Opinion & analysis

Policy Insight | Paving the way for future labour migration – A Belgian-Tunisian Skills Mobility Partnership | CEPS

Since September 2017, the European Commission has been encouraging the use of new approaches to broaden labour migration to the EU. In response to this call, several pilots for skill mobility partnerships are being tested by partner countries with, for example, different target groups (e.g. recent graduates or young professionals), types of contract (e.g. internship or work) or duration.

The IOM skills mobility partnership between Belgium and Tunisia highlights the importance of multidimensional cooperation between different stakeholders from both countries (e.g. immigration office, public employment services, employers’ associations) throughout the implementation of the project (e.g. in assessing labour market needs, streamlining procedures, selecting candidates). Throughout this pilot project, IOM improved its understanding of the private sector’s interest in international hiring and the difficulties faced by companies with this issue, while companies became acquainted with different aspects of international labour migration such as ethical recruitment practices and skills recognition.

All participants found a job after their internship in Belgium, the great majority back in Tunisia and some in a subsidiary of the Belgian host company. The project therefore achieved its main objectives of i) providing concrete opportunities for skills mobility to third country nationals while ensuring skills return, ii) meeting the labour market needs in terms of skills, and iii) supporting the private sector’s interest in international hiring. Foreign investment on the part of some of the Belgian host companies was but one positive spillover from this project.

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Fostering capital market integration: Is there a role for a CMU equity market index? by C. Alcidi, European Capital Market Institute (ECMI)

On 17 September, the European Capital Market Institute (ECMI) published a commentary by Cinzia Alcidi named Fostering capital market integration: Is there a role for a CMU equity market index? which acknowledged that in the EU there are still 27 national capital markets, which do not function as one. It focuses on the question of what measures could reduce fragmentation and improve access to finance for companies, particularly for smaller companies in small countries with less developed capital markets.

A recent CEPS study, prepared at the request of DG FISMA, investigates the feasibility of a CMU Equity Market Index Family. The idea is that the creation of a CMU all-share index, as well as CMU sectoral and thematic sub-indices, entails the elimination of capital markets’ geographical labels. These are typical of the current classifications of capital market and weigh negatively on small and new EU member states. Eliminating them could help to attract both large investors and more funds towards smaller capital markets. At the same time, a wide use of such new indices would foster EU capital market integration.


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About the author

Cinzia Alcidi is Senior Research Fellow and Head of the Economic Policy Unit at CEPS


Policy Insight | Why the EU needs a geopolitical Commission | CEPS

Image credits: Call4beach, licence: CC-BY 2.0

History has shown that rogue leaders only understand the language of diplomacy when it is backed by force. With the return of great power rivalry, the EU has felt the need to gradually adapt its posture on the increasingly conflicted world stage. Last year, the newly appointed President of the European Commission, Ursula von der Leyen – a former defence minister of Germany, even defined her institution’s mandate as being a geopolitical one. In her first State of the Union address, she has every reason to double down on that mission.

Can the EU be a geopolitical actor without being a state?

International relations pundits may well baulk at the thought. After all, aren’t geopolitical concepts and theories essentially defined by inter-state competition, whereas the EU, by its own admission, is not a state? Are geopolitics really in the DNA of the 2012 Nobel Peace Prize laureate?

Indeed, the European Union was born out of the realisation that ‘jaw jaw is better than war war’. Over the past seven decades, Europe’s integration process has been geared towards reducing tensions on the old continent by weaving a fabric of economic interdependence. Member states entrusted areas of low politics to development by supranational institutions, but jealously guarded the management of high politics for themselves. Hard power politics was the chasse gardée of NATO, with most European countries free-riding under the security umbrella of the US to the point where they even had to rely on Washington to put out the fire in the Balkans.

The EU’s anti-geopolitical bias nevertheless found its vindication in the end of the Cold War. And its rules-based multilateralism was a catalyst for other forms of regional integration, from Mercosur to Ecowas and ASEAN, and global accords on climate change, from Rio 1992 to Paris 2016. Underlying geopolitical tensions were systematically played down and Europeans had no appetite for any talk about discrimination between friends and foes.

