This week the European Commission will publish ‘Fit for 55’ – the package intended to set the EU on the path to a greenhouse gas (GHG) emissions reduction of 55% by 2030 and, ultimately, climate neutrality by 2050. The package will contain more than a dozen legislative proposals, both for new and existing laws. It was always clear that a 55% reduction[1] would require an update of the numerical targets for existing policies: the EU emissions trading system (ETS), effort-sharing for non-ETS emissions, land use and forestry,[2] renewable energy, energy efficiency, and car standards etc.

An increase from the previous 2030 target of ‘at least -40%’ was always going to mean a step change. Witness the surge of EU carbon prices over the past year to more than €58 per tonne of CO_2. This is just the beginning of the European Green Deal’s revamping of the entire EU climate policy architecture, which might take a long time to negotiate.

Importantly, the package still leaves many fundamental political choices to be addressed in negotiations by the Council and European Parliament. Most flagrant among these choices are free allocation volumes to industry, and whether the carbon border adjustment mechanism will actually come into effect or remain a paper tiger. The fact that EP and Council need to make these political choices marks a departure from how previous Commission packages have been processed by the institutions; it can possibly be traced back to the way Commission President Ursula von der Leyen was elected. The price for her appointment was the -55% target and, for those critical votes, the carbon border adjustment mechanism and free allocation for industry was used as a sweetener. This gives leverage to the European Parliament now, which may use it to make radical changes.

One major political choice, however, seems to be to extend carbon pricing to new sectors, and to sectors that directly impact citizens: fuels in road transport and the heating of buildings. The Commission also chose to propose a separate emissions trading system for these sectors rather than inclusion in the ‘main ETS’.

The good news is that an extension of the ETS does not necessarily imply the end of effort- sharing; the two systems can coexist, even if there are possible overlaps, which in a system of shared responsibilities seems unavoidable. The effort-sharing framework will be very much appreciated when the EU discusses negative emissions,[3] in order to differentiate between member states.

Worth looking at the distributional impacts

With the Fit for 55 package, EU climate policy will affect all EU citizens directly, and it will affect them in a big way. Climate change policy will be costly; a balanced sharing of these costs is therefore all the more important. Executive Vice President Frans Timmermans has continued to highlight the need for inclusiveness and the promise to “leave no-one behind”.

When looking at the likely distributional impacts, there is reason to worry, or at least to raise an eyebrow at how citizens are treated compared to business and industry. It is worth remembering that distributional outcomes are always the result of political choices, intrinsic to neither climate policy nor carbon pricing.

All allowances in the new separate ETS for transport and heating[4] will probably be auctioned. This makes sense, because unlike with industrial sectors, there is limited risk of carbon leakage. However, it also means that EU citizens will see carbon costs passed through directly to prices at the pump and to their heating bills. Climate policy does not come for free. It will nevertheless be a tangible cost, and one that is unwelcome for poorer households.

Citizens risk being treated differently from companies and what those in the main ETS have been experiencing over the last 15 years or so. Between 2008 and 2012, most allowances, i.e. more than 90%, were given away for free as a rule. From 2013 onwards, the power sector had to buy their allowances at auction because they can pass through carbon costs (meaning higher electricity bills for households). Energy-intensive industrial sectors continue to receive most of their allowances for free (more than 90% up to 2020), but in many cases they received more allowances than they needed. Note that free allocation (if unchanged) in the next decade will amount to between €250-350 billion. Increasingly, free allocation will hinder rather than support investment in low-carbon breakthrough technologies that Europe needs and is proud of.

With the European Green Deal, more ‘industrial policy’ is on the cards. EU taxpayers will have to finance support for green steel or cement, green public procurement, green infrastructure, and compensation measures for industry. They will also pay carbon costs on imports due to the carbon border adjustment mechanism. What’s more, free allocation to industry may continue even if sectors are covered by the new border mechanism.[5] An allowance granted, for free, can no longer be auctioned, and treasuries will need to find revenues elsewhere, which is another cost.

Individually, each of these measures aimed at industry can be justified. The risk of carbon leakage is legitimate for certain trade-intensive goods, although the rest of the world is adopting increasingly ambitious climate policies. Without public support, some low-carbon technologies will remain uncompetitive, and with it, emissions reductions in industry may remain an elusive goal.

