CER Bulletin Issue 139 | August/September 2021

Three questions on the German election By Christian Odendahl The ‘Fit for 55’ climate proposals explained By Elisabetta Cornago A new migration crisis may be brewing By Camino Mortera-Martinez and Luigi Scazzieri

Three questions on the German election by Christian Odendahl

As the floods in Germany change the dynamics of the race, the CDU could win the most votes yet end up in opposition. In that case, the chancellor could be the SPD’s Olaf Scholz.

The German federal election on September 26th But just as the press was full of articles asking is fast approaching. is stepping whether the Greens should have instead down as chancellor after 16 years, and will leave nominated the more popular Armin Laschet, current prime minister of North as their candidate, torrential rains caused Rhine-Westphalia, in charge of the Christian severe floods in Germany and Laschet’s state Democrats (CDU) and well-placed to succeed her in particular, killing more than 160 people. as chancellor. But Germany’s political landscape This was an opportunity for Laschet to display is evolving: the largest parties – the CDU and his leadership credentials. But he made every the Social Democrats (SPD) – are a lot smaller conceivable mistake. He ignored detailed than they were and the Greens have become and alarming flood warnings and travelled to a serious contender for the chancellery. The southern Germany to campaign, leaving the current strength of the Free Democrats (FDP), affected counties to deal with the fallout. He a conservative-liberal party, also adds coalition failed to realise that the severity of the situation options to the menu. required a state task force – and changed his views on whether the floods should affect Who will come in first? German climate policy three times in 24 hours. For a while in the spring it seemed as though He was then caught laughing in the background the Greens could overtake the CDU, but now of a sombre TV interview with the German the polls have reversed, with the CDU ahead president in one of the worst-affected towns by 10 points. Excitement around the Greens’ in his own state. A recent poll suggests that candidate for chancellor, Annalena Baerbock, Laschet’s approval ratings have taken a severe has subsided. The Greens’ campaign failed to hit, from already low levels. His plan to become anticipate the high level of scrutiny Bearbock chancellor by doing and saying very little – which would be subjected to. Her credibility has worked well until the flood – is obsolete. been undermined by writing an unnecessary book with the help of a lot of copy and paste, Which leaves an unlikely winner of recent embellishing her CV and being late in declaring weeks: the SPD’s Olaf Scholz, who is by far the additional income to the . Her most experienced chancellor candidate. His approval rating is still around 30 per cent, but her response to the flooding was measured, and disapproval rating has increased strongly. focused on putting together a financial rescue [email protected] | WWW.CER.EU CER BULLETIN ISSUE 139 | AUGUST/SEPTEMBER 2021 package – as would be expected of a finance earners, which would be difficult for the FDP to minister and vice chancellor. Furthermore, his stomach. An SPD-Green-FDP coalition would recent successes on the global stage – the G20’s only really work if the SPD were larger than the agreement on minimum rates of corporate Greens, thus making Scholz the chancellor. tax is associated with him in Germany – have added to his standing, relative to his two rivals. A coalition that would definitely not work, The SPD is still well below 20 per cent in the despite pundits outside Germany suggesting it polls, and it is highly unlikely that the SPD will could, is a CDU-SPD-FDP combination. If the overtake the CDU. But the Social Democrats SPD entered such a government, dominated by are within touching distance of the Greens and the right, its remaining voters would abandon it slowly climbing. in droves.