The golden age of deepening and widening the EU’s technocratic project came to a grinding halt with the 2008 global financial and economic crash. The (poly-)crisis decade that followed, and the handling thereof by leaders, politicised the Union at both the national and supranational level. The institutions gradually adapted the EU’s ‘strategic’ outlook on a fast-changing world. The 2015 review of the ENP and the 2016 Global Strategy changed the narrative from that of finger-wagging human rights missionary intent on transforming neighbouring and farther flung countries to the EU’s image, to that of power broker. Keen to defend its own interests, it now insisted on ‘principled pragmatism’ in foreign policy and on strengthening third countries’ ‘resilience’.

The EU’s pivot towards geopolitics only really materialised in March 2019 with the adoption by the Juncker Commission and High Representative Mogherini of a joint communication presenting the strategic outlook on China. This document set a precedent for the EU by characterising a superpower as a ‘systemic rival’ and an economic competitor, as well as a negotiation and cooperation partner. The joint communication inspired the European Council to define its position ahead of the April 2019 EU-China Summit and has been the main frame for EU institutions and member states alike to strike a more coherent and assertive stance towards the communist-ruled juggernaut.

The VDL Commission has its work cut out  

The geopolitical banner under which President von der Leyen has organised her Commission’s work is a recognition of the fact that the EU inhabits a more hostile world defined by competition between states; a more multipolar, less multilateral world; a world in which issues previously belonging to the realm of low politics, such as transport and telecoms (cf. 5G), have come to characterise great power rivalry. Indeed, these are areas in which the competences attributed by member states to the Commission, and the management of a €2 trillion budget for the next seven years, can make a difference in defining the international position of the EU.

Tapping into the momentum generated by the Covid-19 crisis and the need felt to re-shore medical and other industries, High Representative Borrell and internal market Commissioner Breton have broadened discussions about Europe’s strategic autonomy. Their claim that Europe’s soft power needs to be complemented by a harder power dimension is a reaffirmation of Europe’s strategic doctrine, developed in response to Russia’s invasion of Ukraine and the Anglo-American retreat from multilateralism. It strengthens the Commission’s case in taking work towards a European Defence Union forward. In this respect, the creation by von der Leyen of a Directorate General for Defence Industry and Space within the internal market portfolio is a logical follow-up to the member state-driven initiatives (cf. PESCO, EDF, CARD) to forge a single market for defence products.

Critics have rightly pointed out that by flying the geopolitical flag, Commission President von der Leyen has exposed the weaknesses of the EU as a whole in playing a decisive role at the high diplomatic table, not to mention the ability of backing up its words with force if needed. Indeed, divisions between member states have stymied swift and effective EU action to address security issues posed by Libya, Turkey, Russia, and blunt the impact of the US Treasury’s extra-territorial sanctions policy over Iran. Member states seem to be increasingly comfortable with adopting outlier positions, which has even prevented the EU from adopting sanctions against the Belarusian regime for falsifying the results of the presidential elections in August and the violent crackdown on peaceful demonstrators since then.

But rather than recoil from the necessary rhetoric to defend and promote the EU’s position on the international stage, President von der Leyen should step up efforts to shape a geopolitical discourse for the Union and profile the Commission’s role in more traditional areas of high politics.

Instead of waiting for all member states to adopt a common threat perception, develop the capabilities to implement a joint defence policy and back treaty change to move decision-making on CFSP from unanimity to qualified majority voting, the Commission and the High Representative should take the lead in strengthening the EU’s external action by mobilising its soft power instruments for harder power projection. This can be done by more strategically targeting resources to increase Europe’s global competitiveness, more strictly enforcing negative conditionality when EU funds are misused, tightening foreign investment screening, retaliating against the imposition of tariffs and non-tariff barriers, and by engaging more systematically in lawfare to defend its strategic interests and advance its security objectives, from the eastern Mediterranean to the South China Sea.

To give direction to the use of these instruments, the High Representative should initiate a review of the 2016 Global Strategy to frame a European narrative fit for tomorrow’s power politics.
The Commission should also draft a European industrial strategy to raise awareness about technological competition and offer more precise guidance to the Union’s efforts in determining the outcomes of the fourth industrial revolution. In a world dominated by Sino-American rivalry, there is a space for a third way – one that is defined by the EU in alliance with like-minded states and organisations.

