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The EU Budget proposal and its impact on the digital sector

On 27 May, the European Commission put forward its proposal for a major recovery plan. The plan includes not only a proposal for the EU’s Multiannual Financial Framework for 2021-2027 – The EU budget powering the recovery plan for Europe, but the European Commission also proposes to create a new recovery instrument, Next Generation EU.

Next Generation EU, with a budget of €750 billion, together with targeted reinforcements to the 2021-2027 EU budget with a proposed budget of €1.1 trillion, will bring the total financial firepower of the EU budget to €1.85 trillion. Including other schemes such as Support to mitigate Unemployment Risks in an Emergency (Commission’s safety net for workers), the European Stability Mechanism Pandemic Crisis Support (Eurozone’s enhanced credit line) and the European Investment Bank Guarantee Fund for Workers and Businesses (focused primarily on small and medium-sized companies), with a combined budget of €540 billion, significant funds will be available for European recovery.

Next Generation EU will raise money by temporarily lifting the European Commission’s own resources ceiling to 2.00% of EU Gross National Income, allowing the Commission to use its strong credit rating to borrow €750 billion on the financial markets. To help do this in a fair and shared way, the Commission proposes a number of new own resources among which extension of the EU Emission Trading System (ETS) to include maritime and aviation sectors, a carbon border adjustment mechanism, a digital tax and a tax on large enterprises.

Finally, the Commission has published an update of its 2020 Work Program, which will prioritize the actions needed to propel Europe’s recovery and resilience.

The future is digital

The outbreak of COVID-19 has highlighted the importance of digitization across all areas of the economy and society. New technologies have helped businesses and public services to keep functioning and have made sure that international trade could continue. It is expected that, in the long run, the pandemic will have triggered permanent social and economic changes: more remote working, e-learning, e-commerce, e-government. It has, therefore, become imperative for businesses and governments to invest in digitalization.

The twin transitions to a green and digital Europe remain the defining challenges of this generation. This is reflected throughout the Commission’s proposals, which stress that investing in digital infrastructure and skills will help boost competitiveness and technological sovereignty.

Implications for the digital sector

A new instrument, the Solvency Support instrument would be primarily aimed at countries hit hardest by the crisis and unable to provide state aid to their most vulnerable sectors. The distribution of this ‘immediate and temporary’[1] tool will also aim to prioritize green investment according to the Commission. While welcomed by poorer countries the instrument might not have the desired effect unless agreed upon and deployed quickly by the Member States.

The Strategic Investment Facility will be used to promote the green and digital transitions by investing in 5G, artificial intelligence, the industrial internet of things, low CO2 emission industry and cybersecurity. Since such investments might become significantly riskier in the aftermath of the pandemic, the Commission stands behind a common European approach to provide the crucial long-term investments for companies implementing projects of strategic importance. The Strategic Investment Facility will take a more forward-looking approach by focusing on ‘projects relevant for achieving strategic autonomy in key value chains in the single market.

The Digital Europe Programme will be used for the development of EU-wide electronic identities and for the building of strategic data capabilities, such as artificial intelligence, cybersecurity, secured communication, data and cloud infrastructure, 5G and 6G networks, supercomputers, quantum and blockchain. The Commission has managed to withstand the significant pressure from Member States to reduce the funding of the Programme and the digital transition remains one of its key priorities.

In terms of financial inputs, the digital sector would be affected by two of the newly proposed taxes, aimed at funding the Commission’s so called ‘own resources’ used to repay the recovery package. The new digital tax would come into play at EU level if no global solution could be reached at OECD level. If the tax is applied to companies with an annual turnover higher than €750 million, it could generate up to €1.3 billion per year for the EU budget. The other relevant provision is the new corporate revenue tax, which if applied according to the same principle as the digital tax at a rate of 0.1 percent could generate up to €10 billion annually.

The Commission tried to introduce a European digital tax last year but its proposal was blocked by several Member States. The chance of such a proposal being accepted at this date appear slim as unanimity is required and Ireland, amongst others, has been adamantly against it. However, with the departure of the UK who had previously provided strong backing for Ireland’s opposition, some form of digital taxation being accepted remains a possibility. The new corporate tax was also previously unsuccessfully introduced by the Commission in 2016 and would be aimed at ‘companies that draw huge benefits from the EU single market and will survive the crisis.’[2] The chances of the proposal being accepted are also relatively low with countries such as Ireland, Denmark, Luxembourg and the Netherlands strongly opposing it. The proposal might also provoke a ‘race to the bottom’ phenomenon where companies relocate to countries willing to provide them with the most favorable business conditions. While both taxes are facing strong opposition from some Member States, the alternative of increased national contributions might convince leaders that accepting a form of these levies would be the more politically savvy option.

