Tue. May 24th, 2022

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Long delay due diligence obligations for companies that ignore environmental damage or human rights violations in their supply chains, move to the starting line. We will unpack the main elements of the draft proposals before their publication by the European Commission in mid-February.

In Rome, a conclave of legislators and regional representatives begins the papal process of election Italy’s new president, with Mario Draghi named the favorite. We will look at the interests – and the risk of financial markets faltering as the new government begins to turn around on reforms.

With EU foreign ministers meeting in Brussels today to discuss Russia’s sanctions in the event of an attack on Ukraine – which is virtually affiliated with their US counterpart – we will also look at what Sweden and Finland‘s separate meeting with NATO Secretary General is a sign. (Here is the FT’s take about why division in the west has been exposed more than usual this time.)

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Supply chain under scrutiny

One of the more annoying and controversial proposals in the commission’s legislative portfolio comes closer to its debut, writes Sam Fleming, Mehreen Khan and Andy Bounds in Brussels.

Proposals for rules on sustainable corporate governance, which were rejected twice last year by the commission’s internal regulatory investigative council, are tentatively released in mid-February.

The commission has yet to finalize the provisions, but according to the current draft, large companies could find themselves in court if they do not do enough to capture human rights or environmental abuses in their supply chains, according to people familiar with the discussions.

The rules will apply to companies with more than 500 employees and € 150 million in annual revenue. There may be an additional category for “high-risk” sectors such as mining, which applies to 250-500 employees. Smaller companies will be released.

The enchanting regime, led by Justice Commissioner Didier Reynders, had a charged origin. Earlier ideas, including the possibility of forcing companies to withdraw certain non-compliant products from the internal market, did not enter into the latest concept – although there is much room for change.

Reynders tell the FT this month that the commission will come up with an “ambitious proposal on precautionary investigations, environmental issues and human rights issues” – with the aim of getting the proposals in the first quarter of the year.

“We’ll start with big companies – we do not want to put too much burden on SMEs,” he said.

Members of the European Parliament have strongly urged stricter rules, partly due to concerns about the use of forced labor in China’s Xinjiang region. Member countries including Germany and the Netherlands were move forward with their own regimes.

The legislation will allow companies to be taken to court by injured parties if they do not meet the required prudential standards, while also allowing EU member states to impose financial fines. Companies will need to show that they have properly researched risks in their supply chains.

The commission declined to comment on the details of the proposals, which are also overseen by Vera Jourova, the commission’s vice-president.

Heidi Hautala, a Finnish Green MEP, said that without access to justice for victims of abuse covered by the directive, the instrument would have almost no meaning. “It’s something real if the companies have to do everything in their power to identify the key risks in the supply chain and work on those risks,” she said.

Business groups, while supporting an EU-wide framework, have expressed concern about the proposals. “The new rules should not instruct European companies to solve problems outside their scope, by mixing the roles of companies and governments,” says BusinessEurope, which represents the bloc’s major employers.

Chart of the day: Mountain of debt

Mario Draghi’s leadership and the political support for his plan to recharge the economy have helped allay years of concern in financial markets about the sustainability of Italy’s debt, which now exceeds 150 percent of GDP.

It’s the markets, stupid

Italy’s political cauldron is starting to foam in earnest today as MPs, senators and regional representatives begin to vote on who will succeed Sergio Mattarella as president of the republic, writes Sam Fleming.

The central question is whether Mario Draghi’s vote in the Quirinale Palace drives his current role as prime minister, which he accepted last February, and, if so, who will replace him.

The political ferment is being watched extremely closely in Brussels. Draghi, the former president of the European Central Bank, is enjoying enviable credibility in the European Commission, most recently thanks to his skilful handling of Italy’s € 191 billion bid in grants and loans under the NextGenerationEU recovery program.

The risk is that his successor will start struggling to deliver on all the reforms and investments needed to reach agreed milestones in the Italian recovery plan, which jeopardize the flow of cash on Italy’s path.