Taken together, however, the continuing generous treatment of industry set against the immediate carbon cost increases for consumers and taxpayers – no free allocation or transition periods for this new ETS – could be politically toxic, for example in the European Parliament and in some – poorer – member states.

The European Commission is not oblivious to the concerns about social impacts here. It will propose a completely new Climate Action Social Facility to deal with the distributional implications, to ensure that the poorest households do not bear the brunt of necessary, more ambitious climate policies. At least half of the new auction revenues will be used to compensate poorer households.[6] But much depends on the actual implementation, of course. Will there be enough funds to redistribute, and will treasuries give up auction revenues? How will it compare to the €20-30 billion per year of free allocation, in addition to billions in state aid and other support?

The social and equity dimension of the European Green Deal will therefore be under the spotlight with the Fit for 55 package, and everything is still to play for with so many political choices left to be made by the Parliament and Council. Striking the right balance between how costs are shared between citizens and companies will be one of the Green Deal’s biggest challenges.

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[1] The official target is “at least -55% net emissions reductions”, because natural carbon sinks from e.g. forests can contribute (up to a pre-defined limit) to the target. This was not the case for the previous 2030 target.

[2]  A leaked version of the Forestry Strategy – a non-legislative proposal of the package – suggests increasing the EU’s natural carbon sink (which has been declining in recent years) from 225 to 310 million tonnes.

[3] Negative emissions (or carbon removal) are greenhouse gases removed from the atmosphere.

[4] A focus on equity is also necessary because the separate ETS carbon price will be the same throughout the EU, but GDP per capita differs significantly.

[5] There have been several leaks of the carbon border adjustment proposal (CBAM), and of the EU ETS proposal. Both proposals – as well as final negotiated texts – will need to be read in tandem to fully answer the question of how industry will be compensated for carbon leakage risk

[6] According to a leak of the EU ETS revision proposal.

“CC-BY-4.0: © European Union 2020 – Source: EP”.

Recent research suggests that European integration may have led political parties to adopt increasingly similar positions. This ideological convergence among parties could pose a democratic challenge if it also increases the gap between citizens and their representatives. Drawing on a new study, Daniel Devine and Raimondas Ibenskas find little evidence that the integration process has reduced the level of congruence between parties, governments and parliaments on one hand, and citizens on the other.

A key concern about European integration is the consequences for the democratic legitimacy of EU member states. Whilst this has been most evident in Eurosceptic discourse across Europe – encapsulated by the ‘take back control’ slogan of the UK’s Vote Leave campaign – it has been a longstanding topic in academic research. The late Peter Mair’s book Ruling the Void, for instance, casts the European Union as a body that is designed to evade the constraints of representative democracy through non-majoritarian institutions removed from the domestic political sphere – and the influence of citizens.

These normative judgements aside, academic research has investigated how European integration impacts an important part of domestic politics: the party system. The party system, and the parties within it, aggregate and mobilise the preferences of the public, and form governments and parliaments.

Whilst early research suggested there was no effect of integration, there is evidence that European Parliament elections give a leg-up to challenger parties which increases the number of parties in domestic elections. There is also evidence that European integration has led to parties becoming more similar over time, but then polarising as European policymaking becomes more constraining.

In a new study, we argue that these developments are less important if political elites are congruent (aligned) with public preferences. Put differently, it would be much more concerning if, alongside these developments, European integration also led to parties, governments and legislatures being less representative of their publics. This was raised as a potential issue in the earlier debates about the European Union’s ‘democratic deficit’, in which it was suggested that there was ‘policy drift’ in which policies are adopted away from (most) voters’ ideal positions.

Our theoretical argument, and more so our empirical evidence, challenge the stylised argument that integration leads to a loss of congruence. Starting with the assumption that integration leads to the convergence of mainstream parties, as empirical evidence so far suggests, we argue that this may actually increase the congruence between the median voter on the one hand and governments and the median parliamentary party on the other. However, integration should still decrease the ‘many-to-many’ congruence between the party system and the electorate, as only centrist voters will be well-represented.

