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Franco-German rift threatens to derail EU competitiveness summit

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Serious disputes between Germany and France are overshadowing today’s (February 12) special European Union summit on competitiveness.

The objective of this informal gathering is to draft new measures to bolster the EU economy. Experts argue that the internal market requires urgent reform; currently, trade barriers between EU member states are equivalent to a 45% tariff on goods and a staggering 110% tariff on services.

According to German Foreign Policy, while some proposals have met little resistance, others remain deeply divisive. Chief among these are demands for preferential treatment for EU-made goods in public procurement and the issuance of joint EU debt to finance critical investments in high-tech sectors.

France supports both initiatives, while Germany rejects them outright.

Conversely, a consensus appears to be emerging on strengthening private pension systems to utilize deposits for investment, modeled after the Canadian pension fund system. While this move would expose pensions to new market risks, a joint Franco-German concept paper explicitly endorses the project.

Objective: The Capital Markets Union

The agenda for today’s special summit at Alden Biesen Castle in Belgium includes initiatives regarding a potential Capital Markets Union (CMU). One primary goal is to create a unified EU capital market capable of generating larger investments than are currently possible within individual member states.

This integration is expected to help the EU compete with the US in sectors such as startup financing. Last year, German and French finance ministers Lars Klingbeil and Roland Lescure commissioned a report on the matter, which was presented in mid-January.

The report’s authors—former German Finance Minister Jörg Kukies and former Governor of the Bank of France Christian Noyer—propose encouraging larger financial groups across the EU to engage in joint investments while leveraging private pension services.

According to the report, if private pension services are significantly bolstered, pension funds could be utilized to inject substantial capital into private companies. This would, inevitably, turn pensions into objects of speculation. Klingbeil has already begun efforts to strengthen these private pension frameworks.

Diverging paths toward a “sovereign and competitive” Europe

Klingbeil is currently drafting a ten-point plan to strengthen the capital markets union. “In light of global upheavals, we are focusing on a sovereign and competitive Europe,” the SPD politician stated, adding that “strong capital markets” are the key to achieving this.

Among the ten points proposed by the Federal Finance Minister is the EU-wide standardization of the legal structures for small and medium-sized enterprises. Until now, only the European Company (SE) designation existed. Additionally, the plan seeks to standardize insolvency laws and streamline bureaucracy, though specific details remain vague.

Klingbeil’s plan also includes initiatives to strengthen private pension services, aiming for the comprehensive use of pension funds for investment and the inclusion of associated risks. To implement this, Klingbeil intends to rely initially on the “E6 format”—comprising Germany, France, Italy, Poland, Spain, and the Netherlands—rather than the entire EU. According to the minister, this would represent a further step toward a “multi-speed Europe.”

Plans to abolish unanimity for a “multi-speed” Europe

European Commission President Ursula von der Leyen has also signaled clear support for a “multi-speed Europe.” In a letter sent to EU heads of state and government on Monday ahead of today’s summit, von der Leyen noted that while the primary goal should always be to “reach an agreement among all 27 member states,” no one should “hesitate to use the possibilities for enhanced cooperation provided for in the Treaties.”

Under the EU’s founding documents, closer cooperation in specific policy areas is permitted provided at least nine member states join forces. To date, this mechanism has rarely been utilized.

One model discussed in the past is “Core Europe,” a Germany-centered alliance that would allow the EU’s power center to pursue deeper integration than the states on the union’s geographic periphery. Recently, Wolfgang Ischinger, President of the Munich Security Conference, proposed such a “core Europe” for the EU’s foreign and potentially military policy.

Merz vs. Macron

The option for “different speeds” within the EU is a critical factor for the summit, as German and French proposals to increase competitiveness have once again diverged sharply.

Chancellor Friedrich Merz, who initiated the special summit, advocates primarily for strengthening the internal market, reducing bureaucracy, and pursuing deregulation. The specifics of the latter two points remain entirely undefined; however, there are indications that the EU must stop supporting “zombie enterprises” that are no longer fit for the modern age. Such a move could impact everything from labor protections to environmental standards.

Merz also supports the simplification of digital legislation, though it remains unclear whether this would affect data protection standards.

From the perspective of French President Emmanuel Macron, these measures are insufficient. Macron warns that the world is experiencing a “deep geopolitical rift” hitting the EU from two sides: rapidly accelerating competition from China and continuous pressure from the Trump administration in the US. In an interview published in four leading European daily newspapers, Macron warned: “If we do nothing, Europe will perish within five years.”

