Debt rules vs. inflation — Climate backtracking — Abad start for Macron – POLITICO

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POLITICO Brussels Playbook



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COMMISSION’S HOMEWORK FOR COUNTRIES: European Commission Executive Vice President Valdis Dombrovskis and Commissioner Paolo Gentiloni will today present their reform and fiscal recommendations for EU countries — a yearly exercise known in EU jargon as the “European Semester.” This year, the focus is clearly on shifting away from Russian fuels while avoiding even more inflation.

What to expect today: For the first time ever, the Commission is including energy guidance as part of its country-specific recommendations. Officials tell us the focus will be on getting EU countries to phase out Russian fossil fuels.

Debt rules on ice: The biggest news already leaked last week: The Commission will propose a further suspension of EU rules governing public debt and deficits for one more year until end-2023, three EU officials told POLITICO Thursday. Brussels will not open new excessive deficit procedures against EU countries, officials tell Playbook. EU leaders will need to confirm the decision to suspend the debt rules.

Closing the tap on other spending: However, the Commission will warn it is deactivating the debt rules as a precaution should Russia’s war on Ukraine require sudden new spending. Considering inflation is already high and the economy is growing, Brussels will ask countries to rein in their spending as no new stimulus is needed.

Preventing a wage spiral: The commissioners will also tell countries to ease labor market access for refugees and to support vulnerable households who struggle with rising energy prices and cost of living. That’s important as such support schemes are seen by economists as a way to prevent wages from skyrocketing, which would in turn exacerbate inflation.

Inflation warning: Officials tell us the commissioners will warn that Russia’s war on Ukraine is putting pressure on supply chains and driving inflation higher — an admission that inflationary pressure is not just coming from short-lived shocks, as the European Central Bank has claimed, but that it could instead remain high as long as the war rages.

ELEPHANT IN THE ROOM: On top of inflationary pressures from the war come those caused by China’s perpetual lockdown. Authorities in Beijing are isolating a country of 1.4 billion people from the world, while its draconian lockdowns and border checks are wreaking havoc across supply chains.

Bad faith: Don’t expect the commissioners to mention China, but behind closed doors, diplomats are starting to question Beijing’s real motives, arguing that the Communist Party may be fueling inflation in the West on purpose. Beijing has justified its policy with its declared goal to achieve “zero COVID” transmissions in the country.

Concern: As Playbook reported last December, economists are warning China’s travel and transport restrictions and lockdowns are an overlooked driver of inflation. “China plays a major role in the current supply chain bottlenecks and global inflation,” Alicia García-Herrero, chief economist of Natixis and a fellow at Bruegel, told Playbook back then. “Those bottlenecks are not just happening naturally — Beijing has decided to impose strict” restrictions, she warned. Since then, Beijing’s lockdowns have only intensified, with the entire mega-city of Shanghai put under months-long lockdown and new restrictions in Beijing.


AUSTRALIA GOES GREEN: Australian voters on Saturday dumped the Liberal-National Coalition (LNP) that has governed in Canberra for nine years. Climate change was a central theme as the pro-coal Liberals lost both heartland and inner-city seats to the Greens and a group of so-called Teal Independents backed by the Climate 200 organization. Center-left Labor Party leader Anthony Albanese — known Down Under as “Albo” — was overnight sworn in as Australia’s 31st prime minister, succeeding the LNP’s Scott Morrison.

Pen portrait: Playbook’s own Zoya Sheftalovich has this pen portrait of the new Aussie PM: Raised by a single mother in government housing, 59-year-old Albo is only the fourth Labor leader since World War II to win government from opposition. Studied economics at uni; joined Labor Party more than 40 years ago. Hit the six-week campaign trail with a “glow-up” and Toto, his cavoodle. Got COVID and was forced into self-isolation for a week. Didn’t hurt his campaign. In victory speech, promised to make Australia a “renewable energy superpower.”

Next stop Tokyo: Albanese and his Foreign Minister Penny Wong are currently en-route to Japan for a meeting of the Quad Alliance. The new Australian PM is on Tuesday due to meet U.S. President Joe Biden, Indian Prime Minister Narendra Modi and Japanese Prime Minister Fumio Kishida.

Adieu ScoMo, we won’t miss you: France’s departing foreign minister, Jean-Yves Le Drian, took a final swipe at Morrison, saying his loss “suits me just fine.” Relations between Canberra and Paris turned icy after Australia pulled out of a lucrative submarine deal with France, and grew arctic after Morrison’s team leaked a private text message from President Emmanuel Macron. Referring to that episode, Le Drian told reporters Sunday: “The actions taken at the moment when they were taken were of such brutality and cynicism and I would even be tempted to say of unequivocal incompetence,” adding: “I hope we can resume frank and constructive dialogue with Australia in the future.”

MEANWHILE, IN EUROPE: The Aussie election results were a reminder that inaction on climate change for short-term economic profit can see voters punish governments. That’s a message that will resonate in Europe’s capitals, as they debate this week whether to effectively backtrack on EU climate plans.

