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321. An uphill struggle: a long-term perspective on the European public goods debate

Author:
Emmanuel Mourlon-Druol
Publication Date:
10-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The historical track record of centralisation of public expenditures at European Union level is patchy, and the prospects of agreement on future common spending are not good. However, Russia’s attack on Ukraine, NextGenerationEU, ensuring the stability of the euro and the climate crisis have been cited as justifying a further step-up in public spending at EU level. In recent years, the economic debate over the definition and provision of so-called European public goods (EPGs) has also revived and has put upfront the question of what to spend at EU level, based on an economic interpretation of where spending would be more efficient. To provide a counterpart to the more abstract debate on EPGs, this paper analyses major discussions that have taken place since the beginning of European integration about increasing the EU’s fiscal capacity. It shows how heavily EU agreements on what public expenditure should be centralised have relied on political considerations, in addition to, or instead of, reasoning about economic efficiency. These precedents should inform today’s discussions. In particular, it should be remembered that: (a) very specific historical and political contexts made proposals to centralise expenditure at EU level convincing and successful; (b) the notion of ‘fiscal federalism’ was and is occasionally invoked but rarely put into practice; (c) progress depends on clearly delineated issues; and (d) a political agreement on a ‘non-market definition of the common interest’ remains crucial to any change.
Topic:
Governance, Budget, European Union, Public Spending, and Public Goods
Political Geography:
Europe

322. Catch-up with the US or prosper below the tech frontier? An EU artificial intelligence strategy

Author:
Bertin Martens
Publication Date:
10-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
European Union policymakers want to close the artificial intelligence innovation gap with the United States, as a way to accelerate lagging productivity growth. The EU focus is on expanding an existing supercomputer network with more AI hardware and computing infrastructure, with taxpayer support. However, this computing infrastructure is not adapted to AI modelling. The cost of catching up with leading big tech AI computing centres is already prohibitive for EU budgets, and is set to become even more so. The hardware focus overlooks missing EU markets for complementary services that are required to set up a successful AI business: large-scale business outlets for frontier generative AI models to generate sufficient revenues to cover huge fixed model training costs, hyperscale cloud-computing infrastructure and private equity financing for AI start-ups. In the absence of (or with insufficient) complementary services markets in the EU, start-ups are forced to collaborate with US big tech firms. Injecting taxpayer subsidies to make up for these missing markets may further distort EU markets. Regulatory compliance costs, including uncertainty about the implementation arrangements for the EU Artificial Intelligence Act, add to market problems. The EU should address a wider range of market failures in its policy initiatives. It should strive to increase productivity growth below the AI technology frontier, by facilitating investment and applications of AI-driven services produced by derived and specialised generative AI models, or AI-applications that build on top of existing generative AI models. Building these below-frontier AI applications requires far less computing capacity and less heavy investment costs. Promoting the uptake of AI application services across a wide range of industries can substantially stimulate productivity growth. That requires a razor-sharp focus on pro-innovation guidelines, standards and implementation provisions for the EU AI Act, shortening the Act’s regulatory uncertainty horizon as much as possible, and facilitating collaborations between EU AI startups and big tech companies. Widening and deepening the EU private equity and venture capital market would also be very helpful.
Topic:
Markets, Science and Technology, European Union, Investment, and Artificial Intelligence
Political Geography:
Europe and United States of America