French demands: “Made in Europe” and eurobonds

Consequently, Macron advocates not only for deregulation and the diversification of foreign trade relations but also for “prioritizing European products.”

This concept is being discussed under the “Made in Europe” banner. It would require a minimum proportion of jointly produced goods in EU public procurement across at least three sectors: steel, eco-technology, and electric vehicles. For electric cars, the proposed quota is 70%, while for solar panels—where Chinese competition is most intense—it ranges between 10% and 20%. This demand is being championed most vocally by French EU Industry Commissioner Stéphane Séjourné.

Furthermore, Macron is pushing for “joint debt capacity,” or Eurobonds, to fund investment in key sectors. The French leader argues that the EU is under-investing in defense, security, technology, ecological transition, artificial intelligence, and quantum technology. In his view, the EU has no choice but to engage in joint borrowing to close the investment gap with the US and China.

Germany emphasizes national interest

The German government rejects these final two demands, citing national interests.

Berlin fears that introducing a minimum “Made in Europe” quota for procurement would trigger retaliation. EU exporters could find themselves at a disadvantage in procurement processes outside of Europe. As the EU’s largest exporter, Germany would be the most affected by any such restrictions.

Furthermore, Germany remains staunchly opposed to EU joint debt, symbolized by Eurobonds. Berlin’s rejection is not merely a matter of principle; Germany’s debt is only half that of France, allowing it to easily assume its own debt to stimulate investment. Moreover, Berlin calculates that such investments would primarily benefit German companies rather than EU firms in general.

Italy sides with Germany

Rome has aligned itself with Berlin, stating that now is not the time to discuss the European joint debt proposed by Macron.

Italian Foreign Minister Antonio Tajani stated on Wednesday that while the government generally recognizes the need for joint borrowing to invest in strategic sectors, there is no point in entertaining the idea while France and Germany remain in conflict over it.

“Instead of starting a debate on issues where no agreement can be reached, I prefer to find solutions on matters where various countries already agree,” Tajani told Sky TV. “If an agreement cannot be reached, there is no point in entering a discussion, even on issues we find positive.”

Italy continued to support EU joint debt even under the current Prime Minister, Giorgia Meloni. However, in recent weeks, Meloni has drifted away from Macron’s “Made in Europe” proposals—which favored European companies in procurement and local content rules—and has moved closer to Merz.

Rome makes no secret of the fact that its cautious stance on discussing joint debt at the EU leaders’ meeting is a strategy to avoid tension with Germany. “I have always supported Eurobonds, but currently there is no agreement between Germany and France,” Tajani said. “Starting a discussion and dividing ourselves is pointless. We must find what unites us and move forward.”

Europe

Fico accuses Merz of blackmail over threat to veto EU budget

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Slovak Prime Minister Robert Fico has hit back after German Chancellor Friedrich Merz threatened to veto the EU budget unless funding for Ukraine is secured.

Merz said he would block the EU’s seven-year budget if no agreement is reached on financial assistance for Ukraine.

The chancellor’s intervention has angered Central European leaders who are net beneficiaries of EU funds but do not want to take part in the next round of funding to support Ukraine’s war effort.

“What the chancellor is doing is typical blackmail, and I will not bow to it,” Fico told reporters in Bratislava.

Fico spoke alongside his Czech counterpart, Andrej Babiš, whose government has refused to participate in a future loan to Ukraine.

“I do not know why he said this,” Babiš said, referring to Merz’s stance.

Merz wants EU leaders to discuss Ukraine’s financing needs at a summit in Dublin on Friday.

In a letter to European Council President António Costa, who will chair the meeting, obtained by The Guardian, Merz wrote:

“We must maintain our support for Ukraine in its struggle to defend itself. This is our shared vital interest. Yet bilateral aid provided to Ukraine is distributed unevenly, with the burden shouldered mostly by only a few member states.”

The EU agreed last year to provide a €90 billion loan to Ukraine, intended to cover two-thirds of its military and civilian spending for 2026 and 2027.

Since then, however, Russia’s relentless bombardment has placed a heavier financial burden on Kyiv, prompting President Volodymyr Zelenskyy to ask for €70 billion to plug the budget deficit.

The EU has endorsed Zelenskyy’s figures and pledged to find €45 billion. Ukraine’s other allies, such as Britain and Canada, are expected to cover the rest.

Last year, Merz launched an initiative to tap €210 billion in frozen Russian state assets held in the EU, but the plan fell through due to opposition led by Belgium, which holds most of the funds in Brussels.

