How will the European Union develop over the next five years? Using Treaty Powers to promote Competitiveness and Security

The Draghi Report is intended to inspire the European Commission's programme for the next five years to restore Europe's competitiveness. The three areas of action to re-ignite growth that it identifies are promoting innovation, restoring competitiveness and increasing security (or reducing dependencies). It is in fact, a manifesto for the development of a true EU-wide industrial policy.

The Draghi Report echoes the Commission President's Political Guidelines and is frequently referred to in the mission letters she has issued to the Commissioners-Designate.

The Draghi Report considers that additional annual investment of EUR 750 to 800 billion is needed. to realise its objectives.  That reflects the principle that the carrot is more effective than the stick in a market economy.  While the Commission President has proposed the creation of a "European Competitiveness Fund", this would need to be accepted by all Member States when they adopt the next 7-year financial framework and the chances of obtaining substantial new resources appear remote. A more realistic prospect is a relabelling and repurposing of existing financial instruments.

However, existing financial instruments may not be sufficient and the EU will have to pursue its objectives through regulation and changes in policies.  We have already described in our earlier commentary on the Draghi Report the changes that are proposed to competition policy to improve the competitiveness of EU companies.  In this contribution, we will look at some other regulatory initiatives that may be forthcoming.

A brief review of existing regulatory initiatives

The EU has recently started to use its Treaty powers to regulate to remove obstacles to the establishment and functioning of the internal market for the purpose of adopting a number of overtly industrial policy measures, such as:

• The Chips Act
• The Net Zero Industry Act
• The Critical Raw Materials Act

Industrial policy objectives are also apparent in numerous other measures, as revealed by their references to the need to "level the playing field," to remove perceived disadvantages suffered by EU producers. For example:

• The Carbon Border Adjustment Measure
• The Deforestation Regulation
• The Sustainability Due Diligence Directive
• The Foreign Subsidies Regulation

A striking feature of all these measures is the way in which they seek to make non-EU producers respect EU standards and rules as condition for gaining free access to the EU internal market.

Possible Future Initiatives

The Draghi Report and the Commission President's Political Guidelines and the mission letters issued to the Commissioners-Designate provide some valuable clues about what may be forthcoming.

A Circular Economy

The EU has for a while pursued the objective of improving the environmental sustainability of consumption through promoting the repair, re-use and recycling of materials (in that order).  The original objective was to improve resource efficiency in the EU economy and to protect the environment. It was already a component of the European Green Deal, which included a Circular Economy Action Plan in 2020 and has led to a number of legislative interventions, such as the Single Use Plastics Directive and the pending regulation on packaging and packaging waste. 

Now that the European Green Deal is morphing into the Clean Industrial Deal, circularity is becoming seen as also being a tool to improve the position of EU industry.  Not only is it hoped that EU rules will inspire action elsewhere (the Brussels Effect), giving EU industry a first-mover advantage, it is also clear that imposing repair, re-use and recycling obligations on imported goods will have a protective effect for EU industry, given the lower transport costs and economies of scale which EU producers would enjoy.

Concretely, the Commission intends to promote circularity by proposing, in particular, a Circular Economy Act and an Industrial Decarbonisation Accelerator Act.  It appears that responsibility for piloting this project is being assigned to the French Commissioner-Designate, Stéphane Séjourné, who will have the title of Executive Vice President for Prosperity and Industrial Strategy, together with the Spanish Commissioner-Designate, Teresa Ribera, who will have the title of Executive Vice President for the Clean, Just and Competitive Transition.  These titles and the mission letters show that the dominant priority is now competitiveness rather than environmental protection for its own sake.

Reducing Dependencies

The need to reduce dependencies on third countries has been a feature of the last years of the previous Commission which has produced, for example, the Critical Raw Materials Act and entered into numerous international partnerships in an effort to secure supplies, as we described in a earlier blogpost The Problem of Critical Mineral Supply Chains.

Another of the proposals in the Political Guidelines for the new Commission is a Critical Medicines Act which will be designed to reduce dependencies on critical medicines and their ingredients for which there are currently few sources.

More generally, the Commission has opened a new chapter of activity promoting economic security, as we have described in another note, including an upgrade to the existing Foreign Direct Investment Screening Regulation by making inward investment screening obligatory for the Member States, laying down a minimum scope and extending it to foreign investments made through EU subsidiaries. The EU is also tightening export controls and even considering controls on outbound investments to guard against potential security risks linked to EU investment in third countries.

The concern about security features strongly in the Political Guidelines and there will be a new Commissioner for Defence with an ambitious agenda (including coordination of defence procurement and demand aggregation to increase the proportion spent in the EU).

Advancing the EU's economic security and economic statecraft is included as a priority for the next Commission and is to be implemented through its powers to regulate trade. The traditional trade portfolio now becomes that for Trade and Economic Security and is allocated to the seasoned Slovak Commissioner Maroš Šefčovič, who will be reporting to Stéphane Séjourné, the Executive Vice President for Prosperity and Industrial Strategy.  He is instructed in his mission letter to focus on the core objectives of competitiveness, security and sustainability and that with regard to China in particular the policy should remain de-risking, not decoupling.

Conclusion

It is clear that the new Commission will continue to use the tools that it is given in Treaties for creating an internal market, conducting a common commercial policy and protecting the environment for novel purposes and will be advancing in areas normally considered the domain of Member States, that is industrial policy, security and defence.  As the President insists in her Political Guidelines, this is necessary adaptation to a changing world. 

Of course, as has always been the case, well-designed plans, especially those stretching over a period of five years, are liable to change as events develop.  The Political Guidelines and their incorporation into the mission letters for the Commissioners-Designate show enormous ambition.  If they are implemented, they will greatly advance the project of ever closer Union.