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Policy Insight | Another tough year ahead for the von der Leyen Commission | CEPS

After a demanding but successful first year in office, President von der Leyen now faces the daunting task of adapting the EU’s long-term agenda to the paradigm shift brought about by the Covid-19 crisis. This includes prioritising public health policy, to address the almost complete lack of a European dimension in this domain. And since global cooperation has deteriorated over the past year, the enhanced geopolitical role the President promised for the EU at the beginning of her mandate is important, proving that ‘more Europe’ is needed now than ever before.

A year ago, we wrote that Commission President von der Leyen would not have a honeymoon period in her new post. Those words have proved to be more of an understatement than anyone could have realised. Admittedly, there has been follow through on the intended ‘big splash’, with numerous first-100-day plans in the green, digital, social, industrial and global policy agendas. But after not even as many days in office, the president had to radically veer her programme to the health crisis, its economic impact, and the sharpest decline in GDP since the Second World War.

On tackling immediate challenges, the EU Commission did remarkably well, in cooperation with the other institutions, to reach a Eurogroup financing agreement on April 9th, to use European Stability Mechanism (ESM) loans and devise the temporary Support to mitigate Unemployment Risks in an Emergency (SURE) and, most importantly, the Next Generation EU funding. A doubling of the EU budget, possibly combined with more own resources, could be the basis of a deeper Union, but this has many provisos. The EU Commission will be at the centre of making this work in the coming seven years, and will thus have to demonstrate that it is really up to a bigger EU. This includes enforcing the rule of law as a condition for EU funding.

Longer term, many challenges remain, of course. Public health policy should take priority on the agenda, now that Europeans have seen that one of our core values, universal healthcare, is not very European in its daily functioning. Comparable criteria and statistics in the health domain are still a long way off, as we have all seen, but they are sorely needed. Cooperation and exchange of best practice among nationally oriented administrations remain limited, and a common framework or even a shared approach and mutual assistance is missing altogether. Such a framework is needed to allow people to move in the single market in a pandemic situation. A high-profile committee of scientists should advise the EU Commission in such circumstances and decide at EU level on healthcare threats and risks. The framework should also upgrade and give greater visibility to the Stockholm-based European Centre for Disease Control (ECDC), hardly known to most Europeans, and the European Medicines Agency (EMA), as we proposed in an earlier piece.

The healthcare sector should also be much more central to the EU’s industrial policy and ambitions for strategic autonomy. Pharma is the single most important industrial sector left in Europe, in terms of market capitalisation, but a dashboard of its strategic competencies and weaknesses does not exist. The recent narratives that have circulated about Europe’s dependence on China and India for key medicines and medical equipment, and about the priorities of the US in securing a vaccine, underline the need for a European strategy to calm fears and demonstrate Europe at work. This also applies to biotech research, where national governments are investing in lucrative but not necessarily life-saving treatments, in a disparate and uncoordinated fashion. A proper EU industrial strategy is probably as (or even more) important in the pharmaceutical sector than in other domains, such as tech or transport.

Public support for a real green agenda has grown as a result of the crisis. The Green Deal is on track; it is agreed that the recovery should be green, but it awaits the European Parliament’s approval, and what member states do to implement it will be crucial. Greenhouse gas emissions should be further reduced by more than 50%, compared to the 40% target today. The Covid-19 crisis could be an opportunity to accelerate the phasing out of old infrastructure such as coal-based power plants, but this will undoubtedly be an uphill struggle.

Much action is expected on Big Tech in the market for data, AI and digital tax, where the EU may well be able to set a benchmark for the world. But it will be highly contested, as the EU saw in a recent Court case setback.

In view of mounting international tensions, the EU’s geopolitical role is the most important but possibly also the most elusive target for its members. On the EU’s relations with the US, very little progress has been made since the historic Juncker-Trump encounter in July 2018. On the contrary – relations have cooled even more. Transatlantic relations await the outcome of the US presidential elections, but one may wonder whether a Biden administration would change much on the trade front, apart from a greater willingness to talk. And although China has effectively become a ‘systemic rival’, the EU is gradually progressing on the trade front, with maybe an investment agreement, following the agreement on geographical indications.

There is no shortage of hotspots closer to home, notably in Belarus, where the EU seems to be running out of time to act against Lukashenko, as Russia advances stealthily in the country and undermines basic norms.