323. Updating the EU strategy on China: co-existence while derisking through partnerships

Author:
Alicia Garcia-Herrero and Abigaël Vasselier
Publication Date:
10-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The European Union-China relationship has deteriorated markedly since the EU introduced a three-part strategy in 2019 based on partnership, competition and systemic rivalry. Th e relationship has been undermined by China’s support for Russia’s aggression in Ukraine and its increasingly anti-Western foreign policy that aims to alter the international rules-based system. Meanwhile, the economic relationship is changing because of China’s structural deceleration and increasing self-reliance, coupled with the EU’s growing critical dependence on China, especially for digitalisation and decarbonisation. Europe must accept that relations with China will not return to their pre-pandemic state. While there is no need to change the overall strategy, the EU should seek co-existence with China while preserving EU values and interests. Cooperation is still needed to address global problems, including climate change, in which China plays an important role in finding solutions, but on which the EU cannot accept Chinese cooperation at any price. In terms of co-existence, the EU must continue to pursue de-risking – or reducing its exposure to China – especially for its energy and digital transitions. De-risking has started but more needs to be done to understand how it can be continued while not creating conflict. The EU should pursue a three-part approach: increase coherence and coordination with all European stakeholders, refi ne the EU economic-security strategy while accepting trade-offs, and seek partnerships as the best offensive tool. The 2024-2029 European Commission should foster discussion of China and coordination of strategic issues within a larger constituency. EU countries, with Commission coordination, need to be more involved in building a comprehensive approach, including by conducting national risk assessments and by shaping and implementing de-risking measures. On economic security, full implementation of current defensive instruments is needed, along with new protections, such as better coordination of export controls and a new outbound-investment screening mechanism. The trade-offs stemming from pursuing more security will need to be made explicit in order to mitigate them. On partnerships, the EU must look beyond the United States, working within the G7 and with other like-minded countries, such as Australia and South Korea, which have valuable experience of de-risking. Mutually beneficial and strategic cooperation agreements need to be brokered with relevant emerging and developing economies.
Topic:
Bilateral Relations, European Union, Partnerships, Economy, Risk, Trade, and Coexistence
Political Geography:
China, Europe, and Asia

324. Extra time for deforestation: lessons for future EU environmental legislation

Author:
Heather Grabbe and Luca Léry Moffat
Publication Date:
11-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Forests are essential to regulating the climate, absorbing greenhouse gases and providing fresh water and habitats for biodiversity and indigenous peoples. If deforestation continues at current rates, large parts of the planet will become uninhabitable. The European Union has only 5.5 percent of the world’s population, but its demand drives 15 percent of the global forest destruction linked to trade. Therefore, the EU has introduced a law – the regulation on deforestation-free products, or deforestation regulation – to outlaw from its market products linked to deforestation. The regulation has triggered protest about its impact on trade partners, leading the European Commission to propose at short notice a delay in its implementation. However, the objectives of the regulation remain valid and important. Moreover, a large majority of EU consumers want to avoid buying products that result from deforestation and find it frustratingly difficult to find information on whether products are deforestation-free. Economic actors in most of the affected sectors support the objectives of the regulation, even though they criticise the way it has been implemented. To avoid this delay having a chilling effect on other green measures in future, the EU should learn lessons from this experience. The European Commission needs to develop a consistent and effective strategy for managing the external impact of the EU’s green policy agenda, with better diplomacy towards trade partners and specific financial assistance to help the poorer countries with compliance and the transition to more sustainable production. This Policy Brief sets out why the deforestation regulation has the right objectives but needed better design and preparation for implementation. In particular, the EU needs to provide more flanking support for developing countries to ease their transitions and improve forest protection. Economic actors along the whole of supply chains need more consultation during the design stage, and the Commission needs to provide clearer guidance by sector and a well-functioning system for compliance.
Topic:
Environment, Governance, European Union, Deforestation, Implementation, and Forests
Political Geography:
Europe

