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Brussels budget crisis scuppers climate consensus

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The EU’s budget fiasco is overshadowing what should have been a big month for Europe’s international climate ambitions. 

An EU leaders’ summit next week had been earmarked as the moment for the bloc to sign up to an ambitious 2030 emissions target and mark a milestone in the continent’s drive towards climate neutrality. 

But a budgetary showdown with Hungary and Poland is threatening to scupper the green celebrations. 

Diplomats warn that an agreement for the EU to cut its emissions by “at least 55 per cent” by 2030 is at risk as those same capitals — Warsaw and Budapest — demand more money and guarantees that the green transition won’t hit their economies hardest. 

As the FT reported last month, a December deal on the 2030 target may well end up as the first significant casualty of the budget spat as tensions run high between Brussels and the illiberal squad. The EU had hoped to finalise an agreement on the 55 per cent target this year, paving the way for the bloc to upgrade its emissions goal as part of the Paris agreement. 

The danger of failing to have a budget ready for 2021 would mean that tens of billions of euros to fund the carbon transition simply would not be available next year. Poland, which has consistently demanded more aid for its coal-dominated economy, was due to be the biggest beneficiary of said funds. 

Poland and Hungary — joined by allies including Romania, Bulgaria, Slovakia and the Czech Republic — have also demanded that the 2030 target come with a detailed set of political promises to provide money and support for countries undergoing the transition (a so-called “enabling framework”).

“I don’t think it is feasible to agree on climate conclusions and an enabling framework when we don’t have a budget agreement and rule of law conditionality,” said one senior EU diplomat. 

It’s not just money at stake. The same group of eastern member states want guarantees that the green transition will not prohibit them from using controversial low-carbon technologies including natural gas and nuclear power. This has been a perennial demand of the EU’s nuclear champions, such as Czech Republic, which made similar calls at last year’s December summit.

But countries frustrated by the budgetary brinkmanship of Poland and Hungary aren’t in the mood to show too much generosity to the east. A draft set of summit conclusions does not mention that the green transition should be “neutral” on different forms of energy generation — a phrase prized by eastern governments. 

“This is not the time to bet on industries that have no future in a fairer and greener world,” said Sebastian Mang at Greenpeace. “Governments and the EU can’t duck the truth — cutting emissions as fast as possible to zero means there is no place for fossil fuels like gas, or risky and expensive technologies like nuclear power.”

Chart du jour: Russia’s hidden Covid-19 death toll

Chart showing that Russia’s all-cause mortality has climbed far above expected levels since its Covid-19 outbreak began

Russia is becoming the epicentre of Covid-19 deaths in Europe. Analysis from the FT shows that 123,000 excess deaths have been recorded in Russia since the pandemic began. This compares to an official state count of 41,053. Across the country, hospital capacity is exceeding 95 per cent in 17 out of 85 Russian provinces. The alarming rates of infections have led the Kremlin to declare that they will start vaccinating citizens “as soon as possible”, according to the country’s health minister. (chart via FT)

Europe news round-up

Poland’s deputy prime minister has suggested that the country could drop its budget veto if it receives ‘binding’ assurances over rule of law mechanisms © via Reuters
  • Is a budget endgame finally in sight? Poland has said it is ready to drop its veto over the EU’s €1.8tn recovery package if Warsaw can secure an explanatory declaration laying out the link between a rule of law mechanism and EU money, the country’s deputy prime minister has said. (Reuters) The comments from Jaroslaw Gowin, following a meeting with European Commission officials, are the most significant sign of a potential thaw in a long-running stand-off that threatens to freeze billions in EU budget money next year. Mr Gowin told reporters his government would accept a “binding” declaration that would state that the rule of law mechanism “would not be used to exert unjustified pressure on individual member states in areas other than the proper use of EU funds”. It comes a day after a senior commission official said Brussels was considering setting up a €750bn recovery fund without Poland and Hungary.

  • British officials have accused France of making new Brexit demands at the eleventh hour, leaving a future-relationship agreement hanging in the balance. Hopes remains on both sides that the last minute bust-up can be resolved and a deal be reached by Monday or Tuesday. The FT has more.

