Executive Summary The new German government pushes to digitize and green the G7 economies Holding the G7 presidency in 2022, Germany is responsible for setting the Group’s agenda, leading negotiations, and hosting the annual Leaders’ Summit at Schloss Elmau in Bavaria on June 26-28. Berlin aims to green and digitize the G7’s financial policy, such as through new financial technology regulations and a ‘climate club’ to align investment flows with climate goals. After 16 years with former chancellor Angela Merkel as a G7 fixture, the presidency is a key opportunity for the new German government to demonstrate its future policy direction to international partners State of Play 2022: A year of new challenges for the G7 Representing over 40% of the world’s GDP, the G7 still plays a key role in an increasingly complex global financial system. In addition to the immediate economic challenges posed by the COVID-19-induced downturn, G7 members are facing a series of financial challenges, such as heightened global inflation rates and unstable financial markets. At the same time, Russia’s aggressive actions on the border of Ukraine have put financial sanctions back on the agenda – including the potential exclusion of Russia from the SWIFT payment system. Furthermore, the recent proliferation of innovative financial technologies, including but not limited to cryptocurrencies, is bringing new regulatory and monetary questions to the fore. Finally, the G7 has come under increasing pressure to leverage financial policy to address climate change, particularly in the wake of recent extreme weather events like the 2021 floods in Western Europe. All these financial policy challenges reinforce the G7’s role as a forum for international financial cooperation and the importance of G7 members working together to address these challenges. Key Issues A new German government is setting the agenda In January 2022, Germany assumed the G7 presidency, shortly after the formation of a new government marked the end of the Merkel era. Chancellor Olaf Scholz of the center-left Social Democratic Party (SPD) and Finance Minister Christian Lindner of the pro-business Free Democratic Party (FDP) will be leading the G7’s financial policy negotiations. While this unprecedented coalition of SPD, FDP, and the Greens will aim to bring a new direction also to the G7, Scholz's previous role as Merkel's finance minister and vice-chancellor makes for at least some continuity. Indeed, a significant portion of Germany’s agenda will be consistent with the G7’s traditional approach to financial policy. This will include discussing ways to strengthen the international financial system, which is particularly important in the context of the global economic recovery. Given Minister Lindner’s belief in fiscal prudence, he will likely steer conversations to managing inflation rates through coordinated financial efforts. The agenda is likely to build also on previous G7 debt relief efforts in cooperation with the IMF to ensure developing countries have access to the resources they need to rebuild their post-pandemic economies. Finally, it is to be expected that Germany will want to discuss protecting market integrity from financial crimes through comprehensive cross-border efforts and law enforcement. Current events will also shape the agenda with Russia’s threat of war with Ukraine driving the debate on financial sanctions. When Russia invaded Crimea in 2014, the group suspended Russia’s membership of the then-G8 and coordinated financial sanctions vis-à-vis Moscow. The same situation may play out again in 2022 with the G7 cutting Russian financial institutions off from global transactions and, in a new move, imposing an embargo on US-made or US-designed technology used in defense and consumer industries. The G7: a more digital and green approach to financial policy Beyond focusing on the more traditional aspects of financial policy, the German priorities demonstrate the intention to accelerate the trend within the G7 to digitize and green financial policy. Driven by the finance minister’s free-market spirits, Berlin will try to leverage the digital economies of the G7 to create sustainable growth. In parallel, and to ensure that rules keep pace with the digital economy’s evolutions, the G7 will likely focus on addressing the regulatory challenges posed by the rise of innovative financial technologies. For example, crypto assets are gaining in popularity but are often anonymous, making it difficult for regulators to trace and identify international illicit transactions. They can also create financial instability by reducing central banks’ ability to effectively manage monetary policy. The global nature of crypto assets, in turn, requires international cooperation, particularly to tackle data gaps, monitor transactions, and create international rules when for central banks issuing digital currencies. Greening the financial system to achieve global climate goals is also a priority for Germany. It wants to create a climate club of like-minded countries to achieve carbon net-zero while ensuring their industries’ competitiveness is not disadvantaged. Inspired by the G7’s successful introduction of a 15% global minimum corporate tax which now includes 136 signatories, Berlin’s strategy is to first work with European and G7 partners to then bring the G20 on board. Specific goals are to implement similar domestic prices for carbon emissions, develop global standards to measure the CO2 content of products and materials, transform industries to be climate neutral, prevent carbon leakage in accordance with the EU’s Carbon Border Adjustment Mechanism, and create a global green hydrogen supply chain.