In conclusion, the new EU budget proposal creates new opportunities and challenges for the digital sector with the potential application of new pan-European taxes but also with additional funding devoted to digitalization, increased connectivity and sustainable value chains. The Coronavirus pandemic has demonstrated the increasing importance of digitalisation for the daily functioning of the economy and the Commission’s proposal reflects that through a series of digital political priorities. Increased connectivity, investment in strategic digital capacities (artificial intelligence, cybersecurity, data and cloud infrastructure, 5G and 6G networks, blockchain and more) building a real data economy and legislative efforts on data sharing (a EU-wide Data Act), as well as a thorough reform of the single market for digital services (Digital Services Act expected in late 2020). The combination of budgetary provisions and policy priorities makes the moment beneficial for a transition to online business models, a trend which has appeared during the pandemic but is expected to remain for the next few years.

[1] Annex to the Commission Budget Communication, p 6.

[2] Commission Budget Communication, p 15.

Dr2 Consultants among top EU Public Affairs Consultancies in Brussels

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Bold sustainability ambitions in the European Union

Already in July, Ursula von der Leyen made clear that the new European Commission has bold ambitions to tackle climate change: The European Union must become an example of how to live sustainably. In this regard, energy efficiency and circular economy are central to the European way of life.

Frans Timmermans and the European Green Deal

The European Green Deal will be the guide for this ambitious transition, targeting among other things, an emission reduction of 50% to 55% by 2030. This target is about 10-15% higher than the current 2030 climate and energy framework. The Commissioner in charge of the Green Deal will be the Dutchman, Frans Timmermans, who also holds the position of first Executive Vice-President of the next European Commission. In his hearing in the European Parliament on 8 October, he urged the European Parliament to be ambitious and lead by example in the world. To make a real difference with regards to global warming, the EU needs to focus on talks with its global partners, according to Timmermans. He feels like he has got a strong mandate, since according to statistics, 9 out of 10 European citizens want the EU to act decisively on climate change.

Concretely, Timmermans will propose a draft Climate Law within the first 100 days of his mandate. This law will put into legislation the EU’s climate ambitions, but most importantly determine the in between steps to be taken to reach these goals. Timmermans is strongly considering using infringement procedures against Member States not complying with the EU’s upcoming climate laws and its ambitions. Furthermore, the Climate Pact will engage citizens with the EU’s climate policy which would make legislation seem less ‘top-down’.

Virginijus Sinkevičius and the European Circular Economy

Three years after its adoption, the Circular Economy Action Plan can be considered fully completed. Its 54 actions have now been delivered or are being implemented. Together with Timmermans, Lithuanian Virginijus Sinkevičius will however increase the ambitions in the field of the circular economy. Sinkevičius stated during his hearing in the European Parliament on 3 October that if the EU ensured the complete circular use of just four materials (steel, aluminum, cement and plastic) – which goes further than the existing Circular Economy Action Plan – EU’s industrial emissions would be cut in half.

Sinkevičius believes that a new action plan can involve three major areas:

  • First, by examining the ways in which the EU produces and consumes. He mentioned particular further action on eco-design and more focus on reuse and repair. This strand could also integrate circularity in other sectors such as textiles, construction, food and ICT.
  • Second, by helping consumers make informed choices.
  • Third, by moving beyond recycling. Waste should not only be minimized, but prevented completely in areas such as textiles and construction.

Environment Council

Not only the European Commission wants to increase the European ambitions regarding climate change and sustainability, but also the Council realizes their importance. On 4 October, Environment Ministers held a debate on the EU’s strategic long-term vision for a climate neutral economy and adopted conclusions on climate change, which set out the EU’s position for the UN climate change meetings (COP25) in Chile in December 2019. The Council called for action to promote circularity systemically across the value chain, including from the consumer perspective, in key sectors including textiles, transport, food as well as construction and demolition. The Council also stressed the need for more measures on batteries and plastics.

 

 

 

 

Brexit: What after the prorogation?

On 16 September, Boris Johnson and Jean-Claude Juncker met for the first time in person since Johnson became Prime Minister. Both parties saw the meeting as an opportunity to take stock of the negotiations, but the Commission’s statement afterwards concluded that no concrete proposals emerged from the discussion. On the same day, the Prime Minister of Luxembourg, Xavier Bettel, called Boris Johnson’s approach to Brexit a nightmare at a press conference (which Johnson left early due to anti-Brexit protestors ruining it). Bettel also said the British government had not made any serious proposals for a new deal. Therefore Jean-Claude Juncker also repeated on 18 September, during the European parliament plenary session in Strasbourg, that a no-deal scenario is still very plausible.

However, a deal (or an extension of Article 50) seems necessary as the British government has been accused of minimalizing the possible disruption at ports in a no-deal scenario. Documents published last week about Operation Yellowhammer, the official plan to handle a no-deal scenario, suggested that there would be a low risk for ports outside Kent, a port that has a lot of EU traffic. But new documents show that this is only because tens of thousands of vehicles would be rejected because they would be non-compliant, meaning that the drivers would not have the correct permits or the correct papers filled in, and would be turned away. Also, the facilitation of trade between Northern Ireland and the Irish Republic still needs some time. Johnson is setting out plans for an all-Ireland economic relationship which must replace the Irish backstop. With this plan, Northern Ireland would effectively become a special economic zone inside both the UK and the EU. There would still be a border and everything that is not covered by the all-island regime would be subject to checks.

