatic approach: it will restore good old relations with Europe, but will turn to where the gravity is shifting: Asia. In the share of the global GDP weighting, the EU continues to lose ground, the US remains in the lead, while China is advancing. These trends are accelerated by the Covid-19 crisis, which has highlighted our dependence on US big tech. This puts Europe in a dire position with its digital tax, where the only solution is a global one for effective taxation in the realm of the OECD. The EU will thus need to watch out in the coming weeks and months that it fulfils its side of the bargain in relations with the US, and make genuine commitments on the security and defence side, also by advocating a truly open trade agenda in line with the WTO commitments, to boost its competitiveness. The EU will need a permanent structure for regular interaction with the US, as is the case for its other most important trading partners. Many attempts were made in the past, such as the Transatlantic Economic Council (TEC), but with limited success. Given Europe’s declining importance as an economic power, this is its last chance, also because more US-centred administrations will come back in the US. Yet another reason for the EU to overcome its perennial divisions, get its act together and assume its rightful role in the world order.

Social Innovation in the Temporary Agency Work Industry

2020-12-01T11:51:45+01:00

This study presents a selection of 15 social innovation practices, from the temporary agency work sector and beyond, for skills enhancement and training, working conditions and social protection. Implemented across nine countries across Europe, this geographical coverage allows consideration and comparison of different socioeconomic and institutional contexts in which social innovation takes place. Moreover, one practice is implemented worldwide and several others have this potential.

This report was commissioned jointly by the World Employment Confederation-Europe (WEC-Europe) and UNI Europa Temporary Agency Work in the framework of the European sectoral social dialogue on temporary agency work.

The research for this study was conducted in full independence by CEPS (Sara Baiocco, Willem Pieter de Groen, and Zachary Kilhoffer) and the Research Institute for Work and Society (HIVA) at KU Leuven (Karolien Lenaerts).

The insurance properties of common debt issuance

2020-11-26T15:44:41+01:00

In a federation of sovereign states, common debt can provide insurance against idiosyncratic shocks even without any intended, ex ante transfers. This insurance property arises automatically when the common debt service is financed by a levy on members that is proportional to national income. This is the case in the EU. It implies that if the economy of a member state is hit by a negative shock, i.e., if it grows less than the Union average, its contribution to the service of the common debt is correspondingly reduced. By contrast, the service of national debt, which is typically fixed in nominal terms, becomes more difficult in the case of a negative idiosyncratic shock. Ceteris paribus, common debt issuance is thus akin to linking debt service to GDP growth. Uncertainty about growth increases with the time horizon. The insurance property of common debt thus increases with its maturity.

