Simone Tagliapietra is Senior Fellow at the Bruegel, Brussels. Jeromin Zettelmeyer is the director of Bruegel.
In the run-up to the European elections, the economic policy debates tend to follow a familiar pattern.
There is a fair degree of consensus among Eurocrats, Brussels think tanks and pro-EU national elites on what actions are needed to achieve the desired end, which is typically some variant of “ever-closer union”. This means a deeper internal market, a banking union, a capital markets union and effective common action on issues of concern through regulation and, even more controversially, common tax instruments. The main question is how to balance ambition and pragmatism, which requires reconciling divergent national interests without losing direction.
However, the upcoming election cycle is different.
The main theme is not ever closer connection – although this may surface again. Rather, it is about how to respond to existential threats, including the possible escalation of Russian aggression, an increasingly powerful and autocratic China, the possible return of former President Donald Trump to the White House, and the fact that economic nationalism is now the order of the day The bipartisan consensus in the United States is preparing Europe for trade wars and subsidy races with its closest ally – even if President Joe Biden is re-elected.
And all this against a background of climate change, the catastrophic effects of which are becoming more and more evident in the EU, and rising energy prices, which put the EU at a competitive disadvantage.
This cycle is also different because eurocrats, think tanks and pro-European national elites don’t know what to do.
EU member states have yet to agree on approaches to addressing the continent’s existential threats iStock
All agree that economic security has become a defining issue; Everyone is concerned about the EU’s industrial competitiveness. and almost everyone believes that government intervention plays a bigger role. However, there is no consensus on what economic security means, what policies are best suited to boost competitiveness and what form government intervention should take.
Some view the US and China as essentially symmetric economic threats, while others do not. Some believe there is a trade-off between single market rules and economic security, others disagree. Some believe reshoring is essential to economic security, others advocate diversification. Some think the EU should jump on the bandwagon and ignore World Trade Organization rules, while others argue that doing so would do more harm than good. And some believe that the US Inflation Reduction Act (IRA) must be met with appropriate subsidies at the national level, while others fear that this will lead to fragmentation of the internal market.
Regarding China, too, the EU is torn between several conflicting goals: protecting European companies from unfair competition, protecting Europe from security threats, maintaining mutually beneficial trade and working with China on important global issues – notably on climate change – work together the same time.
A worrying consequence of this intellectual and political chaos is that it could undermine the EU’s resolve to decarbonise.
Europe’s social and economic fabric remains highly dependent on high-carbon industries such as automotive, metals and chemicals. Therefore, converting brown jobs into green jobs is essential for Europe to preserve and strengthen its socio-economic model. Originally there was hope that Europe’s leadership in the green transition would lead to a lead in clean technology, but the IRA’s size and aggressiveness dashed that hope. If many of the green jobs the EU had hoped to create end up migrating to the US, it will undermine the case for phasing out brown jobs as quickly as possible.
The European Commission of President Ursula von der Leyen deserves great credit here. It has succeeded in making green the defining color of Europe, setting clear and ambitious climate targets and launching a wave of new legislation – including the Just Transition Fund, the new Emissions Trading Scheme (ETS) for transport and buildings and the world’s first CO2- Border Adjustment Mechanism (CBAM). The country has also taken a more realistic approach to China, showing leadership and determination during the pandemic and after the Russian invasion of Ukraine.
What it has failed to do, however, is offer a coherent policy vision in response to the EU’s existential competition fears fueled by higher energy prices and the IRA.
Perhaps this has always been unattainable, as Commissioners and Commission staff are divided on these issues, as are Member States. But the next Commission must offer such a vision – and measures to support it.
And while it’s still too early to tell what that vision will entail, we believe two specific points need to be considered:
First, simple solutions are unlikely to work. Tensions between decarbonization, competitiveness and economic security can likely be reconciled. But to pretend that there are no such tensions and that all three goals can be achieved simultaneously through aggressive reshoring — as the draft Net-Zero Industry Act does — is a mistake. The EU’s competitiveness depends in part on its ability to import cheaper inputs than it can produce, and the bloc’s policy response must recognize key trade-offs and seek ways to address them.
The second point is that new policy paradigms – from creative use of regulation to more aggressive industrial policies – are no substitute for overcoming the EU’s long-standing competitive weaknesses. These relate primarily to the inherent fragmentation as a cluster of sovereign states, which in turn limits fiscal responses to external threats at the EU level and stands in the way of a genuine single market.
For this reason, while ever-closer connection is part of the answer, it’s also an insufficient one.
Ultimately, the fate of Europe will depend on finding policies that respond quickly enough to address the pressing challenges the country faces, while being sufficiently thoughtful to minimize unintended consequences. And this is where a lively pre-election debate can help.
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