Update on EU Election Results Suggest Tougher Regulatory Climate for US Firms Doing Business in Europe

Late on July 2nd, after several days heated and extensive discussions, the leaders of the EU countries announced their choices to lead the EU institutions for the next five years:

• Germany’s current Minister of Defense, Ursula von der Leyen as President of the European Commissioner
• Belgium’s lame duck Prime Minister, Charles Michel as President of the European Council (the heads of the EU member countries acting as an institution).  Michel is thus the “head of state” for the EU
• Spain’s current Foreign Minister, Josep Borrell, to be the High Representative for Foreign Affairs and Security Policy (akin to Foreign Minister); and
• Christine Lagarde, currently Managing Director of the International Monetary Fund, to be the new head of the European Central Bank.

The next day, the newly convened European Parliament, which sees the institution’s presidency pass from the center-right European People’s Party to the Socialists, elected Italy’s David Sassoli, as its new President.

The nominations of von der Leyen and Borrell need to be ratified by the European Parliament by an absolute majority, something that is not a certainty.  The choice of von der Leyen has been met with great skepticism in the Parliament, particularly in its Socialist, Green and Far Left blocs.  Moreover, she faces serious allegations of mismanagement of the German military during her time as Minister.  The vote in the European Parliament is expected to occur at its session on July 15.

Whatever the final outcome of the von der Leyen nomination, the clear winner in all this is France’s President Emmanuel Macron, who managed with his pick of von der Leyen to line up an EU leadership far more in sync with Macron’s vison of a United Europe.  U.S. businesses need to be aware of the likelihood of a European Commission less friendly to non-European business interests.

As we previously reported, the May 26th election results themselves suggested that:

• US businesses will likely be impacted by more pro-European regulation and oversight.
• Although technology firms already are under scrutiny, new political alignments can be expected to target other US business sectors such as automobile manufacturing, energy and food.
• Firms doing business in EU countries should consult counsel about these developments
• Rimon’s European Practice Group can assist with how to deal with regulation by the European Commission.

The results of the European Union elections announced on May 26th suggest a more uncertain regulatory climate over the next five years for U.S. business in Europe.  Technology firms have already been under ever closer scrutiny in recent years by the European Commission, particularly its Competition Directorate.  This tighter regulation will likely now apply to more sales, services and investments in Europe if the outcome of the election is, as is very possible, a Commission that will more aggressively assert European interests.

The EU elections for the European Parliament, with ballots cast in 28 different countries, attracted only limited interest in the U.S., including the business community.  Most U.S. commentary focused on whether populist right-wing politicians, such as Italy’s Matteo Salvini or Hungary’s Viktor Orbán, would be seen as “winners”, suggesting a Donald Trump-like wave in European politics.  Other American news coverage focused on the anomaly of British participation in an election for the Parliament of a European Union that the United Kingdom voted to leave in 2016.

In fact, the elections have a great impact on U.S. businesses and investors, particularly in matters of competition/antitrust (where the European approach is as much protection of competitors instead of the U.S consumer protection model), auto import and emission regulation, food labeling and safety, and taxation.

The elections were held to elect the 751 members of the European Parliament.  Seats are allocated by population among the 28-member states[1], with a minimum of 6 seats for the smallest member states (Malta, Cyprus, Estonia and Luxembourg).  The largest delegations are from Germany, France and ironically the United Kingdom. Citizens vote for lists of candidates on a proportional basis.

For many years, the European Parliament played no more than an advisory role.  Even today, although it has investigatory and oversight responsibilities, it cannot propose legislation on its own, but rather must depend on the non-elected European Commission, the executive body of the European Union, to make legislative proposals.

The European Parliament’s real power is in the confirmation vote of the 28-member “cabinet” of European Commissioners – the heads of the various directorates that regulate all manner of things — and the Commission’s President.  Beginning with the outgoing Parliament, which was elected in 2014 for a 5-year term, the European Parliament has the right to vote up or down on the entire selection of Commissioners, as well as the President of the Commission[2].  And here is where there is great potential for change in the generally pro-business nature of European Union regulation.

