Supply chain crisis management. The EU Commission presented the Single Market Emergency Instrument.

Politics - October 18, 2022

First the Covid 19 pandemic, followed by Russia’s war of aggression against Ukraine, the energy crisis, inflation and the risk of recession. These are the main events that have been putting the European Union to the test for the past two years: at the level of the member states’ national governments, but also at the level of the institutional structures in charge of EU governance.

One of the critical factors that emerged during the mentioned events is the supply chain, which suffered during the pandemic phase, experiencing real blockages in logistics and retail.

At the beginning of the pandemic phase, difficulties in the supply chain were due to the sudden health restrictions and security measures applied at every level of people’s lives, both in private and working life.

This was also the case in Asian factories, the starting point for a wide range of products and supplies in the globalised world, which were also affected by temporary closures and ever higher containment measures in terms of safety standards, aimed at limiting the human presence in the workplace as much as possible.

Paradoxically, the system has continued to go haywire precisely because of the upswing in social and economic activities. This, in fact, has caused a surge in demand from consumers who are becoming more and more demanding in terms of availability of desired goods and speed of delivery.

The global supply chain, now marked by changes due to the health emergency, can no longer meet pre-covid demand levels in terms of supply, in many cases.

In Europe, the Covid-19 crisis also created major imbalances in the relations between individual Member States, undermining in some cases the necessary European solidarity, which broke down over the governance weaknesses of the single market.

The interdependence of European value chains suffered when some states unilaterally decided to close their borders, effectively blocking trade flows.

In this context and in light of the new geopolitical challenges we are facing, the European Commission has put in place an emergency instrument, which gives it new powers in relation to supply chains.

The new Single Market Emergency Instrument (SMEI), which repeals Council Regulation (EC) No 2679/98, aims at preserving the free movement of goods, services and persons, as well as preserving the availability of essential goods and services in case of new emergencies in the near future.

The tool, designed to benefit EU citizens and businesses, “complements other EU legislative measures for crisis management”: e.g. the EU Civil Protection Mechanism, as well as EU rules for specific sectors; supply chains or products such as health, semi-conductors or food safety, which already provide for targeted crisis response measures. “It establishes a balanced crisis management framework to identify different threats to the single market and ensure its smooth functioning,” the EU press release states.

To be more specific, the instrument allows the Commission to actively intervene on individual EU states in order to commit them to building up stocks of goods considered ‘critical’; at the same time, companies will have to share information on their real production capacities and possible stocks of essential goods in the event of a crisis. Furthermore, the Commission will dictate production priorities in the event of an emergency, diverting them to those goods considered ‘key’.

The SMEI foresees the establishment of an advisory group, the creation of a framework for contingency planning of a single market supervision mode regulation and its entry into emergency mode. The advisory group, which will have the role of advising the Commission on measures to be taken in the event of a threat, to prevent it or to deal with it if it is already underway, is chaired by the Commission itself and consists of one representative from each Member State.

Actions will be based on the monitoring of supply chains, the establishment of strategic reserves, the classification of goods to be stockpiled, the sharing of information on reserves by member states and the coordination of efforts on the basis of target lists. Member states will be prohibited from restricting the free movement of goods and services if a state of emergency is triggered, and companies may be sanctioned if they withhold required information.

However, nine EU countries, including Belgium, Denmark and the Netherlands, have already spoken out against this version of the plan, which they consider to be too far beyond the original objectives.

“We call on the European Commission to stick to its original plan of adopting an instrument that ensures the free movement of goods, services and people, with greater transparency, coordination and rapid decisions, based on a clear definition of the crises related to free movement within the European Union,” the countries wrote in a letter addressed to the heads of cabinet of Commission President Ursula von der Leyen, Vice-Presidents Margrethe Vestager and Valdis Dombrovskis, and Internal Market Commissioner Thierry Breton.

Criticism from some Member States is joined by criticism from industry groups, trade representatives and even trade unions. According to the provisions, companies that do not comply with the priority orders established under the emergency regime risk corresponding fines of up to 1.5 per cent of their turnover, while companies that do not correctly provide the information requested from the Commission face fines of up to EUR 300,000.

The risk is that the measures could exacerbate a possible crisis instead of mitigating it, because disclosing commercially sensitive information on stocks and production capacities or directing business decisions from above could ultimately have a negative impact on companies, as stated by Martynas Barysas of BusinessEurope, the largest employers’ group in the region.

According to EuroChambres, the Commission’s proposal exceeds its initial objectives and introduces measures that go beyond what was intended, such as the ‘supervisory mode’, which risk creating legal uncertainty.

The proposals, presented on 19 September, follow the announcement of the European Commission, which, in its updated communication on industrial strategy of May 2021, had planned the presentation of a specific instrument to guarantee the free movement of goods, services and persons, as well as greater transparency, coordination and solidarity in cases of emergency.

This new instrument will fit into the framework of already existing EU legal instruments, set up for crisis management in general, such as the Union’s Civil Protection Mechanism. The SMEI will therefore focus on removing barriers and maintaining the free movement of goods, services and persons and ensuring the availability of critical products in the single market in the event of activation, complementing other recently adopted EU measures and Commission proposals that establish more targeted measures on certain aspects of crisis management or are relevant for specific sectors. One of these is the European Health Emergency Preparedness and Response Authority (HERA). Another specific instrument is the Emergency Plan to ensure food supply and food safety. The European Chips Act also fits into this framework.

The measures are currently being discussed by the European Parliament and the Council of the European Union. Once the regulation has been adopted, it will enter into force on the 20th day following its publication in the EU Official Journal.

The instruments designed should help Member States to strengthen existing ties, increasingly promoting cooperation processes and internal relations in order to cement the privileged relationship that exists within the EU. To remain ‘united in diversity’, even in times of crisis.