The skill challenges posed by Covid-19

2020-12-07T20:00:16+01:00

The impacts of lockdowns in response to the Covid-19 outbreak have been asymmetric across different economic sectors, depending on the degree of social contact needed to perform the activity but also on the use of technology.[1] The measures being taken to contain the spread of the pandemic are accelerating ongoing transformations in the economy and in labour markets, driven by digitalisation. ‘Pandemic-proof’ digital technologies are poised to take over certain jobs faster and more easily than had previously been the case.[2] Workers laid off in shrinking sectors or whose jobs are threatened by technological advancement and by the pandemic require new opportunities to succeed. Failure to manage transitions towards new sectors or new occupations effectively may lead to a significant increase in long-term unemployment, with broader social consequences. It is against this background that up- and re-skilling policies are part of the flagship areas recommended by the Commission for national investments and reforms under the Recovery and Resilience Facility (RRF). These policies recognise the growing need to adapt and develop (up-skill) workers’ existing skill-sets to meet new challenges, as well as the need to retrain (re-skill) workers for jobs in rising sectors of the economy. More generally, labour market policies play a decisive role in mitigating the threat of human capital deterioration and can avoid frictional unemployment, resulting from sectoral restructuring of the economy, turning into long-term unemployment. National governments are responsible for such policies and their choices will affect employment outcomes. EU member states differ greatly with respect to expenditure on their labour market policies. In 2018, total expenditure varied between 0.1 and 2.8% of Gross Domestic Product (GDP) within the EU27 (Figure 1). It was highest in North-Western European countries and in Spain, whereas most Central-Eastern European countries invested the lowest shares of GDP. Within labour market policies, Denmark, Sweden and Finland invested the highest share of GDP in active labour market policies (ALMPs). In some Central-Eastern European countries, such as Poland, Croatia and Hungary, the majority of total expenditure on labour market policies was allocated to activation support, for example through training, employment incentives or direct job creation. By contrast, Italy, Spain and Portugal, as well as Germany, France and the Netherlands invest only a small portion of the expenditure in activation measures. Passive measures make most up of the expenditure. While those countries that spend more in passive labour market policies may appear more able to offer income protection to workers who have lost their jobs as a result of Covid-19, they will be less likely to successfully redirect them towards new occupations and sectors. Unless they change course. Within ALMPs, the share of public investment in training, which provides a rough measure of investment in up- and re-skilling, varies dramatically across the EU27 (Figure 2). Expenditure in training ranges from 3% to 74% of the total expenditure on ALMPs, corresponding respectively to between 0.01% and 0.43% of GDP. Yet, no clear pattern can be determined. Some countries that invest little in ALMPs overall concurrently invest a small percentage in training, while others dedicate a higher percentage to training. Expenditure on ALMPs does not occur in a vacuum. For instance, engagement in training and jobs programmes is influenced by the quality of the services that provide support, guidance and mentoring to beneficiaries of ALMPs. Expenditure in labour market services (i.e. Public Employment Services – PES, see Figure 1) is therefore part of the capacity to implement ALMPs and to engage beneficiaries in up- and re-skilling effectively. Countries such as Germany, Belgium, France and the Netherlands that spend a limited share of GDP on ALMPs devote in reality a substantial part to PES. This may be characteristic of an efficient ecosystem in which workers receive financial support for activation and the PES are well-equipped to guide and support them in the transition. In contrast, Italy and Greece exhibit a relatively low share of GDP investment in ALMPs as well as very low spending on PES. This may denote low capacity to use the (already scarce) resources effectively, because the PES system is not developed enough to reach out to and follow workers in need of support. Confronted with the Covid-19 pandemic, a key question is how member states can put in place adequate policies for up- and re-skilling. The EU is trying to offer a framework and resources for them. The European Skills Agenda can play an important role in setting benchmarks and guiding and assisting member states. Next Generation EU funds can support member states by committing unprecedented levels of spending. Yet in order to be successful, the EU policy framework and EU financial resources could be explicitly intertwined. This can be done by linking mid-term progress on the European Skills Agenda targets for participation in learning[3] to progressive disbursement of funds during the recovery. Tracking progress on targets for up- and re-skilling could push member states to tailor their policies and investment of EU funds where progress is slower and more needed. Moreover, qualitative and quantitative indicators on labour market services (e.g. PES) could provide additional measures for monitoring progress of policies. This information is in part already considered under the European Semester, though its measurement is not completely systematised and homogenised across countries. As we stand today, the final choice on how to spend the EU RRF funds lies with national governments. Whether member states will opt to invest further in up- and re-skilling as part of a more developed social investment approach is still unclear. The draft National Recovery and Resilience Plans prepared by Italy and France to access EU funds offer insights into current trends. Of a total provisional list of 390 projects (equivalent to €454 billion in spending) proposed by Italy, two are with its ALMP national agency (ANPAL) and amount to €15.4 billion (0.86% of GDP). This figure is more than double the country’s current annual expenditure in total ALMPs, i.e. 0.36% of GDP. Of the €15.4 billion allocated, €11.2 billion would be earmarked for a Plan for workers’ competences development, to support labour market transitions, with a focus on reinforcing PES.[4] The latter component, in particular, signals a significant shift in policy and is intended to reinforce the ecosystem for stronger ALMPs. In France, €14.3 billion are planned to be dedicated to policy measures for skills development and activation of the most vulnerable categories of workers, including youth and those with disabilities. An additional €1.9 billion is proposed for spending on professional training reinforcing pre-existing programmes.[5] These measures collectively amount to 0.67% of France’s GDP, a significant increase on the current total expenditure on ALMPs at 0.52% of GDP. The examples of Italy and France point to an increased awareness of the skill challenges posed by the Covid-19 pandemic and the importance of active labour market policies to address its long-term impacts. Plans must however be followed by action. The effective implementation of the measures will be the real test of any new approach to social investment. Countries which have limited experience or few structures in place will face bigger practical challenges and be slower to deliver. In this respect, it will be important not only to monitor the implementation and quality of policies but, crucially, labour market outcomes. This piece is one of a series of articles written for the EuSocialCit project. The EuSocialCit project has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 870978. This document reflects only the authors’ views and the Commission is not responsible for any use that may be made of the information it contains. [1] Accommodation and food services, retail trade, sport, fitness and recreation, and personal services are the sectors most subject to restrictive measures and those experiencing the highest losses. See Barbieri et al., 2020, similar studies for the US and for France, and estimations in this article of the Economist. [2] See Frey’s article in The Financial Times. [3] Objectives are set for 2025: 50% of adults and 30% of low-qualified adults in learning during the last 12 months, 20% of unemployed adults with a recent learning experience. [4] In Italian: Piano per le nuove competenze. Rilancio delle politiche attive a sostegno delle transizioni occupazionali [Plan for new skills. Relaunch of active policies in support of employment transitions]. In addition, approximately €9 billion is allocated for other projects assigned to different ministries but dedicated to up- and re-skilling. [5] Such as France competence and Pôle emploi. Grouped under the ‘Cohesion’ priority focusing on investment in human capital to achieve social inclusion.