And then there is Turkey’s drift from NATO and the EU in order to realise its own hegemonic ambitions in the Mediterranean. Each challenge highlights Europe’s profound difficulty to speak with one voice and agree on priorities. Chancellor Angela Merkel’s likely departure next year leaves the role of great flagbearer for Europe vacant, making it even more difficult for the EU to make its mark the world stage.

One year on, plaudits can go to the von der Leyen Commission for how it reacted to the pandemic, but the big lead themes still need to be fleshed out and adapted to the lessons and challenges of the crisis – not least the EU dimension of public health policy.

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Why the EU should put innovation at the centre of its recovery plan | Europp – LSE Blog

Copyright: European Union

Innovation is often viewed as a key driver of economic growth. Yet as Marcel de Heide and Gosse Vuijk write, the recent agreement between EU leaders on a Covid-19 recovery package cut funding for some programmes linked to innovation. They argue the European Parliament should push for innovation to be placed at the centre of the recovery plan.

Europe is facing an unprecedented crisis and as a consequence a threat to its unity. The health, social and economic consequences of the Covid-19 outbreak have been felt very differently across the Union. This is exacerbating existing disparities between the member states. The EU’s recovery strategy should therefore not just repair the damage done, but also actively prevent further divergence in the Union.

In July, European leaders agreed on a recovery package, which European Council President Charles Michel presented to the world with the words “Europe is strong, Europe is robust, and above all, Europe is united”. But does the deal indicate that Europe is strong, robust and united? We believe that our leaders have missed a crucial disparity which needs to be addressed to ensure long term positive convergence within the Union: the innovation divide, namely the disparity in the ability of member states to generate new ideas and to translate them into economic growth and prosperity. Instead of investing in innovation to address this divide, innovation spending has been cut by EU leaders.

This was a surprising outcome because innovation has been put forward by several member states and the Commission as a crucial part of the recovery in Europe. And rightly so. Innovation is the only way through which we will eventually defeat Covid-19 by developing a vaccine and effective treatments. Innovation is also crucial in addressing the twin-transitions Europe was already facing before the pandemic: the digital revolution and becoming a sustainable continent.

However, most crucially, innovation is regarded as a way to reinvigorate economic growth. One could even argue that for Europe, innovation is the key driver for sustainable economic growth as it has been found to fuel two-thirds of economic growth in Europe and up to 30% of productivity growth in the member states.

However, Europe also has an innovation deficit when compared to its global competitors and the innovation divide is one of the causes. The recovery from the Covid-19 induced crisis should address this deficit because it is a crucial factor in slowing Europe’s sustainable growth. Unfortunately, our leaders did not recognise this crucial role of innovation in their deal.

In theory, economic growth can be generated by increasing labour force participation (‘more people in work’) or by increasing labour productivity (‘creating more value per employee’). Before Covid-19, unemployment in Europe was at historic low levels. These levels have risen (and are expected to rise) due to the outbreak, but after they rebound, increased labour force participation will not drive economic growth in Europe sustainably.

This means we need to increase labour productivity for sustainable growth. Increasing labour productivity can be achieved first and foremost by increasing the capital intensity in an economy, in other words more and better machines. However, following the law of diminishing returns, we can expect that for the already highly industrialised European economy, the added value of those investments will be low and will become lower over time.

Therefore, Europe will need to rely on other factors to foster labour productivity growth – and innovation has the capacity to carry a large share of that burden. From 2010 to 2016 it was responsible for about 60% of labour productivity growth. Therefore, the ability to innovate, to turn knowledge into new or increased economic activity, is crucial for recovery and the return of sustainable growth in Europe. This makes the innovation divide a central issue for our common recovery.

How to tackle the divide

The causes of the innovation divide are diverse and could be either addressed or deepened by how we shape Europe’s recovery. For example, having attractive research systems, securing sufficient public and private investments, and an innovation-friendly policy environment are among the aspects where the innovation divide is most pronounced in Europe (see Figure 1) and our leaders could have ensured that the recovery package addressed these issues.

Figure 1: Performance groups: innovation performance per dimension

Credit: European Union

For example, the Recovery and Resilience Facility will supply cheap money for public investments through national recovery plans in line with the European Semester. This could be a perfect means to shore up national research systems and encourage member states to make their policy environment more innovation friendly. This would require a direct instruction to the member states to address these issues in their national recovery plans.