The CDU will probably end up as the largest What does the election mean for Europe? party, but does that mean that Laschet will All the major parties share a strong commitment become chancellor? to the EU, the transatlantic alliance and the euro. With one exception – Konrad Adenauer Outside Germany, it is often underestimated governing with an absolute majority after the how strongly Germany’s security and commercial 1957 elections – post-war Germany has always interests anchor the European and international been ruled by coalitions. The CDU, even when policies of its leaders. EU and NATO membership, it was the largest party in the Bundestag, has at for example, are not transactional projects to times still found itself in opposition, for example Germany, but at the core of its national interest. when the SPD and FDP formed a coalition under No conceivable CDU chancellor would dissolve the SPD chancellors Willy Brandt and Helmut the euro or expel one of its members. Nor Schmidt. This election may lead to another would a Green chancellor suddenly change instance of this happening. course on China fundamentally, despite some hawkish rhetoric, as Germany’s commercial The most likely outcome is still a CDU-Greens interests are too strong. That is a benefit and a coalition. That is a well-rehearsed combination curse at the same time: Europe can count on in several states, both parties are keen to govern the next German government to provide stable, and the pressure on their leaderships to come to predictable leadership; but no conceivable an agreement after the election would be high. coalition seems willing to challenge voters on The CDU-Greens coalition would have broadly their preference for the status quo, like strict similar policies to the existing government, fiscal rules and tight monetary policy, aversion to but with a stronger green agenda because the military interventions and limiting confrontation Greens would aim to extract concessions from with either Russia or China. the CDU: a steeper carbon price path in the national scheme, more subsidies for renewables But there are nuances between the possible and more public investment in decarbonising coalitions which would affect Europe. A traffic transport and buildings. light government would be keen to invest in modernising Germany’s economy and public Another coalition of Greens, SPD and FDP could administration. But there would be no way it also have the numbers to govern. This ‘traffic could fundamentally reform domestic fiscal light’ coalition (because the parties’ colours are rules against CDU opposition, since changing green, red and yellow) would aim to tackle, at the constitution requires two-thirds majorities least rhetorically, the three main issues facing in both houses of parliament. Tweaking the Germany: climate change (Greens), social equity existing rules is possible, as is circumventing (SPD) and the modernisation of its economy them via special investment funds, but without and public sector (FDP). However, forming a proper change in Germany, the EU’s fiscal stable three-party coalition of erstwhile enemies rules will be harder to reform. A CDU-Greens would be tricky: the election platforms of the coalition could reform Germany’s fiscal rules SPD and Greens on the one side, and the FDP to allow for more public investment to fight on the other, do not exactly match, with the FDP climate change, setting the tone for something favouring tax cuts for the rich. similar at the EU level. Overall, however, the mere fact that Germany’s government will be a There is another, underappreciated problem centrist coalition means that its European and of a traffic light coalition: the SPD’s fear of international policies will be variations of the entering the coalition as a junior partner and status quo. thus becoming a permanent second fiddle to the Greens. To avoid that, the SPD would put hefty policy demands on the table, such as more Christian Odendahl generous social benefits or higher taxes on high Chief economist, CER @COdendahl The ‘Fit for 55’ climate proposals explained by Elisabetta Cornago

The costs of the Commission’s proposals to meet the EU’s 2030 climate goals need to be distributed in a more progressive way.

Despite the jokes about Fit for 55 sounding The Fit for 55 package aims to accelerate like a fitness programme for the middle- decarbonisation by gradually reducing the overall aged, the climate policy package presented amount of emissions allowed under the ETS. The by the on July 14th is number of free ETS allowances for individual a historic milestone. With its 13 proposals, plants already depends on benchmarks that the Commission has charted a path towards reflect the emissions of the most efficient plants reducing EU-wide greenhouse gas emissions in that sector. The new proposal would provide in 2030 by 55 per cent, relative to 1990 levels, fewer free allowances to plants that do not as required by the Union’s recently-approved undertake the decarbonisation efforts suggested Climate Law. The proposals will face political by energy auditors. resistance, because they involve increasing carbon prices for both businesses and The package will also directly support households. The key to making the package a innovation and investment in heavy industry: reality is to put compensation front and centre, a greater share of the ETS’s revenues will be through income support to address energy allocated to innovation subsidies, and ‘carbon poverty and investment support for industry’s contracts for difference’ will be introduced. decarbonisation efforts. These contracts will guarantee investors a fixed carbon price, higher than the current one, for The EU Emissions Trading System (ETS) places a a set period of time if they innovate and invest