New Asia-Pacific trade deal

2020-11-23T15:14:30+01:00

The conclusion of a new overarching Regional Comprehensive Economic Partnership (RCEP) Free Trade Agreement (FTA) between 15 Asia-Pacific countries has been celebrated across the globe. Its signatories are the 10 members of the Association of Southeast Asian Nations (ASEAN) countries and Japan, Korea, China, Australia and New Zealand; India withdrew from the agreement at the last moment. The signing of the RCEP is certainly good news for world trade and investment. It brings together a group of countries representing 30% of the global population and generating 29% of its GDP. It aims to facilitate and solidify global value chains; accept opening-up in terms of tariffs (while aiming to discipline non-tariff barriers); build a legal framework for services, trade, and investment; and address e-commerce issues such as the commitment not to impose data localisation. Much like the EU-Canada Comprehensive Economic and Trade Agreement (CETA), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) (an FTA between 11 APEC countries, without the US), and the EU/Japan Economic Partnership Agreement (EPA), the RCEP demonstrates once again that the US under the Trump administration was effectively alone in its attempts to disrupt further globalisation. Nevertheless, the RCEP is not a deep FTA and stipulates slow liberalisation over long periods of time, among its other peculiarities. It may also impact East Asian regionalism in the long term. This paper explains the Association of Southeast Asian Nations (ASEAN)-led origin of the RCEP in the context of APEC, summarises the substance of the agreement, and gives an inevitably crude first estimate of its impact on trade and overall income, as well as its structural implications. It concludes with reflections on the possible long-term implications of the RCEP for East Asian regionalism, for world trade and investment, and for the European Union.

What role for forest-based industries in a climate-neutral future?