Unfortunately, the EU’s leaders did not include anything along those lines in their deal. To ensure that the facility is working towards closing the innovation divide, the European Parliament as co-legislator could specify in article 16.3 of the Regulation on the Facility that the national recovery plans have to contribute to making national economies more innovative.

Another way to address the innovation divide is increasing pan-European innovation collaboration. Research suggests that collaboration with partners from knowledge-intensive regions can be a key driver for improving the innovation capacity of a region. It is precisely this collaboration that should be fostered in the recovery over the coming years, both by EU action and by national initiatives.

National governments could invest more in fostering science and innovation collaboration with other member states as part of their international science and innovation policies. Here the initiatives of the Czech government since its adoption of a new innovation strategy might serve as an example. The European Parliament has no direct role in this, but MEPs can use their personal positions to encourage it. What the Parliament could also do is advocate that spending under national recovery plans for the Recovery and Resilience Facility is partly invested in cross-border innovation collaboration. At the EU level, the Commission proposed additional investment in the collaborative pillar of Horizon Europe as part of the recovery plan to enable this. However, EU leaders decided to cut this budget. Horizon Europe was cut by €13.5bn of which about €9bn was expected to go to collaborative research projects.

The European Parliament has already indicated that it cannot accept these cuts, but in the past the Parliament has mostly put its weight behind additional funding for the ‘Widening Participation’ programme to address the divide. However, this programme is aimed at increasing participation in the Framework Programme by researchers from ‘widening’ countries, rather than closing the innovation divide. The innovation divide and participation in the Framework Programme do not overlap fully and so far the widening efforts have not been proven to contribute to any closing of the innovation divide. Therefore, it would be more productive if the Parliament were to focus on restoring collaborative research budgets.

Ever since the Lisbon Strategy of 2000, we have known that Europe’s future prosperity and competitiveness is tied to its ability to innovate. The recovery from the crisis induced by Covid-19 represents a perfect opportunity for Europe to tackle one of the key issues to strengthen that ability: the innovation divide. Unfortunately, the deal between EU leaders on the next budget and the recovery package failed to take this opportunity. Our hope now rests on the wisdom and political power of the European Parliament. With the right priorities, the Parliament could truly be the guardian of our shared European future.

Policy Insight | Europe and the Covid-19 crisis – The challenges ahead | CEPS

The European economy is now recovering briskly, after an unprecedented fall in output during the second quarter of 2020. But this recovery is likely to be incomplete for some time, not least because of the substantial degree of social distancing measures still in place.

The defining feature of the present situation is that the remaining demand and supply obstacles are highly sector specific. Aggregate demand management will thus be less effective. Income replacement measures, such as short-term work schemes, will be needed for some time, but should be applied flexibly to support rather than hinder structural adjustment. This also applies to the funds to be made available under the €750 bn Recovery and Resilience Facility. Money is fungible. This means that the key for success will not be the projects to be financed by the RRF, but whether member states undertake structural reforms that increase their growth potential.


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Next Generation EU: Why the blueprint for transforming Europe may have been long in the making | Europp – LSE Blog

Copyright: European Union

In July, EU heads of state and government finally reached agreement on a recovery package to tackle the socio-economic fallout from Covid-19. Daniel F. Schulz writes that although the agreement was unprecedented in its scope, Europe’s recovery strategy will draw heavily on the existing analyses and institutional structures of the European Semester. Ultimately, Europe’s leaders will be betting on the potential of renewable energy and digital services to create millions of jobs across the EU, suggesting that large-scale upskilling programmes may become a prominent feature of member states’ labour market policies.

When July’s marathon European Council summit finally overcame the sharp divisions among European leaders, the prevailing mood among policymakers and commentators was euphoria. ‘Next Generation EU’ has been called a ‘real game-changer’, a ‘huge step forward’ for the EU, or even Europe’s ‘Hamilton moment’, and there can indeed be little doubt that the agreement sends a strong signal for strengthening the European project. Yet sceptics were also quick to point out that a large pot of money alone cannot make up for a lack of strategy, pointing to the critical issue of how the new recovery fund will be used. While issuing common debt implies a milestone for the EU, much depends on it being used for productive purposes so that it will also be seen as ‘good’ debt, as Mario Draghi recently pointed out.

