Warsaw, 17^th September 2021

 

Memorandum on the Digital Services Act

 

Introduction

The Internet as we know it today has largely been shaped by the Directive on electronic commerce adopted in 2000, also known as the e-Commerce Directive. Since then, online platforms have been brought to life, e-commerce has developed, and social media have emerged, and along with them new challenges related to how the Internet is used. To respond to these challenges, the European Commission has recently launched a number of legislative initiatives, including the Digital Services Act, referred to as DSA. A draft of the DSA was submitted by the Commission on 15^th December 2020 and the negotiation period began. On 3^rd September 2021, the Slovenian Presidency of the Council of the European Union presented a compromise text on which the following analysis is based.

In the foreseeable future, the DSA will amend the e-Commerce Directive and thus modernise the regulatory framework for the various Internet service providers. The Act can guarantee competition in digital markets under better conditions and may support business growth. At the same time, it is a major reform in terms of moderation and removal of illegal content on the Internet and introducing far-reaching changes to the way all actors on digital market operate.

In our view, the draft of the DSA requires certain modifications that will increase legal certainty, reduce disproportionate burdens on enterprises, and will actually support smaller entities. Before we move on to selected aspects of the DSA, however, we will place this new regulation in light of a broader trend to regulate the digital world. Next, we will discuss in this memorandum the three elements of the Act. First of all, we would like to point out that the DSA is not introducing any of the changes necessary to increase legal certainty in the context of the conditional exemptions from liability established by the e-Commerce Directive. Secondly, we will show that excessively detailed obligations in the context of reporting and removal of illegal content will worsen the ability of smaller players to compete. Thirdly, we will draw attention of the fact that the radical changes in digital advertising proposed by the European Parliament will have a negative impact on European consumers and entrepreneurs.

1. DSA in the context of digital regulations

An appropriate regulation of the digital economy is a priority on the agenda of the world’s largest organisations, including the World Trade Organization, the International Monetary Fund, the World Bank, the Organisation for Economic Cooperation and Development, and the European Union[1].

Over the past few years, many proposals have been made at the level of the European Union, aimed at regulating enterprises operating in the broadly understood digital world. The DSA is just one example of new regulations, including the GDPR, the P2B Regulation, the Regulation on preventing the dissemination of terrorist content online (Terrorist Content Online Regulation, or TCO), the Digital Markets Act (DMA), and the Directive on digital services tax.

A large number of new regulations may lead to the risk of conflicts between legal acts. First, the terms and conditions for the removal of illegal content are elaborated on in the DSA, the TCO as well as the Directive on Copyright and the Regulation on explosives precursors. While the last two pieces of legislation have a narrower scope than the DSA, the essence of all three is the regulation of illegal online content and, importantly, all three establish different obligations and liability thresholds for Internet service providers (ISPs). Secondly, the relationship between platforms and entrepreneurs is a subject of not only the DSA, but also the P2B Regulation and the DMA. Above all, new regulations – the DSA as well as the DMA – were proposed before it was possible to thoroughly assess the effects of implementing P2B.

Furthermore, the multitude of new regulations is a source of definition-related and procedural difficulties, which consequently reduces legal certainty. For companies active in the digital sector, this translates into the need to incur high costs related to compliance with the new rules. Paradoxically, however, such a large number of new regulations may become a barrier to entry and growth for European SMEs, while large foreign entities will easily adapt their business models to a new reality.

2. Conditional exemptions from liability for illegal content

One of the most important principles introduced by the DSA is the mechanism of conditional exemptions from liability for user-published content to be granted to providers of intermediary services. However, since the adoption of the old directive in 2000, new digital services emerged that have changed the way communicate, connect, consume and do business, and with them, doubts have arisen over the application of the directive. The European Commission has therefore committed itself to updating existing legislation[2].

The following section will analyse whether the draft DSA adequately addresses the interpretation problems regarding the liability exemptions established under the e-Commerce Directive. To this end, the following topics will be discussed: (i) terms and conditions of exemptions from liability for user-published content to be granted to providers of intermediary services; (ii) case-law of the Court of Justice of the European Union in this respect; (iii) changes in the scope of liability of providers of intermediary services in the draft DSA.

• Terms and conditions of exemptions from liability for user-published content to be granted to providers of intermediary services

Articles 12-14 of the e-Commerce Directive provide for conditional liability exemptions (so called “safe harbours”) for three types of intermediation services: mere conduit, caching, and hosting[3]. Moreover, Art. 15 of said directive prohibits the imposition of a general obligation to monitor intermediaries.

Mere conduit

Pursuant to Art. 12 of this directive, mere conduit is a service consisting in the transmission in a communication network of information provided by a recipient of the service, or the provision of access to a communication network. Liability in this case will be avoided if the provider of the service: a) does not initiate the transmission; b) does not select the recipient of the transfer; and c) does not select or modify the information contained in the transmission. Art. 12 sec. 2 specifies that the activities consisting in transmission and providing access specified in sec. 1 include the automatic, intermediate and transient storage of the information transmitted in so far as this takes place for the sole purpose of carrying out the transmission in the communication network, and provided that the information is not stored for any period longer than is reasonably necessary for the transmission. The conditional limitation of liability contained in this article, however, does not affect the possibility of a court or administrative authority of requiring the service provider to terminate or prevent an infringement

Caching

Art. 13 of the directive regulates “caching”, a service consisting in the transmission in a communication network of information provided by a recipient of the service. The service provider will not be liable for the automatic, intermediate and transient storage of the information transmitted performed for the sole purpose of making more efficient the information’s onward transmission to other recipients of the service upon their request, on condition that the service provider: a) does not modify the information; (b) complies with conditions on access to the information; (c) complies with rules regarding the updating of the information, specified in a manner widely recognised and used by industry; (d) does not interfere with the lawful use of technology, widely recognised and used by industry, to obtain data on the use of the information; and (e) acts expeditiously to remove or to disable access to the information it has stored upon obtaining actual knowledge of the fact that the information at the initial source of the transmission has been removed from the network, or access to it has been disabled, or that a court or an administrative authority has ordered such removal or disablement.

Hosting

Article 14 of the e-Commerce Directive defines hosting as a service consisting of the storage of information provided by a recipient of the service. The service provider will not be responsible for the information stored at the request of a recipient of the service, only if the service provider: (a) does not have actual knowledge of illegal activity or information and, as regards claims for damages, is not aware of facts or circumstances from which the illegal activity or information is apparent; or; (b) upon obtaining such knowledge or awareness, acts expeditiously to remove or to disable access to the information.

No general obligation to monitor

The last important element of the mechanism of conditional exemption is the absence of a general obligation to monitor established under Art. 15. Pursuant to this article, service providers are not required to monitor the information which they transmit or store, nor a general obligation actively to seek facts or circumstances indicating illegal activity. Such an injunction would risk excessive control over content and the removal of content that is legal but controversial, thereby censoring the Internet and hindering the freedom of speech.

At the same time, it should be remembered that neither conditional exemptions, nor the absence of a general obligation to monitor prevent intermediaries from being required to undertake appropriate steps against infringement of third party rights – by virtue of court orders or due diligence obligations[4].

• case-law of the Court of Justice of the European Union in the scope liability for user-published content to be granted to providers of intermediary services

There is widespread consensus that the conditional exemption mechanism is incomplete and presents a number of problems in its present form[5]. The following section discusses selected issues in this area, including: a subjective scope of application; the distinction between “active” and “passive” intermediaries; the effects of proactive measures; and the knowledge or awareness threshold for a conditional exemption.

Subjective scope of application

There are certain uncertainties as to the subjective scope of applying “safe harbours”. As has been noted, the conditional liability exemptions from the e-Commerce Directive do not apply to services provided by all intermediaries, but only to services that qualify as “information society services”[6]. Thus, this concept is a condition that determines the subjective scope of application of these safe harbours and shows the incomplete nature of the directive[7].

The Directive on electronic commerce does not include a definition of an information society service[8]. The definition in earlier Community legislation covers all services normally provided for remuneration, at a distance, by means of electronic devices for processing (including digital compression) and storage of data, at the individual request of the recipient. At the same time, recital 18 of the e-Commerce Directive states that “information society services are not solely restricted to services giving rise to on-line contracting but also, in so far as they represent an economic activity, extend to services which are not remunerated”.

In its case law, the CJEU applied Art. 14 of the directive to a search engine advertising service[9], sales on an online platform[10] and a social media platform[11]. Art. 12 of the directive has been applied to an ISP[12] and to an open Wi-Fi access service provider[13].

At the same time, the CJEU refused to qualify Uber’s services as those of an information society, thus negatively delimiting this definition[14]. In the Court’s opinion, a company providing a smartphone application that mediates between a passenger and a non-professional driver in booking a journey constitutes a transport service[15].

The distinction between “active” and “passive” intermediaries

The distinction between active and passive intermediaries is crucial from the perspective of service providers: passive intermediaries qualify for a conditional exemption from liability, but active intermediaries forfeit this privilege[16].

In some cases, determining whether a platform’s activity is active or passive is simple. The Papasavvas case of an online journal publishing company is a clear example of an active platform[17]. In the opinion of the CJEU, the company as a rule “has knowledge of the information posted and exercises control over that information”, and therefore cannot apply for conditional exemption from liability[18]. A good example of a passive intermediary can also be found in the case of Netlog, where the Court found that a social platform that stores information provided by users on its servers can make use of the “safe harbour”[19].

