The weekly Vulcan View for the 8th to the 12th of January featuring analysis of the latest EU developments

KEY EVENTS THIS WEEK:


EUROPEAN UNION
 
Brexit shortfall creates EU budget headache
The European Commission has begun eyeing up potential new revenue streams in order to fill the Brexit-sized hole looming over the EU wide budget. Negotiations for the next ‘’Multiannual Financial Framework’’, or the MFF, have kicked off and the challenge of matching the UK’s contribution has led to new innovative tax-raising proposals being brought forward and even a push for a lift on the longstanding spending cap of 1 percent of gross national income by the EU Budget Commissioner, Günther Oettinger.
 
While some argue that the EU needs to slim down its budget needs, the Commission has proposed a range of potential new taxes such as an increase on the border charge for non-EU tourists and travelers, a plastics tax across the bloc, and a possible shifting of profits from the EU’s carbon trading scheme from member states to Brussels. Speaking this week, Mr. Oettinger said that EU countries would have to add €16 billion or more (roughly 10 percent) to the EU’s annual budget in order to meet new pressing priorities and filling the Brexit gap.
 
Reaching a common agreement between the EU27 on the next MFF, which will run from 2021 for at least five years, will be hugely challenging as budget negotiations often lead to showdowns between net payers and net beneficiaries. There have already been calls for budget beneficiaries who haven’t complied with EU-wide refugee re-settlement such as Poland or Hungary to have their funding cut. Although such policies would be difficult to implement, the Commission faces numerous turbulent talks with European capitals as it navigates its way to an EU-wide agreement on its next budget.

 
BREXIT
 
Brussels signals warning to British business over potential no-deal Brexit
Reports emerging this week have revealed that British companies are being flagged by the European Union that they face a possible regulatory deadlock if a no-deal Brexit occurs. The warning by Brussels highlights that the EU is stepping up its preparations in the event of the UK walking away from exit negotiations without an agreement in place. Legal notices indicate that EU regulators have issued memos to British firms that they must step up their contingency activity in order to ‘’be prepared’’.
 
Firms receiving the memo have been urged to be ready for when the UK becomes a ‘’third country’’ on the 29th of March 2019 and therefore will have no legal right to operate within the EU single market.  Operating licenses in particular will face difficulty as they will automatically lapse once Britain leaves, meaning many UK groups would have to set up entities within the bloc to ensure continuity of business.
 
The warning issued by Brussels provoked an angry response from the UK minister for exiting the EU, David Davis, who claimed that the EU’s preparations for a no-deal Brexit is damaging British business and breaching the country’s rights as a member state. Mr. Davis outlined his complaints in a letter to the British Prime Minister Theresa May that was subsequently leaked. The minister’s claims were met with mild disbelief in Brussels, with the commission’s chief spokesperson stating that ‘’we are surprised that the UK is surprised that we are preparing for a scenario announced by the UK government itself’’.
 
British ministers target Germany with Brexit charm offensive
The UK’s Chancellor and Brexit minister, Philip Hammond and David Davis, travelled to Germany this week in attempt to win over the German business community as London attempts to seek a bespoke post-Brexit trading agreement with the EU. Berlin has so far maintained that given the nature of the UK’s red lines, such a model does not exist. Ahead of the trip, the British ministers argued London’s case in a joint article in a German publication which claimed that ‘’it makes no sense to either Germany or Britain to put in place unnecessary barriers to trade in goods and services’’.
 
The British government is lobbying Brussels and the other EU27 capitals hard for a free trade agreement that would include financial services. Addressing a business audience in the German capital, the UK Chancellor accused EU leaders of appearing unenthusiastic and unimaginative on a future deal, urging them and the Commission to behave more like Australia or the US in showing willingness to agree on a post-Brexit trade deal.
 