Executive Summary Flagship space programs will improve Europe’s global standard-setting capability The US is weighing the benefits of outbound investment screening (OIS) to counter China. Introducing de facto capital controls requires Europe’s support, putting the transatlantic relations to a test. The goal of OIS is “soft decoupling” to prevent the offshoring of increasingly discrete supply chains in aerospace, semiconductors, AI, IT, robotics, and other critical tech sectors to non-allied third countries. The EU has focused on space-based capabilities mainly to enable stronger continental defense and now faces the challenge of integrating discrete projects across member states and institutions State of Play Different dimensions of competition in outer space The idea of introducing a – US-only if needed, but preferably transatlantic – outbound investment screening (OIS) is gathering steam. This mechanism aims to screen and, eventually, ban certain US and European investments into critical tech sectors in non-allied third countries. The implicit goal is to prevent China from acquiring critical technologies through political pressure and, effectively, capital controls. Yet, capital controls increase economic costs and risks for American and European companies – from compliance burdens and higher risk premiums to a loss in strategic competitiveness. Washington’s actions are guided by geopolitical, not commercial, reasoning. The Biden administration is likely going to make it a central request to Europeans in confronting China. Many European countries are skeptical, but prioritize a strong transatlantic partnership. Furthermore, EU governments see increasing risks in being tied to Beijing-controlled tech supply chains. Key Issues A race for technology and regulation Rivalries among states competing for power on Earth have not precluded space cooperation. The most prominent cooperative effort, the International Space Station (ISS), connects two historic competitors, the United States and Russia, with Canada, Japan, and the European Space Agency (ESA) in pursuit of ground-breaking science. However, states are becoming more proficient space actors as innovation reduces barriers to space access. Reusable launch vehicles, improved satellite manufacturing, and revolutionary operational constructs have lowered the costs to access space. These technological innovations have flattened states’ comparative advantages, allowing them to choose ideologically close partners instead of having to collaborate with political opponents that command a specific technology needed. States still compete for technological superiority, but the major contest among leading states has evolved into a sprint to attract a critical mass of partners to establish a preferred spatial order. For instance, the United States has invited all nations to sign the Artemis Accords, a set of obligations based on Washington’s interpretation of existing international law. Furthermore, the U.S. Department of Defense recently issued internal guidelines for space behavior. These tenets could be an attempt to seed a future universal regulatory framework for space. China, too, is aiming to influence the rules in space by establishing ties with countries in Asia, Africa, and Europe through its Belt and Road Initiative (BRI). The space-related aspects of BRI focus on constructing space and ground segments, integrating services, and guaranteeing coordinated policies for future collaboration. China is expected to eventually leverage these relationships for support of its preferred governance methods and practices. Europe’s continued challenges in space despite a new strategy The EU has pivoted from considering space as a scientific pursuit to seeing it as an enabler of strategic sovereignty. The aim is to ensure the bloc can credibly and independently operate in and through space without relying on foreign systems. European programs like CHEOPS for planetary discovery and Rosetta for comet inspection already indicate scientific mastery, while launch vehicles like Ariane 5 evidence a strong industrial base. Adopting civil systems into security missions allows the EU to leverage this expertise to support strategic autonomy. For example, the EU has incorporated civilian systems for Earth observation (Copernicus) and global satellite navigation (Galileo) into its security network to support force readiness and lethality. These arrangements not only lower Europe’s dependence on foreign systems, but also support the EU’s strategic autonomy by bolstering security and economic prosperity. The European Defence Agency has prioritized developing space-based and -related capabilities to both protect space assets and reinforce long-term technological sovereignty. Major focus areas relate to deriving information superiority from space by leveraging Positioning, Navigation and Timing (PNT), tactical Communication and Information Systems (CIS), Intelligence, Surveillance and Reconnaissance (ISR), and Space Situational Awareness (SSA), among others. This process started with establishing EU-wide defense requirements. Now the challenge is to integrate discrete projects across states and institutions – a task assigned to the European Commission’s Directorate General for Defence Industry and Space. Europe faces several challenges in space. European countries and the EU itself have traditionally been junior partners in bigger missions and now struggle to initiate novel flagship programs. Tying ambitious projects in space to other strategic goals like shaping Europe’s digital future as well as reaching the EU’s climate goals could galvanize political will and open new funding streams. Moreover, tangible European assets in orbit would improve the continent’s standards-setting capability, which will be a critical aspect in efforts to systematize space traffic coordination and other much-needed orbital regulations.