  • French authorities are monitoring 76 French mosques “suspected of separatism” and will order their closure if they are found to be in breach of republican values or acting as “breeding grounds of terrorism”, the country’s hardline interior minister Gérald Darmanin has said. (FT/Le Figaro)

  • Spain’s parliament has approved an annual national budget for the first time since 2016, giving a much-needed boost to socialist prime minister Pedro Sánchez, who is fighting off coronavirus outbreaks and years of budgetary gridlock. (Bloomberg)

  • After a year in Brussels’ top job, commission president Ursula von der Leyen talks to FT editor Roula Khalaf about handling a pandemic just three months in to her term, her relationship with her former boss Angela Merkel and her fondness for the British sense of humour.

  • Hungarian prime minister Viktor Orban has criticised his close ally and former Fidesz MEP Jozsef Szajer for his “unacceptable and indefensible” actions after it was revealed Mr Szajer broke Belgium’s lockdown rules by taking part in what local media described as a “sex party”. (Euractiv)

Coming up today

European Council president Charles Michel holds a press conference this morning to take “stock of the past year and look forward to future challenges”. There is a possibility Michel Barnier, the EU’s chief Brexit negotiator, will brief ambassadors.

mehreen.khan@ft.com; @mehreenkhn
david.hindley@ft.com





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ECB expected to keep generation sub-zero waiting

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Guten Morgen and welcome to Europe Express.

A lot is happening in Germany these days — and not all is elections-related, though yesterday’s parliamentary debate with Angela Merkel getting heckled as she campaigned for her party’s chancellor candidate was rather remarkable.

In Frankfurt, the European Central Bank is having its first governing council after the summer break tomorrow. With interest rates expected to stay negative, we’re exploring what it means for a whole generation of young German savers never to accumulate any interest on their savings.

US secretary of state Antony Blinken is in Germany today, touring the American army base at Ramstein which was instrumental in the Afghan evacuation. He is also set to co-host, together with German foreign minister Heiko Maas, an international conference on how to engage with the Taliban, including with ministers from Russia and China. (More here)

Over in Paris, the wheels of justice are slowly turning in response to the 2015 Islamic State terrorist attacks on the Bataclan nightclub, cafés and the national football stadium. We’ll explore what the trial looks like and what Brussels can expect next year, when its own proceedings begin.

Back in the EU headquarters, today is the first post-holidays meeting of Ursula von der Leyen’s team of commissioners. Among the topics on their minds is the EU’s latest Strategic Foresight Report, and we’ll unpack its findings.

This article is an on-site version of our Europe Express newsletter. Sign up here to get the newsletter sent straight to your inbox every weekday morning

Sub-zero generation

Thousands of German children will visit their local Sparkasse savings bank at the end of October to deposit their pocket money and learn about the virtues of frugality, as has been a tradition since 1925, writes Martin Arnold in Frankfurt.

Some of these children are part of a growing “sub-zero generation” that have only ever known the world of negative interest rates, in which savers pay to put their cash in a bank and governments earn interest on money they borrow from investors.

The European Central Bank — the main orchestrator of this topsy-turvy world — will meet tomorrow to decide its next monetary policy move. While ECB officials are expected to slow the pace of the €1.85tn asset purchase scheme they launched in response to the pandemic last year, the chances of them raising rates anytime soon remain highly remote. 

Line chart of Eurozone deposit facility rate (%) showing Going down: How the ECB cut rates to a record low

Other central banks are starting to tighten monetary policy as the world economy rebounds from the pandemic.

But most economists think it will be at least 2024 before the ECB raises its deposit rate from a record low of minus 0.5 per cent. By that time, benchmark interest rates in the 19 countries that share the euro will have been negative for a decade.

Paul Diggle, deputy chief economist at Aberdeen Standard Investments, sees a low probability for negative interest rates to end anytime soon. “Over time the ECB could look like a dovish standout amid the global move towards slightly tighter monetary policy,” he said.

The eurozone’s second-quarter growth rate was revised up to 2.2 per cent yesterday, while inflation rose to 3 per cent in August — its highest level for a decade and well above the ECB’s 2 per cent target. This has prompted conservative rate-setters, such as Germany’s Jens Weidmann, to warn the risks on inflation “are tilted to the upside right now”.

But Paolo Gentiloni, the EU’s economics chief, warned against “making conclusions too soon”, saying this “would be a big mistake, because the mainstream consensus is . . . that this inflation is still a temporary phenomenon.” 

The last time the ECB raised rates was in 2011, just as the eurozone sovereign debt crisis was erupting, which was widely seen as a major policy blunder.

After the central bank adopted a new strategy in July following an 18-month review, its president Christine Lagarde said she hoped it would ensure “there cannot be premature monetary tightening as we have seen it in the past”.