There is, however, considerable uncertainty as to the extent to which activities such as ranking building, indexing, sharing review systems, managing infrastructure and content hosted by platforms are actual control and thus an active intermediary role[20].

In this context, the connection to copyright is particularly important. The GS Media case concerned liability for linking to unauthorised content. The Court then held that “when the posting of hyperlinks is carried out for profit, it can be expected that the person who posted such a link carries out the necessary checks to ensure that the work concerned is not illegally published on the website to which those hyperlinks lead”[21]. Thus, the CJEU established a rebuttable presumption, which depends on whether or not the links were made for profit [22].

The effects of proactive measures

The e-Commerce Directive, as well as other legal instruments, urge intermediaries to step up their efforts to combat illegal or harmful content[23]. However, taking into account the aforementioned distinction between active and passive intermediaries and the lack of a general monitoring obligation under Art. 15 of the Directive, there are doubts as to what level of actions taken by platforms will not lead to the loss of the conditional exemption from liability[24].

A good example of this tension is the due diligence obligation in recital 48. It states that member  states have the right to require service providers “to apply duties of care, which can reasonably be expected from them and which are specified by national law, in order to detect and prevent certain types of illegal activities”.

The narrow understanding of due diligence indicates obligations “imposed by criminal or public law e.g. aid in investigation of crime or security matters, not as extending to duties under private law, e.g., to help prevent copyright infringement”[25]. In other words, due diligence may manifest itself in ex-post obligations, e.g. by removing content after gaining knowledge about its illegality, which, from the point of view of Art. 14 of the Directive, is not problematic, as well as in ex-ante obligations, i.e. measures that platforms must take before they become aware of the illegal nature of the content, which may result in the loss of conditional exemption from liability[26].

Nevertheless, member states retain the right to impose both types of obligations on platforms, and some ex-ante obligations are promoted by EU instruments, including “The EU Code of conduct on countering illegal hate speech online” of 2016 launched together with Facebook, Microsoft, Twitter and YouTube and signed by all these entities, the 2017 “Communication on Tackling Illegal Content Online” by the European Commission, and a Recommendation on measures aimed at the same goal[27].

Knowledge or awareness threshold for a conditional exemption

The case law of the Court of Justice of the European Union (CJEU) has provided criteria to determine when a service provider is aware of the illegal nature of an activity or information. The ruling in the L’Oréal case requires the interpretation of the principles set out in Art. 14 sec. 1 “as covering every situation in which the provider concerned becomes aware (…) of such facts or circumstances”. Thus, the Court emphasised that intermediaries may benefit from the liability exemption when they perform a purely technical, automatic, and passive role[28]. Despite the efforts of the European Court of Justice, in a very limited number of cases, many interventions or actions, especially in terms of content moderation, remain in the grey area[29].

• Changes in the scope of liability of providers of intermediary services in the draft DSA

As stated in the Introduction, the purpose of the DSA is to update the Directive on electronic commerce. It could therefore be assumed that solutions to the above-mentioned doubts would be among the most important priorities of the authors of the project.

Unfortunately, Articles 3-5 of the DSA replicate Articles 12-14 of the e-Commerce Directive, thus preserving the key problems that have arisen around the intermediary’s liability for content[30]. It should also be noted that the DSA uses the method of asymmetric regulation and imposes additional obligations on various entities. Thus, new regulatory layers are created that will lead to new interpretative doubts in the future.

The DSA seems to solve two minor problems. Firstly, the act was presented in the form of a regulation and not a directive. This means that it will be applied directly to the national orders of individual member states, thus avoiding the fragmentation of the digital single market. Secondly, the DSA includes a new Art. 6 for intermediaries’ liability which governs voluntary own-initiative investigations. According to it, intermediary service providers will not lose the possibility of exemption from liability due to carrying out “voluntary own-initiative investigations or other activities aimed at detecting, identifying and removing, or disabling of access to, illegal content”, or because they “take the necessary measures to comply with the requirements of Union law, including those set out in this Regulation”.

Even though the purpose of Art. 6 was to clarify the terms of liability, it raises a number of other doubts, especially in connection with additional obligations imposed on very large internet platforms.

At the same time, it is worth paying attention to the changes that were included in the compromise text presented by the Slovenian Presidency. Articles 3 and 4 remain unchanged; however, there are certain changes to Articles 5 and 6.

First of all, Art. 5 contains a new definition of online sales platforms, i.e. marketplaces. The very definition contained in Art. 2 (ia) defines marketplaces as online platforms that enable consumers to conclude distance contracts with entrepreneurs.

The proposed definition was intended to improve legal certainty, but leaves in our opinion much to be desired. A prerequisite for the recognition of a platform as a marketplace is the conclusion of a transaction between an entrepreneur and a consumer on a given platform. For example, if a consumer clicks on an advertisement for shoes on a newspaper’s website, it does not make the newspaper a marketplace. However, according to the currently proposed definition, this newspaper could be considered a marketplace, which would impose certain obligations on it.

Such a faultily constructed definition would be particularly severe in the face of an attempt by the European Parliament to introduce more stringent obligations for marketplaces. For example, one can recall the amendment introduced by MEP Alex Saliba regarding Art. 14a, according to which “marketplaces deserve special attention due to the large number of illegal activities detected on their Internet interfaces”, or additional provisions on marketplaces related to illegal offers proposed by, among others, French MEPs in Art. 22b. In our opinion, the above-mentioned amendments are attempts to differentiate responsibility due to the business model and constitute a departure from the general principle of asymmetric regulation based on the size of the enterprise. As a result, they can reduce legal certainty and increase the burden on entrepreneurs, and therefore should be assessed negatively.

Secondly, there is an amendment in recital 13 that extends the scope of hosting services to comments submitted to the platforms by users. In the compromise text proposed by the Slovenian Presidency, we read that “hosting comments on a social network should be considered an online platform service if it is clear that this is the main feature of the service offered, even if it is ancillary to the publishing of posts by service users”. In our opinion, such an amendment is technically impossible to implement. We draw attention to the fact that some user comments under live videos on online platforms are so-called live reactions. For this reason, it is not possible to monitor each transmission of this kind and investigate the users’ current reactions. Furthermore, the creators themselves usually have control over comments on their videos. They are free to disable comments on individual videos or approve comments that appear under their videos. Therefore, we evaluate the proposed change negatively.

Third, concepts such as acting in good faith and exercising due diligence have been introduced to Art. 6. However, we still do not know what is meant by due diligence. These amendments will therefore not increase legal certainty, but may allow platforms to better defend their interests in the event of a dispute by proving that they were acting in good faith.

Considering all the above-stated conclusions and taking into account the efforts of all parties involved in the works on the DSA, supporting this solution seems to be a squandered opportunity to simplify and systematise European law in this specific field.

3. Changes to the system of reporting and removal of illegal content

Another expectation that the DSA was hoped to fulfil was the regulation of appropriate procedures for reporting and removal of illegal content. The purpose of introducing a new mechanism is to ensure a balance between the protection of freedom of speech and the protection of personal and intellectual property rights. We can therefore observe a similar tension as with the conditional exemption from liability of service providers for user-posted content and the absence of a general obligation to monitor content.

First of all, it should be noted that the European Commission in the draft DSA decided to propose the introduction of a notice-and-action mechanism. Thus, it gave up the narrower obligation to notify and remove illegal content (notice and take down) as well as the wider obligation of the intermediary to control, so that illegal content does not reappear (notice and stay down)[31].

Secondly, it should be noted that the reporting and removal procedure for illegal content only applies to illegal content, not to harmful content. So it can be seen that the DSA maintains the division used thus far in the e-Commerce Directive. Furthermore, Art. 2(g) of the compromise text of the DSA defines illegal content as “any information which, in itself or by its reference to an activity, including the sale of products or provision of services is not in compliance with Union law or the law of a Member State, irrespective of the precise subject matter or nature of that law”. Therefore, the DSA does not provide a definition of illegal content, leaving it a gesture of national law of the Member States[32].

However, this definition raises serious doubts, namely the “reference to an activity” that is illegal. Such an unclear definition may in practice mean that legal content describing illegal activities will be removed. As an example that already raises problems at this point, one can cite the descriptions of activities in war zones and the materials documenting these activities. Naturally, this gives rise to the risk of excessive removal of content posted on the Internet and has serious consequences not only from the perspective of freedom of speech, but also the protection of other values.

Thirdly, the DSA quite precisely defines the elements that should be included in a notice in order for it to be considered a credible message or source of knowledge on which the intermediary’s liability for the content depends within the meaning of Art. 5 of the DSA[33]. Accordingly, upon receipt of the communication, if an intermediary wishes to retain the possibility of conditional exemption from liability, it should immediately proceed to remove illegal content or prevent access to it.

Another doubt arises in this context related to the risk of excessive removal of content. The EC’s proposal required the users to explain the reasons why they consider the content to be illegal. The explanation of the reasons may turn out to be largely subjective in practice. The EC did not require the user to prove the unlawfulness, nor does it foresee any consequences for users for false reports (except for multiple reports in bad faith). In its previous form, the provision did not provide adequate protection to content creators (personal and intellectual property rights) or intermediaries (liability for illegal content). However, the Slovenian Presidency introduced an important amendment here, the so-called requirement that the justification for the illegality of content be “sufficiently substantiated”. While this is a step in the right direction, the rationale is still subject to subjective scrutiny and platforms do not have clear guidelines for their actions, which may create a risk of excessive removal of content.