So, what kind of investments and reforms can we expect to come out of the recovery plan? While the details of implementation are, of course, impossible to foresee, the institutional design of the fund contains hints about which priorities are likely to prevail. The new Recovery and Resilience Facility (RRF) will be ‘firmly embedded in the European Semester’ (originally established in 2010), showing how, in EU policymaking, past agreements often influence future solutions. By adding financial firepower, the RRF significantly upgrades this relatively mundane instrument of policy coordination, thereby strengthening the European Commission’s power to influence member state economies. Member states keen on getting their share of the funds have to submit so-called ‘recovery and resilience plans’ for Commission approval. Following Commissioner Paolo Gentiloni, the Commission’s assessment of the national plans will then depend on ‘whether they effectively address the relevant challenges identified in the European Semester’.

Hence, a look at the track-record of the European Semester throughout the past decade offers important clues on what types of reforms we are likely to see. In a recent study (co-authored with Jörg Haas, Valerie D’Erman, and Amy Verdun), we analysed more than 1,300 country-specific reform recommendations (CSRs) which the EU issued to euro area countries and found that many recommendations keep coming back consistently. This suggests that the Commission has a pretty clear idea about the reforms it wants member states to pursue – and that it will likely continue pushing these issues once the new recovery fund gives its demands more weight.

The good news first. By adding non-repayable grants as reform incentives, the RRF has the potential to overcome a key weakness of the European Semester: its unimpressive implementation record. In the past, the lack of effective carrots and sticks has meant that recommendations were often simply ignored. The lack of financial incentives has arguably been a prime obstacle which was only heightened by some inherent tensions between different recommendations: many countries were told to reduce public deficits while, at the same time, increasing social protections for vulnerable groups (see the top-left quadrant in Figure 1 below). Given that measures to improve education, family support, or training the unemployed tend to be costly, the Semester’s ineffectiveness in times of fiscal austerity should not come as a surprise. Thanks to the juicy carrots implied by the new RRF grants, however, the revamped Semester may finally overcome such apparent contradictions.

Figure 1: Reform recommendations concerning spending and social protection (2012-18)

Note: Net scores are calculated by deducting the number of CSRs that call for less social protection/spending from the number of CSRs calling for more. Source: Haas, D’Erman, Schulz & Verdun 2020

A closer look at those costly recommendations to improve social protection reveals the Commission’s overwhelming emphasis on active labour market policies (ALMPs). More than a third of all recommendations in this area involve activation and ALMPs, typically focused on training the low-skilled, the young, and the long-term unemployed. The second most prominent set of ‘social’ recommendations focuses on education, followed by measures to improve healthcare and childcare, and the adequacy of social assistance and services. In line with the flexicurity concept, the Semester thus carries strong elements of both security and flexibility, and is outsider-oriented in the sense that the bulk of measures target the low-skilled and unemployed. These measures typically do not focus on protecting workers from the market but, as Kathleen Thelen suggests, on actively adapting their skills to what the market demands.

This focus on training and education in the Semester sits well with the stated goal of using the recovery fund to invest in the ‘digital transition’. While upskilling for the digital age has arguably been an implicit goal for quite some time, it was not until 2018 that Ireland, Italy, and Portugal became the first to receive explicit calls for investing in digital skills as part of their CSRs. Going forward, this appears an obvious area where the past focus of the Semester and the Commission’s new strategies intersect. The hope is that widespread investment in digital skills will solve the EU’s perennial problems of high (youth) unemployment and dual labour markets – particularly in the South. Publicly funded training and education programmes to strengthen digital skills could thus become a prominent feature of the reforms the new recovery fund will support.

Figure 2: Recommendations mentioning ‘digital’ or ‘green’ reforms (2012-20)

Note: Compiled by the author

What about the recovery plan’s other main priority, the green transition? While Ursula von der Leyen put the ‘European Green Deal’ front and centre in her bid for the Commission presidency, the ‘old’ Semester CSRs tackled environmental issues only sparsely and partially. During the first few cycles (2012-14) the Commission focused primarily on shifting the tax burden from labour to environmental taxation, but environmental aspects faded from sight during the Juncker Commission (see Figure 2). Hence, the past track-record holds fewer lessons for how exactly an amended Semester process will support green policies in member states.