But, as Juncker stated, there is also a very big chance that the UK will leave the European Union without a deal. Two weeks ago, UK MPs passed a law which requires Boris Johnson to seek an extension of Article 50 if Johnson fails to secure a Brexit deal with the EU by 19 October (dubbed the Benn Act). There is no guarantee that Johnson will do that. However, another concern now is that even if Johnson agrees with the Withdrawal Agreement (WA) with the EU and the deal successfully passes through Parliament, there could not be sufficient time to pass through Parliament a separate act implementing the WA (a complex piece of legislation) – or it could be blocked by MPs – before 31 October. Now, once the WA is agreed, the Benn Act does not come into force because it does not take into account the separate act to implement the WA, so the result is a no-deal Brexit. Therefore, it is in the interest of Labour and Tory rebel MPs not to agree to the WA before the extension has been secured. An extension should be obligatory, whether there is a deal or not.

In the meantime, the Supreme Court, the UK’s highest court, is currently hearing the case over Johnson’s decision to temporarily shut down the UK Parliament. Scotland’s highest court ruled last week that the suspension was indeed unlawful, but the High Court in England had ruled earlier the opposite way. Therefore, the UK Supreme Court is now discussing if this case is justiciable and, if so, whether the prorogation was lawful. After two days of hearing arguments on both sides, also former Tory prime minister John Major spoke on the final day in court to doubt Johnson’s decision to suspend parliament. It is not yet known when the judges will deliver their verdict, but it is expected for next week.

In addition, on 18 September, a clear majority of the Members of the European Parliament voted for a resolution supporting the UK being given a Brexit deadline extension should it request one. The vote itself is largely symbolic because the European Parliament wants to show that it cannot be ignored. However, the EP will reject a deal that does not include a backstop. This is significant because the EP will need to vote through the final Brexit deal.

Brexit: state of play of the no deal scenario

That a no deal Brexit will damage the British and European economy was already clear. The Catholic University of Leuven even calculated that a no deal Brexit would cost the European Union 1.54% of GDP and 1.2 million jobs. The effect for the UK: a 4.4% reduction in GDP and 525,000 job losses, this only in the short term. In terms of sectors, a hard Brexit would have especially a severe effect on the European Food and Beverages sector. A hard Brexit would also have a big impact on the European textile industry and in addition, services sectors would be heavily affected.

Due to the severe economic consequences of a no deal, Members of Parliament (MPs) from both the Conservative Party as the Labour Party tabled an amendment on the parliamentary estimates bill that would deny funding to four government departments in the event of a no-deal Brexit without explicit parliamentary approval. The amendment concerned the departments for International Development, Work and Pensions, Education, and Housing, Communities and Local Government. However, the Speaker of the House of Commons, John Bercow, said on 1 July that he had not selected this amendment. Grieve and Beckett have, therefore, re-submitted their amendment on 2 July, but 10 Downing Street has strongly condemned this amendment to shut down the government as very irresponsible.

Not only the MPs are concerned, but also Brexit Secretary, Stephen Barclay, asked last week to accelerate the preparations for a no deal Brexit. Barclay said: “Time is of the essence and we can’t be complacent. I do not want to be in a situation when we get to November and there were things we could have been doing at this time and we didn’t do them.”

Key players in a possible no deal Brexit are of course Boris Johnson and Jeremy Hunt, the remaining contenders in the Conservative Party leadership race. In his bet to become the next leader of the Conservative Party, Foreign Secretary Jeremy Hunt presented his ten-point plan for delivering Brexit in case he wins. Hunt proposes to speed up the no deal preparations, the establishment of a No Deal Cabinet Task Force and the appointment of a new negotiating team. A Government under his leadership would prepare for a No Deal Brexit Budget, and the Treasury would prepare a No Deal Relief Programme including a £6 billion fund for the fishing and farming sectors.

Boris Johnson, on the other hand, has said that he believes there is only a “very, very small possibility” that the UK will have to leave the EU without a deal. However, he also said that when he is elected as new Prime Minister, every member of his Cabinet should have to live with the possibility of leaving the EU without a deal. This is also in line with the fact that Johnson is preparing an emergency budget for such a scenario. More concretely, this budget will consist of a tax cut and a revision of stamp duties to safeguard the economy after a hard Brexit.

What’s next?

Conservative Party members will receive their postal ballots between 6-8 July. The final deadline to return the ballots is Sunday 21 July. Boris Johnson and Jeremy Hunt participate in hustings until 17 July. It is widely believed, however, that a majority of voters will immediately cast their vote when they receive their ballot. The next few days will, therefore, be key for Hunt to get his message across and for Johnson to avoid any gaffes. In the week of 22 July, Britain’s new Conservative Party leader and Prime Minister will be announced.