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Week Ahead (1 July)

W/C Monday, 1 July – France braces for second round of parliamentary elections   

This week, France braces for its second round of parliamentary elections which will be held on 7 July.  Following the first round on 30 June, the far-right Rassemblement National (RN) secured a historic 34% of the vote, with the left coalition ‘Front Populaire’ at 28.1%, and Macron’s Ensemble coalition at 20.3%. The conservative Les Republicans came in fourth with 10.3%. Voter turnout was 67%, a 35-year high, indicating a highly engaged electorate. The RN could win between 260 and 310 seats, potentially reaching an absolute majority of 289 seats.  


Given these polls, the likeliest scenarios are either a relative majority from another party (RN or the left-wing bloc) or an absolute majority for one of these blocs. A relative majority without necessary allies would likely lead to political paralysis. An absolute majority by the left or far-right would result in "cohabitation," with the Prime Minister and government taking charge of domestic policy and EU negotiations, while the President retains control over foreign policy and the military.   


However, the fragmented political spectrum and high turnout mean that around 285 to 315 constituencies will see three candidates in the second round after meeting the threshold of 12.5%.  There will be increased pressure on Macron’s alliance and the left bloc to avoid splitting the vote, which could benefit RN. Historically, it is also worth noting that the far-right’s vote share has tended to diminish in the second round of votes. Disagreements have emerged within Macron’s camp regarding whether centrist candidates should withdraw in favour of left-wing candidates to prevent the RN from winning. Leading Macron MEP Pascal Canfin urged centrist candidates to withdraw if they come third, even if a far-left candidate leads, to prevent an RN majority. This contrasts with Macron’s strategy of heretofore opposing both the far-right and far-left equally. 


France's economic situation is under strain, with a budget deficit of 5.5% of GDP last year. Macron’s government has pledged spending cuts to meet the EU’s 3% deficit target by 2027, but the RN’s policies threaten to derail these plans. Instead, they have promised significant economic reforms, including tax cuts on electricity and fuel, and reducing VAT on essential goods. Economists have criticised these measures as unfunded and likely to worsen France’s deficit. An Institut Montaigne study estimated the RN’s program would cost over €101 billion annually, a figure the RN disputes.  The left-wing bloc plans increased public spending by €150 billion, financed through higher taxes on the wealthy and corporations, enhancing social benefits but potentially increasing inflation and operational costs for businesses. 


Without a parliamentary majority, Macron risks becoming a lame-duck president. Macron’s alliance will face substantial losses, and the political landscape is poised for major shifts, either towards the right or the left, depending on the election's outcome on Sunday. If no party secures a majority and alliances fail, it leads to political stalemate and a hung parliament. New legislative elections cannot be called for a year, leading to potential stagnation in governance. 


Finally, another noteworthy aspect of the election's outcome is its potential impact on the EU's next Commission. Last week, Macron openly backed Thierry Breton for a second term, ideally as a vice-president with a significant economic portfolio. However, the RN insists that they should nominate the next commissioner if they win. This situation is complicated by the lack of clear legal guidelines on who has the authority to suggest the Commissioner’s name during a period of ‘’cohabitation’’ in France.  


W/C Monday, 1 July – Meta to digest European Commission charges over its ‘’pay or ok’’ model  

The European Commission has this morning published the preliminary findings of its probe into Meta under the Digital Markets Act (DMA), indicating concerns over the company’s ‘’pay or consent’’ model. 


In October 2023, Meta announced the introduction of ad-free versions of its social networks (Facebook, Instagram) to users in the EU, EEA, and Switzerland for a monthly fee of €9.99 for users on desktop browsers and of €12.99 for Android and Apple iOS users. Earlier this year, Meta offered to almost halve its monthly subscription fees to €5.99 from €9.99, in an attempt to ease both antitrust and privacy concerns. 


On 25 March, the Commission launched full-scale investigations into Apple, Google, and Meta’s compliance with the DMA, the first ones since the new rules entered into force on 7 March, scrutinising inter alia Meta’s subscription-based ad-free versions of Facebook and Instagram. Today’s preliminary findings are that Meta’s model does not comply with Article 5(2) of the DMA because it: 


  1. Does not allow users to opt for a service that uses less of their personal data but is otherwise equivalent to the “personalised ads” based service.  

  1. Does not allow users to exercise their right to freely consent to the combination of their personal data. 


The Commission has therefore called on Meta to ensure that users who do not consent should still get access to an equivalent service which uses less of their personal data, in this case for the personalisation of advertising. 


