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Week Ahead (19 June)

Monday, 19 June – Energy ministers meet to agree position on power market reform and discuss final agreement on the third Renewables Energy Directive (REDIII)

EU energy ministers are convening today to discuss the reform of the EU's electricity market and a proposed final agreement on the third Renewables Energy Directive (REDIII). Last Friday, EU ambassadors reached a tentative deal on REDIII, which included concessions to France, particularly regarding ammonia factories using natural gas or fossil-based hydrogen. This move eased the compliance burden for countries like France and Slovakia with hard-to-abate ammonia industries. However, it remains uncertain if this requires reopening negotiations with the European Parliament.

The REDIII breakthrough also paved the way for an agreement on ReFuelEU Aviation, the EU's plan to introduce a sustainable aviation fuel mandate at European airports in 2025. Despite their tentative agreement on REDIII, EU ambassadors failed to reach common ground on power market reform, after Poland lobbied to extend subsidies for coal plants until 2028. Both the outcome of the reform of the electricity market, which was proposed by the European Commission last March, and the fate of coal subsidies are expected to be major points of discussion during the Energy Council meeting.

In addition to these debates, there has been a Franco-German rivalry on renewables, with German Greens politician Sven Giegold suggesting last week that other EU countries, including France, should match Germany's success in green power generation. France's energy transition minister, Agnès Pannier-Runacher, responded by highlighting France's higher renewable energy production and lower reliance on coal compared to Germany. The meeting agenda also includes discussions on the work program of the incoming Spanish presidency, preparedness for the upcoming winter, and safety at nuclear reactors in Belarus and Turkey.

Tuesday, 20 June - European Commission to announce its first economic security doctrine

On Tuesday, the European Commission is set to announce its Economic Security Strategy. This will be its first economic security doctrine, reflecting the EU’s quest for greater strategic autonomy in critical sectors, after pandemic supply chain shocks and the war in Ukraine prompted its own ‘’geopolitical awakening’’.

Even though little information is available on what the strategy will entail, it is highly likely that it will focus on ways to increase scrutiny in screening both inbound and outbound investments. Furthermore, it is also expected to push for a harmonised EU-wide policy in export controls with an eye to preventing rival countries from gaining access to the most sensitive technologies, including dual-use technologies. Thus, guidelines helping EU companies safeguard their technologies while continuing trading with other countries could also be part of the strategy. However, certain member states are critical of Commission’s push for greater authority over export controls and risk assessments, which were previously the exclusive responsibility of national governments. Additionally, the EU's traditional backers of free trade are also cautious about implementing outbound investment screening measures.

Although the strategy will not be exclusively aimed at Beijing, it will be unveiled in the backdrop of President von der Leyen’s recent tougher rhetoric on China. In her speech ahead of her visit to Beijing on 30 March, the Commission President stated that the trade relationship between the EU and China is increasingly imbalanced and that the EU is becoming more vigilant about protecting its interests and dependencies to ensure a level playing field, calling for an economic ‘’de-risking’’. Europe remains sceptical of China, with the lessons learnt from its energy overreliance on Russia impacting the bloc’s approach.

Tuesday, 20 June - German Chancellor Olaf Scholz and his cabinet to host Chinese ministers, following the release of the National Security Strategy

Also on Tuesday, German Chancellor Olaf Scholz and his cabinet will host their Chinese counterparts for a joint summit in Berlin.

The summit will take place only a few days after the German government unveiled its National Security Strategy. The document took a strong stance on China, accusing Beijing of aggressively asserting supremacy in Asia and leveraging its economic might to achieve political goals. This suggests a growing recognition in Germany of the potential risks associated with China's economic influence. It also indicates that Germany may be reevaluating its economic relationship with China in light of these security concerns. Germany's cautious stance towards China extends beyond its national security strategy. As preparations are underway for a joint summit with China, German officials have reportedly discussed downsizing the Chinese delegation seeking to avoid appearing too accommodating to China, given the tensions over Taiwan and China's indirect support for Russia's actions in Ukraine.

China is Germany's top trading partner, and economic ties between the two countries have been strong. However, Germany's national security strategy reflects a shift in emphasis toward geopolitics and security concerns, which can have implications for business and trade relations. Balancing economic interests with security considerations is likely to shape Germany's approach to business and trade with China in the coming years. However, this week’s summit could focus on less controversial issues, including fighting climate change.

Thursday, 22 June - Bank of England to decide on interest rates

The Monetary Policy Committee (MPC) of the Bank of England (BoE) will meet on Thursday amid expectations that it will increase interest rates for the 13th meeting in succession. The decision will come a day after the Office of National Statistics (ONS) releases its inflation data for May.

On 10 May, the Bank announced its 12th consecutive rate hike raising interest rates by 25 basis points to 4.50%, the highest rate since 2008. The MPC decided with a majority of 7-2, with two of its members preferring to stick to a bank rate of 4%. In April headline inflation softened to 8.7%, down from 10.1% in March, dropping to its lowest level in more than a year. However, core inflation, which strips out energy and food costs, increased to 6.8% from 6.2% in March

Hence, markets widely expect another rate increase in the UK, pricing in another 25-basis point hike. It remains uncertain whether this week’s rate hike would mark the end of its tightening cycle, with economists now predicting that rates could reach a peak of 5% by August or September. On 23 May, the International Monetary Fund (IMF) revised its forecast for the UK economy this year, stating that it now expects the country to avoid a recession. Last week, the ONS announced that UK GDP grew by 0.2% in April, returning to modest growth following a 0.3% contraction in March, indicating a renewed sense of moderate optimism around the UK economy.

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