10 September 2019

Bruegel: Economic priorities for new EU leadership

Europe remains vulnerable; it is unprepared and it is procrastinating. Following European elections this May, new leaders are about to take their positions at the main European institutions. Maria Demertzis outlines the three most urgent challenges that require collective European action.

[...]In my view the priorities for the next five years fall into three broad categories.

The first, and in my view by far the most urgent, refers to climate change. Without a clear and decisive action to stop and reverse global warming, there will be horrific natural disasters some of which are already visible.
For starters, energy transition, from depleting sources of energy to renewable resources, needs to speed up. From research on batteries for electric vehicles to the generation of electricity the need for innovation is crucial. It is shocking to see just how much of our electricity is still generated by coal (80% for countries like Poland or Estonia, above 40% for Greece and Germany) the most environmentally and climate damaging of resources.

But beyond that, investment decisions by firms, the carrying out of monetary policy and trade agreements will all need to have accounted, from now on, for the environmental footprint they leave behind. Importantly, our way of life will need to adjust, from the way we eat to the way and frequency with which we travel.

But, as the gilets jaune movement in France has shown, the policies pursued put the burden of adjustment disproportionally on those that are economically the weakest. This is neither socially sustainable or indeed just. A whole new set of compensating policies will need to accompany any green action in order to preserve equality and fairness.

The second set of challenges fall under the category of a changing global system of powers.

On the one hand China. A country that has grown enormously since it joined the global trading system, WTO. And, while it has done so following the letter of the multilateral system, it has not followed the spirit of the global rules of engagement. This has given it what both the US and the EU believe is an unfair competitive advantage. The US also worries that the underlying motivation is not just economic but may have a security dimension.

The US is a lot clearer in terms of how to deal with China. In my view it does not believe that the spirit of the current global trading system is fit to accommodate such a big and different country like China. So, it chooses to bypass it itself. And the trade policy that it is currently pursuing with respect to China is part of an attempt to rebalance some of what it perceives as unfair advantages attained by Chinese competition practices. At the same time, it has excluded Chinese firms from providing critical communications infrastructure like 5G in its territory, despite the fact that Chinese technology is the most advanced.

Europe is far behind in terms of providing answers to these questions. It is broadly in agreement with the US when it comes to economic matters. But it does not approve of trade wars as a way of imposing discipline. How do we then level the playing field? And do we allow Chinese investments in critical infrastructure like communications and ports, no questions asked? It is problematic that these decisions are taken at country level while the ramifications will be felt across the continent. There is going to be more and more pressure to coordinate such economic decisions perhaps in direct conflict with a country’s right to make sovereign decisions. Europe is unprepared.

On the other hand, the US. Europe relies to a very big extent on the US for its security. This dependence has tied its hands when it comes to some economic decisions, as the recent US sanctions on Iran have demonstrated. If European preferences on foreign policy are going to diverge from those of the US more and more in the future, then it will be important to reduce our military dependence on the US in order to regain economy autonomy. Europe again is unprepared.

The last set of challenges have to do with the way our economy works. At the brink of a new recession, some of the financial crisis wounds are exposed. First, there is a visible increase in economic divergences between regions and countries. Social and economic cohesion has decreased and divisions are a lot more visible. Second, there is little to no appetite to centralise parts of economic policy that are necessary to promote and sustain a monetary union. Third, populist and even nationalist forces in many countries create centrifugal forces, like Brexit, that weaken the EU. [...]

Full article on Bruegel

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