Additionally, the EU does not have the same influence across issue areas – we would expect a greater impact on economic regulatory and immigration policies than, say, redistribution. Issue areas should further differ on whether congruence affects more the left/liberal or right/conservative voters.

To test the effect of European integration on citizen-elite congruence, we match public opinion data on left-right ideological placement and five issue areas (attitudes to redistribution, integration, the environment, immigration, and social liberalism) with expert survey data on parties’ positions on the same, largely using the Chapel Hill Expert Survey.

To measure European integration, we use six different measures capturing different aspects of the integration process and themselves measured in different ways, such as economic integration through intra-EU trade flows (‘EU Index’), an expert survey, legislative output (Directives, Regulations and Decisions), and treaty readings (ENLABASE). Our analysis includes all EU member states and, whilst the time period varies depending on the measure, it ranges from 1980 to the late 2010s at its longest.

Our results indicate that European integration has no noticeable impact on congruence between citizens and elites across any of our measures. No measure of integration has an impact that is statistically distinguishable from zero, and most coefficients are centred over zero. Moreover, the direction of the effects – whether integration increases or decreases congruence – has no pattern, which suggests we are not just limited by our relatively small sample size.

An example of our results is presented in Figure 1, which shows the coefficients of the different measures of integration (on the left) on parliament-public congruence across different issue areas, including left-right position. As noted, it is clear that most coefficients are over zero (i.e., have no effect) and there are no clear patterns regarding direction. In addition to this analysis, we present an extensive range of alternative tests that lead to the same conclusion.

Figure 1: Effect of European integration on congruence between public and parliament

Note: For more information, see the authors’ accompanying paper in European Union Politics

Overall, our results lead us to conclude that integration has not had an effect on the congruence between the public and elites – our uniquely large range of measures of congruence and integration provide us with additional confidence.

There are a few reasons why this might be the case. First, challenger parties – new parties on the left and right – have increased in electoral strength in many EU countries; whilst they do not often gain control of government, it may be that these parties are sufficiently influential to force governing parties to adopt policy positions they may not otherwise, or simply fill the gap left by converging mainstream parties.

Second, it might be that whilst parties have indeed become more similar, as shown by previous work, so have voters. In other words, there may have been policy changes caused by integration, but this has not led to a loss of congruence between public and elites. Another explanation may be rooted in that our analysis has focused on averages, such as the median legislator or voter, but there may be a divergence between the median voter and an increasingly disaffected minority of citizens which we have not identified.

These explanations aside, our results provide some rebuttal to the ‘democratic deficit’ fears of European integration. Whilst there may be many other problematic features, we suggest that a loss of congruence – of a match between governing elites and the governed public – is not one of them: domestic elites are still broadly representative of their citizens.

For more information, see the authors’ accompanying paper in European Union Politics

It is estimated that 2-5% of global GDP is laundered annually, with an overall recovery rate of illicit assets at just 1.1% in Europe, according to Europol. Tackling money laundering is a longstanding policy priority, but one pursued with limited success. In the meantime, crime proliferates, citizens see that rule of law does not work and the foundation of civil societies is degraded. The EU Commission is announcing an AML action plan in July, but a new approach is needed.

Taking aim at money laundering is nothing new, but the target has broadened significantly. Over the past two decades, the mandate has grown from crime and drug trafficking-related proceeds to include tax avoidance, terrorist financing, human trafficking and state-sponsored and corporate bribery. At the same time, technological progress has increased the ways and means to launder money.

At the EU level, the Commission is aware of the urgency and has put AML high on its agenda for 2021, with a proposal for a single AML agency (AMLA), and an AML regulation (along with a new directive, the sixth). However, fundamentally new methods are required to detect money laundering. They should consist of a truly risk-based regulatory framework, and enhanced cooperation between financial and non-financial supervisors, financial intelligence units (FIUs), and the judicial authorities. To detect suspicious cases, cooperation tools need to be developed within the private sector, and between the private and public sectors. Ample use of technology must be made, while respecting data privacy, respective competences and free competition.

The regulatory side should be addressed first. A thorough benefit/cost analysis of the AML rules thus far could guide the way to a more measured and effective approach. The banking sector is at the forefront of detecting cases and transmitting information to the authorities, at huge cost and under the threat of multimillion-euro fines and penalties. As much as 95-98% of the suspicious activity detected by the private sector are false positives, which are nonetheless transmitted in thousands of reports it transmits to FIUs. Very few lead to prosecution.