The €90 billion loan was the backup plan. Having opted out of that loan, Hungary, Slovakia, and Czechia indicated that they would not take part in the next round either.

Bulgaria joined these three member states following the election of Prime Minister Rumen Radev last April.

The question of funding for Ukraine is now spilling over into the fraught negotiations on the 2028-34 EU budget.

Germany, the largest net contributor, wants substantial cuts to the proposed budget and opposes the EU providing generous funding to member states that refuse to contribute to Ukraine’s financial needs.

Merz states in his letter that a “collective commitment without exceptions” is a “fundamental prerequisite” for closing Ukraine’s financing gap and for “discussing other matters, particularly those with financial implications.”

He also notes that, in the context of the EU’s next seven-year budget, known as the Multiannual Financial Framework, all member states must contribute to a “robust” financial perspective for Ukraine from 2028 onwards.

A German government official said:

“For the Multiannual Financial Framework (MFF) to be successfully concluded, it is vital that all EU member states provide financial support to Ukraine.”

Berlin is also aiming to shift decision-making on funding for Ukraine from unanimity to qualified majority voting, in an effort to prevent a single government from blocking EU decisions.

The letter reflects mounting frustration among the EU’s northern member states, Ukraine’s most generous backers, over lower contributions from other EU countries in Central and Southern Europe.

The task of brokering an agreement on the budget falls to Costa, the former Portuguese prime minister.

Costa wants a deal by the end of the year, ahead of elections in France, Poland, and Italy in 2027 that could complicate the process.

A spokesperson for Costa confirmed receipt of the letter without elaborating on details. “President Costa will dedicate time to the Ukraine issue at the informal European Council meeting in Dublin this week,” the spokesperson said, adding that funding for Ukraine would be addressed at a dedicated summit on the EU budget scheduled for 26-27 November.

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EU expects next Israeli government to adopt less aggressive posture

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The EU expects the next Israeli government to mend its “difficult relationship” with Brussels and adopt a more constructive approach toward Gaza and illegal settlements.

Israeli President Isaac Herzog tasked Gadi Eisenkot, the leader of the anti-Netanyahu bloc, on Sunday with forming a government.

Eisenkot stated that the country faces a “catastrophic diplomatic crisis” as traditional allies begin to reassess their relations with Israel.

Speaking to Rapporteur, several European diplomats stationed in Tel Aviv said they expect ties to get back on track.

“Whatever government comes in, we can try to revitalize relations because Israel is clearly a very important partner,” one European diplomat said, adding that Brussels expects the next administration to be “less aggressive”.

The diplomat noted that relations with Europe are currently “not very good”.

Israel cut off communication with Kaja Kallas, the EU high representative for foreign affairs and security policy, after Rapporteur revealed in June that she had compared Israel to apartheid-era South Africa during a visit to Mexico.

The diplomat stated that this decision, taken ahead of elections, was political in nature. A second European diplomat based in Brussels explained that the announcement came only a few days before an official visit by Dubravka Šuica, the European commissioner for the Mediterranean.

“This could have been interpreted as a tactic to divide Europe, but Israel had asked Kallas to deny the report; she did not do so,” the second diplomat said.

Brussels has repeatedly voiced its frustration with Israel over the humanitarian crisis in Gaza and the expansion of West Bank settlements.

However, EU governments blocked almost all sanctions proposed by the European Commission.

A third diplomat said opposition parties would “almost certainly take the issue more seriously” when it comes to tackling violence by West Bank settlers:

“We see Palestinians being expelled from their homes and new illegal settlements being built in the West Bank. There is a reluctance on the part of the current government to address this issue, which causes problems in our relations.”

The new government is expected to ease pressure on Palestinians and halt construction of the E1 settlement project, a controversial plan to build settler housing in the West Bank east of Jerusalem.

“They will probably try to deal with the problem of extremist settlers in the West Bank,” the diplomat added.

On Gaza, the diplomat described the situation as “a complete nightmare”, with two million Palestinians crowded into an area that accounts for roughly 35% of the territory.

“There are not enough tents for the winter, and not enough vaccines are reaching the area despite an increase in diseases,” the diplomat said.

The European official argued that Donald Trump’s peace plan met all the conditions for Europe. Although the EU had much to offer, neither the US nor Israel appeared interested in EU involvement in the process.

“We are currently training Palestinian police in the West Bank, and if permitted, we could do the same in Gaza,” the diplomat said.