2020-11-20T13:34:39+01:00

Climate neutrality in the European Union and globally will lead to a deep transformation of existing industrial value chains, bringing new and lower-carbon products, processes and novel business models. This transformation will affect the entire industrial sector, notably including all energy-intensive industries, forest-based industries among them. The sector represents a full value chain, from forest owners and managers, to industries transforming the forest products and recycling. While the exact routes for this transformation remain uncertain, the technological pathways for decarbonisation are known: electrification, hydrogen, energy efficiency, circular economy, carbon-neutral liquids, carbon capture and negative emissions. For policymakers, the transition of forest-based industries raises the task of finding the right balance between the sector’s contribution to sinks, product substitution (including recycling), renewable energy and biodiversity, in addition to carbon accounting issues, especially if international trade is included in the analysis. Possible trade-offs – food versus feed, fibre versus fuel, and land versus ecosystems – will most likely become more acute after 2030 as the deadline for climate neutrality approaches. More knowledge will be required to make the most appropriate choices, such as which energy crops have the potential to deliver the highest negative emissions, which forest management practices are optimal from a biodiversity perspective, and what role forests will play more generally in climate change mitigation and adaption. Low-carbon ‘lead markets’ can in theory support demand for climate-neutral products, including for wood-based products, but policy-driven demand is not equivalent to market-driven demand. Climate-neutral products are not necessarily of higher value to consumers, nor do they offer better functionality. Consumer preferences for bio-based products in, for example, the materials or textiles sectors will matter

Legal obstacles in Member States to Single Market rules

2020-11-20T11:19:28+01:00

This study analyses the current state of national obstacles to free movement in the EU Single Market. It focuses on various aspects of obstacles related to free movement of goods and services, the right to establishment, the Digital Single Market, consumer protection and public procurement. CEPS researchers Jacques Pelkmans and Mattia Di Salvo co-authored this collaborative study, prepared with other think tanks and institutes, for the Policy Department for Economic, Scientific and Quality of Life Policies, at the request of the committee on Internal Market and Consumer Protection (IMCO).

Europe’s Capital Markets puzzle

2020-11-18T09:31:32+01:00

Creating an attractive framework for more market financing in Europe is proving to be an increasingly complex puzzle. The EU and other European states are battling on several fronts, but without the unity and vision that is needed to move forward. Brexit is one of the difficult pieces of the puzzle, but also problematic is the dominance of universal banks, especially in mainland Europe, as is limited acquaintance with more market finance. Market financing is however paramount for Europe’s competitiveness.

The EU Commission’s latest action plan – the New CMU Action Plan – lacks workable solutions and gets lost in small items that will not allow for significant change or bring Europe’s markets up to speed. A positive development on the horizon is the emergence of a euro safe asset, a crucial building block for European capital markets, but the issues it raises are not reflected in the action plan either. Six years after the launch, we are no closer to the benchmark set by the United States.

The real actionable items of the new plan are limited; several elements are intentions, proposals for studies or elements to strengthen existing frameworks. Of course, there is no need for an extensive new legislative agenda. But rather a clear vision and strategy on what the EU wants to achieve, by when and how, on which there seems to be no agreement. The incremental approach followed in recent years is now harming the EU’s long-term interests.