Meta now has the possibility to exercise its rights of defence by examining the documents in the Commission's investigation file and replying in writing to the Commission's preliminary findings.  The Commission aims to finalise its conclusions within 12 months of the launch of the investigation (25 March 2024). This expedited timeline contrasts with the multi-year investigations commonly seen in antitrust cases which have been a source of criticism for the EU regulator. This also reflects Commissioner Vestager's focus on enforcing the DMA before her term ends on 31 October.  


Monday, 1 July – Hungary to take over rotating presidency of the Council of the EU 

Today, Hungary takes over the presidency of the Council of the European Union. It will do so for a six-month period, until 31 December. This is its second time, after holding the Presidency in the first half of 2011.  Budapest takes over amid a politically charged atmosphere given Hungary's often contentious relationship with other EU members and institutions. 


Last week, Hungary outlined its policy agenda, centred around seven key priorities: enhancing European competitiveness, reinforcing European defence policy, ensuring a merit-based enlargement policy, tackling illegal migration, shaping the future of cohesion policy, supporting a farmer-oriented EU agricultural policy, and addressing demographic challenges The presidency's motto, “Make Europe Great Again,” has drawn criticism due to its resemblance to former US President Donald Trump’s own motto. Particular focus is likely to be placed on competitiveness, migration, and the accession of the Western Balkans. 


In terms of specific policy files, Hungary will handle issues such as the European Defense Industry Programme (EDIP), the proposed new rules to combat late payments, and the proposal for combating child sexual abuse online (CSA).  It will also be tasked with drafting the first document outlining the next Common Agricultural Policy for 2027-2031. 


Hungary’s presidency comes at a time of heightened geopolitical tensions, particularly with Russia and China. Hungary’s Russia-friendly stance and potential veto power pose risks to the effectiveness of these measures. It is also very unlikely that a 15th sanctions package against Russia will pass in the next six months, given Budapest’s vocal opposition to the introduction of additional restrictive measures. In spite of a focus on the accession of the Western Balkans, Hungarian Minister for EU Affairs, Janos Boka, has stated that the presidency will not initiate new enlargement procedures, which could stall Ukraine's and Moldova's accession processes. Besides its dovish stance towards Russia, this may also reflect Hungary's ongoing disputes with Ukraine over the treatment of the ethnic Hungarian minority in Ukraine. 


Furthermore, Prime Minister Viktor Orbán has cultivated close ties with China, a relationship that runs contrary to the EU's broader strategy of "de-risking" from China. This relationship has resulted in substantial Chinese investments in Hungary, including a €16 billion influx of foreign direct investment (FDI). Hungary's stance may complicate EU initiatives such as the economic security strategy, which aims to shield critical research and technologies from rival powers.  Overall, Boka has expressed scepticism towards the EU's economic security proposal, arguing that it should not lead to decoupling from China but rather “targeted risk management’’. 


Thursday, 4 July – EU additional tariffs on Chinese EVs kick in 

On Thursday, the EU’s additional tariffs on Chinese electric vehicles (EVs) will enter into effect. On 12 June, the European Commission informed affected parties it is proceeding with imposing additional tariffs of up to 38.1% on imported Chinese EVs from 4 July. Per previous reports, on 4 October 2023, the Commission published a notice of initiation of EU anti-subsidy investigations into EU imports of battery electric vehicles (BEVs) from China.  This is understood to have been driven mostly by Emmanual Macron.  Brussels argues that Chinese EV manufacturers benefit from subsidies that give them an unfair advantage over European competitors. More specifically, the announced tariffs will vary by manufacturer, with BYD facing a 17.4% mark-up, Geely 20%, and SAIC the highest at 38.1%. These rates are based on inter alia the level of cooperation with the EU's investigation. Companies that did not cooperate face the maximum duty of 38.1% while those that provided some information will be charged 21%. 


China reacted swiftly, with the Chinese Chamber of Commerce to the EU expressing "shock, grave disappointment, and deep dissatisfaction" at what it called a "protectionist measure" by the Commission, denouncing the investigation as a "witch hunt", but also expressed readiness to negotiate to avoid escalating trade tensions. Beijing, wary of another tariff war similar to the one with the US, has stressed its need to protect Chinese firms but prefers a diplomatic resolution. Last week, Commission and China agreed to start consultations over the EU’s ongoing anti-subsidy investigation, during a video call between China's Commerce Minister Wang Wentao and EU Trade Commissioner Valdis Dombrovskis. Both sides agreed to engage based on facts and in compliance with World Trade Organization (WTO) rules, aiming for a solution that addresses the issue of subsidisation. 


Despite their willingness to engage in talks, tensions remain high, with both sides preparing potential retaliatory measures. Beijing has threatened retaliation in sectors such as aviation, farmers and spirits and is attempting to rally EU member states against the new tariffs, which would be in addition to the current 10% duties. China already announced in January that it would investigate whether European producers of liquors are dumping their products on its market. Following the announcement of the EU’s provisional tariffs on Chinese EVs, Beijing also announced the launch of an anti-dumping probe into EU pork imports on 17 June, marking the first counterstrike in a potential Sino-European trade war. Many EU carmakers now fear potential Chinese retaliation or market access restrictions. 


