An ambitious plan to enhance the geopolitical strength of the EU?
On 19 January 2021, the European Commission presented its new strategy to foster the “openness, strength and resilience” of the EU’s economic and financial systems into the future (the Strategy). Two of the most important issues underpinning the Strategy are the former Trump administration’s extensive use of secondary sanctions to influence the conduct of non-U.S. persons and the EU’s desire to promote its green finance agenda. In that light, the Strategy has three complimentary pillars: first, it aims to promote a stronger international role for the euro; second, it will seek to further develop the EU’s financial market infrastructures and improve their resilience; and third, it aims to promote the uniform implementation and enforcement of the EU’s own sanctions. The Strategy is consistent with President von der Leyen’s vision of a stronger EU with a more active role globally and comes at an important moment geo-politically as a new U.S. presidential administration grapples with an increasingly assertive China, and the EU faces the challenge of navigating its relationship with those two competing powers. The Strategy also comes at a time when China is seeking to counter the effects of U.S. secondary sanctions (see here).
In this paper, we focus on the Strategy’s proposals in relation to green finance, sanctions and foreign direct investment.
Promoting a stronger international role for the euro
The European Commission notes that the euro is the second most widely used currency in terms of its share of global payments. Consequently, the Commission considers that the euro could contribute, to a greater extent, to the EU’s strategic autonomy, especially as the EU looks to become a global “green finance” hub. As such, the European Green Deal and upcoming Renewed Sustainable Finance Strategy are amongst the policy initiatives that the Strategy builds on. Consequently, a significant focus in the Strategy is on promoting the use of green bonds as a tool for the financing of the energy investments necessary to reach the EU’s 2030 energy and climate targets. A key action in the Strategy is also for the Commission to look for possibilities to expand the role of the EU Emission Trading System (ETS) to maximise its environmental outcome and to support ETS trading activity in the EU.
Developing the EU’s financial market infrastructures and improving their resilience
The second key component of the Strategy is developing the EU’s financial market infrastructures and improving their resilience. The European Commission considers that this is a key interest for the EU to enable it to avoid over-reliance on the provision of financial market infrastructure by third parties, since such infrastructure may be vulnerable to disruptive actions by third countries. Relatedly, the Strategy also considers the adverse impact of unilateral actions by third countries on business that the EU considers to be legitimate. The backdrop to this concern is principally twofold. First, the EU has faced considerable difficulties in encouraging EU companies and banks to continue to do and facilitate business with Iran in the face of the risk of the imposition of US secondary sanctions. In addition, the EU faces on-going issues relating to the impact of US secondary sanctions on Germany’s ability to complete the Nord Stream 2 project successfully.
In that light, the Commission is intending to engage with companies that make up the financial-market’s infrastructure, the ECB and the relevant European Supervisory Authorities, to analyse the EU’s vulnerabilities and assess the need for further recommendations in this area. Furthermore, the Commission will explore ways to ensure that essential financial services, including payments, can continue unimpeded by sanctions unilaterally imposed by third countries.
Strengthening the implementation and enforcement of EU sanctions
The Strategy is stark in its assessment of the implementation and enforcement of EU sanctions across the Member States: “implementation is not as uniform across the EU as it ought to be” and “inconsistent enforcement undermines the efficacy of sanctions and the EU’s ability to speak with one voice”. As such, the European Commission states that it will work to improve the effectiveness of EU sanctions including through conducting a review in 2021 of practices that circumvent and undermine sanctions, such as cryptocurrencies and stablecoins. Legislative proposals are expected in the latter regard in 2022.
Other measures that the Strategy announces are a Sanctions Information Exchange Repository to promote the exchange of information between the Member States and the Commission on the implementation and enforcement of sanctions. An expert group of representatives from the Member States will also be established with the European External Action Service in attendance. That group’s remit will include examining the technical implementation of the EU Blocking Statute (Regulation (EC) No 2271/96) (the Blocking Statute). The Strategy also foresees the possible amendment of the Blocking Statue and procedures associated with it to ensure that, amongst other things, processing of authorisations under Article 5 is streamlined, as well as a broader review of the EU’s response to extra-territorial sanctions. The outcome of that review is expected later this year.
Separately, the Strategy envisages that when foreign direct investments into the EU are assessed under Regulation (EU) 2019/452 (the FDI Screening Regulation), the Commission will consider the likelihood that the transaction will result in the application of unilateral sanctions adopted by a third country to the relevant EU target. For example, the Commission envisages that transactions will be assessed to see if the proposed acquisition will render an EU target more likely to abide by extra-territorial sanctions. Further background on the FDI Screening Regulation can be found here. This development comes at a time when national security screening regimes are being enhanced globally (see, for example, here).
Closing observations
The measures proposed in the Strategy appear to be relatively modest in scope with many resulting in further reviews by the Commission or the introduction of facilitative measures. Whilst this may disappoint some, most EU companies and financial institutions will welcome the fact that the Strategy is unlikely to result in significant further sanctions compliance burdens being imposed on them in the near term. Of course, careful consideration will still need to be given to the specifics of any legislative measures that follow.
More broadly, the timing of the publication of the Strategy appears politically awkward as a new U.S. presidential administration settles into the White House, especially since the EU’s agreement to the EU – China Comprehensive Agreement on Investment (see our publication here) has already set the EU at odds with the Biden administration. It is clear that geo-political machinations, with their potential to impact sanctions compliance considerations for companies, have not ended with the exit of President Trump.
