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Comment: The hollowing out of the EU’s commercial power base 

European Commission president Ursula von der Leyen and Council president Charles Michel. Credit: EC.

To many, the European Union ends its 2019-2024 legislature triumphant, with a European Commission having deftly navigated the Trump years, the pandemic, the war in Ukraine and rocky relationships with China. But let’s not believe in fairy tales: the EU made dangerously deep cuts into the branch of the tree of power on which it sits. 

The European Union is facing parliamentary elections in June and a subsequent leadership reshuffle at the top of the European Commission.  

The outgoing Ursula von der Leyen commission signs off on a permanently crisis-stricken EU that morphed into a predominantly intergovernmental body where capitals free-ride on its common public goods – namely its budget and single market – but get away with ignoring the rules when it pleases them. 

The end of the current five-year term leaves us with an EU where its customs union rests on shaky grounds and its credibility as a normative power able to sign treaties and foster partnerships – an official ‘economic security strategy’ goal – are more in jeopardy than ever.  

The U-turn on agriculture trade liberalisation in favour of Ukraine and the EU’s impending departure from the Energy Charter Treaty are among the most emblematic episodes leaving long-term institutional scars. 

The ‘Not Brussels’ method 

The European way of resolving crises such as the Covid-19 pandemic worked, said French president Emmanuel Macron in his largely laudatory stock-taking speech on the state of the EU last week. 

“We’ve also done it with a method that is probably different, which has not been only a Brussels method, if I may use that term,” Macron said. 

The French president is right. Crisis management and resolution in the EU has not advanced with the ‘Brussels method’ better known as “community method” with the commission key driver of legislation prepared with due evidence-gathering and impact assessing, and the Council and the European Parliament as equal co-legislators taking final decisions. 

It is indeed intergovernmentalism that prevailed. It has perverted much of the legislative process in the EU.  

The commission has for years acted as crisis fire-fighter when member states broke the rules.  

It was the case in 2020 when some member states banned personal protective equipment exports to their EU neighbours and closed intra-EU borders during the pandemic, hijacking the bloc into taking largely unnecessary action such as export controls on PPEs and then vaccines to non-EU destinations. 

The recently released report to member states on the future of the much-vaunted single market authored by former Italian prime minister Enrico Letta very prudishly points to a broader problem with the state of the EU rule-book. 

“The effectiveness of the single market is contingent upon the integrity of its rules, and major breaches pose a significant threat to this integrity,” writes Letta. 

A serviceable European Commission 

Three institutions: Belgian PM Alexander De Croo, European Parliament president Roberta Metsola, and Ursula von der Leyen, from left to right in a joint press conference in 2024.

I do not share a currently widely held view in the Brussels commentariat and some national newspapers that with von der Leyen, the commission has never been so powerful. Yours truly holds that, to the contrary, it has never been so weak.  

And we are not even talking of the European Parliament, whose power, perhaps briefly increased in 2014-2019 as the Lisbon Treaty came fully onstream, is that of a second-order player in the system that certainly shapes outcomes but not at the height of crises and mostly when key national governments stand behind the goals of large political groups advancing their agenda in Strasbourg. 

The legislative body elected to represent EU citizens as citizens, was ever so often shunted to the side during the last five years and forced to simply acquiesce to many policy outcomes and to last-minute ‘post-trilogue’ whims of capitals. 

Examples include the expedited ratification of the Trade and Cooperation Agreement with the United Kingdom in early 2020 after negotiations were finalised on the eve of Christmas 2019.  

Others are the last-minute undoing, by member states, of already negotiated outcomes on the corporate sustainability due diligence regulation and the heavily watered-down extension of trade liberalisation in favour of Ukraine. 

The parliament simply had to take it or leave it. 

No longer a rigourous guardian of the treaties 

Now back to the commission.  

The EU executive arm is not a victim. It is in fact an active participant in this erosion process because its leadership’s political survival at the heart of decision-making depends on being pliant vis-à-vis member states. 

In that sense it is not surprising that it largely abdicated its mandated role as guardian of the treaties, playing it selectively at best – and otherwise bowing to the pressures, demands and blackmailing of member states.  

This is a broader problem of governance in the EU – and it did certainly not begin with the von der Leyen commission.  

But von der Leyen took it to extremes. It is now fully in the open – at least for those who care to look – at a time when national-populism is gradually normalised across the continent and hollowing out the Brussels system from within.  

While the process has broader consequences for the future of the EU as an area of individual freedom, rule of law, prosperity and even peace, it also has very specific implications for trade and investment policy – on which this publication focuses. 

The EU tends to consider itself as a commercial power on the international scene – absent being an old-school global power with unified government with flanking military means.  

It sees itself as spreading its norms globally through the appeal of its large domestic consumer market. This happens passively as global technical or regulatory standard-setter – the famous ‘Brussels effect’ – and/or through a proactive trade diplomacy which includes the pursuit of international trade agreements.  

It also happens increasingly and more controversially, through unilateral regulation that overrides the national sovereign regulatory choices of non-EU countries such as the carbon border adjustment measure or the deforestation regulation. 

For decades, the very base of that power, i.e. a functioning common customs union and a reasonably well-functioning if yet incomplete single market, was never in question.  

Brussels also regulated at unprecedented levels over the last five years on environment and tech and continued to negotiate trade agreements – but without paying much attention to how that very power base that makes it effective and credible is being eroded. 

EU customs union now merely an option 

The silence in media and commentariat about the deeper process unveiling in the roll-back of unilateral trade liberalisations in favour of war-torn Ukraine is astonishing. We should be seeing an outcry by think tankers, important EU capitals and business about it. But no. 

Member states – Poland, Hungary, Slovakia and initially also Romania and Bulgaria – for the first time in EU history blatantly violated the EU customs union and single market by closing borders and banning imports unilaterally.  