The provisional duties will apply from Thursday onwards, immediately affecting Chinese EV imports. However, member states will vote on the tariffs by 2 November, with definitive duties usually imposed for five years, making it crucial for von der Leyen to propose a tariff level acceptable to both France and Germany. It is understood that German Chancellor Olaf Scholz has been instrumental in pushing for further talks with China. Besides Germany, Sweden and Hungary have also opposed the move but in order to reverse the tariffs they will need the support of 55% of the member states (currently 15 out of 27) representing at least 65% of the total EU population. 


Many EU carmakers fear potential Chinese retaliation or market access restrictions. Besides Germany, Sweden and Hungary have also opposed the move but they need the support of at least 11 other governments to block the tariffs. The provisional duties will apply from 4 July, immediately affecting Chinese EV imports. However, member states will vote on the tariffs before 2 November, with definitive duties usually imposed for five years, making it crucial for von der Leyen to propose a tariff level acceptable to both France and Germany. 


Thursday, 4 July – ECB to release minutes of its June meeting 

On Thursday, the European Central Bank (ECB) will release the minutes of its June meeting where the Governing Council (GC) decided its first rate cut in five years, from an all-time high of 4% to 3.75%. This rate cut was widely priced in by the market, after the ECB signalled in its April meeting that ‘’it would be appropriate to reduce the current level of monetary policy restriction’’. Nevertheless, the meeting in June was held only a few days after Eurostat’s flash inflation data revealed a rise of 2.6% year-on-year, up from 2.4% in April and higher than the consensus of 2.5%. Energy and food rose by 2.9%, ending a six-month trend of easing prices while services prices – of particular concern to the ECB – rose 4.1%, the most since November 2023. Inflation now stands above ECB staff projections and this will be a source of concern to the GC. 


This would likely reinvigorate the more hawkish members of the GC who have been reluctant to commit to further rate cuts in the upcoming monetary policy meetings of July and September. Overall, the disinflationary trend remains intact but this is unlikely to satisfy hawks who will continue to emphasise, as ECB Executive Board Member Isabel Schnabel did in May, that the ‘’last mile of disinflation is the most difficult’’ and therefore continue calling for caution regarding rate cuts beyond June.  ECB President Christine Lagarde has also stated that she will not commit to a path of pre-set interest rate cuts. Following the ECB’s rate cut in June, she warned that inflation was likely to remain above the bank’s 2% target “well into next year”, averaging 2.5% in 2024 and 2.2% in 2025, adding that the ECB would keep interest rate policy "sufficiently restrictive for as long as necessary" to bring inflation down to the Bank's 2% target. She noted that while the near-term risks to economic growth are balanced, medium-term risks remain tilted to the downside, citing geopolitical tensions in Ukraine and the Middle East, as well as the potential impact of extreme weather events and the broader climate crisis on food prices. 


Last Thursday, Peter Kazimir, ECB Governing Council member and Governor of the National Bank of Slovakia, stated that he anticipated one more interest rate cut this year. He predicted a "quiet summer" for rate decisions and stressed the importance of the September outlook. Despite the recent calm, he also expressed concerns about rising inflation, particularly driven by wage growth, suggesting that this could put upward pressure on prices. Also last week, his Irish peer, Philip Lane, stated that ‘’the central bank will be agile’’, indicating that the ECB would adjust its actions based on incoming data, prepared to do less if there are positive surprises and move quickly if there are negative ones. 


Against this backdrop, investors are likely to pore over Thursday’s minutes to look for further indications of monetary policy easing beyond June. 


Thursday, 4 July – UK to hold parliamentary elections; Labour Party set for landslide victory  

On Thursday, the UK will hold snap parliamentary elections which are set to be pivotal for the country, marking a shift after 14 years of governance under the Conservative Party. Economic concerns, particularly the cost of living crisis and inflation, which peaked at 11.1% in 2022, dominate the voter agenda. Public services, especially the National Health Service (NHS), suffering from chronic underfunding and staff shortages due to a decade of fiscal austerity, are also among the top priorities. Immigration remains a significant issue, albeit with stark differences in importance between Conservative and Labour voters. While 65% of Conservatives view it as a top concern, only 20% of Labour voters prioritise it. 