At the supervisory level, states must first put their own house in order first, by streamlining the AML controllers. AML detection requires the cooperation of a multitude of supervisory entities, both financial and non-financial, FIUs and law enforcement officials. In the EU context, this means well over 100 entities. At the non-financial level, such as for the audit and law professions, no EU-wide supervision exists.

A further bottleneck in AML effectiveness lies with the FIUs, which are designated to examine both cash transaction and suspicious activity reports, and transmit doubtful cases to law enforcement authorities. The FIUs are organised, resourced and staffed very differently across states. Increased cooperation between FIUs is much more urgent than a single EU AML supervisory agency, but it questions EU competence. A single template for suspicious transaction reports (STRs) among FIUs would be a big step forward.

FIUs and law enforcement bodies need more coordination, better resources and support for training, though new training techniques are having a significant effect. But it’s hardly credible that governments claim a lack of funding when the fines levied on financial institutions are simply eye-wateringly large.

Lastly, registries of corporates and ultimate beneficial owners (UBOs) need to be much better applied and legal entity identifiers (LEIs) more widely used. LEIs were instituted after the financial crisis, but their utilisation rate is only 2-7% of the eligible entities in the Western world.

At this stage, a single AML agency would be akin to the Stockholm-based European Centre for Disease Control (ECDC) during the Covid-19 crisis, tasked with controlling chronic and epidemic diseases without having the powers or means to do much about it. In the AML domain, such an agency would create the expectation that something will be done, but this requires more harmonisation of judicial procedures and criminal offences, which EU member states have so far been unwilling to do. We must get regulation right before unifying supervision.

This opinion is based upon the recommendations of the CEPS task force: Anti-Money Laundering in the EU Time to get serious, which was chaired by Eero Heinoluoma, MEP, and attended by a diverse group of industry representatives and experts. It was first published in the Financial Times on 2 July 2021.

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The EU currently faces a volatile and shifting environment in the Eastern Mediterranean (East Med) centred on a difficult relationship with Turkey. This coincides with a moment of profound change in world order.

French President Emmanuel Macron and European Commission President Ursula von der Leyen have both pledged to build a more ‘geopolitical’ EU, but disunity among member states and competition between European-level institutions have plagued these efforts. As a rules-based interstate union, the EU retains a strong interest in preserving the rules-based character of the wider international order. Brussels will enjoy little credibility in its efforts to affect the global order, however, without first evidencing decisive impact on a regional level.

With EU-Russia relations at a standstill, the EU’s relationship with Turkey and the East Med region now represents the more natural area for Brussels to solidify its geopolitical bona fides. To bolster its credibility as an effective and independent guarantor of regional order at a time when the United States is re-examining its international priorities, the EU must also take care to ensure that its ties with Turkey do not descend to the level of hostility currently being witnessed in EU-Russia relations.

This will prove a difficult task. The EU is not necessarily seen as an honest broker in the region, owing to the persistence of powerful Greek and Cypriot bilateral interests and Europe’s need to keep Turkey onside in the migration complex. But against the backdrop of growing competition over energy resources and proliferating conflicts in the wider neighbourhood, there remains space for EU institutions and member states to take actions that enhance their capacity for strategic action, anchor Turkey in Europe, and foster a more inclusive and level-headed climate for regional security.

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In response to the outbreak of the Covid-19 pandemic, EU member states put various tools in place to support employment, from traditional short-time work (STW) schemes and wage subsidy (WS) schemes to new income support schemes for self-employed and atypical workers.

The European Union offered financial support to these schemes through the creation of a new financial assistance facility – temporary Support to mitigate Unemployment Risks in an Emergency (SURE) – with a capacity of €100 billion to be distributed in the form of loans to those countries that requested it. As of May 2021, 19 member states have obtained financial support from SURE for a total of almost €95 billion. Despite its smooth functioning and success, SURE remains a temporary mechanism linked to the pandemic. In the (unfortunate) case of future crises, the EU will not have a similar tool to provide immediate support to countries in need. As already advanced in 2020, we argue that SURE should become a permanent mechanism.

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