European companies really feel that it is becoming more and more difficult to comply with the growing bureaucracy in Brussels, especially due to the new sustainability regulations and data collection obligations, as the Magyar Nemzet article "Brussels is carrying out modern colonization - companies claim" shows in detail. Many European companies, such as Mann+Hummel, report on EU administrative burdens.

As a result of excessive EU bureaucracy, many European entrepreneurs prefer to seek funding from American venture capitalists and enter the overseas market; according to the Draghi report, between 2008 and 2021, nearly 30% of "unicorn" companies (i.e. startups valued at more than one billion dollars) founded in Europe moved their headquarters abroad, and the vast majority of them moved to the United States. The rapid loss of young, growing European companies and enterprises undermines the competitiveness of the EU. During the farmers' demonstrations that broke out in the Czech Republic, Slovakia and our country in February, farmers and agricultural producers complained about the administrative burden. On the one hand, the changes and environmental protection obligations introduced in the new European common agricultural policy from 2023 - which are further strengthened by the European Green Deal (EU Green Deal) - cause a significant loss of income, and due to the increased bureaucracy and administrative burdens, significant extra work is imposed on all EU agricultural workers .

ESG and related legislation

ESG is an abbreviation of the English words Environmental, Social and Governance. The acronym denotes a framework whose purpose is to enable financial and capital market participants to judge the activities of economic organizations more objectively than before, based on uniform standards and criteria from the point of view of sustainability.

The goal behind ESG-related legislation and ESG reporting obligations is correct, as large companies (and gradually the SME sector as well) must pay attention to environmental protection, labor law, management, risk management, compliance and transparency aspects, as well as the fact that their activities what impact it has on society, and all of this must be reported in standard reports. The idea is acceptable, but the implementation is extremely worrying, businesses cannot adapt to new and new rules so quickly, and thus they have to face reputational or even legal risks.

Only in recent years have the most important EU legislation been adopted on the subject:

  •  Taxonomy Regulation: EU Regulation 2020/852 on the establishment of a framework for the promotion of sustainable investments, this determines when an activity is green and how green a company is.
  •  SFDR: regulates what information must be displayed in relation to investment products (effective from 2021)
  •  NFRD: non-financial statement directive (valid from 2017)
  •  CSRD: Corporate Sustainability Reporting Directive (effective from 2024)
  •  CSDDD: it is about due diligence of the supply chain, the largest companies must demand this from their suppliers (it is based on the German LKSG, LKSG: the law on the obligation of corporate due diligence of German supply chains), not in force for the time being

Corporate administrative burdens in the EU

Restoring the competitiveness of the European Union is treated as one of the main priorities by the Hungarian EU Presidency, so Hungary is proposing the adoption of a new five-year European Competitiveness Pact in order to reduce administrative burdens and over-regulation in the EU, to ensure affordable energy prices and a a truly sustainable, green industrial policy in Europe.

According to the ideas of the Hungarian government, this pact would cover the strengthening of the EU internal market, the elimination of barriers that hinder the movement of goods and services, capital and labor unnecessarily, i.e. without rational reasons, after - evaluating the current situation of EU competitiveness, the so-called Based on the numbers of the Draghi report - these excessively bureaucratic rules alone consume one tenth of the European GDP.

Expectations related to legislation

While European companies are facing major challenges due to war inflation, energy crisis, partial aftermath of Covid closures, supply chain problems, raw material scarcity and need to invest to adapt to the new European Green Deal rules and the digital transition, the legislation of the EU and the progressive political forces behind it create new EU legislation based mainly on themselves, without the need for consultation and consensus with other economic and social actors, without providing the necessary preparation time for European businesses, and setting aside the principle of purposefulness.

This legislative dumping, in addition to stretching the national legal system frameworks, no longer makes it possible to create a practically manageable situation within the framework of the new regulation in the European for businesses.

The new EU regulation cannot be unreasonably fast, parallel or multi-level, a more realistic transition time and essential guarantees related to the realization of the regulatory goal must also be recorded in the relevant EU legal standards. The basic expectations and requirements for the related legislative process aim to maintain the quality and democratic legitimacy of the legislation, to respect the legal systems of the member states, however, several basic principles have been damaged during legislative dumping and the increase in administrative obligations.

Article 296 of the TFEU enshrines the principle of purpose limitation when it states that legal acts must contain reasons and refer to any proposal, initiative, recommendation, request or opinion required by the Treaties. Paragraph 4 of Article 5 of the EUSZ declares the principle of proportionality. In accordance with the principle of proportionality, the Union's measure may not go beyond what is necessary to achieve the objectives of the Treaties, neither in terms of content nor form.

As a result of the increase in administrative obligations and regulatory dumping, it becomes questionable whether they really only regulate to the necessary and proportionate extent. It can be seen that the administrative burdens are disproportionate to the carrying capacity of the companies and are not in proportion to the purpose of the law, which thus goes against the requirement of cost efficiency.

According to Article 5 of Protocol (2) on the application of the principles of subsidiarity and proportionality, draft EU legislative acts must be discussed in detail in a separate memorandum. This note must contain data on the foreseeable financial effects of the draft, and - in the case of a directive - on the effects of the legislation to be adopted by the member states and, where appropriate, the regions for its implementation.

Based on this, it is the duty of the institutions of the Union to provide time for appropriate adaptation during the legislative process. However, companies do not have enough time to adapt to the new requirements, which results in significant administrative and cost burdens, thus violating the principle of sufficient preparation time.

