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Week Ahead (27 March)

Today, EU ambassadors will meet to review a deal on the future of e-fuel cars struck between Brussels and Berlin on Saturday, ahead of tomorrow’s Energy Council meeting.

More specifically, on Saturday morning Commission’s Vice-President Frans Timmermans announced an agreement with the German transport minister to work on a legal path to include climate-neutral synthetic fuels, also known as e-fuels, in EU-wide regulation effectively banning new cars and vans with internal combustion engines from 2035. The regulation is a push for the mass adoption of electric vehicles and part of the bloc’s ‘’Fit for 55’’ climate package, aiming to achieve zero CO2 emissions by 2035, and is currently in its final legislative stage after the European Parliament backed the Commission’s proposal last June.

Last weekend’s agreement paves the way for the adoption of the CO-2 standards for car regulation after Germany and Italy originally threatened to block its formal approval earlier this month. The two countries, joined by Poland, the Czech Republic, and Bulgaria voiced their concerns over the regulation’s implications for their national auto industries and pushed for the inclusion of e-fuel, arguing that such fuels are green and could allow carmakers to continue producing conventional combustion engine vehicles instead of switching to batteries.

The Commission is expected to publish its final proposal by next fall, with the German minister expressing his hope for the entire process to be completed by 2024.

EU energy ministers will meet on Tuesday aiming to reach a political agreement on a proposal to extend a Council regulation on a voluntary reduction of natural gas demand by 15% ahead of next winter. The current gas demand reduction plan ends this Friday. Under the proposal, this gas demand reduction plan will remain in place until March 2024.

A drop in gas consumption, coupled with increased diversification of imports and mild weather temperatures helped the bloc get through winter relatively unscathed, despite the disruption of Russian gas imports. However, a serious gap between supply and demand for gas remains a possibility next winter, with a tighter global gas market following China’s exit from its zero-covid policy earlier this year.

The gas and hydrogen package is also on the agenda, with the EU ministers expected to seek a general approach on a proposal for a directive and a proposal for a regulation on common internal market rules for renewable and natural gases and hydrogen, aiming to facilitate the integration of renewable and low-carbon gases into the existing network. A first policy debate on the proposal to revise the EU’s electricity market design is also part of the Council’s agenda.

Tomorrow, the European Commission will announce its preliminary decision on Alphabet unit Google’s proposed acquisition of Photomath, a math app.

This means that the Commission will have to decide whether to clear the deal with or without remedies or launch a four-month long in-depth investigation, should it conclude that there are serious concerns about potential distortions to competition. However, according to recent reports, the EU competition enforcer is expected to give its unconditional antitrust clearance.

The agreement between Google and the Croatian firm was reached in May 2022, although the value of the deal has not been made public yet. According to a Google spokesperson, ‘’Photomath’s technology will help Google to enhance its ability to provide better math learning experiences to students, helping to build out Google’s homework help offerings for users’’.

On Thursday, the UK Chancellor Jeremy Hunt will appear before the Treasury Committee to discuss his Spring Statement, also known as the mini-budget and one of two statements the UK Treasury makes each year with publication of economic forecasts.

On 15 March, Hunt unveiled the Spring statement, deemed by the Chancellor as the ‘’Budget for Growth’’. Bolstered by a better-than-expected economic performance in Q4 2022, it included £9 billion in tax breaks for businesses. It also introduced two measures intended to prevent older workers from retiring early, with a £5 billion extension of free childcare in England and a surprising decision to scrap the £1 million lifetime allowance on tax-free pension contributions, with Hunt adding that ‘’no one should be pushed out of the workforce for tax reasons’’. According to the latest official forecasts in the House of Commons, the UK would avoid a technical recession in 2023, with inflation forecasted to be halved.

Nevertheless, last week, the Office for National Statistics (ONS) announced that inflation in February surprisingly increased by an annual rate of 10.4%, above the 9.9% forecasts, ending three months of consecutive declines. The announcement prompted the Bank of England to raise interest rates by 25 basis points to 4.25% last Thursday.

On Friday, Eurostat will publish flash inflation data for March 2023. In February, Eurozone inflation data slightly eased to 8.5% - down from 8.6% the previous month and significantly lower than the peak of 10.6% in October 2022.

As has been well flagged, the energy crisis is having an outsized effect on inflation rates in Europe. Thus, the recent drop in energy prices was reflected in the easing of inflation figures in the Eurozone. Food, alcohol & tobacco accounted for 3.10% of the inflation rate in the eurozone in January, followed by services (2.02%), non-energy industrial goods (1.74%) and energy (1.64%). Once again, Latvia had the highest inflation in the eurozone with a rate exceeding 20.1%, while Luxembourg and Belgium had the lowest, at 4.8% and 5.4% respectively.

Nevertheless, the ECB Governing Council appears more concerned about core inflation. Despite an overall decline in consumer prices, core inflation climbed from 5.3% to 5.6% in February, reaching an all-time high. This is the main reason behind the ECB’s 50-basis points hike earlier this month which took place in the face of growing uncertainty in the banking sector. Although in the previous months the ECB GC had been unanimous on its rate hikes, a debate has now emerged over whether to keep increasing interest rates in the upcoming meetings of May and June amid fears of a potential financial crisis.

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