Secret backtracking: As Playbook reported last week, the EU is, behind the scenes, readying to sell additional emission allowances to make up for a lack of funds. This means that, despite all the lofty talk about “speeding up the green transition,” Commission President Ursula von der Leyen is actually preparing to undermine the EU’s single most important climate instrument, the famed Emissions Trading System (ETS) — reversing course on decades of EU efforts to rein in emissions.

Yikes: “The aim is to reduce our dependency from Russian energy and speed up the green transition, so a proposal that actually incentivizes fossil fuel use sounds borderline schizophrenic,” one diplomat said about the proposal.

In detail: The Commission has proposed to release and sell additional CO2 emission permits to raise €20 billion. Brussels wants that cash for its REPowerEU subsidy scheme, as EU member countries can’t agree on other ways to raise the funds, as tools such as eurobonds would require unanimity.

After years of haggling over the low price of EU emissions allowances, the EU in 2018 decided to cancel a surplus of allowances in the “market stability reserve.” Von der Leyen’s proposal effectively reverses that decision, and makes it cheaper again to burn coal in power stations.

Bottom line: Brussels claims REPowerEU will help member countries build wind towers and install solar on roofs faster. But the funds will be handled by the — shall we say varyingly efficient — administrations of EU countries and, as the Commission president admitted, can in certain cases even be used to build new oil pipelines. Effectively, the Commission is weakening a proven and direct instrument to fight climate change under its control for yet another subsidy package.

STINGING CRITICISM: Even multinational energy companies are taking aim at Brussels for its decision to backtrack on emissions reduction. The entire architecture of EU emissions trading is “being brought down by the EU Commission’s plan,” write Markus Krebber, CEO of major German energy company RWE, and economist Felix Matthes of the Institute for Applied Ecology in an op-ed published by Handelsblatt today.

Illusion: “Europe is being robbed of its functioning, market-based and efficient instrument for achieving emissions reductions,” Krebber and Matthes argue, because the EU can’t agree on other ways to finance its subsidies. “But it’s an illusion that this will avoid taking on new debt. The debt will only be incurred in a place where it is much harder to offset: in climate protection.”

Some like it hot: EU ambassadors had a first discussion on the Commission’s proposal last Wednesday. Only Germany, Denmark, Luxembourg, the Netherlands, Austria, Finland and Ireland clearly opposed the Commission’s plan to auction additional ETS emission rights, according to diplomats.

In other words: Get ready for a lot of questions for leaders in France, Spain, Italy, Belgium, Portugal — and von der Leyen herself — who never miss an opportunity to claim they are green.

HITTING THE SKIDS: The EU’s plan to accelerate the shift to electric vehicles by outlawing pollution-emitting internal combustion engines by 2035 — part of Brussels’ effort to go climate neutral by 2050 — has not gone down well in Central European countries whose economies are heavily reliant on the car industry, reports POLITICO’s Tim Gosling.

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SPRING CLEANING: France’s new government meets today for a first council of ministers at 10 a.m., after Emmanuel Macron on Friday appointed the Cabinet for his second term as French president.

KEY NAMES: Apart from the new Prime Minister Elisabeth Borne, who previously served as labor minister, these are the names to remember …

Catherine Colonna is the most interesting addition. The seasoned diplomat takes the helm of the foreign affairs ministry, which also oversees European affairs, from Jean-Yves Le Drian. Colonna has a reputation as a crisis diplomat: She steered the French Embassy to the U.K. through the Brexit negotiations. A pro-European, she was previously France’s EU affairs minister under President Jacques Chirac, appointed just days after Chirac lost the 2005 referendum on the EU constitution, after French Socialist Laurent Fabius campaigned against it (sowing division on Europe which haunts the party to this day). Colonna will now lead the troubled Quai d’Orsay, as it reckons with tattered relations with former colony Mali, Russia’s invasion of Ukraine and the never-ending Brexit telenovela.

Clément Beaune is still Macron’s EU affairs man, but he’s been promoted to the rank of minister delegate, from secretary of state.

Bruno Le Maire stays on as super-minister in charge of finances and the economy, but his title is growing with the addition of new roles in industry and digital strategy. Announcing his new portfolio may be the only time journalists will ever spell out Le Maire’s entire new title, so enjoy the spectacle: French Minister of the Economy, Finance and Industrial and Digital Sovereignty Bruno Le Maire.

Sébastien Lecornu, one of Macron’s most faithful lieutenants, becomes defense minister, while Marc Fesneau has been appointed agriculture minister. 

Agnès Pannier-Runacher has been reassigned as energy transition minister and Amélie de Montchalin becomes environment minister. 

ABAD START: But as our Playbook Paris colleague Juliette Droz reports today, there’s trouble ahead: Macron’s new minister for solidarity, autonomy and disabled people, Damien Abad, has been accused of rape by two women in a report published by Mediapart.