The diplomat disclosed that Israel had agreed with Šuica that Europe would finance two projects aimed at improving sewage and water infrastructure in Gaza, continuing:

“However, none of these projects has started yet because there is a serious problem with dual-use goods. Getting materials into Gaza is very difficult because the Israelis say they could be misused if they fall into the wrong hands of Hamas.”

Israel insists that Hamas must be disarmed before subsequent phases of Trump’s plan can proceed.

With disarmament unlikely to happen in the near term, the EU argues that certain measures can be carried out in parallel.

“We can begin rebuilding sanitation systems in Gaza. We can start building desalination plants. We can begin providing energy and water to Gaza,” one diplomat said.

While Brussels hopes for progress on Gaza and the West Bank, it maintains that expectations regarding the establishment of a Palestinian state need to be “managed”.

The EU continues to advocate a two-state solution, yet most leading Jewish parties oppose the creation of a Palestinian state.

The diplomat noted that the next Israeli government will likely have “a very slim majority and not much room for manoeuvre”.

There is also a “major misunderstanding” between the EU and Israel that must be addressed. According to the diplomat, Europeans fail to recognize the “psychological impact” of 7 October on Israelis.

“This event changed the country and made the two-state solution even more distant than before,” the diplomat said.

In return, some Israeli politicians believe Europe has betrayed Israel despite what they view as a fight against “Islamist terrorism”.

“Their argument is that European politicians are somewhat afraid of the Muslim population in Europe,” the European diplomat said.

Europe strongly opposes Iran and the possibility of Tehran acquiring nuclear weapons, imposing sanctions in response.

However, the diplomat argued that the EU would not participate in a war because it lacks a common army:

“We are a diplomatic and economic power, which is why we resort to sanctions and diplomacy. The expectation that we would take part in a military operation is unrealistic.”

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Germany threatens EU budget veto over long-term Ukraine aid

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Germany has threatened to veto the European Union’s joint budget for the 2028-2034 period, which is currently under negotiation, unless every member state commits to providing financial support to Ukraine in 2027 and subsequent years, German Chancellor Friedrich Merz warned.

According to a report by the Financial Times (FT), Chancellor Merz set out Berlin’s condition for the budget talks in a letter addressed to European Council President António Costa.

In his letter, Merz wrote: “A collective commitment that every single one of us, without exception, will make a fair contribution to closing Ukraine’s budget deficit is an indispensable prerequisite for resolving this budget issue and, in particular, for addressing subsequent matters that carry financial implications.”

The German Chancellor stressed that a formula backed by all member states must be established to provide Ukraine with a reliable, multi-year financial perspective starting from 2028.

Merz also insisted that any agreed solution must cover the interest payments on debts incurred to finance the assistance provided to Kyiv.

Conversely, several countries within the bloc have cut financial aid to Ukraine, and the number of capitals adopting this stance is projected to rise next year.

In December 2025, Hungary, Slovakia, and the Czech Republic approved the EU’s 90 billion euro loan package for Kyiv only on the condition that they would not contribute to its costs themselves.

Alongside these three countries, Bulgaria has also stated that it does not plan to participate in subsequent financial assistance packages for Ukraine.

In France, far-right leader Marine Le Pen, who could potentially win the presidential election scheduled for spring 2027, recently told the FT that Paris has run out of funds.

Le Pen assessed: “The honest approach is to tell Mr Zelensky clearly, and even warn him: ‘Look, we cannot do more. We have already allocated the 90 billion euro EU loan, in which France’s share amounts to 18 billion euros. 18 billion euros is genuinely a huge amount of money.'”

The EU’s 90 billion euro loan, covering the 2026-2027 period, aims to meet two-thirds of Ukraine’s financing requirements.

Brussels expects the remaining 45 billion euros to be covered by other partners, including Canada, the UK, Norway, Japan, South Korea, and Australia.

Germany remains the largest net contributor to the EU budget.

In contrast, the four Eastern European countries seeking to avoid financing Ukraine rank among the largest net beneficiaries of the bloc’s budget.

Leveraging this balance, Chancellor Merz aims to use his influence in the EU budget negotiations to secure uninterrupted support for Kyiv in 2027 and the years beyond.

According to the FT, Berlin is also demanding that future aid packages be decided by qualified majority voting rather than unanimity, which is required under the current system.

A German government spokesperson told the newspaper:

“The issue of Ukraine’s financial needs must be resolved within the framework of the next EU budget. Financial support for Ukraine from all EU members is decisive for the successful conclusion of the budget talks.”

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