EU Commission plans to stabilise supply chains with new crisis instrument

The Commission wants to secure the supply of strategically important goods and services to member states in times of crisis and aims to stabilise supply chains. To this end, it has presented a new "Emergency Instrument for the Single Market" (SMEI).

However, experts have warned against potential limitations on entrepreneurial freedom under the proposed law, as well as additional bureaucracy for businesses in challenging situtaions.

The SMEI is a reaction to the Covid-19 pandemic, the war in Ukraine and their impact: disrupted supply chains and production stoppages. With it, the Commission wants to ensure that member states do not raise barriers within the single market during crises. At the same time, it intends to ensure that the member states can be reliably supplied with critical goods and services even in times of crisis.

The Commission proposes a three-stage plan: The first stage is the "contingency mode". It includes measures the Commission and member states will take in stable times to prepare for crises and to be able to respond quickly whenever required. In this stage early warning systems and crisis protocols shall be put in place. The second stage, called "vigilance mode", involves single market monitoring measures that would be taken in times when a threat to the single market is foreseeable but no emergency has yet occurred. In this stage, supply chains would be monitored by member states, information would be requested from businesses and strategic reserves of crisis-relevant products would be established by member states. The vigilance mode would last for a maximum of six months. However, there is a risk of artificially inflating the market and thus ultimately causing oversupply, especially with regard to the creation of strategic reserves, according to Dr Florian von Baum, technology, science and industry expert at Pinsent Masons.

As a third stage, there would be an "emergency mode" for times of acute crisis. This would allow the Commission to intervene in the market directly. But the Council would have to agree to the activation of the crisis mode before the Commission could take any actions. If the Council approves the activation of the emergency mode, the Commission could intervene directly in the production of crisis-relevant goods and intermediate products. It could even dictate to businesses which orders they have to process with priority. Accordingly, it would be possible for the Commission to force manufacturers of certain goods to give preference to orders for EU citizens over other orders. Businesses would only be able to refuse this instruction if they could present serious reasons for doing so. Businesses that simply disregard the directive would face fines.

"The proposal risks overburdening businesses with additional administrative work and pushing them to their limits, especially in crisis situations that require their full attention and ability to react," said Dr von Baum. Although the Commission’s proposal addresses the risk of small and medium-sized enterprises being overburdened with the additional administrative work and states that all measures must be examined for their effects and their proportionality, no reference is made at this point to any burdens that could arise for larger businesses.

Beyond the other measures available in emergency mode, intra-EU export bans on crisis-relevant goods and services would also be prohibited, as would restrictions on the free movement of workers producing crisis-relevant goods and services or responsible for their supply.

The proposed measures can cover almost all types of goods and services, provided they are of "strategic importance" or "relevant to the crisis". Only medicinal products, medical devices, semiconductors, energy products and financial services are excluded from the Commission's proposal as there is separate EU legislation on these, for example the planned EU Chips Act or the Regulation on the reinforced role for the European Medicines Agency in crisis preparedness.

"A major challenge will be determining which goods, services and intermediate products are crisis-relevant in the respective emergency and should therefore be covered by the EU's measures," said Dr von Baum. "This is a delicate decision that is likely to give rise to further discussion should the SMEI actually be adopted in its now proposed form."

The Commission's proposals will next be discussed by the European Parliament and the Council of the European Union.