Consequently, the EC proposal required the intermediary to perform certain actions immediately after receiving a notice, including: “the provider of hosting services shall promptly send a confirmation of receipt of the notice to that individual or entity”[34]; “shall also, without undue delay, notify that individual or entity of its decision in respect of the information to which the notice relates”[35]; “providing information on the redress possibilities in respect of that decision”[36]. The DSA will apply horizontally to all types of online content. Given the multitude of different information and the potential nature of its unlawfulness, it cannot be reasonably expected that intermediaries will make all decisions at the same time. We therefore welcome the replacement by the Slovenian Presidency of “immediately” with “without undue delay”. In any event, burdening intermediaries with excessive liability would undoubtedly lead to excessive removal of legal content and infringement of the rights of their authors.

Ultimately, one should remember that the DSA obliges the intermediary not only to contact the notifier, but also the recipient. Art. 15 sec. 1 DSA states that the intermediary “shall inform the recipient, at the latest at the time of the removal or disabling of access, of the decision and provide a clear and specific statement of reasons for that decision”. The statement of reasons is subject to specific requirements and is to include, among others, the following information:

• whether the decision entails either the removal of, or the disabling of access to, the information and, where relevant, the territorial scope of the disabling of access;
• the facts and circumstances relied on in taking the decision;
• where applicable, information on the use made of automated means in taking the decision;
• where the decision concerns allegedly illegal content, a reference to the legal ground relied on;
• where the decision is based on the alleged incompatibility of the information with the terms and conditions of the provider, a reference to the contractual ground relied on[37].

The DSA specifies that the statement of reasons must be sufficiently clear and understandable, and as detailed and precise as is reasonably possible under the circumstances. An additional burden imposed on service providers is the requirement to publish decisions and statements of reasons in an anonymised form in a database managed by the European Commission.

There is no doubt that such detailed and extensive requirements will be counterproductive with regard to the goal that DSA was intended to achieve; that is, reducing the competitive advantage of the largest technology companies and levelling the conditions of competition with larger entities. The largest enterprises in the IT industry have sufficient infrastructure and resources to cope with the requirements described above. However, these obligations will not only be imposed on very large online platforms, but also on smaller platforms. Complicated content monitoring systems will become a kind of entry barrier for new enterprises, which may strengthen the competitive advantage of largest players.

4. Changes in the context of targeted advertising

Digital advertising plays an important role for Internet users, enterprises selling their products and services online, as well as platforms. It is not surprising, therefore, that it has become an object of interest for regulators. The third and final part of this memorandum examines the changes to digital advertising that have been proposed by the European Commission in the draft DSA, as well as by the European Parliament, namely the Committee on the Internal Market and Consumer Protection (IMCO) and the Committee on Civil Liberties, Justice and Home Affairs (LIBE).

The European Commission’s proposal

In its DSA proposal, the European Commission notes the important role that digital advertising plays in the online environment, as well as the risks it entails.

Interestingly, recital 52 of the preamble to the draft DSA mentions specific risks associated with digital advertising, i.e. advertisement that is itself illegal content, to contributing to financial incentives for the publication or amplification of illegal or otherwise harmful content and activities online, or the discriminatory display of advertising with an impact on the equal treatment and opportunities of citizens. In the face of these challenges, the EC proposes to make digital advertising more transparent so that users have the information they need to understand when and on whose behalf advertising is displayed. Service recipients should also have information on the main parameters used to determine whether a particular advertisement is to be displayed to them. Recital 63 of the preamble also requires very large online platforms to ensure public access to repositories of advertisements displayed on their online interfaces to facilitate supervision and research into emerging risks brought about by the distribution of advertising online.

IMCO report

A rather different approach was presented by the European Parliament. The IMCO report states that “pervasive collecting and use of users’ data to provide targeted, micro-targeted and behavioural advertising has spiralled out of control”. Furthermore, it finds the EC’s proposed new transparency requirements insufficient.

According to IMCO, ISPs should implicitly ensure that recipients of their services are not subjected to targeted, microtargeted and behavioural advertising unless the recipient has given voluntary, specific, informed and unambiguous consent. In other words, it proposes to introduce a default opt out and the need to obtain the consent of the data subject before processing personal data for targeted advertising.

LIBE opinion

The opinion presented by LIBE suggests that the DSA should provide for the right to use and pay for digital services anonymously. At the same time, LIBE advocates that digital and personalised advertising, for non-commercial and political advertising, be phased out. At the same time, behavioural advertising and personalised targeting in commercial advertising should only be possible if users have voluntarily consented to it, without risking exclusion from services, and without tiresome and repetitive consent banners.

Consequences

Proposals to increase transparency do not seem problematic, but actually desirable. Increasing the transparency of digital services is in the interest of users as well as intermediaries. However, it is apparent that the European Parliament is proposing a very different approach to digital advertising.

Indeed, if the amendment proposals submitted by IMCO and LIBE are included in the final text of the DSA, they will have a huge impact on the functioning of the online environment. It seems that the rapporteurs did not find the right balance between protecting users’ privacy and preserving the functionality or respecting the economic dimension of the Internet. It is primarily users who will suffer from the radical changes to digital advertising, because the model of free use of the Internet will be threatened. At the same time, European companies that sell their content and services online and creators who distribute their works in this manner will suffer. Significantly, for small and medium-sized enterprises, targeted advertising offers an opportunity to rationalise promotional costs. At the same time, the perspective of consumers is also important, for whom the lack of profiling in practice means an increase in spam.

Bearing in mind the above-mentioned arguments, we believe that the EU legislator should take a broader look at the issue of digital advertising, taking due account of the interests of all parties involved.

5. Conclusions

The Digital Services Act will introduce multiple far-reaching changes to the way all digital market actors operate: the providers of online services, the enterprises that use these services as well as the users. The DSA therefore represents an opportunity to improve competitive conditions and improve the market position of European SMEs. Having analysed the selected changes, we are compelled to conclude that the DSA in its current form does not fulfil this potential. Moreover, many of the proposed changes may even be counterproductive to the goal of improving the competitive situation on the market and lead to the deterioration of the position of smaller entities and the creation of new barriers to entry and expansion. We see these threats from several sources.

First of all, the DSA reproduces the conditional exemption mechanism established in the e-Commerce Directive and with it all the uncertainties that have built up over the 20 years of this directive being in force. In the compromise text presented by the Slovenian Presidency, we find several amendments that could worsen the current situation. The proposed monitoring of comments is technically impossible, and will in any case lead to excessive deletion of content and a restriction of fundamental rights. Moreover, the flawed definition of marketplaces could lead to an unjustified extension of the obligations specific to sales platforms to providers of other online intermediary services. Such a definition would be particularly severe in light of the stricter rules that the European Parliament is attempting to introduce for marketplaces. The introduction of such stricter rules is undesirable, because it differentiates between service providers based on their business model and is a departure from the principle of asymmetric regulation adopted throughout the DSA.

We find minor changes in the DSA, such as clarifying that investigation on one’s own initiative and acting in good faith with due diligence do not result in the loss of the safe harbour. Relative to all the uncertainties that exist, such a change only marginally increases legal certainty. It is also important to remember that the DSA is simultaneously building new regulatory safeguards, which will lead to new interpretive uncertainties and disputes in the future. Therefore, we believe that in this aspect the DSA does not live up to its potential and the EU legislator should put more effort into increasing legal certainty for enterprises active in the digital world.

Secondly, the DSA imposes extremely extensive, yet vague, obligations on digital enterprises to report and remove illegal content. Meeting such requirements will require significant resources from ISPs. As large online platforms have both the infrastructure and capital to adapt to new requirements, the DSA may paradoxically empower very large online platforms and create new barriers to entry and expansion for smaller companies.

Thirdly and finally, the radical changes proposed by the European Parliament in the context of digital advertising seem to ignore the interests not only of European entrepreneurs, who largely base their business models on digital advertising, but also of users who, thanks to digital advertising, can access content for free. If the changes to the DSA are adopted in the form proposed by IMCO or LIBE, we can expect big losses for European entrepreneurs as well as for the users themselves.

 

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[1] Daniil Petrovich Frolov and Anna Victorovna Lavrentyeva, Regulatory Policy for Digital Economy: Holistic Institutional Framework.

[2] Explanatory Memorandum for the draft DSA.

[3] European Commission, Hosting intermediary services and illegal content online – An analysis of the scope of article 14 ECD in light of developments in the online service landscape.

[4] European Commission, Hosting intermediary services and illegal content online – An analysis of the scope of article 14 ECD in light of developments in the online service landscape, page 28.

[5] Ibidem; Sartor, Providers Liability: From the eCommerce Directive to the future; de Streel, Larouche, An Integrated Regulatory Framework for Digital Networks and Services; de Streel, Defreyne, Jacquemin, Ledger, Michel, Innesti, Goubert, Ustowski, Online Platforms’ Moderation of Illegal Content Online; Schulte-Nolke, Ruffer, Nobrega, Wiewórowska-Domagalska, The legal framework for e-commerce in the Internal Market. State of play, remaining obstacles to the free movement of digital services and ways to improve the current situation.

[6] European Commission, Hosting intermediary services and illegal content online – An analysis of the scope of article 14 ECD in light of developments in the online service landscape.

