Poland’s prime minister Mateusz Morawiecki, left, and Czech prime minister Andrej Babis, right,  refuse to sign off EU language on the energy crisis
Poland’s prime minister Mateusz Morawiecki, left, and Czech prime minister Andrej Babis, right, refuse to sign off EU language on the energy crisis © Reuters

Good morning and welcome to Europe Express.

The last EU summit of the year ended at the stroke of midnight, with leaders sparring and ultimately failing to agree a common position on the bloc’s energy crisis. The meeting started on a sour note in the morning, when several leaders ganged up on Italy’s Mario Draghi for having put in place travel restrictions and Covid-19 testing requirements without any prior notice. It ended in relative failure after a statement on how to tackle soaring energy prices was scrapped from the text.

Meanwhile in Frankfurt, the European Central Bank said it would start winding down its pandemic bond-buying in response to soaring inflation, but committed to continue asset purchases for at least 10 months and ruled out raising interest rates next year — a more cautious approach than what the US Federal Reserve and the Bank of England have announced.

And in Luxembourg, an opinion by the EU top court’s advocate general has dealt another blow to Margrethe Vestager’s strategy of using competition law to clamp down on multinational corporations paying as little tax as possible — in this case, Fiat Chrysler’s sweetheart tax deal with Luxembourg.

The case will only bolster the European Commission’s arguments for the need to translate into EU law the international agreement inked earlier this year on corporate taxation. Proposals on that and other so-called own resources are scheduled for next week. Below we’ll have more on that and other issues coming up in the next few days.

This will be our last Europe Express edition of 2021. We will be back on January 5. Happy (and Omicron-free) holidays!

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Bones of contention

European leaders opened their summit in a grim mood — the prospect of Omicron becoming dominant in the new year — and ended in disagreement on how to respond to the continent’s mounting energy crisis, write Mehreen Khan and Sam Fleming in Brussels.

The summit ended in bizarre fashion with European Council president Charles Michel announcing that there would be no common language on rising energy prices and promising to return to the matter in the future.

Rising CO2 prices, the functioning of the EU’s Emissions Trading Scheme and an upcoming commission proposal on green finance rules divided leaders all night — emerging as an unexpected flashpoint during a summit where the resurgent pandemic and the bloc’s efforts to prevent Russian aggression were on the agenda. Here’s the Financial Times’ take on the fight over the ETS.

Poland and the Czech Republic stood firm in their demands that the summit communiqué should commit the EU to exploring the functioning of the ETS market — amid fears that carbon prices are being “manipulated” by traders (Brussels says there is no evidence this is the case).

Warsaw and Prague also demanded a mention of forthcoming taxonomy rules, due next week, which will decide how investment in nuclear power and natural gas should be categorised. Anti-nuclear countries — Germany, Luxembourg and Austria — resisted on the taxonomy, forcing Michel to abandon attempts at common language just after midnight, diplomats told the FT.

The scrap casts an ominous shadow on the EU’s continuing attempts to agree ambitious emissions reductions policies in the midst of record high energy prices this winter. Commission president Ursula von der Leyen tried to calm tensions over the ETS and the forthcoming taxonomy, but without success.

On Covid, the clear message among leaders was that booster shots are the top priority, given early evidence that they provide around 75 per cent protection against symptomatic infection, better than two shots alone. (Belgium has just lowered to four months the period between the second and third shot, in a bid to accelerate its booster campaign.)

But the risk, as with the previous outbreaks, is that the spectre of a surging caseload eats away at EU unity — especially when it comes to rules governing travel around the union. Concern that this is already happening because of the Omicron outbreak was on display at the summit.

As Kyriakos Mitsotakis, the Greek prime minister, observed as he arrived, member states were now engaged in a battle against time, as they seek to win extra breathing space to enlarge their booster programmes before Omicron hits with full force. Greece has joined Italy in requiring negative tests from passengers arriving even from within the EU.

The idea of requiring tests is not in itself seen as beyond the pale as an emergency brake — and is indeed envisaged in commission guidance on the topic released earlier this month.

But the Italian measures irked other EU member states because of a lack of advance notice, diplomats said. Their concern, expressed by states including Belgium, Estonia and Spain, is that EU co-ordination breaks down.

Do you agree with the latest European travel restrictions? Click here to take the poll.