Executive Summary Balancing domestic and international energy transition concerns A timely and successful green energy transition is critical for MENA countries as the region enjoys an abundance of hydrocarbon sources but is also a “hotspot” for climate-related risks and extreme events. The countries’ adoption of ‘green-ish’ nuclear energy presents an opportunity for non-Western suppliers of large and small modular reactors, resulting in increased Russian and Chinese influence. While regional leaders are reluctant to implement long-term initiatives as they bet on lower commitment to climate action from future US administrations, intra-GCC competition may add impetus to act. State of Play Short-term commitments to the green energy transition Few regions in the world have more at stake than the Middle East and North Africa (MENA) when it comes to the green energy transition. The region’s hydrocarbon abundance made Gulf countries rely on oil and gas exports for more than 80 per cent of government revenue, while exposure to climate-related risks and extreme events has increased water scarcity and desertification. Yet, it will be difficult for the region’s oil producing countries to diversify their economies, partially due to concerns about social and political stability and partly because past financial and economic reform efforts did not create alternative productive sectors. Given the US’ influence in the region, the Biden Administration’s emphasis on climate action has led several MENA countries to set net zero goals and introduce respective initiatives. The EU’s leverage, in contrast, is more moderate, especially in Gulf Cooperation Council (GCC) countries. Still, the ability of regional governments to continue delivering public goods at lowered prices for citizens will clash with the climate change agenda sooner or later, potentially leading to a revision of current commitments. Key Issues The energy transition drives nuclear energy adoption and local clean energy projects Efforts to combat climate change and accelerate the energy transition in the MENA region are lagging Western countries’ endeavors. The lack of urgency to act on the part of oil producing countries can be attributed to continued demand for the region’s fossil fuels from Asia for the foreseeable future. Furthermore, regional leaders recognize a significant gap between the ideals and realities of the global climate change agenda, which in turn reduces the incentives to enact change domestically. With regard to the energy transition, MENA’s non-oil producing countries face the challenge of limited access to finance and poor energy infrastructure. At face value, the regional reaction to the recently concluded United Nations climate conference, COP26, was positive, but participation was primarily viewed as a political and diplomatic necessity. Climate advocates have accused regional heavyweights, such as Saudi Arabia, of having worked with lobbyists ahead of the Glasgow gathering to water down the conference’s outcomes. Since most MENA countries will struggle to simultaneously meet emission targets and energy demand, a renewed drive to explore nuclear energy and the attempt to rebrand it as a green alternative to the hydrocarbon sector is likely. The first of the UAE’s four South Korean-built reactors is also the first to come online in the region and the remaining three will be completed in the next two years. Egypt is already in contract with Russia to build four reactors while the race is on to meet Saudi Arabia’s stated interest. The possible shift to nuclear energy does not bode well for Western nuclear power plant manufacturers as Asian and Russian manufacturers currently dominate the market. One exception may be small modular reactors below a capacity of 1000MW in which Western manufacturers can still compete. With a view to the energy transition, the GCC states, especially Saudi Arabia and the UAE, will present the most interesting opportunities for investors. These countries will likely focus on leveraging existing technologies in carbon capture and storage while also seeking to develop several clean energy products from natural gas to solar power as well as blue and green hydrogen production (designating the low-carbon or carbon-neutral making of the stuff, respectively). Efforts to increase electrification of GCC economies (i.e., replacing fossil fuel-based technologies with those using electricity as a source of energy) and offsets in green initiatives (like tree planting to capture carbon) constitute other attractive opportunities for international businesses. For instance, Saudi Arabia plans to create hundreds of man-made lakes to capture seasonal rains or draw seawater inland. Further climate action impeded by uncertainty about lasting US commitment While regional leaders recognize the importance of tackling climate change and the global push for climate action, they question whether environmental policies will remain a priority of future US administrations. This still being the most important benchmark, critics view current measures in the region mainly as lip service to gain goodwill with Washington. MENA countries will likely continue with highly aspirational commitments, such as Saudi Arabia’s Vision 2030 plan to increase the share of renewable energy production to 50% from today’s 1%, or pledges that disguise details, such as Riyadh’s unsubstantiated net-zero claim that excludes oil exports. In contrast, observers view Egypt’s commitment to increase its share of renewable energy from 20% today to 40% in the next fifteen years as more reasonable. Intra-GCC competition may actually add impetus for Gulf countries to take climate change seriously and position themselves as leaders in this space. Further action by China and India, the region’s primary energy resource consumers, could also drive the region’s green energy transition – not least because of China’s dominance of the nuclear reactor market. While European businesses could stand to benefit from the GCC’s energy transition, the EU is expected to be more relevant in the Levant and North Africa. There, it can actively foster the green energy transition through its numerous financing mechanisms, especially as Algerian, Egyptian, and East Mediterranean gas are critical for Europe’s energy security.