yearly cap on EU CO2 emissions by requiring the in decarbonisation. Some clean technologies businesses covered to buy carbon permits from that are in the early stages of deployment are a fixed pot. It currently covers heavy industrial too expensive, given current carbon prices. sectors, electricity generation and intra-EU At the end of the contract, the firm can sell, at flights. However, European heavy industry and market price, the ETS allowances that it did not aviation have so far obtained most of their use thanks to green investment, and receive the emissions allowances for free, so that they can difference between the market carbon price and remain competitive with foreign businesses, the higher, contracted carbon price. In essence, most of which do not pay for carbon emissions. the Commission is bringing forward higher This has reduced incentives for low-carbon carbon prices for industrial innovators. innovation, and led to industrial emissions falling more slowly than those from the The package also proposes to level the playing electricity sector. field between domestic and foreign producers [email protected] | WWW.CER.EU CER BULLETIN ISSUE 139 | AUGUST/SEPTEMBER 2021 of cement, iron and steel, aluminium, electricity EU-wide energy-efficiency target binding. Both and fertilisers with a carbon border adjustment aims are welcome and necessary to achieve the mechanism (CBAM). This mechanism would 2030 climate goals, but there are challenges. impose a cost of carbon on imports of these 60 per cent of the EU’s renewable energy still goods into the EU, eventually replacing the comes from biomass – from forests, municipal free allocation of ETS emissions allowances. But waste, and agricultural and wood-working the timeline for ending free allowances, which residues. Today, the dependency on biomass will be phased out by 2036, is not ambitious needs to be squared with the EU’s ambitious enough. If the 2030s are ‘the decisive decade’ biodiversity and forestry strategies: this will for climate action, as the Commission insists, it require stringent criteria to ensure that biomass should not wait 15 years to apply the ‘polluter use is environmentally sustainable. pays’ principle to industry. The new EU-wide target for energy-efficiency Households have not yet felt the full impact of would be binding, and paired with indicative carbon pricing, because of the limited scope of national-level targets. Energy-efficiency the ETS. This would change with the proposal improvements in transport and industry are for a new ETS, beginning in 2026 and separate largely in the hands of industrial players and can from the existing scheme to start with, to cap be encouraged with carbon prices, standards pollution from road transport and heating, both and, if needed, subsidies for innovation. of which are largely powered by fossil fuels. The Efficiency improvements in housing are in Commission also wants national taxes on heating the hands of households: poorer people will and transport fuels to be set according to their need support in order to afford the costs of energy content and environmental performance, renovation. Many member-states are offering which is currently not always the case. renovation subsidies as part of their recovery plans, but more investments will be needed. These proposals would lead to higher prices at the pump and higher heating bills, which would Overall, the proposals are ambitious, and long disproportionately hit lower-income households, negotiations loom between the Commission, who spend a higher share of their income on the member-states and the European transport and heating. To mitigate that hit to Parliament. To get the package over the line and incomes, the Commission plans to put 25 per reach its targets, Europe must: cent of the revenues from the new ETS into a  Resist the call from some member-states Social Climate Fund. The fund will launch in 2025, to water down price signals. Reaching the one year before carbon pricing starts applying ambitious climate targets without strong to buildings and road transport. Frontloading and consistent price signals will not work. this kind of compensation is important, in Price signals are not sufficient, but they are a order to make climate action fairer and more necessary foundation of climate action. effective: transfers are necessary to offset fuel  Stand its ground on regulatory requirements. price increases. But the Commission’s proposal Regulation sets minimum standards to force needs to be bolder and more detailed: the carbon innovation, and adds further credibility to price price of this new ETS needs to be made stable signals. The main political battle here is the and predictable, to give households guidance on phase-out of combustion engine cars. future costs; and a larger share of revenues of the  Be bold in addressing the distributional new ETS should go into the Social Climate Fund, impacts of the energy transition. Richer to make the scheme politically acceptable while households, richer businesses and richer creating strong incentives for households to member-states should shoulder a larger share invest in reducing their emissions. of the cost of climate action. Avoiding these discussions is not an option: climate inaction In addition to price signals – energy taxes and would have even more unequal outcomes. ETS carbon prices – to encourage households to  Lead the world in climate action. The EU shift away from natural gas heating and petrol needs to raise its climate diplomacy efforts or diesel cars, the Commission is also proposing ahead of the COP26 climate negotiations in regulations to lower carbon emissions. For Glasgow: it should encourage the US and China example, if adopted, new standards for car and to match its own policy efforts, and it should truck emissions would end sales of combustion step up its support for developing countries to engine vehicles in 2035. help them in the energy transition.

The proposals for the power sector seek to increase the share of renewable energy sources to 40 per cent of final energy consumption, Elisabetta Cornago and to reduce energy demand, by making the Research fellow, CER @ElisabettaCo A new migration crisis may be brewing by Camino Mortera-Martinez and Luigi Scazzieri

Member-states have made some progress towards a common asylum system. But large divisions endure and the EU’s efforts to increase co-operation with third countries will continue to face difficulties.