Unresolved issues

Even as leaders jet back to their capitals, Brussels will keep working into next week as officials seek to settle unfinished business. Here are the main items on their radar for the coming days:

  • Brexit detente: The UK government today is expected to drop its demand to remove the European Court of Justice as the ultimate arbiter of trade rules in Northern Ireland as it seeks to de-escalate tensions with Brussels ahead of the winter holidays. Meanwhile, the commission is set to propose a law to ensure Northern Ireland continues to receive medicines from the UK (we wrote about it here).

  • Taxonomy: The commission is finally due to present a second draft legal act next week and is almost certain to include both nuclear power and natural gas in the “sustainable” category. The move is likely to win majority backing from member states, but has come under fire from NGOs and some MEPs for opening the door to greenwashing.

  • Own resources: The commission is due to unveil its proposals next week on how to raise the billions of euros that will be needed to repay the borrowings backing the EU recovery fund. This will entail three new “own resources” (revenue streams allocated to the commission). First, the EU’s Emissions Trading Scheme and secondly, its proposed carbon border levy. The third would involve the commission taking a slice of the proceeds from newly proposed rules agreed under the auspices of the OECD. These force multinationals to declare profits and pay more tax in the countries where they do business. Brussels is also due to put forward a directive implementing the other wing of the OECD tax deal setting a 15 per cent global minimum effective corporate tax rate.

  • Gibraltar deal for Easter: After Spanish-UK talks this week, the deadline to conclude talks on Gibraltar has been extended to Easter. As a reminder, this would create a treaty out of the last minute outline deal on free movement of people and goods between Gibraltar and Spain. That provisional accord was struck on New Year’s Eve 2020, less than a day before the frontier was set to become the only hard land border created by Brexit.

Chart du jour: Omicron damper

Line chart of purchasing managers’ index showing slowing  momentum: eurozone businesses report slowing activity

Business activity in the eurozone slowed after more Covid-related restrictions hit the services sector, while there were signs of an easing in the supply bottlenecks holding back manufacturers, according to the latest IHS purchasing managers’ index. (More here)

Vestager setback

An adviser to the EU’s top court has said Fiat Chrysler did not break any EU rules, in yet another setback for the bloc’s competition supremo Margrethe Vestager in the area of taxation, writes Javier Espinoza in Brussels.

The bloc’s competition chief has for years tried to use state aid rules to try to bring member states in line and force companies to pay their fair share of taxes. But the limits of competition law when it comes to tax policy became evident when Vestager lost a massive case against Apple, in which the court quashed an order for the US tech giant to pay back €14.3bn in tax advantages to Ireland.

Following a similar reasoning, the court’s advocate general Priit Pikamäe said yesterday that the commission was wrong to say Fiat Chrysler had broken state aid rules. This means the Italian carmaker does not need to pay €30m in back taxes to Luxembourg.

The European Court of Justice is set to rule on the case in the coming months but the opinion is an indication of where the ruling might land as the ECJ follows the advice of most opinions.

Even though the ruling may turn into yet another loss for the commission in this area, when it comes to antitrust law, Vestager’s reputation has been bolstered by a recent ECJ judgment confirming her €2.4bn fine and competition decision against Google.

What to watch

  1. UK Brexit minister David Frost and his EU counterpart Maros Sefcovic meet online

  2. Valdis Dombrovskis speaks at this ECFR event about the EU’s new anti-coercion instrument

Smart reads

  • Guide for Aussenpolitik: The German Institute for International and Security Affairs (SWP) has published this paper detailing the new German government’s foreign policy, including its relations with Russia and China and EU matters ranging from rule of law to a permanent recovery fund.

  • Populism, unpacked: The reasons why rightwing populism has emerged in areas traditionally occupied by the European left are being explored in this paper by Chatham House.

  • Year in review: The Centre for European Policy Studies’ Karel Lannoo has summarised here the highs and lows of 2021 for the EU, as well as the challenges the bloc faces in the new year.

  • Smart listen: In the latest FT Weekend podcast, Lilah Raptopoulos collects recommendations from FT editors on the best books of the year (plus, take an audio trip to the book vault beneath the FT’s headquarters).

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Are you enjoying Europe Express? Sign up here to have it delivered straight to your inbox every workday at 7am CET, as of Jan 5. We look forward to hearing from you at europe.express@ft.com. Happy holidays and see you in 2022!

Today’s Europe Express team: mehreen.khan@ft.com, sam.fleming@ft.com, andy.bounds@ft.com, daniel.dombey@ft.com, javier.espinoza@ft.com, valentina.pop@ft.com. Follow us on Twitter: @MehreenKhn, @Sam1Fleming, @AndyBounds, @danieldombey, @javierespFT, @valentinapop.

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