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24 May 2013

EU Summit May 2013:

EU leaders paper over the cracks…but bigger

issues lie on the horizon

The quiet summit On Wednesday the heads of the 27 EU Member States met in what was originally planned as a grand “Energy Summit”, but ultimately became a rather low-key summit focusing on energy and tax evasion. Hardly the headline grabbing fare of recent months, but maybe this was intentional. With EU citizens forced to scrimp and save, this is no time for grandstanding – anyway, there have been enough grand schemes, treaties, and new fund injections in recent years. So, after all was said and done, Europe was owed a quiet Summit, and it duly got one.

Source: The Council of the European Union

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Is the end nigh for the Green Agenda? This latest summit signifies how economic reality in Member States is slowly taking over the green agenda of the European Commission. After all, how could a Spanish or Greek Prime Minister justify speaking about anything other than competitiveness, jobs, tax revenue, and growth? These days, a theme such as renewables or energy efficiency must first and foremost demonstrate its economic credentials before it can be properly discussed by the Heads of State. Does this mean that the end of the green agenda is nigh? Will EU Summits from now on only ever talk about economic growth? Probably not, as the Commission and Parliament are much more resilient on these matters, but mainly also because it is clear that both issues are interlinked and future growth needs to be sustainable. That said, the Commission will from now on have to repackage all its initiatives under the banner of jobs and growth, and its sustainability agenda will be weighed against the impact of any measure on Europe’s global competitiveness. Energy: Back to basics The key adjective at the summit to describe energy was not sustainable but affordable. Affordability, after all, is a crucial element for Europe’s international competitiveness. The more energy intensive European companies are, the harder it becomes for them to compete on the global market. This thrown into even sharper focus when, according to BusinessEurope figures released this week, the cost of electricity in the US can be up to 3 times lower than in Europe. To ensure this affordability, the European Council refers back to four classical pillars: completion of a fully functioning and interconnected internal energy market, facilitation of the required investment in energy, diversification of Europe's supplies, and enhanced energy efficiency. Interconnection and completion of the internal energy market

Member States are still officially committed to promoting the interconnection of national gas and electricity grids and the liberalisation of the market through implementation of the third energy package. The reality, however, remains far removed from this ideal scenario, as grids remain nationally-oriented and incapable of interoperating. Moreover, many countries still lag behind on

unbundling the infrastructure provision activities from energy production, and selling activities and national energy companies remain in the hands of national energy ministries. In parallel, Member States take note of the need to establish capacity mechanisms in Europe. This effectively recognises that energy production is a very strategic matter that cannot be left to the market alone. The European Commission has been given the almost impossible task of producing guidance on how states can orientate and support the market without distorting it.

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Facilitation of the required investment in energy The European Council recognises that major investments are needed in the European energy sector, mostly from the private sector, and that more predictability is needed. It therefore calls for the effective reform of the Emissions Trading Scheme (ETS) and the adoption of climate and energy targets for 2030 to supplement the EU’s 20/20/20 policy. The Heads of State also call for the rapid implementation of the revised TEN-E programme and the development of subsidies and state aid rules that will facilitate the introduction of “cost-effective” renewable energies. The new element here, of course, is the focus on the cost-effectiveness of green energy, and this has already received much criticism from NGOs and green parties in Brussels who fear Europe is taking a major step back and giving mixed signals to companies investing in sustainable energy sources. Diversification of Europe's supplies and “indigenous” production The Summit restated its support for diversification of energy supplies. While the development of the Southern Corridor and access to Azeri gas sources is currently the most significant development, it was not directly mentioned in the Conclusions. The Heads of State also fired a shot across the bows of Russia by asking the Council to review before the end of the year the options to enhance Europe’s external energy policy and create a level playing field with external energy suppliers. A common approach on “indigenous” energy sources was also endorsed, but leaders shied away from directly referencing shale gas or lignite production. The Commission will be looking into options for “safe, sustainable and cost effective” extraction options, and the Conclusions insist on Member States’ freedom to determine their own appropriate energy mixes. All in all, a common EU energy policy, for the time being, looks a long way off. Tax evasion: Battling a lion with a fly swat For many weeks the media have been reporting on tax fraud and evasion, a phenomenon that costs the EU around €1.3 trillion every year. In times of economic crisis, the issue has, in the words of European Council President Herman Van Rompuy, reached a “momentum incomparable to before”. However, taxation issues remain under Member State control, unanimity reigns, and negotiations often result in deadlock. Although this time round European leaders made a real effort, there were barely any concrete outcomes from this summit and merely soft political declarations, unlikely to make much of a dent in the €1.3 trillion figure quoted above. Towards an automated exchange of information? On banking secrecy - the most controversial issue - EU leaders agreed to apply an automatic exchange of bank information between tax offices from 2015, as established by the Savings Tax Directive.

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Although Luxembourg and Austria had previously resigned themselves to abolishing their bank secrecy, they demand that the exchange remains within the limited framework of the current rules on tax savings. Moreover, they sign up to this only on condition that serious negotiations will be launched with Switzerland, Liechtenstein, Andorra, San Marino, and Monaco to get them to adapt their agreements with the EU on savings taxation and to lift their bank secrecy. In this context, EU leaders agreed on the European Commission’s negotiating mandate to improve the EU’s agreement with the five non-EU countries and to ensure that they apply equivalent measures to those in the EU.

Although EU leaders accepted this condition, if pressure on Switzerland is not conclusive, it will nonetheless make its presence felt in Luxembourg and Austria. The Council also recalled its commitment to extend the automatic exchange of information at the EU and

global levels and welcomed the initiative taken by a group of Member States – Germany, France, the United Kingdom, Italy, and Spain – to create a European model of total tax transparency. Agreements on minor dossiers On the least controversial issues, leaders called on their ministers to sign a set of rapid response measures on VAT fraud as early as June this year, agreed to give priority to the concrete follow-up of the European Commission Action Plan on the strengthening of the fight against tax fraud and evasion, and decided to adopt the revision of the third anti-money laundering Directive by the end of the year. Cameron makes a stand UK Prime Minister David Cameron’s attempt to unify European leaders on the automatic exchange of bank information for individuals succeeded during the Summit. However, his strong stance on the issue has fuelled some counter-comments which denounce the UK’s apparent divided loyalties, whose key objective is allegedly to achieve results at the G8 summit, for which it holds the Presidency. In short, the UK seems to be willing to address the issue internationally, while President Van Rompuy and the European Commission prefer to give it an EU dimension. Addressing the right issues? Tackling tax evasion from individuals only remains the tip of the iceberg. Multinational corporations still benefit from advantageous taxation systems, even at the heart of the EU. Unless this issue is also somehow addressed at the European level, the greatest part of tax evasion will continue. Furthermore, if, as highlighted by President Van Rompuy, it is an issue of “credibility” (of EU institutions and national governments) and “fairness” (to European citizens), EU leaders should at least start considering establishing a minimum level of harmonisation of national taxation systems. Contact robert.francis@grayling.com To contact Grayling’s energy team, please contact EU.Energy@grayling.com

“We cannot let one EU country, or

even several, be sources of

transfers for tax reasons.”

François Hollande