The weekly Vulcan View for the 19th to the 23rd of March featuring analysis of the latest EU developments

GLOBAL TECH REGULATION
 
Regulators pile pressure on Facebook after Cambridge Analytica data leak
 
The popular social media tech company Facebook is facing increased scrutiny from regulators across the world after it emerged that the data of 50 million users had been leaked to the UK data analytics firm Cambridge Analytica, which played a role in the Donald Trump Presidential Campaign. Former employee turned whistle-blower Christopher Wylie revealed that the data company took the personal information without consent in early 2014 that allowed them to create a system that could profile individual US voters and thereby target them with personalised political advertisements.
 
News of the data breach sent the shares of Facebook tumbling at the beginning of the week.  Regulators in the US, the EU, along with the UK have lambasted the internet giant and called on senior representatives of the company, including the CEO Mark Zuckerberg, to come forward and personally testify on the scandal.
 
Both British MEPs and the European Parliament have issued invitations to the company head to give evidence and US regulators are preparing to launch an investigation into the crisis that could potentially lead to fines of up to $40,000 for each affected user or an incredible $2 trillion in total. Global technology companies have already been coming under growing pressure from authorities on a range of matters from tax avoidance and online terrorist radicalisation to data privacy issues.
 
After days of silence following the emergence of the scandal, Mr. Zuckerberg eventually spoke on the data breach and apologised for the ‘’mistakes’’ that Facebook made over Cambridge Analytica. Speaking to the US network CNN, the 33 year-old billionaire said that Facebook is changing the way it shares data with third-party applications. Although he laid out the measures that will be carried out, privacy advocates believe the proposals do not go far enough. With democracies across the world ever fearful of the threat of technology influencing elections, this crisis may forever change the way data online is controlled.
 
 
BREXIT
 
EU & UK reach agreement on 21-month transition period 
 
Negotiators on both sides strongly welcomed the agreement of a provisional deal for a transition period, hailing it as a ‘’decisive step’’ that would give businesses and citizens across the continent assurance that there would be no ‘cliff-edge’ exit. The breakthrough came after several days of intense negotiations and should allow the leaders of the EU27, who are gathering today in Brussels for a council summit, to adopt new guidelines for the next stage of negotiations over a framework for future relations.
 
The deal reached on the transition period will grant some reprieve for British prime minister Theresa May who has been under intense pressure from hard-line Tory backbenchers who are pushing for a hard Brexit. She did receive some criticism however, as she made a series of concessions to Brussels in order to achieve the transition deal, including accepting that the UK would continue to abide by all EU rules during the period, but will have no say in any decision-making. 
 
Although London will be allowed to negotiate and sign new trade deals that will come into force in 2021, Scottish politicians and pro-Brexiters lamented that Britain will remain under the EU’s common fisheries policy during the 21 month transition period and will be ‘’consulted’’ on fishing quotas for 2019 and 2020. UK Environment minister Michael Gove acknowledged that it was a poor outcome for the nation’s fishing community but urged all Brexiters to keep their ‘’eyes on the prize’’.
 
The issue of the Irish border was long seen as the biggest potential stumbling block but a partial breakthrough came when London agreed that the agreement should include a ‘’backstop’’ guarantee to avoid the re-emergence of a hard border.  This inclusion will give legal effect to a full ‘’backstop’’ meaning that in the absence of a solution for the Irish border, Northern Ireland would effectively remain within the EU customs union. Although the provisional deal recognises that further negotiations will be required on the issue, the agreement allows negotiations to proceed to the future EU-UK trading relationship.
 
It is our view however, that this ‘breakthrough’ on the NI question is no different in substance to what was agreed in December, and as we know this has been interpreted in wildly different ways by each of the stakeholders (UK Government, the EU, the Irish Government and the DUP).  This issue will not be definitively resolved until the very end of the process and so the latest breakthrough should be taken with a pinch of salt.
 
UK offered equivalence on financial services by Brussels 
 
The financial services hub of the City of London will be granted access to the EU market post-Brexit but only on terms dictated by Brussels. Leaders of the EU27 are expected to sign off on the ‘’guidelines’’ on negotiation terms for future EU-UK relations and the area of financial services is expected to be only mentioned in the annex of the text. This will state that Britain’s future market access will rely on ‘’equivalence’’ arrangements, a mechanism that provides limited access to certain financial services from non-EU countries.
 
Such a deal would see UK-based banks accessing the EU as long as Brussels deems that UK rules are equivalent to the bloc’s. This limited agreement will come as a blow to the British chancellor Philip Hammond who has been warning various EU member states that restricted access to the city of London will harm all sides.
 
However, the chancellor may be encouraged from the notes of the annex which indicate that the current EU equivalence system should be ‘’reviewed and improved’’. The language is intentionally ambiguous as there has been diverging opinions within the EU27 over how to treat the UK’s financial services sector. While Ireland and Luxembourg are seeking a pragmatic approach, Paris has been more strident about the consequences for Britain if it is leaving the market.
 