According to point 81 of the judgment of the first-instance court of 7 October 2009 in Vischim v. Committee (Case No. T-380/06), "it should be recalled that the principle of legal certainty requires that the Community regulations concerning legal entities be clear and unambiguous, enabling legal entities to clearly understand their rights and obligations and to act accordingly."

Sustainability reporting obligations impose complex obligations on companies, compliance with which is often extremely complex and requires rapid adaptation. The rapid change in administrative obligations is not necessarily clear to businesses, as they do not have enough time to interpret the new rules.

The evolution of EU competitiveness compared to America and China

"Política Exterior" c. magazine published a comparative analysis of the economic growth of the European Union, the United States and China, and found that 15 years ago the size of the European economy was 10% larger than that of the United States, but by 2022 it would be 23% smaller ; the European Union's GDP (including the pre-Brexit UK) grew by 21% (in dollar terms) over this period, compared to 72% in the US and 290% in China.

The French newspaper Le Monde cites the Wall Street Journal article, according to which the Eurozone was almost in competition with the USA for a decade and a half, but today America is 80% behind the EU's currency zone; because, based on the numbers, in 2008 the gross domestic product (GDP) of the Eurozone and the USA at current prices was 14.2 trillion dollars and 14.8 trillion dollars (13.1 trillion and 13.6 trillion euros), while today, after fifteen years, the GDP of the Eurozone is just over $15 trillion, while the GDP of the United States has grown to $26.9 trillion by 2023.

  • China's GDP grew by 4.6 percent in the third quarter of 2024.
  • In the USA, GDP increased by 3 percent in the second quarter of this year.
  • In contrast, in the first quarter of 2024, the EU's GDP grew by only 0.3%.

The American IRA

In the last decade, the USA took a turn towards protectionist economic policy. The change in direction began under the presidency of Donald Trump with the trade war against China, then continued with the suspension of the planned Transatlantic Partnership (TTIP) negotiations between the EU and the US, and with the withdrawal from the Pacific Trade Agreement (TPP). And under Joe Biden, a bipartisan consensus emerged on the need to transform the American economy and move away from dependence on China toward a new form of strategic economic nationalism. American protectionism, although primarily directed against China, also threatens European economic relations. A glaring example of this is the 2022 inflation reduction law, which allocates 391 billion of its total budget of 738 billion dollars to energy and climate change-related expenses, i.e. to where European economic interests are also strong or significant.

The Inflation Reduction Act (IRA) of 2022 is a landmark federal piece of legislation in the United States, with the nominal goal of curbing inflation by reducing the budget deficit, lowering prescription drug prices, and promoting clean energy use, including domestic energy production. with investment.

In fact, it is a comprehensive development program that includes the green transition and social issues. The law was passed by the 117th Congress of the United States and signed by President Joe Biden on August 16, 2022. By 2032, out of a total budget of $738 billion, the USA will spend $391 billion on energy and climate change-related expenditures, $237 billion on budget deficit reduction, and additional funds for the three-year support of the Affordable Care Act (Affordable Care Act), the price of prescription drugs reduction and other tax reforms.

The law represents the largest investment in climate change in US history. According to some analysts, by 2030, US greenhouse gas emissions could decrease by as much as 40% compared to 2005 levels. The government's goal is climate neutrality by 2050. This is the third piece of legislation since late 2021 aimed at improving US economic competitiveness, innovation and industrial productivity. The Bipartisan Infrastructure Law (BIL), the CHIPS&Science Act, and the IRA have partially overlapping priorities and together introduce $2 billion in new federal spending over the next ten years. The IRA's subsidies and tax incentives for green industries - electric car, solar panel or battery production - which weakens the competitiveness of the EU and EU companies the most, because the provisions, with a few exceptions (Canada, Mexico and other free trade partners of the USA) only American made products are supported.

The law aims to catalyze investment in domestic manufacturing capacity, encourage sourcing of critical goods from domestic or free trade partners, and to initiate research and development and advanced technologies such as carbon capture and - storage and the commercial utilization of pure hydrogen. The Congressional Budget Office (CBO) estimates that the law will reduce the budget deficit by $238 billion over the next decade.

Among important measures, the IRA Act includes more than two dozen clean energy tax credits aimed at encouraging the deployment of clean energy technologies. In addition, the measures include tax incentives for renewable energy sources of next-generation technologies, such as clean hydrogen and advanced nuclear power. One of the major changes the IRA makes to clean energy tax credits is that they are refundable and transferable.

In addition, the IRA includes a $7,500 rebate for consumers on new and a $4,000 tax credit on used electric vehicles (EVs). Eligibility for credit is subject to final assembly of the vehicle in North America. The measure also requires that 40 percent of critical minerals in electric vehicle batteries be mined or processed in the United States or a country with a free trade agreement with the United States, or reprocessed in North America.

The requirement for the critical mineral content of batteries will rise to 80 percent by 2027. In addition, battery components cannot come from specifically sanctioned countries. The so-called Russia, China, North Korea and Iran are currently on the sanctions list. The income limit for claiming the EV tax credit will be $300,000 for a married couple and $150,000 for individual filers.

It is clear that the USA is preparing for the green transition without weakening its own industry (in contrast to Brussels), and even sucking out large European companies, many of whom are moving their headquarters to the United States due to the benefits provided by the law. and/or their production capacities.

Source: Basic Law Blog

Photo: Pixabay