To achieve this, the ECB has set a triple lock of conditions to meet before it raises rates. Inflation has to reach 2 per cent by the midpoint of its three-year forecast period; it has to be projected to stay there for the rest of the period; and “underlying inflation” that excludes more volatile energy and food prices also has to rise sufficiently close to its target.

Both Weidmann and Belgium’s central bank boss Pierre Wunsch opposed the changes, warning they could lead to runaway inflation. “It is an indication of how dovish the new guidance is that reasonable people came out and said they weren’t comfortable with it,” said Spyros Andreopoulos, senior European economist at BNP Paribas.

Investors will be watching closely tomorrow to see if Lagarde shows any signs of conceding the recent rise in inflation could be less transitory than first thought. As this appears unlikely, Germany’s “sub-zero generation” seem destined to wait many more years before they start earning any meaningful interest on their money.

Paris mega-trial

Nearly six years after the terrorist attacks labelled as France’s own 9/11, the largest terrorism trial in the country’s history is starting today, writes Leila Abboud in Paris.

An aspect of the French legal system that differs from common law in the UK or the US will lend a particular intensity to the trial: about 1,800 victims, often the families of those killed, have joined the case as civil parties. 

Because no courtroom was large enough to accommodate all parties, a special 700 sq m temporary structure was erected under the vaulted ceiling of a ceremonial hall in the Palais de Justice.

Among the witnesses will be former president François Hollande, as well as the then interior minister and intelligence services chiefs. “This will not be a trial to judge the state’s actions, but that of the defendants,” Hollande told Libération newspaper. “But I feel I have a duty to help with the search for truth.”

The sole alleged perpetrator on trial, Salah Abdeslam, told prosecutors that he abandoned his suicide mission after dropping off the other gunmen at Stade de France on November 13 2015. A French citizen who grew up in Brussels, Abdeslam returned to the Belgian capital on the night of the attacks, where he hid for another four months before being captured by police. He has said little during the years in French pre-trial detention and it remains to be seen if he will speak at the trial.

Thirteen other defendants allegedly helped out by renting cars or apartments, providing fake passports, or obtaining weapons. Six defendants, including several Islamic State leaders who allegedly planned operations in Europe, are being tried in absentia.

Abdeslam has already been convicted in Belgium to 20 years in prison for his role in a shootout with police officers who were trying to arrest him. He has also been charged with involvement in the 2016 Brussels suicide bombings attacks at the airport and a metro stop near the EU institutions, that took place a few days after he was captured, killing 32 people and wounding hundreds more.

Those attacks were carried out by the remaining members of the same Islamic State cell that staged the Paris attacks — and they initially sought to carry out a second attack on Paris before changing their minds at the last minute because of Abdeslam’s arrest.

Belgium’s leg of the trial is scheduled to start next year — with more than 700 families of victims and survivors having joined the case as civil parties. As in Paris, because no courtroom was large enough, the Belgian state repurposed Nato’s old headquarters for the trial.

EU’s crystal ball

When he’s not tussling with Lord David Frost, the UK’s brawly Brexit minister, EU vice-president Maros Sefcovic is tasked with scanning the horizon for future threats and opportunities heading the EU’s way, writes Sam Fleming in Brussels. This involves producing annual “strategic foresight” reports, the latest one of which lands today. 

Europe Express has had a peek at the conclusions, which centre on four “megatrends” that the commission reckons will shape the EU’s fortunes up to the middle of the century. The first of these is, unsurprisingly, climate change, along with associated threats including rising pressure on water and food security and biodiversity loss. 

The others are the advent of digital hyperconnectivity; pressure on democratic values as civil liberties and political rights decline in many parts of the world; and democratic changes which will include declines in the EU’s population and an eastward shift in the “geoeconomic centre of gravity”.

The underlying contention running through the report is that the EU needs to find ways of enhancing its “capacity and freedom to act” in the face of this daunting global backdrop, rather than allowing itself to become a hapless victim of broader trends and of the activities of muscular rival powers.

Boosting the EU’s “open strategic autonomy,” to use the commission’s ever-more-ubiquitous buzz phrase, will entail 10 key areas of action. These include lifting the bloc’s abilities in artificial intelligence; jumping ahead of the global pack on regulatory standard-setting; securing decarbonised energy; and diversifying supplies of critical raw materials.