 
EUROPEAN UNION
 
Brussels puts forward two-step digital tax approach 
 
The European Commission on Wednesday formally laid out its plans to tax the revenues of the internet tech giants under a two-pronged approach that it hopes will reform the international rules on digital taxation. The first initial approach would see a temporary 3% tax being applied to internet giants operating in the EU with annual global revenues of €750 million or more, and total taxable revenues of €50 generated across the Union.
 
This temporary introductory tax would be phased out over time as the Commission would bring in a second, longer-term initiative which would tax digital companies where they make sales, rather than where their physical operations are located. The first-stage of the plan, if ratified, is estimated to bring in some €5 billion a year to EU governments. The European Commissioner for tax, Pierre Moscovici, highlighted how outdated the pre-internet tax rules were, noting that ‘’the digital economy is a major opportunity for Europe and Europe is a huge source of revenues for digital firms’’.
 
These latest plans are different to past approaches as they would target tech company’s revenues as opposed to profits. In addition, the tax would be based on where consumers are located rather than where offices and employees are based. The proposal has fuelled further protest across the Atlantic at a time when the EU-US relationship is already tense amid President Trump’s tariff plans.
 
Washington has criticized the move, claiming that it unfairly targets large US technology companies. In an effort to quell any souring of relations, Mr. Moscovici sent the US treasury secretary Steven Mnuchin attempting to ‘’pre-empt  any misconceptions that these proposals are aimed at US tech companies’’. Although France and Germany heavily back the tax, a threat that the US could retaliate may lead to Berlin moderating its position. It would be yet another of a number of EU countries such as Ireland and the Netherlands who are already strongly opposed to any moves for a digital tax.
 
European leaders back Britain on tough stance on Russia 
 
Prime Minister Theresa May has won strong backing from the heads of the remaining EU27 in her country’s hardline approach on Russia and its claim that Moscow was responsible for the covert poisoning of an ex-spy in Britain earlier this month. Despite ongoing Brexit negotiations that have often soured relations between Brussels and London, leaders of all EU 28 countries agreed at today’s European Council Summit to collectively condemn the Russian Federation in its action against the UK.
 
The strong statement released by the EU is a strong diplomatic win for Ms. May and as many as 10 countries across the bloc are considering following London and expelling Russian diplomats from their countries. Paris and Berlin are known to have been the key drivers behind the tough language seen in the statement, overcoming some resistance from the likes of Greece who often take a soft stance on Russia. The united position agreed is a crucial development for the EU as a new diplomatic freezing between Europe and Russia descends across the continent.
 
EU evade planned Trump tariffs as China feels full brunt
 
As European leaders descended on Brussels yesterday for the start of the two-day European Council Summit, there was good news coming from across the Atlantic as US politicians were informed by the country’s Trade Representative Robert Lighthizer that that the EU would be exempted from the planned import tariffs on steel and aluminum. The bloc, along with other key US trading allies, were granted temporary reprieve after weeks of intense lobbying.
 
The announcement did not subside growing fears that a looming trade war is approaching as the Trump administration carried through with the imposition of 25% tariffs on $60bn worth of Chinese imports. Beijing were quick to counter and today revealed that they were planning tariffs on 128 US products that account for some $3bn in imports.
 
News of the erection of the protectionist measures saw stock markets across the world come under heavy pressure. Although the EU will be able to breathe a temporary sigh of relief, the damages of an escalating China-US trade war will lead to serious spillover costs leading to a poorer global trading environment negatively affecting all.
 
 
ITALY 
 
Newly elected parliament set to take seats today 
 
The long road to the eventual formation of an Italian coalition government begins today as the newly elected parliamentarians take their seat in Rome. With the left-wing populist party Five Star Movement and the right-wing Northern League dominating the numbers, there is no natural formation of a coalition government. Negotiations between the various parties are expected to begin in early April but it could be weeks or months before any kind of conclusive government materializes.
 
Although Five Star and the Northern League appear to be at completely opposite ends of the political spectrum, there have been signs that both parties are willing to talk to one another. Former incumbent’s the Democratic Party (PD) suffered such an heavy defeat in the recent election that they have conceded that they will be sitting on the sidelines in the upcoming talks, thereby restricting the possible future coalition options.
 
Matteo Salvini, the leader of the Northern League, has been attempting to lead the right wing-coalition of his party, Forza Italia and Brothers of Italy in negotiation discussions but is facing trouble from the former Prime Minister Silvio Berlusconi who is refusing to allow his party Forza Italia take a junior party position even though Northern League scored more votes.
 
Politicians and officials across Europe will be observing the proceedings in Rome over the next few weeks with keen interest as the two main political winners attempt to form some sort of working coalition government. Whether Five Star and the Northern League manage to come to a political arrangement is as yet unclear, meaning that incumbent government led by Paolo Gentiloni will remain in place for the time being.