Search

Begin New Search Topic European Union Political Geography Europe

371. The longer-term fiscal challenges facing the European Union

Author:
Jeromin Zettelmeyer, Gregory Claeys, Zsolt Darvas, Lennard Welslau, and Stavros Zenios
Publication Date:
04-2023
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The pandemic and subsequent price shocks triggered by Russia’s invasion of Ukraine, have increased longer-term fiscal pressures in the European Union through higher debt, higher expected real interest rates and higher public investment needs. This Policy Brief makes some simple quantitative assessments of those effects and discusses policy implications, with the following results. First, long-term increases in primary fiscal balances required to offset higher debt and higher expected real interest rates are in the range of 0.5 percent to 1.5 percent of GDP for most EU countries. However, because of pre-existing differences in fiscal space, not all countries will need to undertake that adjustment, while some countries may need to adjust by substantially more. Among the 21 EU countries for which we have data to undertake this analysis, 14 will need to adjust by more than they were planning to do by 2025. Second, the required additional fiscal adjustment looks manageable, although it is substantial in some cases. To achieve medium-term debt-reducing primary balances, several EU countries will need to raise primary balances by more than 2 percent of GDP above their 2025 target, but no country will need additional fiscal adjustment of more than 3 percent of GDP. Third, market data suggests that the future path of real interest rates is very uncertain. Compared to the period immediately preceding the pandemic, longer-term expected real interest rates have increased by about 2 percentage points but remain low on average, at about 1 percent in real terms. Future developments depend on whether the structural factors that led to low interest rates in the first place persist or unwind. While interest rates might decline again, fiscal policymakers should not make plans that assume such a decline. Fourth, public spending needs for additional defence and climate spending run well above 1 percent of GDP per year. These needs do not appear to have been incorporated into current fiscal baselines, and hence will come on top of the adjustment described above. To ensure that fiscal adjustment does not defeat its purpose by slowing growth, it is essential that it is conducted gradually. In countries that require such adjustment, it should start as soon as cyclical conditions allow.
Topic:
Governance, European Union, Finance, and Fiscal Policy
Political Geography:
Europe

372. The potential of sovereign sustainability-linked bonds in the drive for net-zero

Author:
Alexander Lehmann and Catarina Martins
Publication Date:
03-2023
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
European Union governments have for some years issued green bonds that raise funds for climate-related spending. These bonds have been received well in capital markets but because they promise a certain use of proceeds, they complicate budget management and may not match investors’ claims of having an impact on national climate policies. Public commitments made by major investors and asset owners suggest that limiting climate transition risks and the assessment of the alignment of sovereigns with net-zero targets will now become key determinants of portfolio allocation. Yield differentials in bond markets are already beginning to reflect transition risks that arise from the inadequate pursuit by issuers of climate targets. Unlike standard green bonds, sustainability-linked bonds (SLBs) create a link between performance (outcome) indicators and the financial terms of the bonds. SLBs have grown rapidly in importance in private markets and are now being assessed by sovereign issuers. We show that sovereign SLBs could help incentivise climate policies in EU countries, and accelerate emission reductions. They would be an effective tool for signalling commitment. A common EU framework for issuance by EU countries would enhance capital market integration and the transparency of national policies, and would limit climate transition risks in EU capital markets more broadly.
Topic:
Climate Change, European Union, Finance, Carbon Emissions, and Sovereign Bonds
Political Geography:
Europe

373. Phased European Union electricity market reform

Author:
Georg Zachmann and Conall Heussaff
Publication Date:
03-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
In an environment of record-breaking electricity prices driven by a gas supply shock and below-average electricity generation, reforming the design of the European electricity market is seen as a means to delink consumer costs from volatility in short-term power markets. Electricity markets should meet three objectives: fairness, optimal investment and optimal operation. The current market design has achieved these objectives to varying degrees. Faced with the unprecedented shock, the electricity system has operated well, but electricity markets have struggled to achieve fair outcomes and investments have not been driven by market-based cashflows. Further complicating market reform, the power system is being changed radically by decarbonisation. The electricity system is becoming more decentralised and digitalised, with an active demand side. These transformations will have consequences for the optimal electricity market design in the later stages of the energy transition. Reform proposals have focused on increasing the share of long-term contracts in the remuneration of generation technologies. Different long-term contracting regimes have structural implications for the functioning of electricity markets, especially in relation to the roles of the state and the market, and the responsibilities of national governments and European Union institutions. A phased approach should be taken to EU electricity market design reform. In the near-term, reform should seek to protect consumers and drive investment. An assessment should also be made of what market design will best meet the fairness, investment and operational objectives in a decarbonised system, and what the conceptual role of electricity markets should be during the transition. This process should start as soon as possible so well thought-through proposals are available when the next European Commission takes office.
Topic:
Markets, Reform, European Union, Electricity, and Green Economy
Political Geography:
Europe