Polls indicate the Labour Party, led by Keir Starmer, is leading by double digits (35-40%) and is projected to win 465 of the 632 seats in England, Scotland, and Wales, potentially securing the largest majority since World War II. The Conservative Party, under Prime Minister Rishi Sunak, faces a significant drop, with predictions of securing only 76 seats (15-25%), the fewest in its history. The party has lost up to a third of its voters since early 2024. The Reform Party, co-founded by Nigel Farage, is rising in the polls and could win 14% of the national vote and three seats. The Liberal Democrats and the Green Party are also expected to make gains, with the Liberal Democrats projected to win 52 seats, its highest number since 2010. The Scottish National Party (SNP) is predicted to lose ground, potentially falling from 48 to 29 seats. 


Economic concerns are at the forefront of voters' minds. Britain's economy pulled out of recession in early 2024, with GDP expanding by 0.7% from the previous quarter, surpassing initial estimates. However, the broader economic backdrop remains fragile. Over Q1 2024, GDP was only 0.3% higher than a year earlier, and real household disposable income per head was 0.6% lower than in the final quarter of 2019. This period has seen the worst income growth since the 1950s, adding to the electoral difficulties faced by Prime Minister Rishi Sunak. 


Despite a solid start to 2024, with the fastest growth since late 2021, the longer-term outlook remains weak. The Bank of England estimates GDP will grow by 0.5% in Q2 2024, but underlying expansion rates are expected to float around 0.25% per quarter. Total foreign direct investment has also fallen for five of the last six quarters. 


The Conservative manifesto centres on £17bn in tax cuts, including reductions in national insurance and stamp duty, funded through welfare cuts, tax avoidance crackdowns, and civil service savings. However, this plan has raised concerns about its fiscal sustainability. Labour's manifesto focuses on economic stability, additional funding for the NHS and education, and a robust infrastructure strategy. While pledging not to increase corporation tax, VAT, or national insurance to show fiscal responsibility, Labour plans to raise £8.6bn through targeted tax increases, including a higher levy on private equity bosses, which may impact UK competitiveness. Keir Starmer has pledged to ensure Britain achieves the highest sustained growth in the G7 with reforms such as easing planning controls to expedite infrastructure projects and building 1.5 million new homes. 


Overall, this week’s elections, occurring months earlier than expected, will most likely be a disapproval test for Conservative government's handling of major issues, including Brexit implementation, the COVID-19 pandemic, and political scandals like “Partygate.”  


Friday, 5 July – European Commission to announce final decision on Lufthansa’s purchase of controlling stake in ITA Airways 

By the end of this week, the European Commission is expected to announce its decision on whether to allow Lufthansa’s purchase of a controlling stake in Italy’s ITA Airways. A green light looks increasingly likely following the submission of concessions last month. 


On 30 November, Lufthansa and the Italian government notified the European Commission of their agreement that will see the former acquire a 41% controlling minority stake for €325 million in the Italian national carrier, including an option for the German airline to acquire the remaining shares at a later date. Under the deal, aimed at strengthening Lufthansa's presence in southern Europe, ITA Airways, established as a successor to Alitalia, would transition from SkyTeam to Star Alliance. German Chancellor Olaf Scholz and Italian Prime Minister Giorgia Meloni have voiced support for the proposal. However, the two parties did not receive a fast-track status for the deal. Hence, in January, the Commission launched an in-depth (Phase 2) investigation into Lufthansa’s bid. The Phase 2 investigation was initiated due to the Commission’s concerns over competition on routes connecting Italy to central Europe and long-haul connections to the US and Japan, as well as Lufthansa’s dominance at Milan Linate airport. 


The Commission is now likely to accept a series of concessions recently made to address concerns about the deal’s impact on long-haul flights, particularly to North America. The advisory committee on mergers, comprised of experts from the EU’s national competition authorities, will issue today a recommendation to the Commission, which is expected to finalise its approval this week. Experts will evaluate if the deal harms competition on 18 routes, particularly between Italian and German cities, and on flights from Rome to Washington, San Francisco, and Toronto. The companies have proposed keeping ITA separate from Lufthansa's transatlantic joint venture for two years, allowing rivals to connect to these routes. If approved, this transaction would further expand Lufthansa’s presence, already the EU’s largest airline by revenue. 


Margrethe Vestager, the EU competition chief, faces significant pressure to approve the deal, which Italy deems essential for the survival of its loss-making national airline. Its likely approval will ease tensions between Brussels and Rome, which had been strained by the potential for a veto. Indicatively, Italy's Deputy Prime Minister Matteo Salvini had described any potential ban on the merger as a "serious attack on Italy." Lufthansa’s proposed purchase of a controlling stake in ITA Airways, along with IAG’s proposed acquisition of Air Europe are part of a series of airline merger deals that the Commission has been examining in past months, potentially indicating the direction of its competition policy for such deals.  A deadline for a final decision on the latter is set on 20 August. 




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