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Europe’s challenges in the next 5 years

Many people will agree that the challenges for the EU over the next few years will be multiple and multi-faceted. Policy-making is about making choices. So which are the most pressing issues and what options are available to EU policy makers in the European Parliament, the Council and the Commission? Maria Demertzis is Deputy Director at Bruegel, a European think tank that aims to improve the quality of economic policy through research, analysis and debate. Together with her colleague Guntram Wolff she edited the book ‘Braver, Greener, Fairer. Memos to the EU leadership 2019–2024’. Bruegel published this set of memos on 4 September 2019, presenting major challenges to be addressed by the new political leaders in the EU. Below Maria Demertzis identifies some key issues for EU decision-makers to consider.

By Maria Demertzis, Deputy Director at Bruegel

Need for collective European action

Europe is no longer in crisis mode. But it remains vulnerable, it is unprepared and it is procrastinating. Challenges ahead cannot be met by simply more of the same, and this is a good time to be reminded of that. Following the European elections in May 2019, new leaders are about to take up their positions at the main European institutions for the next five years. They have the power in their hands to take action. But more importantly, they have the power to convene 28 states, which, if united, can play a significant global role. What are the urgent challenges that require collective European action?

Challenge one: climate change

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 clear and decisive action to stop and reverse global warming, there will be horrific natural disasters, some of which are already visible.

Figure 1 — Climate change (annual CO2 emissions by world region, billion tonnes per year)

Source: Bruegel, based on Our World in Data. Annual carbon dioxide (CO2) emissions measured in billion tonnes (Gt) per year.

Europe, along with other countries, has managed to level off, if not slightly reduce, CO2 emissions (Figure 1). But this is not enough. Energy transition from depleting 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 from coal (80% for countries such as Poland or Estonia, above 40% for Greece and Germany), the most environmentally and climate damaging of resources.

Similarly, it is not sufficient that we just ‘clean up ’ our production. We also need to ‘clean up’ our consumption. Figure 2 shows that the CO2 of our imports is far bigger than that of our exports. This implies that we have not really reduced our CO2 production; we have just exported it — a fact that is not ultimately helping to make a difference at global level.

Figure 2 — Climate change (difference between production and consumption)

Source: Our World in Data

From now on, everything, from investment decisions by firms to implementing monetary policy or trade agreements, will all need to be accounted for on the basis of the environmental footprint they leave behind. Importantly, we will need to adjust our way of life, 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 nor indeed just. A whole new set of compensating policies will need to accompany any green action in order to preserve equality and fairness.

From now on, everything, from investment decisions by firms to implementing monetary policy or trade agreements, will all need to be accounted for on the basis of the environmental footprint they leave behind. Importantly, we will need to adjust our way of life, 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 nor indeed just. A whole new set of compensating policies will need to accompany any green action in order to preserve equality and fairness.

Maria Demertzis giving a presentation at the ECA in 28 June 2019

Challenge two: the EU in a changing global system of powers

The second set of challenges falls under the category of a changing global system of powers. On the one hand we see China — a country that has grown enormously since it joined the global trading system through the World Trade Organisation (WTO), see Figure 3, and, while doing so, has followed the letter of the multilateral system but has not followed the spirit of the global rules of engagement. This has given it what both the USA and the EU believe is an unfair competitive advantage. The USA also worries that the underlying motivation is not just economic but may have a security dimension.

Figure 3 — GDP Growth

Source: Bruegel based on World Bank, GDP index 2009=100

The USA is a lot clearer in terms of how to deal with China. In my view, the USA does not believe that the spirit of the current global trading system is fit to accommodate such a big and different country as China. So it chooses to bypass it itself. And the trade policy that the USA is currently pursuing with regard to China is part of an attempt to rebalance some of what it perceives to be the unfair advantages gained by Chinese competition practices. At the same time, it has excluded Chinese firms from providing critical communications infrastructure, such as 5G, on 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 USA 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? The EU, unlike the USA, insists on preserving the multilateral system as a way of enforcing the law. In my view, this does not give sufficient consideration to the fact that, given China’s size and ambitions, it will at some point want to be a rule maker, and not just a rule taker. This means that a whole new global rule book needs to be written. How will the EU ensure that we have a say, and, at least to some extent, hold the pen?

And what about security concerns? Do we allow Chinese investments in critical infrastructures such as communications but also ports, no questions asked? It is problematic that these decisions are taken at country level while the ramifications are 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, we have the USA. Europe relies to a very big extent on the USA for its security. This dependence has tied its hands when it comes to some economic decisions, as the recent USA sanctions on Iran have demonstrated. If European preferences in foreign policy are going to diverge from those of the USA more and more in the future, then it will be important to reduce our military dependence on the USA in order to regain economic autonomy. Again, Europe is unprepared.

Challenge three: address divergences

The last set of challenges concern the way our economy works. On the brink of a new recession, some of the financial crisis wounds have been exposed. First, there is a visible increase in economic divergence between regions and countries. Social and economic cohesion has decreased and divisions are a lot more visible. Figure 4 shows a number of regions in red. These are regions that for a period of 15 years have underperformed by comparison with what was expected of them.

Figure 4–2003–2017 GDP per capita convergence, NUTS-2 regions, divided by quintile

Source: Bruegel based on Eurostat. The colour coding indicates each region’s positive or negative deviation from its expected growth rate. Quantiles depend on the residuals obtained from a regression of the growth rate of GDP per capita in current prices between 2003 and 2017 on its starting level in 2003, across EU-28 NUTS2 regions. The estimated coefficient of the starting level of GDP (demeaned to the overall average) is negative and significant at 1% level. Residuals should therefore be read as deviations from the predicted growth rate in percentage points.

If these divergences continue, the ability to unite behind the challenges of the future will be seriously hindered. At the same time, it will contribute to Euroscepticism and question the EU’s added value.

Second, there is little to no appetite for centralising those parts of economic policy that are necessary to promote and sustain a monetary union. From completing the Banking Union to creating a euro area budget that will allow fiscal and monetary policy coordination — countries are unable to agree on the way forward. Similarly, there is great resistance to the idea of a safe asset at euro-area level, despite the fact that it is difficult to achieve a Capital Markets Union or even a complete Banking Union without one.

Third, populist and even nationalist forces in many countries create centrifugal forces — such as Brexit — that weaken the EU. While it is not easy to forecast what the relationship between the UK and the EU will be, it is crucial that both parties aim to maintain as close a cooperation as possible on all things, including security. Similarly, the rule of law, and more generally good governance need to be guaranteed and promoted as the only way of protecting European democracies.

Speak with one voice and act accordingly

In 2024 we will be looking back at the legacy that the new set of leaders leave behind. There will be a lot on which to judge them. But perhaps the most important thing will be whether they have managed to make Europe speak with one voice, the only way it can deal effectively with the challenges that lie ahead.

This article was first published on the 4/2019 issue of the ECA Journal. The contents of the interviews and the articles are the sole responsibility of the interviewees and authors and do not necessarily reflect the opinion of the European Court of Auditors.

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