Experts nevertheless argue that the Semester holds the most promise as a steering instrument for the green transition, and there has been a clear revival of ‘green CSRs’ during the past two years (Figure 2). New sections on environmental sustainability and Sustainable Development Goals (SDGs) in the annual Country Reports also suggest that the new Commission is getting serious about greening the European Semester. Beyond an apparent emphasis on clean energy in the 2020 CSRs, however, the reform priorities do not seem as clear as in the case of the digital transition.

In sum, the European recovery strategy places its bets on the potential of renewable energy and digital services to create millions of jobs across the Union. As the new RRF utilises the existing analyses and institutional structures of the European Semester, it could likely inherit its emphasis on large-scale education and training programmes to foster digital skills, especially among the young. This would be in line with the Semester’s long-standing initiatives to tackle labour market dualisation and youth unemployment, which previously lacked funding. Beyond the continuity this would imply, Mario Draghi recently spelled out a moral imperative for doing so: the unprecedented debt created by the pandemic ‘will have to be repaid mainly by those who are young today [and it] is therefore our duty to equip them with the means to service that debt.’


About the author:

Daniel F. SchulzUniversity of Agder
Daniel F. Schulz is postdoctoral fellow at the University of Agder’s Jean Monnet Centre of Excellence ‘LabDiff’. He also collaborates in the context of a Jean Monnet Network ‘EUROSEM’ with Amy Verdun and Valerie D’Erman at the University of Victoria, where he previously worked as a postdoctoral fellow and lecturer. He holds a Ph.D. from the European University Institute and has published in outlets such as JCMS: Journal of Common Market Studies, Politics and Governance, and the Journal of European Integration.

Policy Insight | Germany’s inaugural green bond… not so green after all | CEPS

Germany sold its first-ever federal green bond in early September. Analysts and commentators alike have displayed an elevated degree of excitement about the innovation. Some consider it to be a watershed moment for the wider environmental and sustainability bond market but, on closer inspection, the bond will probably disappoint those hoping to see it as an important building block for Europe’s green transition. Two main reasons explain why the bond is less green than first meets the eye.

First, the bond will not lead to any additionality in environmental endeavours because financing follows projects, not the other way round. This assessment could be applied to almost all green bonds, of course. But the somewhat unorthodox design of this German bond makes any additionality even less likely. Normally, green bond receipts are to be used for future green projects; linking receipts to prospective projects is in itself unlikely to create any project additionality. With a forward-looking approach, however, it can at least be argued that a healthy debate will take place inside government cabinets and ministries about how to tilt budget structure more towards sustainable causes.

By contrast, Germany’s green bond receipts will be entirely allocated to green projects that have already been executed in the past. It is not easy to see how this retrospective approach will lead to any structural shifts in the budget to favour commitments that bring the country closer to fulfilling its emission-reduction commitments, for example. Under this framework, green bonds are little more than window-dressing. For 2019, the government has identified up to €12.7 billion of eligible spending to be refinanced by green bonds. In light of this year’s expected budget of over €500 billion, this is a paltry sum indeed.

What is more, the government has counted rather generously. The €12.7 billion include, for example, rail modernisation investment, which is merely beginning to compensate for the underinvestment that has accumulated during the past frugal decade, when infrastructure was allowed to quietly decay. When applying a strict definition, federal budget allocations to ‘environmental protection’ amounted to little more than €1 billion last year.

This trivial sum is partly due to Germany’s federal structure: much green public investment happens at the level of local and regional government. But it also indicates that radically rebalancing the budget towards environmental causes is a much more urgent task than issuing green bonds, which act as little more than fig leaves.

Second, hopes that setting a risk-free green yield curve will pull other issuers into the green bond market are likely to be dashed. The basis for this prediction is that the German government has developed the quirky structure of ‘twin bonds’. Under the twin concept the green bond is merely an instalment of an existing conventional bond, with an identical coupon and maturities.

The government has made it clear that the debt-management agency will purchase the green twin in the secondary market should its price fall below that of the conventional benchmark twin. In a so-called switch transaction, the agency would simultaneously sell the same amount of the conventional twin to keep the overall debt outstanding unchanged. In theory, the green twin could disappear completely from the secondary market through agency intervention. Similarly, should the green twin’s price rise above the conventional twin, the agency would perform the opposite switch, as long as it holds green bonds in reserve that it had previously acquired.