325. A European defence industrial strategy in a hostile world

Author:
Juan Mejino-López and Guntram B. Wolff
Publication Date:
11-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Russia’s illegal invasion of Ukraine has brought war back to Europe. Failing to stop Russia’s aggression would leave Europe at a critical disadvantage for decades, with a long-term threat to peace in the European Union. The EU can no longer rely on United States leadership in NATO and European countries therefore need to rapidly build-up their military capabilities. European countries have increased the amounts spent on defence considerably in recent years but the underinvestment of previous decades means that gaps still exist. While the EU as a whole fulfils the 2% NATO target, 7 EU NATO countries still fall short of reaching it. The European defence market remains fragmented. The lack of joint procurement and national preferences for defence spending translate into small markets with low production numbers. We provide evidence of the cost of no EU single market for selected defence products: Low production numbers are a major reason for relatively high costs per unit of production. European countries should work with the incoming EU defence commissioner to develop a cost-effective rearmament strategy. Countries pursuing goals individually would be ineffective. While EU defence industrial policy is constrained by institutional, political and practical problems, there are significant opportunities. A more integrated market for defence products would lead to greater economies of scale, resulting in lower prices and more defence readiness. Europe should aim at greater market integration for defence rather than at protecting smaller national markets. Addressing the current security concerns will require both EU and national large funding, easily €500 billion in the next five years, for which budget prioritisation as well as European and national debt will be needed. The European defence strategy should account for comparative advantages and disadvantages, which means that purchases of weapons from outside the EU are warranted and rational, especially when the security of supply and interoperability are guaranteed. Yet local purchases, i.e. some European preference, to boost industrial capabilities and innovation are critical to reinforce strategic autonomy and avoid falling behind on military technology.
Topic:
Security, European Union, Defense Industry, and Russia-Ukraine War
Political Geography:
Europe

326. The European Union Deforestation Regulation: The Impact on Argentina

Author:
Pablo de la Vega
Publication Date:
06-2024
Content Type:
Working Paper
Institution:
Center for Distributive, Labor and Social Studies (CEDLAS)
Abstract:
We analyze the potential economic impacts in Argentina of the European Union Deforestation Regulation (EUDR), which as of January 2025 will prohibit the export to the European Union of certain raw materials and related products if they involve the use of deforested land. A dynamic computable general equilibrium model is used to simulate the impact of such regulation on the Argentine economy. The results suggest that the potential macroeconomic impacts are limited. As a consequence of the EUDR, between 2025 and 2030, GDP would be reduced by an average of 0.46% with respect to the baseline scenario. However, of greater magnitude is the potential environmental impact. Deforested hectares would be reduced by 6.64% and polluting gas emissions by 0.39%.
Topic:
European Union, Regulation, Exports, Trade, and Deforestation
Political Geography:
Europe, Argentina, South America, and Latin America

327. UK-EU Relations Tracker Q1 2024

Author:
Cleo Davies and Jannike Wachowiak
Publication Date:
05-2024
Content Type:
Special Report
Institution:
UK in a Changing Europe, King's College London
Abstract:
This edition of UK in a Changing Europe’s UK-EU Relations Tracker covers developments in the first quarter of 2024. The Q1 2024 edition of the tracker looks at the restoration of the Northern Ireland Executive, the ongoing implementation of the Trade and Cooperation Agreement (TCA), cooperation beyond the TCA such as the ‘working arrangement’ between the UK Home Office and Frontex, and bilateral engagements with European counterparts. The tracker finds that with elections on both sides of the Channel, the debate is starting to focus on what might happen afterwards. The Labour Party has set out further details on how it sees its foreign policy relationship with the EU. And the European Commission published a proposal for a youth mobility scheme with the UK which will now be discussed by member states. It highlights that whilst both sides are thinking about areas for closer cooperation, their respective reactions to each other’s proposals have been lukewarm at best. Some of these could soften post-elections. But with red lines mostly unchanged, and trust still repairing, forging a closer relationship will not be straightforward.
Topic:
Foreign Policy, Bilateral Relations, European Union, Trade, European Commission, and Cooperation
Political Geography:
United Kingdom and Europe

