The European Cannabis Market: What’s Next? (Part 3)
Author Sam Saarsteiner
In this article, we continue our journey from reviewing the history of cannabis regulation and the present state of the market and proceed to offer a view on where the European market is headed in terms of regulation, infrastructure, supply chain, and opportunity both for indigenous businesses in this space as well as more established businesses in the U.S. and further afield. The gradual erosion of restrictive laws is taking an effect and there is a growing cohort who see the economic opportunities of a new industry developing in Europe.
What is the Mood Music?
In our last article, we assessed the current state of the law in 29 countries across Europe. In that table, it was readily discernible that a macro move is afoot toward regulation of the medicinal market and away from the decriminalization of the recreational use market. There are parallels with the evolution of the “legal” cannabis market in the U.S. on a state-by-state basis. Note that we are not in this article canvassing the CBD oil market as CBD products do not, per the Kanavape decision, constitute a controlled drug. While some local authorities still act in the contest with that decision, it is not the focus of this article.
It is worth remembering that “legalization” can take different forms. Malta, the first European country to legalize the cultivation and personal use of cannabis, has limits of 7 grams to be possession and no more than four plants to be grown; smoking cannabis in public or in front of children remains illegal. Retail locations will be limited to authorized associations. The changes to the laws in Malta were not exactly won by a landslide vote either: the parliamentary vote in December 2021 was 36 for and 27 against.
The coalition government in Germany has entered a consultation process with stakeholders including health officials, economists, and cultivators on a proposed opening of controlled distribution of cannabis. This was part of Chancellor Olaf Scholz’s 2021 coalition deal forming the liberal/left government. All sources point to a bill being drafted sometime before the end of 2022. Germany would be the world’s largest individual market for legal sales of cannabis. Other European nations will be paying close attention to what Germany does. While the free market does not require other countries to mimic Germany’s actions, the economics of market forces would tend to support a level of a domino effect among other EU states. An estimated €4.7bn tax take for Germany would constitute excellent reasoning for the attractiveness of such a move.
The sheer economic weight would also raise the possibility, if Germany joined the ranks of Canada and 19 U.S. states, of the 1961 UN Single Convention on narcotic drugs facing significant revision to reflect the new reality, informed by revised medical opinions.
From a business perspective, Germany relies on imports for 85% of its annual medicinal cannabis use alone. The opportunity for exporters to sell into Germany is likely to be significant and lucrative, at least in the short to medium term.
Just last month, the government in Luxembourg presented a bill to regulate self-cultivation and private consumption of cannabis. Like other states, public use would remain prohibited. The bill is expected to eventually pass into law.
A full-scale adult-use cannabis sale trial program is operating this summer, covering 400 people. Taking place in Basel, this will provide information on which regulation of the cannabis industry in Switzerland could take place. Recruitment of participants is taking place in August with the trial commencing by the end of that month.
While a referendum on the question of legalization was to be held this year, the Italian Constitutional Court has just ordered a prohibition on this taking place. The referendum also included an initiative to include psilocybin legalization; perhaps this was a step too far for some. The President of the Constitutional Court has stated openly that the multi-drug scope of the proposed measures could “make us violate multiple international obligations which are an indisputable limitation of the Constitution.”
The common thread among all initiatives is universally an attack on illicit suppliers of cannabis and an acknowledgment that these operators continue to thrive despite attempts at criminal enforcement.
There are lessons to be learned from other markets. Canada, California, and Uruguay for example have all experienced significant difficulties bleeding businesses away from illicit suppliers to regulated retailers. The absence of a level playing field (regulatory compliance and taxes both being key barriers to entry) will present challenges for how any new market such as Germany is to be regulated. Details will be key and there are opportunities galore for the law of unintended consequences to apply. Taxing legally retailed cannabis could drive users towards the illicit market by providing it with an advantage.
What is Ireland’s Role?
It remains the position that the cannabis business retains a modicum of adverse cultural reaction among decision-makers and indeed funders, investors, and other key business stakeholders.
Ireland is Europe’s last remaining English-speaking common law country. With offices in Ireland and across the U.S. and Mexico, as well as a long-established network of firms across mainland Europe, Clark Hill is perfectly positioned to advise on the opportunity presented in all jurisdictions, both for indigenous companies requiring legal advice and strategic input/consultancy and for U.S., Canadian and Mexican companies looking to expand into a burgeoning market while retaining local established advisors on both sides of the Atlantic. Ireland’s corporate, tax and insolvency regimes are highly evolved and accessible and could operate as an ideal base of operations for a holding structure.
Notwithstanding the Irish cannabis market is in its infancy, the legal infrastructure for export companies here is renowned to be friendly and is worth speaking to us about.
For more information on the opportunities presented by the Irish jurisdiction and how transatlantic firm Clark Hill, with operations from coast to coast in both the U.S. and Ireland, can assist you to explore your expansion options into the European cannabis industry, please contact Robert Hoban or Sam Saarsteiner.