[7] Ibidem.

[8] It is defined in Directive 98/34/EC of the European Parliament and of the Council of 22^nd June 1998 laying down a procedure for the provision of information in the field of technical standards and regulations and of rules on Information Society services, and in Directive 98/84/EC of the European Parliament and of the Council of 20^th November 1998 on the legal protection of services based on, or consisting of, conditional access.

[9] Judgment of 23^rd March 2010, Google France, C-236/08.

[10] Judgment of 12^th July 2011, L’Oréal, C-324/09.

[11] Judgment of 16^th February 2012, Netlog, C-360/10

[12] Judgment of 13^th January 2012, Scarlet Extended, C-70/10.

[13] Judgment of 28^th October 2016, McFadden, C-484/14.

[14] Judgment of 20^th December 2017, Uber Systems Spain SL, C-434/15; Judgment of 10^th April 2018, Uber France SAS, C-320/16.

[15] Ibidem.

[16] European Commission, Hosting intermediary services and illegal content online – An analysis of the scope of article 14 ECD in light of developments in the online service landscape.

[17] Judgment of 31^st October 2014, Papasavvas, C-291/13.

[18] Ibidem.

[19] Judgment of 16^th February 2012, Netlog, C-360/10.

[20] European Parliament, Liability of online platforms.

[21] Judgment of 8^th September 2016, GS Media, C-160/15.

[22] Ibidem.

[23] European Parliament, Liability of online platforms.

[24] Ibidem.

[25] Edwards, Downloading Torts: An English Introduction to On-Line Torts’ in Snijders and Weatherill.

[26] European Parliament, Liability of online platforms.

[27] Joan Barta, The Digital Services Act and the Reproduction of Old Confusions.

[28] Ibidem.

[29] Ibidem.

[30] Ibidem.

[31] TKP, Procedura notice & take action w projekcie Aktu o usługach cyfrowych (Digital Services Act) (Notice and take action procedure in the draft Digital Services Act).

[32] Ibidem.

[33] Art. 14 sec. 2 lists the following elements: (a) an explanation of the reasons why the individual or entity considers the information in question to be illegal content; (b) a clear indication of the electronic location of that information, in particular the exact URL or URLs, and, where necessary, additional information enabling the identification of the illegal content; (c) the name and an electronic mail address of the individual or entity submitting the notice, except in the case of information considered to involve one of the offences referred to in Articles 3 to 7 of Directive 2011/93/EU; (d) a statement confirming the good faith belief of the individual or entity submitting the notice that the information and allegations contained therein are accurate and complete.

[34] Art. 14 sec. 4: “Where the notice contains the name and an electronic mail address of the individual or entity that submitted it, the provider of hosting services shall promptly send a confirmation of receipt of the notice to that individual or entity.”

[35] Art. 14 sec. 5: “The provider shall also, without undue delay, notify that individual or entity of its decision in respect of the information to which the notice relates, providing information on the redress possibilities in respect of that decision.”

[36] Ibidem.

[37] Art. 15 sec. 2 DSA.

 

See more: 17.09.2021 Memorandum on the Digital Services Act

Warsaw, 19 October 2021

 

New EU Emissions Trading Scheme – how to mitigate the risks for European consumers and SMEs?

 

The emissions trading scheme (EU ETS) cannot be regarded as functioning in accordance with the idea of a free market since the underlying mechanisms artificially limit the supply of allowances. In the ETS there are two groups of buyers. First, installations, that need allowances to conduct their business activities. Second, investors, that can substitute allowances for pretty much any other financial instrument. Investors face little to no risk, while installations have to buy EU allowances (EUA) at any price. Moreover, the econometric analysis leads to a conclusion that there is a bubble forming on the EUA prices. These are the key conclusions from the report “EUA price bubbles and competitiveness” published by ZPP.

Today (19/10) ZPP together with SME Connect and European Enterprise Alliance has hosted an online discussion ‘New EU Emissions Trading Scheme – how to mitigate the risks for European consumers and SMEs.’ The keynote speech was delivered by MEP Marian-Jean Marinescu who’s stated that ‘Fit for 55 is one of the most critical legislation packages ever introduced by the European Commission regarding the impact on the people and industry.’

According to Dr Horst Heitz Chair of the European Steering Board of SME Connect, Executive Director SME Europe of the EPP, Fit for 55 ‘is now a one-sided discussion.’ Discussion about growth and jobs should not be separated from the debate about environmental targets. Otherwise, it will be impossible to avoid social consequences.

The reality is that we have two speed Europe. Imbalances can quickly rise if we don’t mitigate these differences. Reducing CO2 emissions is essential yet the current proposal most likely will have negative consequences on citizens and companies in many countries, leading to impoverishment in Southern and Eastern Europe – added Damir Filipovic, Sec-Gen of the European Enterprise Alliance.

Marek Lachowicz, the author of the report on the ETS, stressed that the ETS market structure facilitates the creation of bubbles  and the monetary price drop will not affect it. What’s more concerning is that forcing installation to keep cash in reserves in case of ETS price increase restricts real ways to reduce emission – Lachowicz notes.

The ETS system can be improved, the biggest problem is, however, that the European Commission doesn’t see the problems – concluded Marcin Nowacki, ZPP’s VP.

 

See more: 19.10.2021 Report by the Union of Entrepreneurs and Employers: Forming of bubbles and the competitiveness of the European Union

Warsaw, 17 September 2021

 

ZPP’s contribution to the Commission’s consultation on the Vertical Block Exemption Regulation Revision

 

Background

The current Vertical Block Exemption Regulation (VBER) entered into force on 1 June 2010 and will expire on 31 May 2022 together with the Guidelines on Vertical Restraints. Therefore, the European Commission has started the evaluation process of existing legislation to propose a new, revised version of the VBER. In September 2020, the Commission Staff Working Document was published, outlining the main directions for reform, including the need to adopt the VBER to the challenges related to the growth of e-commerce.

In July 2021, the draft of the revised VBER was published. Our analysis of the draft VBER indicates that, while the revision aims to respond to challenges related to digitization, it will also have major implications for other industries.

Changes in dual distribution and its implications for franchising agreements

Particularly relevant in this context are the changes for dual distribution, meaning a situation where a supplier simultaneously distributes its goods or services directly to its customers as well as through independent distributors, for instance through franchising agreements. Until now, thanks to the VBER, companies exchanging information in a dual distribution system did not have to fear liability for infringement of competition law under Article 101(1) of the Treaty on the Functioning of the European Union (TFEU). However, due to the increased popularity of dual distribution and its possible undesirable effects on market competition, the EC decided to introduce stricter provisions in the revised VBER in this regard.

Changes in the draft revised VBER

The changes can be summarized as follows. First, VBER will not apply where dual distribution leads to “horizontal problems.” To this end, it is proposed to remove the exemption for all cases in which the parties’ combined retail market share exceeds 10 per cent (as opposed to the current 30 per cent). The draft revised VBER provides for an additional exemption, where a supplier and its distributors have a combined market share at the retail level of more than 10 per cent but do not exceed 30 per cent of the relevant market share within the meaning of Article 2(4)(a) or (b) of the VBER. Nevertheless, the exemption for the 10-30 per cent market share threshold will not apply in the case of an exchange of information between undertakings, and such exchange will have to be assessed under the rules for horizontal agreements.

Implications for franchise business model

First, it is important to note that franchising is a popular and important business model, which drives growth and employment in many sectors of the European economy. Franchising agreement are also important for SMEs, providing them with access to know-how and technology.

Second, it is essential to understand that exchange of information lies at the heart of the relationship between franchisor and franchisees. In any franchise business model, franchisor and franchisees exchange know-how and commercially sensitive information on every day basis. Franchisees receive access to know-how in return for the access to real time data about local customer demand, when then helps to maintain effective planning and product development.

As it stands, the draft revised VBER prevents or to a great extent disrupts the exchange of information in a franchising ecosystem. Moreover, it requires franchisor to differentiate between wholly owned operations and franchisees, what undermines the idea of the franchising business model.

Keeping the above-mentioned points in mind, it can be seen that proposed restrictions on the exchange of information will require franchisors and franchisees to radically re-evaluate their business models, which can have serious implications for the supply of various goods and services in the EU.

According to the CJEU judgements, any exchange of information that substitutes competition for practical cooperation, should be considered as infringing upon the Art. 101(1) TFEU. Hence, exchange of information between franchisors and franchisees can be impeded in a number of ways. Below we briefly summarize some of the most critical potential changes. 

Changes in the treatment of intermediation services and its implications for the marketplaces

Article 2(7) of the Draft VBER withdraws the benefit of an exemption for large parts of vertical relationships entered into providers of intermediary services with their retail activities (“hybrid platform”). Under the new rules, the block exemption will not apply when a hybrid platform enters into agreements with competing undertakings on the retail level. Nevertheless, the block exemption would continue to apply, if competition between two undertakings only exists on the retail level. Therefore, it can be seen that the Draft VBER lead to distortion of competition. Intermediary services providers without their retail businesses will be covered by the block exemption, and intermediary services with their retail businesses will not be covered by the block exemption, while the key criterion used by the Commission to assess who should benefit from the exemption and who should not is the competition with independent retailers on the retail level.