For EU policy-makers, a new migration crisis is the case of Belarus flying in migrants from other never far from sight. After dropping sharply in continents. This is not a new phenomenon, but 2020 – when most people could not leave home, it should bring migration back to the top of the let alone cross borders – the number of migrants EU’s agenda. arriving irregularly in Europe is rising. According to Frontex, the European Union’s border agency, The EU and its member-states managed to arrivals during the first five months of 2021 weather the 2015-16 migration crisis by striking increased by 47 per cent compared to the same controversial deals with countries like Turkey period in 2020. In May, around 12,000 people and Libya, to stop migrants from reaching crossed illegally from Morocco to the Spanish Europe. Since then, the Commission and the enclave of Ceuta in less than two days. The member-states have given more powers to crossings followed Spain’s decision to provide Frontex and national law enforcement bodies to medical treatment to Brahim Ghali, a leader of police the external borders of the passport-free the Sahrawi people who want independence Schengen area. The Commission has also tried from Morocco. In response, Morocco instructed to create a common asylum system, including its border forces to look the other way. Then in solidarity measures that would distribute July, Frontex had to intervene on the border asylum-seekers between member-states. In between Lithuania and Belarus, after a sharp September 2020, the Commission relaunched rise in border crossings. The migrants mostly negotiations among the member-states with a came from sub-Saharan Africa and were proposal for a ‘new migration pact’. reportedly flown in and pushed across the border by the Belarusian government, in On the surface, the politics of migration in retaliation for EU sanctions. Europe remain toxic. Delays and failures in registering and processing asylum applications The numbers are not as headline-grabbing at Schengen’s external borders have caused as those of 2015-16, when 1.4 million people bottlenecks and pitched frontline and arrived irregularly in Europe. However, they destination countries against each other. point to how willing disgruntled neighbouring The former claim that they need more help countries are to exploit desperate people in in dealing with asylum-seekers; the latter say order to put pressure on the EU – especially in border countries are simply unwilling to do their [email protected] | WWW.CER.EU CER BULLETIN ISSUE 139 | AUGUST/SEPTEMBER 2021 job, as it is easier for them to turn a blind eye to The EU has pushed ahead with plans to deepen migrants moving into other member-states. co-operation with third countries, saying it intends to use carrots and sticks, including Behind the scenes, however, there has been curtailing Schengen visas for countries that are some progress. In June the member-states not co-operating. The Union has continued to agreed to turn the EU’s Asylum Support Office give money to partners in the Western Balkans, into a fully-fledged EU agency, with more staff North Africa and the Middle East, to promote and powers to intervene in a crisis. For years, economic development and to strengthen frontline countries insisted that all reforms their border controls. EU leaders have also had to be adopted as a package – they would agreed to provide new funds to Turkey to help not take on greater responsibilities for quickly it sustain the millions of refugees that it hosts processing arrivals or accept compulsory on its territory. The Union wants to bolster co- deployments of EU staff on their territory until operation with Tunisia and with Libya, now that there was an agreement to distribute asylum- there is a provisional unity government in Tripoli. seekers across the bloc. To break the stalemate, Perhaps most crucially, the bloc is actively trying EU countries agreed that the agency should not to get migrants’ countries of origin to take back carry out compliance checks and monitoring, or nationals whose asylum applications have been unilaterally deploy staff on their territory, until rejected. Currently only around a third of those other asylum reforms had also been agreed. ordered to leave the EU do so, largely because of a lack of co-operation from foreign authorities. The deal on the asylum agency is a small step in the right direction. But other proposed reforms All the EU’s efforts to secure greater co- will be harder to conclude. It is unclear whether operation from third countries are likely to the processing of asylum applications can be remain legally difficult and fraught with practical as quick as the Commission would like. And challenges. Its reliance on partners to keep out although border states insist on the distribution migrants will encourage many of them to extract of asylum-seekers across the EU, this remains an increasingly high price for co-operation, by controversial. Some member-states continue asking for more money. Meanwhile, the EU’s to think that solidarity measures encourage plans to motivate countries of origin and transit migrants to come to the EU, while others to take back irregular migrants will be difficult to remain unwilling to take in any migrants at implement. Many countries are deemed unsafe all. EU countries also disagree on when a crisis for migrant returns. And for many governments, would be serious enough to trigger solidarity agreeing to take back their nationals is politically measures. damaging and can mean losing remittances that are worth much more than EU funding. It may be possible for member-states to make further progress by reaching piecemeal Despite these challenges, the EU has no choice agreements on some of the issues relating but to manage migration together with third to improving access to migrants’ data, and countries, including with difficult partners – the screening and processing of asylum unless member-states are willing to engage applications. But the most contentious in massive pushbacks of migrants or to accept measures will have to be decided as a package large numbers of irregular arrivals, risking deal, reflecting a compromise between Schengen’s collapse. This means the EU will have member-states on increased responsibilities to offer its partners more financial help as well for managing arrivals and burden-sharing – as practical assistance and greater avenues for whether it is through accepting asylum seekers, legal migration, in return for their co-operation. contributing with material support or helping But co-operation won’t always be possible and with deportations. EU leaders should be ready to stand up to coercion by countries that will not hesitate Until then, solidarity will continue to take to exploit desperate migrants, like Belarus. If the form of ad-hoc measures by coalitions of they don’t, they may soon find a new migration willing member-states, and the EU will still crisis brewing. focus its efforts on the external dimension of its migration policy, particularly on the common objective of reducing the number of migrants arriving in Europe. The question is whether the Camino Mortera-Martinez EU’s efforts in this direction will be sufficient Senior research fellow, CER @CaminoMortera to deal with new trends in migration – such as climate change creating refugees or unfriendly governments exploiting migrants to put Luigi Scazzieri pressure on the Union. Research fellow, CER @LScazzieri [email protected] | WWW.CER.EU CER BULLETIN ISSUE 139 | AUGUST/SEPTEMBER 2021