Dealing with the second wave

2020-11-16T09:47:08+01:00

Lockdowns are not the only way to control a pandemic. Keeping open the restaurant and retail sector increases the risk of infection, which involves a significant difference between private and social cost. The most efficient solution to this problem would be to offer incentives to shops and restaurants to close, rather than mandate lockdowns. Introduction In the autumn of 2020, many European governments are imposing ‘lockdowns light’, which usually contain limitations on the activities of those restaurants, bars and shops considered as non-essential. The assumption behind these often partial closures is that the risk of infection is high wherever people mingle in confined spaces. A recent paper provides further evidence of the importance of restaurants, bars and gyms in the spread of the virus. Mandated closures have led to strong popular protests (especially in France and Italy) because they threaten the livelihoods of many small individual shop or restaurant owners. These two sectors are already under pressure from e-commerce. There are thus many marginal operators who feel they cannot survive this second lockdown, even if only a light one. Governments have of course been trying to provide help and compensation for lost income. But in many cases, this compensation has been late, partial and unable to target the most (economically) vulnerable. Governments have instinctively reacted with mandated closures, but this step might not be needed if one considers the alternative of taxes or subsidies. Taxes or subsidies have so far played no role in the so-called Non Pharmacological Interventions (NPIs), although they could achieve the same objective in terms of social distancing. In concrete terms, this could mean the following. Governments could announce a subsidy to any store or restaurant owner willing to close the establishment for a certain time (e.g. 1-3 months). A longer period of closure would be better because it would help keep infections low during the rest of the winter. One needs to avoid the problem that the remaining stores become more crowded once a large proportion of them closes. Overcrowding was already regulated before the new second wave restrictions, as customers were asked to keep a minimum distance. This type or regulation should be maintained in the simplest form possible: no more than a certain number of customers on the retail premises per square metre. Governments could thus start with a subsidy offer that could be specified in terms of a lump sum per square metre, paid up front to the owner of any retail establishment willing to close (for in-store shopping or dining) for a number of months. Take-away and internet sales would still be permitted. Each individual operator would then calculate herself the opportunities from other sales channels. For those least able to adapt, accepting the subsidy might be the best option. In principle, it would be preferable to conduct a reverse auction whereby retailers could submit the price at which they would be willing to close. Successive rounds could then be held until the desired reduction in retail space supply has been reached. One caveat: there might simply not be enough time to organise this now. Applying lessons from the Classics: Pigou and Coase Climate change provides another example of a discrepancy between social and private interests. It has been widely recognised that a ‘Pigouvian’ tax, i.e. a tax on emissions or a setting a price on emission allowances as under the EU’s Emission Trading system, can achieve the desired outcome more efficiently than direct regulation of polluting activities (Nordhaus, 2018). This lesson should also be applied to pandemic control. In the case of climate change, it is widely agreed that a tax on emissions is more appropriate than a subsidy not to emit. In the case of pandemic control, the choice is not so clear. Coase (1960) argues that provided transaction costs are negligible, the efficient solution to a problem involving a difference between social and private costs should be independent of the allocation of property rights. In pandemic control the interests of society are represented by the government, which keeps transaction costs low. The key question is then whether the right to keep a store open is held by the owner or whether it belongs to society. The fact that governments provide compensation indicates their recognition that the right to stay open should belong to the owner. It follows that a subsidy for closure would be more appropriate than a tax on restaurants. Political advantages of a closure subsidy In more practical terms, a closure subsidy offers a number of advantages. It would constitute a way to provide income compensation for the most marginal businesses at a reasonable fiscal cost, while still reducing social interactions in stores and restaurants. The subsidy for closure (of in-store activity) should be especially attractive for marginal shops or restaurants (the ones that have more reason to protest). The subsidy would also obviate the need to make arbitrary distinctions between essential and non-essential goods. Another, more long-term advantage of this approach is that it would encourage small shop owners to switch to online, contactless sales (or quit the market). The resistance to structural change that is so strong in this sector might then be overcome. The lesson is clear: as the second wave threatens Europe, governments should change tack. They should induce restaurant and bar owners to take a paid vacation, rather than ordering them to close. Such a policy promises much lower fiscal and social costs and would be politically easier to sustain for the winter months still ahead of us. References Coase, R., (1960) “The Problem of Social Cost”, Journal of Law and Economics 3, 1–44. Pigou, A., C. (1924), The Economics of Welfare, 2nd ed. London: McMillan. This op-ed is a shorter version of Daniel’s article as published by vox.eu on November 12^th.

