Europe's post-election economic landscape: key issues and strategic directions

Thursday, 16 July 2024

In the latest episode of the Future is Blue podcast, host Carlos Carnicero Urabayen covers the post-election economic outlook for Europe, joined by Sander Tordoir, Chief Economist at the Centre for European Reform, and Raymond Torres, Director of Funcas Europe. The discussion centers on the key economic challenges and opportunities facing the EU as the new political cycle gets into motion after the European elections.

You can listen to the podcast here.

Political Landscape and Economic Policy Directions

The recent EU elections have resulted in a complex political landscape. Sander Tordoir highlights that while the political center, comprising the European People's Party (EPP), the Social Democrats (S&D), Liberals (Renew Group) and the Greens retains control, there has been a noticeable rise in support for the far-right. This shift suggests potential pushback on the Green Deal and an increased focus on protectionist measures. Raymond Torres emphasizes that despite this political tension, the center remains the only feasible option for driving coherent policy in the EU.

Top Economic Challenges to dominate EU agenda

Economic growth: Europe's anaemic growth, especially in major economies like Germany, France, and Italy, remains a pressing issue. Tordoir and Torres agree that boosting investment is crucial to reversing this trend.
Geoeconomic fragmentation: The EU must navigate pressures from global powers like the US and China, which are challenging the multilateral trading system. This includes developing a more cohesive trade strategy and addressing internal divisions that could be exploited by external actors.
Energy and green transitions: the EU has ambitious goals to decarbonise the economy, improve energy security and contribute to the fight against climate change. The green transition, however, faces challenges. Tordoir anticipates growing pressure to slow down green initiatives.

Investment and productivity

Raymond Torres points out that Europe suffers from low investment, which hinders productivity and economic growth. He stresses the importance of reactivating investment, both public and private, to support technological advancements and maintain the welfare state. Torres also highlights the implications of Europe exporting savings in the form of Foreign Direct Investment. It is crucial to lift barriers to the mobility of savings within the EU, thus boosting investment prospects.

Higher productivity is needed to support Europe's welfare states. Without significant investment, particularly in technology and energy initiatives, it will be difficult for Europe to compete globally and sustain its social systems. Torres argues that Europe has significant potential to invest in common public goods. Pooling together resources or at least designing a common policy in these areas is crucial –and better than engaging in an inflation of State Aid, which weakens the single market without much gains for the EU as a whole.

Single Market and Services Trade

The potential of the single market, particularly in services trade, could make a real difference driving growth. Despite regulatory barriers, services exports within Europe are growing rapidly. Both of our guests see an opportunity to enhance the single market, especially in high-end services, to boost productivity and economic integration.

The discussion highlights the importance of integrating the services market further to stimulate economic growth. Tordoir explains that services exports, which are catching up to goods exports in value, present a significant opportunity for Europe. However, he warns that achieving this requires overcoming regulatory, fiscal and political barriers that have historically impeded market integration.

Green Investment and Public Goods

Torres suggests that public goods, such as energy interconnections and technological research, should be central to EU policy. Pooling resources at the European level to ensure effective investment in green initiatives and artificial intelligence, which are crucial for the EU's productivity, should be explored.

Centralizing some investments to maximize impact should be considered. Torres points out that fragmented efforts in research and development reduce efficiency, and a coordinated approach could yield better results. He advocates for a strategic focus on areas where Europe can collectively benefit, such as green energy and advanced technologies.

Digital Transformation and Sovereignty

The digital transformation of the European economy is another critical area. Tordoir highlights the importance of integrating digital markets and capital markets to support the growth of European technology firms. He warns against the fragmented approach currently seen in semiconductor subsidies and stresses the need for a cohesive strategy to leverage Europe's strengths in fundamental research and innovation.

The sector's potential for boosting productivity is clear, but we can’t ignore that Europe's digital market is underdeveloped compared to the US and China. Fostering a more integrated market and capitalizing on existing research strengths could help Europe become more competitive.

Conclusion

Addressing these economic challenges requires political will and strategic coordination. Both Tordoir and Torres underscore the importance of investment, preserving the single market, market integration, particularly in financial and services’ markets, and a unified approach to digital and green policies to ensure sustainable growth for the EU in the coming years.

The podcast is available here.

Carlos Carnicero Urabayen