Until Sunday’s election, power in the European Parliament, as well as the European Commission, was controlled by two blocs of political parties, the European People’s Party (“EPP”), composed of the major center-right political parties of the member countries (for example, Germany’s Christian Democratic Union headed by Angela Merkel) and the Progressive Alliance of Socialists and Democrats or the “S&Ds” (composed of the major Socialist parties in Europe, including until now the British Labour Party).  These two alignments comprised a majority of the European Parliament.  In recent decades, control over the Commission and the presidency of the European Parliament was essentially divided and alternated between the two.

The election results changed all that.  Reflecting major losses by center-right “establishment” parties in Germany, France and Spain, the EPP group was reduced by 37 seats in the new Parliament.  S&D, propelled by big losses by Socialist parties in Germany, France and the United Kingdom, will have 42 less seats in Parliament beginning this summer.

Why is this just not “inside fútbol” (ok, it would be “inside baseball”, but nobody plays baseball in Europe)?

The EPP and S&D party groups have overseen for decades the generally business-friendly policies of the European Commission, principally the policies intended to achieve a unified internal market, free of customs and other barriers.  However, in a time of more protectionist policies – as exemplified by President Trump’s aggressive tariff policy and denunciation of multilateral trade agreements – Europe may well react accordingly.

The ascendant political blocs in the new Parliament will likely favor far more aggressive policies to favor European business at the expense of U.S ones.  For example, the ALDE bloc (Alliance of Liberals and Democrats for Europe + En marche) is now the third largest group in Parliament.  ALDE is led by French President Emmanuel Macron’s En Marche party.  President Macron actively seeks to further the integration of Europe, with less regard for trans-Atlantic relationships.  Look for ALDE to pursue aggressively an industrial policy to favor European business development at the expense of other trading areas.

ALDE was a big winner in the May 26th election results, with an increase of 43 seats.  Prominently mentioned as a possible President of the European Commission to be proposed by ALDE is Denmark’s Margrethe Vestager, currently the Competition Commissioner.  Her experience as a Cabinet minister and parliamentarian in Denmark, as well as her executive experience as a Commissioner, stand in contrast to the background of the EPP’s candidate, Germany’s Manfred Weber.  Vestager’s tenure as Competition Commissioner has been highlighted by the aggressive use of investigations and fines against technology giants such as Google, Facebook, Amazon and Apple, including cases that allege that the tech giants’ tax strategies – not normally a competence of the Competition Commissioner – constituted unfair trade practices.

Another party that will be more protective of European interests at the expense of American business is the Green Party bloc, which gained 17 seats.  Together with ALDE, they can be expected to push for regulation in the energy field that will favor European companies and development of alternative energy policies, not to mention aggressive implementation of the Paris Accord, at the expense of American companies.

It is difficult to form a working majority of the Parliament, and thus consensus on leadership and legislation, without the combined 181 seats of the ALDE and Green blocs.  This new power will impact legislation and oversight.

The leadership contests, including the all-important position of President of the European Commission, will play out over the coming weeks.  At the EU’s May 29th summit, it was decided to try and have consensus among member States on candidates by the end of June.  Rimon will continue to monitor developments and report on how they can impact its clients.

[1] The United Kingdom was required to participate in the elections as a condition of the extension on Brexit granted by the European Council – the political body composed of the member states of the EU – until October 31, 2019.  If the U.K. does leave the EU on or before October 31st, there will be a reduction in the number of total seats and reallocation of seats to some countries.

[2] The European Council – the heads of government of the Member States – then make the actual appointments but a confirmatory majority vote by Parliament is first required.

Stephen Díaz Gavin is a Partner in Rimon’s Washington, D.C. office and coordinator of Rimon’s Affiliation Network with Studio Legale Palmieri in Rome. Mr. Díaz Gavin combines legal acumen and litigation experience with public policy advocacy skills to help a diverse range of clients, both international and domestic, in dealing with legal and policy issues facing them in the United States and overseas. Mr. Díaz Gavin specializes in international litigation and arbitration, including sovereign representation.  In addition, for more than 30 years, he has represented companies and individuals in matters before the Federal Communications Commission. Over the years, he has also advised foreign governments and foreign government entities on issues involving various aspects of relations with the United States. Read more.