Europe’s Collaborative Economy

2020-11-12T14:35:34+01:00

Ride-hailing, home-sharing, meal-delivery, and other forms of digitally powered task-sharing are creating jobs and growth in Europe – and significant policy challenges. What should be the responsibilities of these new platforms, how should workers be classified, and how can insurers and others provide services to this new type of economic activity? Above all, what Europe-wide rules are required for the single market to work for the collaborative economy? This new report provides some answers to these questions. It completes the work of a year-long Task Force that heard from corporate, union, employer and city representatives, along with leading academics. Without reform, Europe risks falling behind in this new area of economic activity. Platforms, both European and non-European, face a labyrinth of local, often contradictory, rules. Their legal status as either internet society platforms or as transport or accommodation providers remains unclear. Most taxi and accommodation regulations date from the pre-internet era. Task Force sessions concurred that the present regulations must be modernised. There remained significant differences of opinion about the proper balance between local and European rules. But all members agreed that platforms should take on new responsibilities to combat illegal activities, which can mean sharing information and data on their users with cities – provided privacy rules are respected. They agreed that sectoral rules need to be updated to create a level playing field between hotels and short-term private rentals, and taxi and ride-hailing drivers. And while disagreements remained over the status of workers as independent contractors or employees, they agreed that workers should receive increased social protection.

Compressing over-the counter markets

2020-11-12T13:30:55+01:00

Over-the-counter markets are at the centre of the global reform of the financial system. The authors of this paper show how the size and structure of these markets can undergo rapid and extensive changes when participants engage in portfolio compression, which is an optimisation technology that exploits multilateral netting opportunities. They find that tightly knit and concentrated trading structures, as featured by many large over-the-counter markets, are especially susceptible to reductions of notional amounts and network reconfiguration resulting from compression activities.

Using a unique transaction-level dataset on credit-default-swaps markets, they estimate reduction levels suggesting that the adoption of this technology can account for a large share of the historical development observed in these markets since the Global Financial Crisis. Finally, the authors test the effect of a mandate to centrally clear over the counter markets in terms of size and structure. When participants engage in both central clearing and portfolio compression with the clearinghouse, results show large netting failures if clearinghouses proliferate. Allowing for compression across clearinghouses by-and-large offsets this adverse effect.

Marco D’Errico is Senior Financial Stability Expert at the European Systemic Risk Board, and Tarik Roukny is Assistant Professor of Finance at the KU Leuven.

The paper has received the ECMI Best Paper Award at the ECMI Annual Conference 2020, held virtually on 4-5 November.

Can dialogues advance EU-China trade relations?

2020-11-09T12:21:56+01:00

The EU pursues its trade agenda with China through a web of economic and sectoral dialogues. We show that these dialogues do matter for wider EU trade policy. After a brief overview of the architecture, we map the trade-related dialogues and identify seven possible functions of them, giving examples of dialogues on public procurement; reforms of state-owned enterprises (SOEs); forced technology transfer; the protection of intellectual property rights; and sustainable forestry and the timber trade. The assessment seeks to answer four specific questions:

Do dialogues improve market access? Dialogues would seem to have facilitated market access in a variety of ways. The EU has also insisted on reforms in China with a view to easing restrictions that hinder effective market access. For some aspects this seems to have worked, but not for the big issues, for example SOE reforms.
Can the web of dialogues be seen as an ‘unbundled’ free trade agreement (FTA)? The answer is, not really. The trade dialogues do not seem to substitute, even imperfectly, for an FTA.
Can the dialogues stimulate ‘sustainable development’? A recent convergence of EU and Chinese objectives has been extremely helpful for effective bilateral cooperation, on social matters (labour standards and social protection) and the environment & climate. Cooperation on energy, climate strategies and other environmental concerns, following dreadful neglect and indifference in China, are achieving results, such as better (for instance, risk-based) regulation, higher ambitions and more effective enforcement.
Can dialogues reconcile or at least mitigate ‘systemic’ differences? Here, dialogues have not proved very useful in terms of results. From the EU end, addressing systemic differences effectively when the partner country takes pride in enjoying a ‘socialist market economy with Chinese characteristics’ is intrinsically impossible. It is an accomplishment when channels of cooperation are kept open.