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The new EU agenda climate and digital transitions

The European Union has announced its proposed new Commission. It looks like a clash is building between the US and Europe.

The European Union has announced its proposed new Commission. It looks like a clash is building between the US and Europe.

by
John Redwood

in Features

12.09.2019

The new Commission will take up office on 1 November, subject to ratification of the Commissioners by the European Parliament. The President elect, Ursula Von der Leyen, has chosen to balance the different party forces offered to her through the choices of national governments in part by offsetting clashing views within similar portfolios. Thus a fiscal hawk Valdis Dombrovskis has the capital markets economics portfolio, whilst an Italian Commissioner Paolo Gentiloni, who wants to ease budget rules to countries such as his own, also has an economics portfolio.

The Commission tends to the left of centre and is largely united by a shared conviction that the EU should do more and should be more assertive. It will prove more difficult agreeing the detail of what they wish to do, and then securing the Parliament’s support. The new Commission will be led by the President and three executive Vice Presidents or Super Commissioners. Frans Timmermans from the Social Democrats will have an overarching green portfolio. Margrethe Verstager from the Liberal grouping will be in charge of the digital revolution and competition. Mr Dombrovskis from the Latvian centre right will be the senior Commissioner on the economy. At this senior level, the centre right has a bit more sway, with both the President-elect and one of the two Vice Presidents coming from that background.

A green dawn

The President-elect has set out a comprehensive vision of what she and her Commission wishes to achieve. It will above all be green, making a commitment to much tougher carbon dioxide reduction targets and planning to take the EU to carbon neutrality by 2050. The target for 2030 will be raised to a 55% cut in emissions. It also wishes to be actively engaged in the digital revolution, and talks of the two transitions, “climate and digital”. It has plans to extend its direct action and its indirect influence over benefits and minimum wages, moving towards a standard EU minimum wage and EU benefits. It wants a bigger budget, and will examine introducing flexibility to the Maastricht debt and deficit rules. It plans to put more of the “social” into the social market. It plans more digital law and new digital taxes. It is looking at a number of ways of raising additional EU revenues under a mantra of fair taxation. It wishes to have more control over corporation taxes generally, and condemns the so called race to the bottom or competitive tax cuts.

It wishes to reform the WTO and extend free trade agreements. It proposes rigorous enforcement of competition law. It has ambitions for a more assertive EU foreign policy and seeks more defence integration. It recognises the democratic deficit and suggests moving to co-legislation on all matters with the European Parliament, but falls short of guaranteeing this from the start. Commissioners will be willing to appear more often before the Parliament, and to respond to a Question Time were one introduced.

Manufacturers’ pain

The investment impact of this could be considerable. The strong green agenda means more pain and difficulty for the traditional manufacturers of diesel and petrol vehicles. They are already struggling to make and sell enough electric vehicles to hit targets for lower CO2 from the exhausts of their current model ranges, and this could get worse under these plans. The EU is proposing fines for manufacturers who cannot persuade people to buy the right kinds of cars in sufficient numbers. The Commission threatens to reduce or remove the favourable treatment currently allowed to airlines and shipping operators over green taxation and emissions penalties. There will be knock on negatives for oil companies. Germany will suffer more than others given the central importance of vehicles and oil based engineering to her economy. On the upside the Commission forecasts a round € 1 trillion of new investment over the years ahead in green energy and transport which provides opportunities. The race will be on for the big EU companies to carry out the transition from an oil based economy to an electricity and renewables based one.

More fiscal spending

It seems unlikely there will be anything very big on relaxing the Maastricht criteria, but ways may well be found to allow more off-balance-sheet financing of large public projects for infrastructure and green matters. This means more public and semi-public debt around, which would normally mean lower bond prices. This may be offset, in whole or part, by further quantitative easing so effectively some of the money needed will be simply created by the ECB. The efforts to get wages up at the lower end by a higher and common EU minimum for the minimum wage should be affordable and is unlikely to cause much inflationary pressure in itself.

Digital companies will be losers from the higher taxes planned and from additional regulation. The EU will go it alone with a new digital tax if, by the end of 2020, the world through the G7 has still not come to a global proposal. These policies are likely to slow the advance of the digital economy in the EU and lead the US dominant players to find more ways of locating value added outside the EU’s authority. Companies inside the EU will face further regulations, rising wage costs and some additional taxes, making it more difficult to grow profits. We are entering a world where the divergence between Trump’s USA and Von der Leyen’s EU will become more pronounced. The US will be pushing hard for more traditional growth, with oil and oil powered vehicles still playing an important part. The EU will be driving forwards with its green agenda. The two will clash over trade, tariffs, taxes and regulations, especially in the digital and transport areas.

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