The Commission justifies withdrawal of the block exemption by stating that such agreements affect inter-brand competition and raise horizontal concerns. In our view however this does not justify the exclusion of vertical relationship between intermediary services providers and their retail businesses from the scope of VBER. The Commission should also take under consideration the costs related to this decision. Once the block exemption is withdrawn, the intermediary services providers will have to re-assess all business relationships with their retailers under the horizontal guidelines. The withdrawal of safe harbour will lead to increased transaction costs and increase barriers for SMEs, that use intermediary services providers as distribution channels to access larger pool of consumers. Consequently, proposed changes could harm consumers by leading to increased prices.

Given the above, Art. 2(7) of the Draft VBER will have serious implications for the entire retail industy and will force numerous businesses to re-shape their business models. Therefore, we believe that the Commission should revise Art. 2(7) of the Draft VBER entirely.

Incentives to intermediaries

Paragraph 179 of the Draft Guidelines provides that intermediary services providers may offer incentives to their users to sell their goods or services at a competitive level or to reduce their prices, while resale price maintenance remains prohibited. It is desirable to clarify what incentives would be considered as compatible with EU law and provide examples of such incentives to dispel doubts as to what is a permissible incentive and what is a prohibited influence on the prices charged by users of intermediary services.

 

See more: 17.09.2021 ZPP’s contribution to the Commission’s consultation on the Vertical Block Exemption Regulation Revision

Warsaw, 16^th September 2021

 

Debate hosted by the Union of Entrepreneurs and Employers: Emission allowances trading, price bubbles and energy prices

 

The European Emissions Trading Scheme cannot be considered as operating in accordance with the idea of a free market. The foundations of its operation artificially limit the supply of allowances. On the demand side, financial investors are free to take advantage of the fact that part of the buyers of EUA require them to run a business operations. The allowances have no price cap, as the penalty for emission without allowances does not release the allowance from the obligation to settle it. The conducted analysis suggests that price bubbles are emerging on the EUA market. These are the key conclusions of the report written by Marek Lachowicz and published by the Union of Entrepreneurs and Employers “EUA: Price bubbles and the competitiveness of Poland and the European Union”.

“The withdrawal of energy-intensive companies and the limited access to raw materials related to this phenomenon both pose a serious threat for the entire EU. At this point, we are optimistic and think in globalist terms about imports of raw materials. However, as the COVID-19 pandemic has shown us: in the event of an emergency, countries secures raw material supplies primarily for itself. Extending the ETS to aviation and maritime transport will make it more difficult to transport raw materials to the EU. So his is not even a shot to the knee, but actually to the pelvis. We should also remember that the transport of raw materials from abroad may offset any emission reductions that we achieve thanks to the ETS,” stresses Marek Lachowicz, economist and author of the report.

EUA prices have “bubble-genic” characteristics. Their changes over time are similar to those of the Brent crude oil and natural gas futures contracts. However, there is no long-term link between EUA prices and either the price of Brent crude oil or the GDP. This suggests that financial investors treat emission allowances as a class of speculative assets similar to crude oil.

The creation of price bubbles on emission allowances favours the relocation of energy-intensive enterprises outside the borders of the European Union. These companies often supply key raw materials, such as steel, which are the foundation for the competitiveness of EU industry. The possibility of a bubble emerging forces EUA mechanisms to set up reserves to offset increases in allowance prices, which significantly reduces the pool of available financial resources that could be allocated, for instance, to emission reduction technologies. The unpredictability of allowance prices also prevents real investment planning in the entire energy sector.

The President of the Jagiellonian Institute – one of Polish major think tanks, Marcin Roszkowski, looked at the issue at hand from a slightly different perspective: “The ETS is primarily a political instrument aimed at getting rid of the entire coal and gas industry in the energy sector and, as a result, focused on economic transformation. However, we cannot speak of a bubble in the emissions trading market, because political instruments do not create such bubbles.”

The COVID-19 pandemic has shown the fragility of value chains being based on imports of essential raw materials and semi-finished products. In the event of an international crisis, the Union’s potential technological advantage will be meaningless unless it is backed by the raw materials it required. The changes to the EU ETS system planned in the “Fit for 55” package do not solve the problem at hand, but worsen it. Reducing the number of free allowances for aviation as well as extending this system to maritime transport are a threat to the competitiveness of the Union as a whole. The possible consequences of the reforms proposed by the European Commission include an increase in the prices of goods imported to the EU, which might in turn lead to customs wars, especially should a carbon border tax be introduced

“The Commission’s argument in favour of the necessity to extend the ETS is its effectiveness. Yet, a number of ex-post studies have shown that the annual reduction in emissions achieved by the system ranges between 0.5-1%. Considering the huge costs for society and the low gains in emissions’ reductions, it seems essential to consider whether we should actually base – to a large extent – the EU energy transformation on this very instrument, combined with the equally dubious carbon adjustment mechanism, or not,” concludes Kamila Sotomska, Deputy Director of the Law and Legislation Department at the Union of Entrepreneurs and Employers.

 

See more: EUA: Price bubbles vs the competitiveness of Poland and the European Union – report by the Union of Entrepreneurs and Employers

Warsaw, 10^th September 2021

 

Statement of the Union of Entrepreneurs and Employers on the Polish New Deal tax package

 

Following multiple comments from the business community, including numerous postulates submitted by the Union of Entrepreneurs and Employers itself, the government has revised part of the solutions contained in the Tax Act implementing the assumptions of the Polish New Deal. While we appreciate and value openness to dialogue, we believes that the changes introduced to the draft act are still insufficient. We would also wish to draw attention to the pace at which this new regulation is being proceeded: the entire text of the draft submitted to Sejm, the lower house of the Polish parliament, is almost 700 pages long. One would think it should be subject to additional, comprehensive public consultations, the duration of which should correspond to the exceptional scope of the proposed act.

We support the increase in the tax-exempt amount as well as the valorisation of the second tax threshold. We also understand that these changes require financing. However, we are not on the same page with regard to the costs of these reforms, that they be borne almost exclusively by Polish small and medium enterprises. Furthermore, entrepreneurs will transfer the higher operating costs to the prices of products they sell and services they render, so that ultimately the benefits for that part of the society for which the tax wedge was to be reduced will be lower than assumed.

While the reduction from 9% to 4.9% of the healthcare premium for people running a proprietary business and paying flat tax is a noticeable reduction, we believe that the introduction of such (full) proportionality is a solution that directly affects Polish business, and indirectly – all consumers. An increased burden on companies translates into higher prices of products and services, and the Polish people are already facing price increases unseen for years.

We also find it rather difficult to comprehend that people who work on account of appointment will be covered by a health insurance premium of 9% of their income, which means that the effective tax rate on income in this group will amount to 41%. This will actually lead to the elimination of this form of taxation, as the overwhelming majority will switch to much cheaper forms of taxation. As a result, the state will lose part of the revenue stream.

In our view, leaving a lump sum healthcare premium for those who pay the flat tax would be the optimal solution. However, if for some reason the regulator deems it necessary to introduce proportionality in healthcare insurance premium for companies, we are convinced that there should be some “ceiling” on the amount transferred by entrepreneurs to the National Health Fund per month.

Although formally the taxes paid to the Fund are called a premium or “contribution”, their amount does not in any way determine the quality or frequency of the benefit. In other words, higher contributions to the healthcare system are not associated with an individual improvement in the quality of procedures. With this in mind, we believe that a maximum “contribution” should be defined and linked to, for instance, the minimum wage. The healthcare premium should amount to no more than, for example, 35% of the minimum wage per month. This way, the scale of increases in the burdens of entrepreneurs (and thus price increases) would be curbed.

The Union of Entrepreneurs and Employers advocated for a revenue tax. The presented solution in the form of a minimum CIT calculated on income is a step in the right direction. We emphasise, however, that, contrary to what was stated in the explanatory memorandum to the government draft act, this tax is not the brainchild of the Union of Entrepreneurs and Employers. Our Union proposed a simple revenue tax, without any reliefs and exemptions, in the form of a so-called Minimum CIT in the amount of 1% of revenues. Ultimately, we propose replacing all CIT with a universal revenue tax. Regardless of the changes introduced to our concept, we do appreciate the willingness to tax international corporations more effectively (and thus to level the playing field regarding competition between multinationals and small Polish companies). We will certainly be monitoring the effectiveness of this regulation, even though it is not the project we authored.

To sum up, we have hopes that changes of an even deeper nature will be introduced to the draft act by the Parliament. We strongly support the introduction of a higher tax-exempt amount and the increase in the second tax threshold. We agree with the solutions adopted in the form of lump sum tax on registered revenue, and we ask for similar ones with regard to appointment work relationships. We also appreciate the reduction in healthcare premiums to 4.9%, but the lack of a limit on its account is a matter we find worrying. And lastly, we approach the minimum CIT with caution, and categorically deny our authorship of this tax in this structure.

 

See more: 10.09.2021 Statement of the Union of Entrepreneurs and Employers on the Polish New Deal tax package

Warsaw, 15^th September 2021

 

Kamila Sotomska becomes Chief Expert on Digital Economy

 

The Union of Entrepreneurs and Employers continues to expand its team of experts in areas of particular importance for the development of the Polish economy.

We are, therefore, proud to announce that Ms Kamila Sotomska has been appointed Chief Expert on Digital Economy of the Union of Entrepreneurs and Employers.