Mr. Hammond highlighted the benefits of a bespoke future trade deal and put forward that ‘’it takes two to tango’’ when agreeing on a post-Brexit deal. Unfortunately for the chancellor, his comments had little impact on his German audience, with one official in particular saying ‘’it sounds like the same old story’’ as Britain was once again pushing for a bespoke agreement rather than selecting an existing model.
 
 
GERMANY
 
Breakthrough reached in coalition talks
The deadlock between Angela Merkel’s conservative CDU-CSU bloc and the Martin Schulz’s centre-left Social Democrats was overcome early this morning after marathon talks between both parties concluded in an agreement on how to proceed next in forming a potential new ‘grand coalition’. Europe’s largest economy has been without a functioning government since the elections last September and has at times stalled political momentum in the EU.
 
There were a series of differing points between both sides but reports from within Germany suggest that the breakthrough came with Chancellor Merkel conceding to the SPD’s demands for an equalisation of health-insurance contributions. Ms. Merkel’s conservative bloc won, in return, an acceptance from the SPD to limit the number of family members who can be reunited with refugees that have been granted asylum in Germany.
 
Although the political impasse has been broken for now, weeks of negotiations still remain as SPD delegates will first have to grant approval to proceeding on to formal coalition talks at a special party conference later this month. Members within the party are hesitant to enter another coalition agreement with the CDU/CSU as they believe the party was harmed during its time in power. With so many hurdles left to overcome before any coalition is formed, it will be at least another two months before Berlin has a functioning government.
 
 
CATALONIA
 
Exiled Puigdemont re-elected regional leader by separatists
The regional leader of Catalonia, Carles Puigdemont, has been re-elected to his position by the separatist parties, even though he currently remains in exile in Brussels after fleeing to the Belgian capital following last October’s independence referendum. The decision by the Spanish Prime Minister Mariano Rajoy to hold a snap regional election last month in an attempt to quash the independence movement backfired spectacularly as the pro-independence parties won a majority of seats.
 
As the new regional parliament is set to convene next Wednesday the 17th of January, there has been intense debate over whether Mr. Pugidemont as regional leader can legally take up his position while in exile. Sources from within Mr. Puigdemont’s party, Junts per Catalunta, report that he is planning to preside over the region via video call from the Belgian capital.
 
Madrid and opposition parties point to Catalonia parliamentary rules which state that a leader of the region has to present the new government programme ‘’in front of the house’’. While most legal experts agree that this will mean Mr. Puigdemont would have to be physically in the chamber, his party have argued that these rules were made before video conferencing and therefore there is no reason he cannot conduct official business through Skype. Such an attempt will likely be challenged by the Spanish courts, blocking Mr. Puigdemont from taking his role, and leading to fresh battles between Madrid and Barcelona.
 
 
FRANCE
 
Macron proposes new law to fight fake news
The French President Emmanuel Macron announced last week that he intends to bring in legislation that would combat the spread of ‘’fake news’’ on social media. Mr. Macron was himself the target of widespread fake news in last year’s presidential election and even went as far as banning the Russian media outlets Russia Today (RT) and Sputnik during his campaign trails.
 
Speaking last week at an annual conference to the press, the president said that ‘’if we want to protect liberal democracies, we must have strong legislation’’. Such new laws would mean that when fake news is spread then ‘’it will be possible to go to a judge….and if appropriate have content taken down, user accounts deleted and ultimately websites blocked’’. Mr. Macron also added that it would be mutually beneficial for the authorities and the press to maintain a ‘’healthy distance’’.
 
His proposal was met with criticism from journalists and those within the legal profession who believe that the legislation could allow governments to block information and the freedom of expression from those who oppose their views. Critics believe that fake news could be combatted with fact-checking rather than allowing judges to block or even remove users and websites from the internet.

 
Dates ahead: Monday 15th January – Sunday 21st January
 
January Mon 15th – Thurs 18th: European Parliament Plenary Session
 
AND BEYOND
January 22nd: Eurogroup meeting
January 23rd: ECOFIN Meeting
January 25th: ECB Monetary Policy Meeting