Notably, given the EU’s current debate over its impotence in the face of the US withdrawal from Afghanistan, they also require the bloc to develop its own defence capabilities so it can secure its security interests “autonomously if needed”, says the report.

Needless to say, achieving just a fraction of the goals in the report would be a heady feat — just look at the EU’s previous fumbled attempts at enhancing its defence capacities. Nevertheless, the commission argues the bloc needs to get better at defending its interests faced with an increasingly “multipolar and contested” global order.

Chart du jour: Expanding squeeze

Bar chart of % businesses reporting it as factor limiting production showing Shortages of material and equipment are reported in many EU industries

A global supply chain squeeze that first started with the car industry and chip manufacturing is now expanding to furniture, food and apparel. In the EU, nearly half of rubber, machinery and computer producers, and most electrical equipment makers, report supply shortages. Almost 60 per cent of carmakers remain affected. (More here)

What to watch today

  1. US secretary of state Antony Blinken is in Germany today, co-hosting with foreign minister Heiko Maas a virtual meeting of 20 countries on Afghanistan

  2. France’s largest terrorism trial begins today in Paris, in relation to the November 2015 Islamic State attacks on the French capital

  3. European commissioner Maros Sefcovic deploys his crystal ball in his annual Strategic Foresight Report.

Notable, Quotable

  • Green borrowing: The European Commission yesterday said it would tap debt markets for a sale of green bonds in October, raising funds for environmentally friendly reforms and investment in EU member states as part its pandemic recovery effort. 

  • Fines for Poland: The European Commission has asked the bloc’s top court to fine Warsaw for ignoring rulings over the country’s judicial reforms, in a significant escalation of a stand-off between Brussels and Warsaw over the supremacy of EU law over national rules.

  • Romania turmoil: The government faces a confidence vote after the junior coalition party withdrew its ministers and announced it would join the opposition in voting against prime minister Florin Citu, Euronews reports.

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Today’s Europe Express team: martin.arnold@ft.com, leila.abboud@ft.com, sam.fleming@ft.com, valentina.pop@ft.com. Follow us on Twitter: @MAmdorsky, @labboudles, @Sam1Fleming, @valentinapop





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Angela Merkel implores Germans to pick Armin Laschet as her successor

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German election updates

Angela Merkel made her strongest intervention yet in the German election campaign, using what may be her last speech in the Bundestag to implore voters to choose Armin Laschet and warn of the dangers of a leftwing government for Germany.

Merkel said Germans faced a choice between a coalition made up of the Social Democrats, Greens and the hard-left Linke party and a government led by Armin Laschet, the candidate of her centre-right CDU/CSU, “a moderate government which will lead our country into the future”.

The unusually partisan intervention by Merkel, who is standing down this year after 16 years as chancellor, reflects the increasing nervousness in the centre-right camp at the commanding poll lead established by the Social Democrats in recent weeks. A new poll by Forsa for RTL/ntv-Trendbarometer put the SPD on 25 per cent, the CDU/CSU on 19 per cent and the Greens on 17 per cent ahead of the September 26 vote.

Until recently Merkel, who continues to enjoy high approval ratings, preferred to stay out of the campaign. But in recent days, as her party’s position in the polls has deteriorated, she has become more active, publicly praising the beleaguered Laschet and lashing out at his main rival, finance minister and SPD chancellor-candidate Olaf Scholz.

Merkel rarely criticises Scholz publicly, but on Tuesday she was in full attack mode, slamming his suggestion at a recent campaign event that people who had been vaccinated were “guinea pigs”. “None of us are guinea pigs, neither Olaf Scholz nor I,” she said. Authorities would not succeed in increasing vaccination rates using “such distorted images”.

But her open campaigning for the CDU/CSU and for Laschet’s candidacy in a Bundestag debate about the state of the nation was controversial, and at times she was drowned out by heckling from MPs.

“My goodness, what a fuss!” she retorted. “I’ve been a member of the German Bundestag for more than 30 years and where should we discuss such issues if not here? It is the heart of our democracy.”

Polls indicate that Scholz might emerge as winner of the election, with an abundance of coalition options. He could team up with the Greens and the pro-business Free Democrats, or with the Greens and the Linke party — forming a so-called “red-red-green” alliance.

But Die Linke could prove difficult partners. The party, which has its roots in the former East German Communist party, wants to disband the Nato military alliance and replace it with a “collective security system involving Russia which would have disarmament as its central objective”.

It also advocates a policy of “detente” towards Russia, “instead of further escalation and the deployment of troops or manoeuvres on [Russia’s] western border”.