Details: Both women reported their accusations. The first, “Margaux,” a 35-year-old former centrist activist, filed two complaints in 2012 and 2017 accusing Abad of rape. The complaints were closed without action. The second woman, “Chloé,” filed a report with the Observatory of Sexual Violence in Politics.

Abad response: Abad denies the accusations “with the utmost force,” arguing the rape would be physically impossible because of his handicap.

Did Macron miss the second complaint because of a spam filter? The Observatory said it had e-mailed details of Chloé’s accusations to several leaders of Macron’s party, four days before the new government was formed. But believe it or not, it appears the email could have been caught by a spam filter. The boss of the LREM deputies in the Assembly, Christophe Castaner, said he only became aware of it on Saturday — once the government had been appointed — and immediately forwarded it to the public prosecutor, Playbook Paris reports.

NOW READ THIS: POLITICO’s Clea Caulcutt has this profile of Jean-Luc Mélenchon, the rabble-rouser leading the new French left.


EU UNITY FRACTURES OVER RUBLE PAYMENTS: More and more European companies are admitting that they have opened ruble accounts at Gazprombank to ensure uninterrupted deliveries of Russian gas. Russian President Vladimir Putin had demanded that Gazprom invoices henceforth be settled in rubles, which the EU regards as a breach of sanctions, as POLITICO Pro Energy’s Zosia Wanat reports.

Reminder: Brussels advised companies against opening ruble accounts at Gazprombank, but under pressure from EU countries, revised its guidance. Germany and Italy told companies they could open such accounts following discussions with the EU, according to Reuters

May 20 deadline: Last Friday was the deadline for a number of EU companies to send payments to Gazprom. Slovak state gas importer SPP paid its bill in euros but has also opened a ruble account with Gazprombank, the company CEO said in an interview with RTVS television, adding the currency conversion was not done by SPP. Czech electricity company ČEZ Group carried out a similar transaction, as did Italy’s Eni, which reported last week it had set up a ruble-denominated account. 

​​Cut off: Poland and Bulgaria refused to open accounts in rubles and had their supplies cut off in April. On Saturday, Gazprom also halted the flow of gas to Finland, which diplomats see as retaliation for Helsinki’s decision to join NATO. More on that here

FOOD INSECURITY: Experts say the Ukraine war shows we need a new way to feed the world, POLITICO’s Gabriela Galindo reports.

PROSECUTING PUTIN: The EU must help prosecute Putin for crimes of aggression — and Carl Bildt, the former prime minister and foreign minister of Sweden and the co-chair of the European Council on Foreign Relations, outlines how in this opinion piece on POLITICO.

ISRAEL BLOCKS EUROPEAN PARLIAMENT DELEGATION LEADER FROM ENTERING: The European Parliament’s delegation to Palestine, which was supposed to travel to Isreal today, will remain in Brussels, members tell us. The (non) move comes after the Israeli government blocked the leader of the delegation, far-left Spanish MEP Manu Pineda, from entering the country. Sources within Israel’s government were quoted by the Jerusalem Post as saying Pineda was blocked over his support for groups that have called for boycotts of Israel.

Not happy: Parliament President Roberta Metsola said she regretted the decision. “Respect for MEPs and the European Parliament is essential for good relations,” she tweeted. Her spokesman said she would raise the issue today in talks with Israeli leaders.

IN TOWN THIS WEEK: The Chinese foreign ministry’s special representative on Europe, Wu Hongbo.


— Commissioners Valdis Dombrovskis and Paolo Gentiloni present European Semester Spring package. 10 a.m. Watch.

— General Affairs Council: EU affairs ministers discuss draft conclusions for May EUCO and agenda for June EUCO. AgendaMeeting starts 10 a.m., arrivals from 8 a.m.

— European Committee of the Regions Working Group on Ukraine. Watch.

Eurogroup. Ministers from eurozone countries discuss economic governance and fiscal policies. From 3 p.m.

French council of ministers meets at 10 a.m.

— Dutch PM Mark Rutte travels to Ireland to meet Taoiseach Micheál Martin.

— Parliament President Roberta Metsola is in Israel. Address to a special Knesset plenary session in the afternoon. Meetings planned with President Isaac Herzog, Knesset Speaker Mickey Levy, Prime Minister Naftali Bennett, Alternate PM and Foreign Minister Yair Lapid and other Israeli officials.

World Economic Forum continues in Davos. Ukrainian President Volodymyr Zelenskyy headlines. Catch up with POLITICO’s pop-up Davos Playbook.


BIRTHDAYS: MEP Jean-François Jalkh; Alessia Mosca, sec gen of Italy-ASEAN association and former MEP; European Commission’s Diego De Ojeda; Amnesty International’s Alison Abrahams; European Union Intellectual Property Office’s Antoine Aubert; U.K. Mission to the EU’s Daniel Macarthur; Ilyas Kirmani of NBC News International; Former U.K. Chancellor George Osborne.

Celebrated Sunday: POLITICO’s Florian Eder.

THANKS TO: Juliette Droz, Zosia Wanat and our producer Grace Stranger.

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Jakob Hanke Vela

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