She has authored and co-authored legislative positions, memoranda, and thematic reports, and her field of specialty revolves aroound issues related to European law. Before joining the Union of Entrepreneurs and Employers, she gained experience at the Representation of the European Commission in Poland as well as in law firms and consulting companies. She graduated from the Faculty of European Law at the College of Europe in Bruges (LL.M.) and the Faculty of Comparative Law at the University of Maastricht (LL.B.).

We encourage you to follow the opinions of our Chief Experts published on our website!

Warsaw, 6^th September 2021

 

Survey by the Union of Entrepreneurs and Employers: Polish New Deal in the eyes
of employees and the self-employed – clear pessimism regarding government’s proposals

 

The results of the survey commissioned by the Union of Entrepreneurs and Employers clearly indicate there is reluctance amongst respondents regarding the solutions included the Polish New Deal.

As many as 64% of all people surveyed believe they will be worse off as a result of the tax changes provided for in the Polish New Deal, while only 12% believe they can benefit from them. As many as 83% of all respondents are concerned that the planned increases in taxes will cause a further increase in prices. As the results of the research indicate there is a high risk of such a scenario, as 65% of entrepreneurs surveyed declared that tax changes would force them to increase the prices of their products or services.

As Cezary Kaźmierczak, President of the Union of Entrepreneurs and Employers, points out: “Such widespread disapproval of tax changes should give the government food for thought. Even among employees whose economic conditions will not change as drastically as the situation of entrepreneurs, there is opposition to the proposed solutions. Employees generally perceive the benefits of the Polish Deal as having very little impact on the situation of household budgets. For entrepreneurs, the originally proposed increase in the health insurance premium is, in turn, a heavy burden.”

In this study, people were also asked about potential sources of healthcare financing. According to the majority, as many as 56% of respondents, healthcare should be financed primarily from a more effective taxation of international corporations. Only 9% of participants surveyed expressed the opinion that higher expenditure on healthcare should result from higher taxation of Polish companies.

We encourage you to familiarise yourselves with the report summarising our quantitative study.

Warsaw, 7^th September 2021

 

Analysis of the Polish e-commerce market. Expansion potential of Polish companies

 

The Union of Entrepreneurs and Employers commissioned a study of the e-commerce market in Poland. In-depth interviews as part of that study were conducted in August 2021. The study is already the second analysis of the e-commerce market carried out by the Union.

The first report dedicated to the Polish e-commerce market, published in March this year, focused on the quantitative analysis of the market situation and development opportunities with the use of e-commerce for small and medium-sized companies.

This time, the study aimed to identify the reasons why Polish companies are afraid to utilise e-commerce tools or take advantage of international expansion, as well as on ways that can dispel these fears, and thus unlock the potential of Polish companies.

 

Find out more: 07.09.2021 On-line sales survey of companies

Warsaw, 23^rd July 2021

Memorandum of the Union of Entrepreneurs and Employers on the post-pandemic recovery
of the Polish economy

 

1. Introduction

The coronavirus pandemic that broke out in Q1 2020 led to an unusual recession on a global scale. It was sudden and deep, and left a lasting mark on several sectors of the economy. According to the calculations of the World Bank, the global economy shrank by 4.3% last year. The scale of the recession was milder than it had been assumed at the beginning due to, among other things, the fact that developed countries dealt with the pandemic relatively well.

The pandemic recession affected individual sectors of the economy in various ways. The industries that lost customers due to restrictions on the movement of people were affected most – these include industries such as tourism, food services, air transport, and hospitality. On the other hand, the broadly understood technology industry has benefited from keeping people at home. Certain industries and sectors passed through the worst period of the pandemic in a relatively neutral manner.

The pandemic also had, of course, a negative impact on the Polish economy, leading to the sharpest decline in GDP since the economic transformation. It amounted to -2.7% last year, and was the worst result of the Polish economy since 1991.

The year 2021 brings a post-pandemic rebound, stimulated by governments and central banks. Governments have launched bailouts totalling trillions of dollars. Central banks have kept rates at very low levels – and even lowered them in numerous cases – thereby offering cheap money and readily available credit.

The GDP growth rate in Q1 2021 turned out to be positive in many of the most important economies. In the US, it was 0.4% year-on-year (hereinafter y-o-y). In China, it skyrocketed to 18.3% y-o-y. In Singapore, it came to 1.3% y-o-y. According to the forecasts of the World Bank, the global economy is to grow by 5.6% this year, which is to be the quickest pace in 80 years. The International Monetary Fund (IMF) claims in turn that it will grow by 6%, and then the growth rate will become slightly moderate in 2022 (4.4% y-o-y). This is without any doubts an effect of a low base, but some readings suggest that optimism has returned to the world economy. Let us have a look, for instance, at the IHS Markit Eurozone Manufacturing PMI – the index of the economic situation in the manufacturing industry in the euro area – which reached in June this year historic highs (63.4 points), after 12 months of increases.

How does the Polish economy compare to others? What does the pandemic rebound in our country look like? Which industries are recovering faster and which ones slower after last year’s recession? How do the phenomena taking place in our main trading partners (e.g. demand shifts) affect selected sectors of the Polish economy? The next wave of the pandemic, possibly to emerge in autumn this year, how destructive could it be? This study tries to earnestly answer these important questions.

2. Rebound of the Polish economy at the beginning of 2021

In Q1 2021, Poland’s real gross GDP (that is, inflation-adjusted) was higher by 1.1% than in the previous quarter according to Statistics Poland (GUS). However, year-on-year, it decreased by 0.9%. (data not adjusted seasonally), which turned out to be a better result than economists expected (the forecast mentioned an increase by 0.9% quarter-on-quarter and a decrease by 1.2% y-o-y).

Investment expenditures positively surprised in Q1 2021 (increase by 1.3% y-o-y, while an 8.6% drop was expected after dropping by as much as 15.5% in Q4 2020). Private consumption increased by 0.2% y-o-y, while a decline was expected. Exports increased by 5.7% y-o-y, and imports by 10%.

How did the Polish economy compare to others in Q1 2021? The economy of the euro area shrank by 1.3% y-o-y (forecast: -1.8%), so it fared well compared to developed European markets. Also compared to other countries of the region, it did quite well, because the Czech economy, for example, shrank by 2.1% y-o-y, while the Lithuanian and the Slovak grew by 1.2% and 0.2% y-o-y respectively.

 

Poland – GDP growth rate y-o-y
[% year-on-year (stable prices of the previous year)]

Source: SpotData / Puls Biznesu

 

Median of Poland’s GDP growth forecasts in 2021
[% year-on-year]

Source: SpotData / Puls Biznesu

 

Data on the Polish economy in May this year turned out to be very good. May was the first month that the economy fully opened after the winter/spring restrictions. Retail sales in May rose in real terms by 13.9% y-o-y after an increase of 21.1% y-o-y a month earlier, and – in nominal terms – it increased by 19.1% y-o-y. Construction and assembly production increased 4.% in May y-o-y against -4.2% y-o-y in April. Sold industrial production increased by 29.8% in May y-o-y after an increase of 44.5% y-o-y in April (which resulted from the low base for April 2020). Therefore, one can see that the domestic economy is in the phase of rapid economic growth, and the construction industry is chasing sales or trade.

 

Poland – level of activity in the economy

[Index, January 2020 = 100 retail sales industrial production construction production]

Source: PKO BP Analyses Centre

 

In this case, what are the forecasts for Q2 and the entire 2021? According to economists at PKO BP, the GDP growth in Q2 amounted to approx. 10% y-o-y, and throughout the year the reading may exceed 5.1% (e.g. due to a revival in investments). According to economists at Bank Pekao, GDP in Q2 could have grown in double-digit terms (approx. 11% y-o-y), and for the entire 2021 it will grow by over 5%. According to the economists at Credit Agricole, the period of shrinking of the Polish economy came to an end with Q1 2021, because in the quarters to come the “base effect” will take effect – exports and consumption will grow. In turn, the Polish Economic Institute (PIE) forecasts that the Polish GDP growth rate this year will amount to 4.4%, mainly due to the effect of delayed demand. The European Commission raised its economic growth forecasts for Poland for 2021 in early July from 4% up to 5% in its own forecast, while the Union of Entrepreneurs and Employers forecasts an increase of 4% in 2021 and 5.1% in 2022.

The dynamic economic rebound – not only in Poland, but around the world – results in a significant increase in the demand for raw materials, which creates price pressure. The so-called non-financial barriers to business appear. In May, the indices of delays in deliveries, production costs, and prices of finished goods reached record highs, whereas the employment, semi-finished stock, and production backlog indices were close to their maximum levels. The data shows a high demand for labour, which, combined with production backlogs, results in insufficient processing capacity, which means that there is need for investment.

 

Business barriers – shortage of raw materials, materials, and semi-finished products (due to non-financial reasons)

Source: PKO BP Analyses Centre

3. Dynamic rebound in certain sectors – manufacturing industry, transport, and trade

As the pandemic recession began last year, economists wondered what shape it would take on as the rebounded afterwards – whether it would be V-shaped (deep crisis, quick rebound), W-shaped (series of recessions and rebounds) or L-shaped (a long-term recession). Today we know that none of these scenarios took place, as the K-scenario took over. This means that certain industries and sectors have quickly and dynamically emerged from the pandemic recession, while others are still in an unenviable situation.