Scholz and Annalena Baerbock, the Greens’ chancellor candidate, have both refused to rule out a tie-up with Die Linke, though Scholz said he would only form a coalition with parties committed to Nato.

Merkel stressed that, unlike the CDU/CSU, the SPD and Greens were prepared to contemplate an alliance with Die Linke “or at least are refusing to rule it out”.

The chancellor said the election was a “decision about Germany’s future direction”, warning of the implications of a leftwing government for German foreign policy, its relationship with Nato and Europe, and also for Germany’s economic and fiscal policy.



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UK extends Northern Ireland ‘grace periods’ for third time

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Brexit updates

The UK government has extended the so-called grace periods designed to ease the burden of a contentious section of the Brexit withdrawal agreement governing post-Brexit trade with Northern Ireland.

The move, confirmed in a written ministerial statement to parliament on Monday, is designed to allow negotiations over the future of the problematic accord, known as the Northern Ireland protocol, to continue for another few months.

Both sides said they were seeking to avoid a repeat of the tensions dubbed “sausage wars” by some parts of the pro-Brexit UK press earlier this year, and allow more time to negotiate solutions to the issues caused by the protocol.

Two senior EU officials with knowledge of EU-UK discussions said the extension would not provoke a strong reaction in Brussels. “The idea is that the UK will continue to apply the same conditions and we will assume that this continues to allow for the discussions to conclude,” said one of the EU officials.

Lord David Frost, the UK minister in charge of Brexit, has demanded sweeping changes to the protocol, which he has warned is “not sustainable” in its current form because of the bureaucratic burdens that are facing British businesses sending goods to the region.

Under the terms of the agreement, all goods travelling from Great Britain to Northern Ireland must follow EU customs rules and product regulations. The bureaucratic requirements, including export health certificates, were initially eased by grace periods, lasting between three and six months, that were designed to reduce the amount of paperwork to give businesses time to adjust.

The grace periods were extended, first in March unilaterally by the UK and then again in June with the mutual agreement of Brussels. The latest extension is due to expire in October.

The fresh extension will allow talks to continue on UK demands for changes to the protocol.

In the statement the government said it would continue to operate the protocol with “the grace periods and easements currently in force” and did not set a date for ending what it called the “standstill” arrangement. The government said it would provide business with “reasonable notice” if the situation changed.

However, despite the apparently mutual decision to create space for more talks, officials on both sides said discussions over the summer had made little progress, with the UK and EU still taking opposing approaches to resolving the difficulties.

In a speech last weekend to the British-Irish Association, Frost repeated that the UK was seeking a fundamental rewriting of the protocol, warning that “solutions which involve ‘flexibilities’ within the current rules won’t work for us”.

But the EU is clear there is no appetite in the bloc’s capitals to rewrite the protocol and any solutions must come from flexibilities within the agreement.

In a statement the European Commission said that it took note of the UK move to extend the grace period and would continue to pause legal infringement proceedings against the UK which it had opened in March but then stayed in June in order to facilitate talks.

“Our focus remains on identifying long-term, flexible and practical solutions to address issues related to the practical implementation of the protocol that citizens and businesses in Northern Ireland are experiencing. However, we will not agree to a renegotiation of the protocol,” the commission said.

Leo Varadkar, the Irish deputy prime minister, said on Monday that he acknowledged the protocol was causing some “real disruptions”, which the commission was open to addressing within the terms of the existing agreement.

“We don’t really see the case for renegotiating it [the protocol] so soon. We think most of the solutions can be found within the existing agreement,” he told BBC Radio 4’s Today programme.

The new border checks were required as part of the deal negotiated by UK prime minister Boris Johnson in October 2019 to “get Brexit done” and avoid the return to a north-south trade border on the island of Ireland, which was removed by the 1998 Good Friday Agreement that ended the region’s decades-long sectarian conflict.

Brussels and the Irish government have argued that the UK should conclude a veterinary agreement with the EU to reduce the need for checks on agrifood products, which are causing the bulk of the difficulties. But the UK government has said it cannot accept the required level of alignment with EU laws and standards.

If acceptable solutions cannot be found, Frost has warned that the disruptions to trade between Great Britain and Northern Ireland are already sufficiently serious to justify the use of Article 16. This is a safeguard clause in the protocol that allows for unilateral but limited action by either side to mitigate the effects of the agreement while mutually agreed solutions are negotiated.

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