While the NextGenerationEU scheme runs until 2026, the Italian recovery plan was built to preload reforms and disbursements, in part with the expectation that Draghi would serve in the Chigi Palace until 2023.

The consequences of failure to comply with agreed reforms are serious: payments can be withheld or even forfeited. Given the political uproar that would follow in such a situation, both sides are encouraged to let the cash flow.

The greater risk, some officials fear, may be less that Italy harms the commission, but rather that it again gets into trouble with the financial markets. Its structural reform program includes a range of hot topics, including civil justice, public administration, taxation and procurement. If Italy falls short, market confidence in the country’s growth prospects could begin to wane.

A new government will also face increasing pressure to hand out tax cuts and extra spending with general elections looming by the summer of 2023. All of this will jeopardize Rome’s plans to keep public lending in check – a topic that will receive even greater urgency given EU plans to reinstate the EU’s suspended stability and growth treaty in 2023, as well as the European Central Bank’s ambitions to gradually downgrade sovereign debt purchases.

The commission raised a warning flag in November, declaring that Rome did not adequately limit the growth of its current spending in its 2022 budget, given its debt-to-GDP ratio of more than 150 percent.

Nordic-NATO flirt

The Foreign Ministers of Sweden and Finland meet with NATO Secretary General Jens Stoltenberg today in Brussels, only the latest in a series of diplomatic flirtations between the military alliance and its two most notable Northern European non-members, writes Richard Milne, Nordic and Baltic correspondent.

The governments in both Stockholm and Helsinki as well as all of them from US President Joe Biden on the NATO side have repeatedly emphasized in recent weeks that Finland and Sweden, and they alone, have the right to join the military alliance search. This came after Russia’s foreign ministry broke the Christmas spirit by warning on December 24 that if any of the countries joined NATO, there would be “serious military and political consequences”.

Both Finland and Sweden are known for their long periods of neutrality, but that attitude has changed in recent years, first by joining the EU with its weak mutual defense clause, and then in recent years by perhaps becoming the most important and closest partners. . with NATO.

A decade ago, it was noticeable that Anders Fogh Rasmussen, then Secretary General of NATO, was astute. warned Sweden that only full membership of the alliance would offer full benefits. Now, US and NATO officials are full of praise for the two countries and hint that any application is warmly welcomed and possibly approved soon.

It is against this background that Sweden’s Ann Linde and Finland’s Pekka Haavisto meet Stoltenberg today. Neither Linde nor Haavisto are currently in favor of NATO membership, and there is far from political unity in any of the countries. But there is a feeling that a potential Russian invasion of Ukraine could further change the situation. (Keep an eye on this space – and the FT – for more in the coming days.)

What to watch today

  1. Italian presidential election begins

  2. US Secretary of State Antony Blinken joins as EU foreign ministers meet in Brussels

. . . and later this week

  1. EU affairs ministers meet tomorrow in Brussels

  2. The General Court ruled on Wednesday in a dispute with Intel over a € 1 billion fine dating back to 2009

Remarkable, quotable

  • Taxonomy, sued: The anti-nuclear governments of Austria and Luxembourg started it preparations for a lawsuit against the commission if it describes nuclear energy and gas as sustainable investments, the countries’ energy ministers told the Financial Times.

  • German Publishers vs. Google: The American technology giant stares a new complaint of Germany’s largest publishers, including Axel Springer, who are demanding that the EU intervene in Google’s plan to stop the use of third-party cookies – a critical blow to how the industry generates revenue.

  • More US troops, please: Estonia’s Prime Minister Kaja Kallas asked in an interview with the FT a larger American presence in the Baltic countries as a deterrent, regardless of whether Russia invades Ukraine.

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Today’s Europe Express team: sam.fleming@ft.com, mehreen.khan@ft.com, andy.bounds@ft.com, richard.milne@ft.com, valentina.pop@ft.com. Follow us on Twitter: @ Sam1Fleming, @MehreenKhn @AndyBounds, @rmilneNordic, @valentinapop.

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