In other words, the government targets a 1:1 ‘exchange rate’ between the conventional and green twins. This eliminates the potential concerns of investors that the green segment might be less liquid, and thereby demand a liquidity premium on issuance. Such a premium would raise the government’s funding costs, which it is understandably keen to avoid.

At the same time, targeting price equalisation prevents the emergence of a true green bond yield curve, along which other green debt could be priced. The government wants the green yield curve to mimic the conventional one. The green and conventional bonds are not only twins, they are identical twins. This way, Germany’s contribution to the green bond market remains below its potential.

We should not be too worried about this, however. In fact, there are AAA-issuers already providing a ‘pure’, non-interventionist green yield curve, including Germany’s own government-guaranteed KfW Development Bank. The European Investment Bank (EIB) has already established a green yield curve extending to 25 years. The outstanding amount of EIB green bonds (€35 billion) is bound to increase sharply as it consolidates its policy mandate as the green bank of the EU.

Despite the idiosyncratic choice of design for the green bond, a positive outcome is still possible. The auction result of this bond suggests that investor appetite for Germany’s green bonds could be so voracious that their prices consistently fall below their conventional twins. In this case, the debt agency cannot intervene to equalise yield curves. It simply will not hold enough green bonds in reserve for sale in the market to lower their prices to those of their conventional twins.

A green yield curve would then establish itself below the conventional one. The government could realise a funding advantage by issuing more green bonds in the future. That would require ramping up climate-mitigating public investment to absorb green bond receipts. Maybe projects will follow financing after all. That would be a win-win and improve the climate – both on the green bond market and on the planet. Good news for both bond bulls and polar bears.


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Policy Insight | Reading between the lines of Council agreement on the MFF and Next Generation EU | CEPS

The recent agreement on the EU budget is an unprecedented and historic achievement for the European Union. It has broken a taboo and advanced the integration process. We all saw that the negotiations were arduous, but given the magnitude of the challenge facing the heads of state and government, it would have been naïve to expect otherwise.  It is virtually impossible to find a comparable agreement between numerous countries in any other part of the world; by this measure alone it is impressive.

Having said that, what has been agreed is complex and bewildering to many. While attention has focused on the Next Generation EU, the agreement also includes the ‘normal’ multiannual financial framework (MFF) 2021-27. Comments to the effect that the EU has deleted all funding for health, or much of the research budget, are based on the Next Generation EU ‘temporary’ measure and not on the underlying MFF.

This paper aims to present a brief rundown of the actual changes in numbers and reflect on the meaning of the agreement.

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Policy Insight | Compulsory licensing and access to future Covid-19 vaccines | CEPS

Since the recent World Health Assembly failed to declare future Covid-19 vaccines a global ‘public good’, they are confirmed as private (intellectual) property and will be subject to patent rights protection as a pharmaceutical product. This confirmation could, however, trigger concerns about access to vaccines on the grounds of public health, which is a valid consideration for both developing and developed countries, including EU member states.

Would developing countries have access to affordable Covid-19 vaccines, once available? Would an EU member state be eligible to import generic versions of a patented vaccine if it has insufficient or no manufacturing capacity? Moreover, how to enable an expeditious and predictable multiple patent examination process so that Covid-19 vaccines could become market-ready more efficiently?

This paper examines compulsory licensing and Paragraph 6 of the Doha Declaration on the TRIPS Agreement and Public Health as policy alternatives to voluntary licensing for access to affordable future Covid-19 vaccines. With regard to manufacturing capacity, the EU and its member states may not be eligible to import since they opted out of the Paragraph 6 system outright (although they may still export under the same system). Fortunately, this does not appear to be a major problem since statistics show that most EU27 imports of all pharmaceuticals are from Europe itself, with China a distant second supplier.

For China, however, its pharmaceutical-related patent protection measures under the US-China Economic and Trade Agreement on admissibility of supplemental test data and effective patent-term extension are conducive to a predicable multiple patent examination process for streamlined searches and consistent examination results. To this end, a few initiatives launched in the past at regional and international levels, such as the European Patent Convention and the Patent Cooperation Treaty and, among the world’s largest patent office, the Trilateral Cooperation (on patent) and IP5 Cooperation, for example, will be essential to deliver on these objectives. As contracting members, EU member states will benefit from all these mechanisms.

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