The structural significance of this process is still underestimated.  

The commission let itself be blackmailed into reintroducing an EU-wide import safeguard as a result of this violation of fundamental EU norms whilst the unilateral bans persisted in Poland and Hungary. The commission then went on to force Ukraine to commit to restricting its exports. Yet unilateral border closures persist until today. 

There has been no ‘infringement proceedings’ in sight whereby the commission takes the countries to the European Court of Justice to secure their compliance and collects fines if they continue to violate the EU rule-book. 

“For the first time ever as far as I know, the [newly introduced] emergency brake can be applied if imports disturb or threaten to disturb not the EU market as a whole, but individual member states – read Poland- or even regions inside a member state”, former commission agriculture trade official John Clarke wrote on this news site

“Imposing trade restrictions due to a local as opposed to an EU-wide effect is a dangerous precedent – and I suspect we have not seen the last of it,” Clarke warned. 

Imagine France’s far right presidential candidate Marine Le Pen coming to power in 2027. In its 2022 election manifesto her party listed reintroducing customs duties at the French national border as one of the priorities in matters related to the EU. 

One can be certain that Le Pen would be very happy to follow up on that pledge at the first opportunity.  

This is not science fiction. Both Le Pen’s election and her actions are a real possibility. 

What will the commission do in such a scenario? Just abdicate to Paris as it has done too often already from anything ranging from complying with domestic Schengen rules to budget discipline?  

If precedent is any guide, we can be sure the EU will abdicate. But what kind of EU will this be?  

Energy Charter Treaty – how to lose control and international credibility 

The other under-appreciated threat to the EU’s economic power base is the significance of the ill-fated Energy Charter Treaty exit process. Hardly any global financial and economic newspaper took note. 

The ECT is basically a now-failed attempt at creating a rule-of-law and largely market-based energy system on the Eurasian landmass in the 1990s. 

The ECT saga is part of a wider story, a messy process by which the commission has been seeking to take control away from member states of international investment protection dispute settlement post Lisbon Treaty.  

Part of this involved a quest to eliminate 1990s bilateral investment treaties between ‘old’ EU member states and countries from Central and Eastern Europe that joined in 2004 or 2007. 

More recently a highly effective largely fact-free campaign by NGOs in quest for an easy victim claiming the technology neutral treaty was a ‘dirty fossil fuel treaty’ was the ECT’s final death knell. 

Some EU capitals from the richer West won over by the campaign and annoyed by investors making claims against some of their decisions ultimately rejected a reformist path taken through a careful renegotiation of the treaty.  

The renegotiated 2022 ECT text included contemporary climate and labour provisions and reined in investor-state arbitration abuses. A reformed ECT would have been a good tool for Brussels to work on clean energy or critical minerals with countries in the Caucasus and Central Asia.  

But populist politics back home – there is also a left-wing, green-tinged populism that disregards facts and due process – meant member states failed to agree to reforms. 

After the financial and economic crisis, the commission started a crusade against intra-EU bilateral investment treaties and the private ISDS tribunals that had emerged from them. 

This included filing amicus curiae briefs and active participation in European Court of Justice cases that have led to the outlawing both of intra EU BITs and intra-EU Energy Charter Treaty in landmark rulings.

The difficulty with the commission’s approach is that it intervened in ISDS cases where companies from Western Europe were filing for expropriation compensation following procedurally questionable moves by earlier Orban and Fico administrations in Hungary and Slovakia, or also Romanian interventions. 

Nobody at the time was blind to the fact that there were serious shortcomings in the rule of law and bias in domestic courts in these countries at the time.  

And yet, in 2015 the commission started infringement proceedings against member states for failing to terminate their intra-EU BITs. 

One of the key critiques of business at the time was that, whereas the EU might be justified in its move, it was forcing member states to drop a method of having host states offer a minimum of justice in settings where the rule of law couldn’t be guaranteed.  

The commission was doing so without offering any concrete alternatives: the only solution was to go to national courts on the grounds that they were following the EU rule-book.  

It clearly had an abstract, imaginary, vision of the rule of law and its uniform application in the single market. This had little to do with ‘real existing’ acquis communautaire on the ground.  

The intra-BIT episode was a perverse example of inadvertent support for the rule-of-law drift in Central Europe. 

One can only say that things have only gone downhill on the rule of law in Hungary as the commission failed to act for many years. And now we are seeing the same process in Slovakia. Not surprisingly they are among the key customs union violators in the Ukraine episode. 

Botched departure 

So, the EU is now leaving the Energy Charter Treaty.

It will continue to be bound by investor-state dispute settlement commitments for twenty years due to the treaty’s termination clauses.  

It cannot even, at this stage, avoid being targeted by intra-EU cases, unless capitals sign the inter-se international treaty the commission proposed, committing all member states no longer to apply ISDS between themselves as part of the ECT. There is no sign that member states are close to clinching said deal.  

The commission asked member states that will remain in the ECT to adopt the 2022 modernised reforms. But will they? 

Meanwhile EU member states that left or are in the process of departing from the ECT will also be exposed to ISDS cases of the style the EU has rejected and NGOs abhor.  

Nor is the ECT as it remains in force de facto, up-to-date with today’s net zero standards. 

The only tangible outcome is complete loss of control by the commission after capitals bullied it into a corner, fragmentation – yet again – of the single market’s rule-book, and total loss of credibility  

Can one negotiate a deal with an EU that doesn’t control its member states attitudes towards the customs union and that does not have credibility to commit to agreements that can be undone at any moment? 

Australians, Mercosur parties, India, Thailand, Indonesia with which the EU is negotiating agreements – and not least Ukraine – will certainly take note.

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