CER in the press

The Evening Standard hardest hit, according to The New York Times told Euronews. “I think this 22nd July Elisabetta Cornago and Sam 25th June does reflect an increasing The CER estimates that Lowe at the CER. “It’s very difficult for Greece realisation that China is leaving the single market but also for the EU to co- developing in ways that and customs union at the The Economist operate with Turkey to crack we hadn’t hoped for and end of December 2020 had 14th July down on trafficking,” said perhaps we didn’t expect a reduced UK trade by £10 “Slashing emissions is a Camino Mortera-Martinez few years ago when the talk billion, or 13.5 per cent, rotten problem for the of the CER in Brussels. was of China becoming a in May. John Springford, officials, politicians and “It’s easier for the Greek responsible stakeholder in deputy director of the think- diplomats who must solve authorities to say ‘You were the international system.” tank said this was on top of it. The costs come now and there, you were steering the an £8 billion, or 10 per cent, the benefits are reaped only boat and so you are charged Financial Times hit to trade between the in a generation,” points out with this crime.’” 14th June June 2016 referendum and Elisabetta Cornago of the “Once participating splintering away from the CER think-tank. The Economist banks start to go into the single market. 17th June nitty-gritty of designing The New Statesman A model constructed by [the European Payments Bloomberg 2nd July John Springford, deputy Initiative], the interests 19th July As a new paper by Luigi director of the CER, of those banks will start “As long as the ECB Scazzieri of the CER notes, concludes [in April] that to diverge,” warned Zach continues to expect too-low Germany and the UK signed goods trade is 11% lower Meyers, a research fellow at inflation, the new strategy a “Joint Vision Statement” than it would otherwise the CER. would require it – strictly on security in 2018; they are have been, on top of an speaking – to loosen its both part of the “Northern earlier 10% fall since the The Express policy,” said Christian Group” of states around the referendum. 1st June Odendahl, chief economist North and Baltic seas; along Charles Grant, director of at the CER in . “The with France they comprise Bloomberg the CER, said France will true test of the negotiated the “E3” states crucial to the 16th June use its EU presidency in the consensus is still ahead.” Iran nuclear deal; German “Obtaining a settlement first half of next year ahead leaders among others have [with Google on antitrust of the French presidential The Wall Street Journal in the past contemplated the investigations] is likely to elections to “promote its 14th July idea of a European Security be a roadmap for other ideas of Europe”. But Mr Brussels worries that Council that binds in the UK. regulators,” said Zach Grant warned officials will continuing to grant free Meyers, a research fellow at need to produce “concrete ETS allowances might Financial Times the CER. deliverables” to help Mr breach WTO rules, but 30th June Macron win. Mr Grant industry representatives Sam Lowe, trade expert Euronews wrote: “France will use its believe CBAM and free at the CER, said it was no 14th June EU presidency in the first allowances – without which longer possible for British “The language on China half of 2022 to promote its their exports risk becoming ministers to point the finger certainly goes much further ideas on Europe. Fortunately uncompetitive – can coexist. at Brussels when it came to than anything NATO has said for Macron, many of the Russia, Turkey, China and issues like trade or subsidy before,” Ian Bond, director key people in Brussels are the UK are expected to be control. of foreign policy of the CER, sympathetic to France.”

Recent events 13 July 22 June 9-11 June Launch of Webinar on Progressive Governance Digital Summit 'How to fight corruption and uphold the 'How does the EU lead the world on 2021 'Placing politics above economics: rule of law' climate change?' How COVID-19 has led to a public finance Speakers: Katalin Cseh, Carl Dolan, Speaker: Frans Timmermans paradigm shift' Camino Mortera-Martinez and Michiel Speakers: Agnès Bénassy-Quéré, Jason van Hulten Furman and Christian Odendahl

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