328. UK-EU Divergence Tracker Q1 2024

Author:
Joël Reland
Publication Date:
04-2024
Content Type:
Special Report
Institution:
UK in a Changing Europe, King's College London
Abstract:
This edition of UK in a Changing Europe’s UK-EU Regulatory Divergence Tracker covers developments from January to March 2024. The Divergence Tracker provides an overview of where and how the UK has diverged from EU regulation. It identifies and analyses the most significant cases of divergence between the UK and EU during the period. It explains what the changes are, what impact they are having, and likely further consequences. In the Q1 2024 edition, the tracker finds five cases of active divergence (where the UK, or some part of it, changes its rules); fifteen of passive divergence (where the EU changes its rules and the UK, or some part of it, does not follow); one of ‘NI divergence’ (a new category covering cases where action is taken on the potential application of new or updated EU legislation in Northern Ireland); one of procedural divergence (where new processes are introduced to change how pre-existing divergence is managed); and three of active alignment (where the UK takes steps to align more closely with EU rules, systems or programmes). The standout trend in this tracker is the large volume of EU-led divergence, due to the rush to complete files before the parliamentary elections in June. In contrast to the EU, the pace of UK legislation has slowed in the run-up to the general election.
Topic:
European Union, Regulation, Legislation, and Divergence
Political Geography:
United Kingdom and Europe

329. UK-EU foreign, security and defence co-operation

Author:
Joelle Grogan, Jannike Wachowiak, and Richard Whitman
Publication Date:
03-2024
Content Type:
Special Report
Institution:
UK in a Changing Europe, King's College London
Abstract:
With an election looming in the UK, war raging in Ukraine, and the prospect of another Trump presidency in the United States, the possible evolution of the foreign and security policy relationship between the UK and EU has taken on additional salience. The response to Russia’s war on Ukraine has shown that global events can increase UK-EU cooperation on foreign policy. However, while such major events could in future reinforce the sense of the shared challenges faced by the EU and the UK, they may not be sufficient to propel the EU and the UK towards a truly bespoke security and defence agreement. This new report highlights how Labour and the Conservatives differ in their approach to foreign policy with the EU, and what this could mean for the future relationship. It finds that the EU has well-established models for relationships with third countries for cooperation on foreign and security policy. None of these, however, seem appropriate for a country with the foreign policy and military heft of the UK. This in-depth study of UK-EU relations finds that there is scope for a new relationship, but the EU sees the ball as being ‘in the UK’s court’ to push for closer cooperation. It finds that while the EU is likely to welcome further cooperation on foreign policy and crisis management, it is developing a defence industrial strategy focussed on single market members and Ukraine. A bespoke deal involving UK and EU defence industries therefore will encounter significant hurdles.
Topic:
Security, Foreign Policy, Defense Policy, International Cooperation, Bilateral Relations, European Union, and Brexit
Political Geography:
United Kingdom and Europe

330. UK-EU Divergence Tracker Q4 2023

Author:
Joël Reland
Publication Date:
01-2024
Content Type:
Special Report
Institution:
UK in a Changing Europe, King's College London
Abstract:
This edition of UK in a Changing Europe’s UK-EU Regulatory Divergence Tracker, covers developments from October 2023 to January 2024. The Regulatory Divergence Trackers provide an overview of where and how the UK has used its regulatory freedoms to diverge from EU regulation. It identifies and analyses the most significant cases of divergence between the UK and EU which have taken place since Brexit. It explains what the changes are, what impact they are having, and likely further consequences. In the Q4 2023 edition, the tracker finds nine cases of active divergence (where the UK, or some part of it, changes its rules); ten of passive divergence (where the EU changes its rules and the UK, or some part of it, does not follow); two of procedural divergence (where policy does not diverge but the processes for managing it do); and four of active alignment (where the UK takes steps to align more closely with EU rules, systems or programmes). Key developments on the UK-side include bills to ban the export of live animals and amend the UK’s GDPR regime; a new financial services agreement with Switzerland; and the use of secondary legislation to amend the EU-derived working time regulations and cap on bankers’ bonuses. The EU has brought forward some notable measures to increase the burden on businesses in the name of upholding labour and environmental protections.
Topic:
Bilateral Relations, European Union, Regulation, and Brexit
Political Geography:
United Kingdom and Europe