The manufacturing industry, transport, and trade are the best survivors of the pandemic recession, and are recovering the fastest from it. Sold production of industry in Q1 2021 was 7.8% higher than a year ago (when an increase of 0.9% y-o-y was recorded). In May, sold industrial production increased by 29.8% y-o-y, after it skyrocketed by 44.5% in April y-o-y. The Polish manufacturing industry is a beneficiary of the recovery in the global economy.

It is worth taking a look at the export results from Q1-Q2 2021. From January to April, total exports amounted to EUR 90 billion (+19 percent y-o-y) according to GUS. In April, exports of goods increased by 69.2% y-o-y compared to 27.7% y-o-y in March, and in May by 41.7% y-o-y. These double-digit results from April and May are an effect of a low base, but also a display of the strength of demand for Polish goods. Importantly, such results were achieved by Polish exports in connection to the accelerating German economy, our main trade partner.

The demand for car batteries, TV sets, catalytic converters, clothes and furniture produced in Poland is high and growing. The export-oriented automotive industry has a great influence on the excellent results of the industry. Producers of food, plastics, and metal products can also boast a high contribution. Producers of electrical devices, who sell most of their production abroad, also do not disappoint according to GUS and PontInfo data. It is noteworthy too to pay attention to the production of household appliances: according to the report “Household appliances manufacturers and suppliers in the face of new trends and challenges” (“Producenci i dostawcy AGD w obliczu nowych trendów i wyzwań” by Bank Santander and SpotData, May 2021) Polish producers satisfy approx. 2% of the global demand, and this increased in the pandemic due to the phenomenon of expenditure substitution (consumers saved on entertainment, so they decided to replace their old washing machines or refrigerators).

 

10 biggest household appliances exporters (billion USD)
[China, Germany, Mexico, Poland, Italy, Turkey, United States, the Netherlands, Thailand, South Korea]

Source: Bank Santander / SpotData

 

Refrigerators and freezers – production in Poland (thousand)

Source: Bank Santander / SpotData

 

However, the industry faces a challenge: supply constraints make production not keeping up with the dynamically growing orders. A great example is the shortage of semiconductors, which has been a big deal in recent weeks, also due to the problems of Tesla. At the same time, in Poland, there are no problems in the automotive sector so far, because vehicle production in May sared by as much as 103.9% y-o-y, after an increase by 370% in April (this was due to an extremely low base).

Trading companies have very good prospects. Private consumption in Q1 2021 increased by 0.2% y-o-y, compared to a decline of -3.2% y-o-y in Q4 2020). Retail sales in May rose in real terms by 13.9% y-o-y, after an increase of 21.1% y-o-y in April. In May, textile sales increased by 92.2% y-o-y and sales of furniture, electronics and household appliances increased by 30% y-o-y.

Furthermore, PKO BP data from payment cards show that in April 2021 consumer demand was under the pressure of anti-pandemic restrictions, but at the beginning of May – along with the opening of the economy – it literally exploded and remained at a high level in the following weeks. Savings of households “forced” by pandemic lockdowns amount to around PLN 85-102 billion, which correspond to 6.5-7.8% of private consumption in 2019. During the pandemic, the savings rate of Poles increased from 3% to in 2019 up to 10% in 2020. Consumers in countries that are leaders in vaccination, such as Israel or Canada, spend a lot after the restrictions were lifted, and Poles will probably do the same.

In 2021, the transport industry is gaining momentum. Transport companies in Q2 2021 evaluated their situation as the best in 30 months – this is indicated by the EFL Barometer reading for the transport industry at 65.6 points (+10.4 points quarter-on-quarter) reflecting optimistic forecasts for investments and sales.

4. How are those most affected by pandemic restrictions doing – services, hospitality, and tourism

Let us now have a look at the industries and sectors that were hit the most by the pandemic and the restrictions that followed. It is mainly the broadly understood services sector – tourism, HoReCa, and the event industrt (concerts etc.) in particular. Its activity for a large part of 2020 and in Q1 2021 was very limited, and people were reluctant to travel or make use of attractions drawing larger numbers of people (such as aquaparks, ski sloped, and restaurants). Furthermore, companies have significantly reduced the number of business trips.

The contribution of the hotel and food services sector as well as cultural activities to the annual GDP growth in Q4 2020 amounted to -0.9 and -2.0 percentage points respectively according to GUS. In Q1 2021, in hotel and food services sector, added value decreased by 77.2% y-o-y (almost as much as in Q2 2020: -78.4% y-o-y), and for the first time in almost a decade, the number of entities in the tourism industry removed from the National Court Register exceeded the number of new companies. Nearly 80 companies disappeared from the Polish tourism market in Q1 2021, and another 185 were suspended, the operation of nearly 500 hotels and accommodation facilities was suspended (+50% y-o-y) according to Dun & Bradstreet.

“In Q4 2020, the profitability of the hotel industry amounted to -83.6%, and of the food service industry to -6.0%. Revenues were respectively 65% and 15% lower y-o-y (companies with 49+ employees). According to the Polish Hotel Industry Chamber of Commerce, the number of closed hotels increased to 17% in March 2021, and 8 out of 10 open facilities recorded an average occupancy rate well below the break-even point. The moods of 62% of surveyed hotel operators in March 2021 are more pessimistic (+10 percentage points) than a month ago. In the Corona Mood report by Gfk, it was stated that 8% of food services establishments closed down for good and 25% suspended their operations,” say analysts of PKO BP.

One ought to add that the service industry is very sensitive to the administrative risk that still looms over it due to the pandemic. A perfect example is the sudden decision to introduce a mandatory 10-day quarantine from 24^th June for all people coming to Poland from non-Schengen and non-EU countries. This restriction was introduced by the legislator with a vacatio legis of mere few hours, which outraged the tourism industry, and was obviously a blow to business, as it reintroduced uncertainty among tourists in terms of planning holidays outside of the EU.

The HoReCa and tourism industries are not doomed to fail, because the demand for their services will soon exceed the reduced supply, and the margins on these activities may be very high in the short term. However, it cannot be denied that companies in this industry may be forced to scale up their operations according to the principle of “grow or die”. Moreover, there are signs that these industries are facing an employee-related problem, as they reskilled in search of stable income and stabilsation during lockdowns, and found alternative employment in other sectors.

5. Autumn wave – a threat to economic recovery?

How will the Polish economy fare throughout 2021? Is there a chance for a positive GDP growth rate, even if another wave of COVID-19 appears in the autumn, and with it further restrictions in socio-economic life?

The vast majority of economists are optimistic as to how Poland will handle economic activity in the coming months. The World Bank assumes that the Polish economy in 2021 will grow by 3.8%, that is faster than, for example, the Russian economy (3.2%), but still well below the average growth rate of the world economy (5.6%) or the emerging economies (6%).

“Despite the next wave of the pandemic and the long-term shutdown of many of the largest EU economies, Poland’s return to the pre-pandemic GDP level will be possible already at the beginning of 2022,” said Beata Javorcik, Chief Economist at the European Bank for Reconstruction and Development, in an interview for “Obserwator Finansowy” in April this year.

According to economists at Bank Millennium, the economic losses for 2020 will be made up for already this year.

“The worsening of the pandemic and the related sanitary restrictions will slow down the GDP growth in Q2 2021. Our baseline scenario is the stabilisation of the epidemic within that quarter, which seems realistic given the announced clear acceleration of the vaccination process, as well as the natural increase in the immunity of this part of the society that has been infected with the coronavirus. (…) The economy will be fuelled by consumption and exports, although as uncertainty subsides, corporate investment should also enjoy revival,” economists of Bank Millennium stated in the publication “Makro i Rynek. Oczekiwanie na letnie ożywienie”(April 2021).

Assuming that Polish businesses have already developed measures under the restrictions, and that at the end of the year, the majority of Polish society will have been vaccinated, on can say with a high degree of probability that each subsequent possible wave of COVID-19 will to a decreasing extent interfere with economic activity (as long as vaccines are effective, and possible SARS-CoV-2 mutations are not more aggressive and resistant). Of course, we are talking about activities in those industries and sectors that do not run businesses based on – or requiring – people to gather in a relatively small space. During subsequent quarantines, companies from the hotel industry or broadly understood entertainment (sports events, concerts etc.) may again be affected. Meanwhile, the industrial or commercial sector should operate increasingly efficiently during possible lockdowns, within the already developed rules of conduct, habits, and security measures.

This means that most industries, and the Polish economy as a whole, should be doing ever better in a prolonged pandemic. Therefore, it may be possible to avoid a classically defined recession – that is, a decline in GDP for at least two consecutive quarters. However, it is not completely out of the question, nor is just one quarter with a decline in GDP (it may be Q4 2021 or Q1 2022). At the same time, taking into account the base effect, the occurrence of a recession in the winter of 2021/22 would have to be associated with a significant reduction in economic activity, for instance due to the emergence of a dangerous and/or aggressive mutation of the coronavirus.

 

Number of people who received at least one vaccine dose
[Poland, Canada, Israel, the European Union]

Source: PKO BP Analyses Centre

6. Summary

The driving force of the Polish economy during the post-pandemic recovery are – and it is not a big surprise – exports, whose dynamics is high and corresponds to what is happening in the global economy. The Polish economy currently benefits from a dense network of connections not only with the German economy, but also with economies from around the world (the United Kingdom, the Czech Republic, the Russian Federation and the US). One can assume that the position of Polish exporters will strengthen as a result of the pandemic – especially within the eurozone.

