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Teneo Note on the Special EU Summit in Brussels on 1-2 October

October 6, 2020

On 1 and 2 October, EU heads of state met in Brussels for an extraordinary summit. The meeting focused on foreign policy; in particular, the crisis in the Eastern Mediterranean (Turkey) as well as the situation in Belarus and relations with China. Leaders also discussed the COVID-19 situation, and had their first discussion of the role of the single market, industrial policy, and digital transformation in providing a strong European industrial base in the coming years. The European Council will return to these topics in March 2021. Finally, the European Commission’s President Ursula von der Leyen reported on the ongoing negotiations with the UK.

 

Foreign Policy

Eastern Mediterranean

The security situation in the Eastern Mediterranean has deteriorated over recent months as Turkey has initiated oil and gas exploration at sea in Cypriot waters. The conflict is part of a broader dispute over maritime boundaries in the East Mediterranean and involves Greece, Libya, Egypt, and Israel. It has also brought the continued division of the island of Cyprus to the forefront. Greece and Cyprus have pushed for EU sanctions against Turkey as a response to the illegal activities in Cypriot waters. EU member states, while supporting the legitimate claims of Cyprus, have been reluctant to apply sanctions before all possibilities for a diplomatic solution have been exhausted.

At the summit, EU leaders agreed to support a broad range of diplomatic initiatives aimed at settling the dispute on the delimitation of the continental shelf as well as the resumption of negotiations in the UN framework on the unification of Cyprus, which have been blocked for 20 years. Member states strongly warned Turkey against resuming the oil and gas explorations in the contested waters with a threat of sanctions. At the same time leaders offered Turkey an olive branch with a modernization of the EU-Customs Union and trade liberalization if Turkey chooses the diplomatic track.

Belarus

The consensus on Turkey enabled leaders to reach an agreement on sanctions that will hit 40 ministers and officials involved in the Belarus election irregularities and violence against peaceful protesters. The list doesn’t include President Alexander Lukashenko, but he could be added in a later revision.

Relations with China

Leaders endorsed the outcome of the recent EU-China summit between German Chancellor Angela Merkel, Commission President von der Leyen, European Council President Charles Michel, and Chinese President Xi Jinping. They called for an investment agreement to be concluded this year, and asked China to increase its ambitions on climate, while welcoming China’s recent pledge to reach carbon neutrality by 2060. Leaders also asked China to be more active in the multilateral response to COVID-19. Human rights issues and the situation in Hong Kong were the cause for serious concern, and EU heads of state will dedicate an informal EU summit in Berlin on 16 November entirely to China.

COVID 19

EU leaders addressed the worrying epidemiological situation in Europe in recent weeks. A vaccine is considered essential in the long term and they welcomed the progress on EU-wide actions on developing a vaccine. The Commission has concluded two Advanced Purchase deals with vaccine developers and negotiations on up to nine more are ongoing. Leaders endorsed a blueprint for a vaccine plan setting out who gets priority access to vaccines when they become available, and called for an EU-wide common colour code to reflect the pandemic situation in different parts of the bloc.

 

Single Market, Industrial Policy and Digital

Industrial policy and strategic autonomy

EU leaders agreed that a quick return to the full functioning of the Single Market is crucial for strengthening the European economy. Leaders also asked for an update of the EU’s competition framework to meet the challenges of the green transition, the digital transformation and “the evolving global context”.

The summit did yield agreement on a new European industrial policy, with improved resilience to supply chain shocks and strategic autonomy.

France, Greece, Cyprus, Austria, Spain and Italy support a broad definition of strategic autonomy that includes re-shoring industrial sectors. France is focusing on the role technology can plan to make European industries competitive again, allowing manufacturing to be re-located to Europe. France wants EU policy, including the pandemic recovery fund, competition policy and trade policy to be adjusted to support this objective.

The Nordics, the Baltics, Ireland, Luxembourg and the Netherlands oppose the idea of trying to relocate companies back to Europe and support the principle of keeping the economy open, as resilience does not necessarily mean reshoring. These member states support the idea of investing in technology to attract capital and industries through market forces rather than state support.

All countries support the idea of Europe being more resilient in some critical sectors such as basic medical products (except highly developed medical products and equipment, which is a highly developed market in Europe), batteries, hydrogen and certain raw materials.

Germany cannot take a clear position, since it holds the rotating EU presidency of the Council of the EU and plays the role of a broker in these discussions. The German government is also divided internally. The Federal Minister for Economic Affairs and Energy Peter Altmaier favours the French approach. Merkel, while supporting the notion of European industrial champions and the need for resilience of medical supplies, supports an open economy and open trade.

Central European countries (especially Poland and Hungary) are in a dilemma. They share the Northern European free market instinct but also have eyes on the opportunities with a more state-driven approach. Lower labour costs could make central Europe attractive for re-shored industrial production.

The final Council Conclusions invited the Commission to identify strategic dependencies, particularly in the most sensitive industrial ecosystems such as for health, and to propose measures to reduce these dependencies, including by diversifying production and supply chains, ensuring strategic stockpiling, as well as fostering production and investment in Europe. Regarding the debate on reshoring, member states resolved their internal differences by calling for “achieving strategic autonomy while preserving an open economy, which is a key objective of the Union”.

Discussions on the industrial policy will continue in March 2021. In this context, EU Leaders will also assess the situation regarding the work on the important issue of digital taxation.

Digital

Leaders endorsed the earmarking of 20 percent of the EU Recovery and Resilience Facility for digital projects, announced by Commission President von der Leyen in her recent State of the Union Speech.

However, the way the Commission has calculated the percentage is contested by some member states. The Commission used the same method for categorising digital expenditure as it has in the Green Deal. This method gives spending a weight of 100 percent if the digital element in the intervention is “fundamental” and 40 percent if digital is only a contributing element. This method allows spending to be double counted, both toward the digital target and the 37 percent of funds that are earmarked for the green transformation of the EU.

Leaders welcomed the Commission’s aim to present a proposal for a Digital Service Act by the end of the year, and asked the Commission to present a comprehensive “Digital Compass” by March that sets out the EU's digital ambitions for 2030, including on skills and education. The Compass will allow the EU to monitor Europe’s strategic digital capacities and outline the means and milestones to achieve its ambitions. Leaders also gave a green light to the development of an EU-wide electronic identification (e-ID) and encouraged the Commission to improve Europe’s cloud computing capacity.

Brexit

Commission President von der Leyen gave a short report on the ongoing negotiations with the UK. While Merkel struck a positive note in her press conference afterwards by talking about constructive movements in the negotiations, von der Leyen’s report was more pessimistic. There is still hope for a deal that satisfies EU red lines on the level playing field and fisheries, but many EU leaders expressed pessimism on the UK’s willingness to move. There is a growing feeling that no-deal is better than a bad deal. Brexit will be the main topic for the next EU summit on 15-16 October.

The views and opinions in these articles are solely of the authors and do not necessarily reflect those of Teneo. They are offered to stimulate thought and discussion and not as legal, financial, accounting, tax or other professional advice or counsel.

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