What Might the “New Normal” be for Palm Oil in the EU?

In the fight against the Coronavirus, members of the European Union (EU) seem to be looking out for themselves first.

More so than the financial crisis of 2008, the virus has created a common threat. But the responses are inward-looking: closed borders between EU states. Export restrictions for critical medical supplies apply inside the Common Market. National aid programs dwarf the collective EU effort.

Many observers expect that the COVID-19 crisis will lead to tectonic shifts in the EU’s architecture. This article looks at two developments of potential relevance to palm oil: the debt crisis in the European South and the future of what was supposed to be Europe’s “Man in the Moon moment,” the Green Deal.

COVID-19 and EU Debt: The “Frugal Four” against the “Olive Belt”

The spread of the Coronavirus has once again fueled a European debate on how to support the debt-ridden countries of the southern “Olive Belt” (mainly Greece, Italy, and Spain).

At the heart of the matter lie the so-called Corona-Bonds, i.e., bonds not underwritten by national governments but by the EU. Opponents and supporters have been pushing each other in the same way they did in the 2008 financial crisis. Back then, the issue was known as “Eurobonds.”

The divide still is over the question if each country must finance its debt alone or can count on the EU acting as a single entity in the financial markets. In the latter case, the EU, not Spain or Italy individually, would be liable for the debt.

In the view of the proponents of this idea, not only would market access be easier for the southern countries. Financing costs would also go down, at the end of the day, for everybody. The European North, however, remains unimpressed by the arguments.

In fact, in a spectacular decision, the German constitutional court on May 5, 2020, in the words of the Financial Times, put a bomb under the EU legal order. The court stopped just short of calling the “quantitative easing,” i.e., the purchase of national bonds by the European Central Bank (ECB) illegal.

But it dismissed the European Court of Justice’s legal reasoning on the matter as inadequate. And gave the ECB three months to comply with its view. Or else the German Bundesbank would have to refrain from participating in quantitative easing. That would be a watershed-event for the EU.

The problem is this: if the European idea of “ever closer Union” is to have any meaning in the future, then solidarity in times of need – like now with COVID-19 – cannot stop at national borders. That is a task by which the work of the EU institutions must be judged.

However, the actions of the European Commission and Council of Ministers, in the final analysis, reflect the national powers that be. So, when in April the fierce debate over the Corona-Bonds raged on, it was abruptly silenced by the “Frugal Four” (Austria, Denmark, the Netherlands, and Sweden). Plus, of course, the economic heavyweight Germany, traditionally thrifty and anti-Eurobonds, put its foot down.

That did not sit well with southern EU members, especially Italy. Anti-German sentiment there flared already during the Euro-crisis more than ten years ago. This time, Tullio Solenghi, a popular Italian actor rants against Germany in a video on Facebook:

“Thank God I’m Italian. Yes, we are supposed to be lazy, even Mafiosi, say the Germans. But we are empathic, we are human. So, thank you that we’re Italian and not German.”

Although this might not be the majority view, it decidedly does not sound like “ever closer Union.”

During the Euro-crisis, German Chancellor Merkel spoke a lot about “if the Euro fails, Europe fails.” In the opinion of pretty much every expert, the economic fallout from the Coronavirus will be far worse than back then. Would it not be logical that a break-up of the EU is now more likely, too?

These centrifugal forces pull all the harder because of two closely related events. First, there are the political mavericks like Hungary and Poland, that continue to disregard EU rules and face sanctions for it. They already are having a field day because of the German court´s decision mentioned earlier.

Secondly, there is the issue of costly environmental programs.

Covid-19 and the Green Deal: No Time for the Environment

The European Green Deal, by far the most important project of the European Commission in the current legislative period, was on everyone’s mind until recently. It comprises dozens of initiatives to combat climate change. A legislative proposal has already been tabled, the European Climate Law. It includes more emissions reductions for 2030.

Germany will take over the rotating Council Presidency on July 1, 2020. The Commission’s work program under the leadership of German Ursula von der Leyen now must be revised entirely given the consequences of the Corona crisis.

The German weekly Der Spiegel reports that on April 6, in an urgent letter to his home government, Germany’s Ambassador to the EU sounded the alarm. The letter provides impressive insights into the dramatically reduced capacity for action of the EU institutions.

The Ambassador concludes: “The EU legislative process is slowing down considerably.” To add insult to injury, responsible in part are trivial reasons like technical bottlenecks in video conferencing.

Thus, the issues the EU can address are radically prioritized. European news portal Euractiv reports that the EU-Commission feels pressure to now only deal with “urgent COVID-19 related files”.

On April 22, Euractiv published a list of delayed Green Deal initiatives. Among those deferred until later in 2020 are the Farm-to-Fork and the EU Biodiversity initiative. Both are expected to impact palm oil imports into the EU via banning imported food that “does not comply with relevant EU environmental standards” (Farm-to-Fork) and by promoting “imported products and value chains that do not involve deforestation” (Biodiversity).

Postponed until 2021 – for now – are the ReFuelEU Aviation and the FuelEU Maritime initiatives. Both aim to boost supply and demand for sustainable advanced bio- and electro fuels.

Conclusion: What Does it Mean for Palm Oil?

The virus has brought to light severe shortcomings in the EU. Many EU citizens feel the worst is that the concept of European solidarity appeared elusive during the pandemic.

For the moment, no one knows where this might lead. But – again – it cannot be ruled out that after Britain, others may wonder if it is worth being a member of a club where the cost outweighs the benefits. Especially in the hour of need.

What are conceivable effects on commodity exports like palm oil? Two stand out:

First, a re-nationalization of decision-making. Once the dust of the COVID-19 crisis settles, cash-strapped countries (the South plus probably France and parts of Eastern Europe), will have little patience for expensive environmental programs.

Instead, they will focus on sources of energy and food that are more cost-effective. They will look for ways to acquire them regardless of Union rules.

A second scenario is the “big decoupling” of international supply chains. COVID-19 shocked many Europeans into realizing how dependent they are from Chinese and other imports. Not least for critical medical supplies.

So, the process of replacing international with domestic suppliers has already begun. And many are asking: “If we can now break away from imports considered harmful, why should that not be possible in light of the climate crisis?

The rationale behind the postponement of the Farm-to-Fork initiative mentioned earlier apparently is the lessons COVID-19 teaches Europeans about food security.

Both developments have the potential to significantly impact palm oil. Unfortunately, in what way remains unclear.

Prepared by Uthaya Kumar

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