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EU leaders to debate response to US stimulus

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Good morning and welcome to Europe Express.

EU leaders are meeting for the last summit of a turbulent year, with a discussion on US state aid policy and the latest counterproposal from the European Commission likely to stir up the debate.

In Qatargate news, three of the four suspects arrested in Belgium remain in custody, while a fourth has been released with an electronic tag. Disgraced European parliament vice-president Eva Kaili will appear before a judge next week, as she asked for a delay on her hearing that was supposed to take place yesterday.

We’ll also bring you the latest on yesterday’s commemorative summit with Asian leaders, which included some critical remarks at how the EU understands this relationship.

And we’ll hear from Sweden’s newly minted prime minister and why he believes running an EU presidency can be fun.

Competitive brainstorming

European economic policy will take centre stage at the EU leaders’ table today, as the member states lock horns over the best ways to respond to high energy prices and the public subsidy race emerging around the globe, write Sam Fleming and Alice Hancock in Brussels.

Ursula von der Leyen, the European Commission president, framed the problem in a letter to leaders yesterday, as she warned companies across the union are finding it difficult to compete on the world stage, prompting some to pause expansion or rethink investments because of soaring costs.

Joe Biden’s Inflation Reduction Act, a $369bn legislative leviathan that is luring in corporate investment from around the world is, in von der Leyen’s words, “discriminating against European companies”.

Wary of arriving at a gathering of such disgruntled EU leaders without a four-point plan, the commission president will present an activist agenda aimed at responding to these pressures.

This centres on succeeding to persuade the US to tweak the IRA; a relaxation of EU anti-subsidy rules; fresh EU-level spending; and an easing of barriers to green investment.

Von der Leyen is unlikely to attain anything approaching a consensus on the ideas, however. Member states may share a common fear that the union’s competitiveness is seriously threatened, but the debate on how to answer the challenge is just beginning.

Since the onset of the Covid-19 pandemic, the commission has undertaken repeated relaxations of the state aid rules as it permits deeper public sector interventions in the business world.

This easing inevitably benefits member states with the most fiscal firepower — notably Germany. If the fetters are eased too far, it risks creating the kind of unfair competition within the EU that the union accuses America of perpetrating on its partners. “We do not want to have a subsidy race between member states,” said one EU diplomat, stressing the need for “carefully drafted limits” in the rules.

The commission’s response to concerns about uneven fiscal firepower is to propose a fresh round of common borrowing in the hopes of providing support for hard-pressed governments seeking ways to defend their competitiveness.

But fiscally conservative capitals look at such schemes with tired distaste.

Olaf Scholz, the German chancellor, was notably lukewarm on the idea yesterday. A lot of funds generated to fight the Covid-19 crisis have yet to be disbursed, he pointed out. “It’s worth thinking about how we can use those funds that were supposed to deal with the old crisis . . . and use them to trigger an economic upswing in the current crisis,” he said.

Similar divides exist on a host of other files relevant to this debate, among them the question of how (and whether) to cap gas prices in a bid to ease the pain of the energy crisis, and what kind of reforms are merited to the EU’s public borrowing rules.

As such, von der Leyen’s four-point plan is more of a brainstorming document. Or, as one EU diplomat politely put it, “a useful input into the debate”. 

Chart du jour: Mamma mia

Italy’s borrowing costs have surged this year, with analysts warning that member states’ increased debt issuance, coupled with less ECB bond buying, could spark fears of a repeat of the region’s 2012 sovereign debt crisis.

Partnership of equals?

To read the EU statements following yesterday’s joint summit with Asean leaders, one could be forgiven for thinking it was a joyful commemoration of the close bonds between the two regional blocs. Not entirely, writes Henry Foy in Brussels.

As European Council president Charles Michel spoke of sharing “the same values and the same spirit of co-operation”, some of his south-east Asian partners were clear they thought differently.

“Our partnership is not all smooth sailing. There are many differences which we must address. If we want to build a better partnership, the partnership must be based on equality,” said Joko Widodo, Indonesia’s president.

“There must not be one who dictates to the other, and says our standards are better than yours,” he added. Widodo is the incoming rotating president of Asean and the region’s political linchpin.

That rhetoric jarred with the EU’s pre-summit spin that Asean was a crucial partner as Brussels seeks to expand its global network of “like-minded countries” in response to Russia’s invasion of Ukraine, and underscored that for many partners, substance matters far more than narrative.

As a case in point, an EU attempt to include in the summit statement the need to maintain peace in the Taiwan Strait failed after the Asean members countered with language on the issue that was too pro-Chinese for the Europeans.

As such, the entire section was simply deleted (though a reference to ensuring “peace, security, stability, safety, and freedom of navigation” in the South China Sea was spared the negotiator’s red pen).

Speaking alongside Michel and von der Leyen at the closing press conference, Cambodian prime minister Hun Sen politely reminded his hosts that if they wanted true partnership, they would need to agree to true equality; namely a long-delayed free trade deal.

“It is true that European countries are more advanced. But Asean is not just a place to receive assistance from Europe. We do not want our people to remain poor and require help,” he told reporters when asked about the EU’s offer to provide the region with €10bn.

“We want a free trade agreement between the two blocs,” he added. “We need to . . . be treated like an equal partner of the EU.”

Swedish fun

Ulf Kristersson, the Swedish prime minister, surprised a pack of journalists yesterday with his upbeat assessment of the EU presidency his country takes over on January 1, writes Andy Bounds in Brussels.

“You need to have fun when you go to work,” he said on the margins of the EU/Asean summit. “This is great fun for all of us who have been engaged in international politics and in EU politics since Sweden became a member in the 1990s.”

Perhaps he has not spoken to the Czechs, who have held the presidency since July. They have had months of gruelling wrangling over sanctions, a possible cap on gas prices and Hungary’s compliance (or not) with the rule of law, and whether to deprive it of some European funds.

It has ended in a series of late night meetings to clinch agreement on crucial legislation with parliamentary negotiators.

Then there is the war in Ukraine, an energy crisis, soaring inflation and trade tensions with the US.

Kristersson only took power in Stockholm two months ago but says his centre-right coalition is ready for the challenge. The priorities are to make the EU “greener, safer, freer”, he said.

But do not expect dramatic change.

Sweden will work on immigration, but the solution won’t be found during the six-month stint as president, he said. There will be some more legislation to fight organised crime, including allowing the seizure of assets.

Kristersson said he wanted to “improve European competitiveness”. “Are we overregulating?” he asked in response to calls from business groups to reduce the number of new EU rules.

On loosening rules for state aid, he said “short-term measures” might be needed but “we are among the very many countries that are very much pro-trade and pro-market”.

What to watch today

  1. EU leaders meet in Brussels for the last summit of the year

  2. European Central Bank governing council takes place in Frankfurt

Notable, Quotable

  • Gradual misery: Instead of a rapid collapse of the Russian economy, the western sanctions have prompted a steady degradation of its productive capacity, pushing the country back decades.

  • Cash pushback: The European Commission has warned Italy’s new rightwing government against enacting plans to promote the use of cash, which Brussels said would run counter to Rome’s commitment to fight against tax evasion.

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