In some industries and sectors, the rebound is dynamic, as if they were using some kind of “trampoline”, built primarily on global demand. This phenomenon chiefly concerns the manufacturing industry and production companies (especially those that carry out most of their sales abroad). But not all of them are able to use the trampoline, and in fact remain in quarantine – here we should indicate particularly the broadly understood services and entertainment industries.

The situation on the labour market is good (unemployment is at 6.1%), although certain sectors of the economy may be affected by a shortage in workforce. Food services and tourism could be mentioned in this context, because people working in these sectors during lockdowns were, in a way, forced by their life situation to reskill.

Obviously, it is not that such a dynamic rebound will last forever. The first cracks are appearing, and the threats to the prosperity are already to be spotted on the horizon. First of all, one should bear in mind the issue of the fourth wave this autumn, related to the spread of the so-called Delta variant. It is worth emphasising here, however, that only in a negative scenario – assuming the appearance of a dangerous and contagious mutation of the coronavirus, which would force further “hard” lockdowns – one can expect another recession within the Polish economy in the coming quarters (and thus further blows to trade and services). The baseline scenario should assume effective vaccinations and the acquisition of herd immunity as well as economic growth, possibly a quarter with negative GDP. The optimistic scenario should in turn assume a permanent, or even solid, economic growth, among other things, due to an excellent global economic situation and very high savings of households, which will directly drive trade and, indirectly, other sectors of the economy.

However, the coronavirus and the possible autumn lockdown are not the only “black clouds on the horizon”. It is enough to indicate in this regard the issue of shortages of some raw materials or semi-finished products (this may be a blow to industrial companies), and the issue of price pressure (a global boom raises the prices of raw materials). Moreover, a shift in the demand structure in the West is likely to come – consumers will adjust their interest from goods to services. There are regulatory risk factors hanging over the service and tourism industry (as shown by the example of the sudden introduction of a 10-day-long quarantine for people coming to Poland from non-Schengen countries).

Therefore, the post-pandemic jumping on the trampoline may end quite quickly. Nevertheless, one should hope that even if the pandemic continues, the economy will not revert back to recession, as the extent of consumers’ and companies’ adaptation to a changed reality will be significant.

 

See more: 23.07.2021 Memorandum of the Union of Entrepreneurs and Employers on the post-pandemic recovery of the Polish economy

Warsaw, 30^th June 2021

 

Position of the Union of Entrepreneurs and Employers on the assumptions for the draft state budget for 2022

 

• The forecast of the most important macroeconomic indicators included in the “Assumptions to the state budget for 2022” is definitely more conservative than the values presented in forecasts of other institutions. This allows for a more conservative forecast of budget revenues and expenditures for the next year, while slightly distorting the overall picture of the forecast of the economic situation in Poland.
• When interpreting the values of macroeconomic indicators included in the budget assumptions for 2022, one must be aware of the strong base effects resulting from the crisis-related anomalies of 2021. Part of the real GDP growth in 2022 is only the effect of the recovery from post-crisis declines in demand.
• Linking a significant part of budget expenditure to the level of GDP poses a challenge to the sustainability of the public finance sector.
• Bearing in mind that the Stabilising Expenditure Rule (SER) does not cover all revenues and expenditures of the public finance sector, it should be positively assessed that the budget assumptions allow for the return to the application of the SER in the original formula as early as 2022. There are, however, many risk factors that may adversely affect the level of budget revenues and expenditures.

Chart 1. List of selected macroeconomic indices included in the “Assumptions to the state budget for 2022” compared with forecasts of selected institutions
Forecasted growth dynamics in 2022 y-o-y
GDP                      CPI inflation                     BAEL unemployment rate (registered)               Investments/GDP

The forecasts of the major macroeconomic indices presented in the “Assumptions to the state budget for 2022” are more conservative in relation to the values forecasted by other institutions: the European Commission, the OECD and the National Bank of Poland. This allows for a more conservative forecast of budget revenues and expenditures for the next year, while slightly distorting the overall picture of the forecasted economic situation in Poland. This is the result of both maintaining the assumptions regarding the external environment of the Polish economy, taken from the (now obsolete) forecast of the European Commission of February this year, and the failure to take into account the impact of the National Recovery and Resilience Plan (Krajowy Plan Odbudowy i Zwiększenia Odporności – KPOiZO) and the effects of the Polish New Deal on the economy in the forecast.

When interpreting the values of macroeconomic indices included in the budget assumptions for 2022, one must be aware of the strong base effects resulting from the crisis-related anomalies of 2021. Part of the real GDP growth in 2022 will only be the effect of the recovery from post-crisis declines in household consumption demand and public consumption. Therefore, GDP growth of 4.3% in 2022 is a largely conservative assumption. However, given the existence of many risk factors, such as the uncertainty regarding the further spread of the COVID-19 virus, we believe that this value – although it differs in minus from the forecasts of other centres – is a safe assumption.

The forecast of an increase in CPI inflation in 2021 by 3.1% and in 2022 by 2.8% also seems to be highly underestimated in relation to the inflation data published in the first half of this year and the forecasts of other institutions. We would like to point out that lowering the inflation rate generates an underestimation of not only budget revenues from VAT or excise duty, but also budget expenses that will be necessary to cover, among other things, the statutory minimum in terms of next year’s pension indexation. Therefore, the inflation rate forecast should be revised accordingly.

The assumptions predict a moderate improvement on the labour market and further decline in the unemployment rate down to 5.8% related to it. This is a safe assumption, especially considering the uncertainty accompanying fears of the autumn wave of disease associated with subsequent mutations of the virus reaching Europe. Although the unemployment rate in Poland in May 2021 amounted to 6.1%, the situation on the labour market is not so unequivocally positive – the comparison of the number of job vacancies with the number of the unemployed is a source of concern. As a result of the mismatch between the supply structure and the demand on the labour market, we are currently dealing with a strong wage pressure, especially when it comes to highly qualified specialists. Furthermore, high inflation also affects the growth rate of wages.

In the case of investments in 2022, the forecast of the Ministry of Finance is significantly underestimated due to the fact that it does not take into account the inflow of funds from the National Recovery and Resilience Plan. In 2022, the direct effect of this programme is to be an increase in investment outlays by PLN 22.9 billion, which will result in approx. 5.8% increase in investments, representing the excess 0.9% of GDP. On the other hand, preliminary estimates of Statistics Poland on growth components for Q1 2021 have positively surprised in terms of investment. Despite the fact that in Q1 2021 there was a decline in GDP (-0.9%) caused by a decrease in the dynamics of the trade balance, we were dealing with an increase in investments by 1.3%. Other factors that will positively affect the level of investment in 2022 include the increase in household income driven by high wage growth as well as the increase in imports of our products by countries of the eurozone. However, all of the above-mentioned factors can be effectively neutralised by regulatory uncertainty, which is one of the key barriers to investment in Poland.

The statutory algorithm of linking a significant part of budget expenditure to the level of GDP will pose a challenge to the sustainability of the public finance sector in 2022. The basis for calculating health expenditure in 2022 will be the level from 2020 when we dealt with a 2.8% decline in GDP. The real drop in health care expenditure, due to the high forecasted inflation, may be much higher. The combination of this decline with high inflation will also generate additional pressure on wage growth in this sector. With regard to national defence spending, the opposite will be the case. The “Act on restructuring and technical modernisation of the Armed Forces and their financing” sets the minimum expenditure on national defence in 2021-2023 at the level of 2.2% of the forecasted GDP for a given year, as included in the assumptions of the draft budget. The rapid recovery of the economy in relation to the crisis anomaly of the previous year will be challenging for the state budget in this context.

In 2020 and 2021, we used the so-called general exit clause from the fiscal rules introduced by the European Commission. The Commission kept in force the application of the exemption from these rules for 2021-2022 arguing that during this period all member states should remain able to pursue fiscal policies without restrictions on the pace of expenditure growth. Bearing in mind that the Stabilising Expenditure Rule (SER) in force in Poland does not cover all revenues and expenditures of the public finance sector, it should be positively assessed that the budget assumptions allow for the return to the application of the SER in its original formula as early as 2022. There are, however, many risk factors which may adversely affect the level of budget revenues and expenses.

 

***

 

[1] Ministry of Finance, Assumptions to the state budget for 2022, Warsaw, June 2021, online: „Założenia projektu budżetu państwa na rok 2022” – Chancellery of the Prime Minister – Portal Gov.pl (www.gov.pl)

[2] Economic Forecast of the Union of Entrepreneurs and Employers 2021/2022, Warszawa, 10^th June 2021: online: Prognoza Ekonomiczna ZPP 2021/2022 – ZPP

[3] European Commission, Spring 2021 Economic Forecasts for Poland, Luxembourg, May 2021, online: Economic forecast for Poland | European Commission (europa.eu)

[4] Organisation for Economic Co-operation and Development, Economic Forecast Summary, May 2021, online: Poland Economic Snapshot – OECD

[5] National Bank of Poland, Projection of inflation and economic growth of the National Bank of Poland based on the NECMOD model, Warsaw, 8^th March 2021, online: Projekcja inflacji i wzrostu gospodarczego Narodowego Banku Polskiego na podstawie modelu NECMOD (nbp.pl)

 

See more: 30.06.2021 Position of the Union of Entrepreneurs and Employers on the assumptions for the draft state budget for 2022