374. How Europe should answer the US Inflation Reduction Act

Author:
David Kleimann, Niclas Poitiers, André Sapir, Simone Tagliapietra, Nicolas Veron, Reinhilde Veugelers, and Jeromin Zettelmeyer
Publication Date:
02-2023
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The 2022 United States Inflation Reduction Act (IRA) is a significant and welcome climate law. It also includes trade-distortive subsidies, including local-content requirements prohibited under World Trade Organisation rules – the first time the US has done this and a blow to the international trading system that could trigger protectionism in other countries. The expected IRA green subsidies are of similar size to those available in the European Union, except in renewable energy production, where EU subsidies remain far larger. However, there are important qualitative differences. Some IRA subsidies discriminate against foreign producers while EU subsidies do not. IRA clean-tech subsidies are simpler and less fragmented, and they focus mainly on mass deployment of green technologies rather than innovation. The IRA will likely harm Europe through its competitiveness effect, while it will likely benefit climate transition in Europe and most of the rest of the world. However, the magnitude of both effects is very uncertain, partly because the IRA will induce substitution away from Chinese inputs. By forcing the reorganisation of supply chains, the IRA may make the EU and other economies more competitive relative to China. It may also initially slow the green transition. But in the longer run, this effect should be outweighed by the reduction in the cost of clean tech driven by the IRA. In responding to the IRA, the EU should not just seek to protect its competitiveness relative to the US but to pursue broader aims, including competitiveness in general, speedy decarbonisation and broad foreign policy and development policy goals. These aims imply that the EU should not impose local-content requirements of its own, should not loosen state-aid rules and should not mimic the IRA’s approach to manufacturing subsidies. Rather, it should focus on boosting its structural competitiveness, formulate a trade policy response that includes reform of the international subsidies regime, and develop an instrument for EU-level subsidies that focuses on early-stage development and increasing EU resilience to trade disruptions.
Topic:
Governance, European Union, Inflation, and Trade
Political Geography:
Europe

375. From East to North: New Frontiers for the EU-NATO Arctic Defence

Author:
Luca Cinciripini
Publication Date:
03-2023
Content Type:
Journal Article
Journal:
Turkish Policy Quarterly (TPQ)
Institution:
Transatlantic Policy Quarterly (TPQ)
Abstract:
After a geopolitical phase of peace and international cooperation, the Arctic is witnessing renewed military tensions, particularly between Russia, NATO, and European Union (EU) member countries. The multilateral governance that has so far governed the fate of the Arctic is being challenged by the confrontation between Russia and the West. In addition, climate warming opens up new trade routes. It provides access to immense deposits of raw materials, accelerating competition among actors partly by including external players such as China. To assess the future trajectory of European defense governance on the northern flank, it is necessary to view the Arctic and Baltic as a single region in light of common critical factors.
Topic:
Security, NATO, European Union, and Regionalism
Political Geography:
Russia and Europe

376. A "Civil Association" Between the European Union and Russia

Author:
Enes Ozcan
Publication Date:
03-2023
Content Type:
Journal Article
Journal:
Turkish Policy Quarterly (TPQ)
Institution:
Transatlantic Policy Quarterly (TPQ)
Abstract:
Contradicting political worldviews of the EU and Russia contribute to their conflictual relations much more than the attention currently given to this facet of the relations. Each of their solidarist worldviews creates an ideological wall severing their communication that is essential for possible peaceful solutions. However, shifting toward a pluralist worldview inspired by conceptual tools of the English School and Michael Oakeshott’s theory of civil association could be an alternative to the current situation of conflict. Building on this theoretical framework, we also attempt to explain the significance of Türkiye’s mediation efforts along the way and present a constructive criticism of today’s norms-based international law.
Topic:
Diplomacy, European Union, Conflict, and Regionalism
Political Geography:
Russia and Europe

377. How to rebuild Europe’s security architecture?

Author:
Loïc Simonet
Publication Date:
01-2023
Content Type:
Special Report
Institution:
Austrian Institute for International Affairs (OIIP)
Abstract:
Russia’s war on Ukraine is overturning the European security order in place since the end of the Cold War. The Helsinki Final Act (1975), the Charter of Paris for a New Europe (1990), the 1992 Helsinki Summit, as well as the fragile acquis of the Organization for Security and Co-operation in Europe (OSCE), failed to build and maintain a system involving all countries of ‘Greater Europe’, including the Russian Federation. For at least two decades, Russia has expressed discomfort regarding its perceived status in a ‘concert of nations’ dominated, in its perception, by the Atlantic Alliance and the European Union. Still referring to a conception of security based on spheres of influence, it has considered NATO’s eastward expansion as a threat to its national security (Russian National Security Strategy, 2015, 15). “Only during ‘critical junctures’ – relatively rare watershed moments marked by rapid change and upheaval – are security architectures likely to be fundamentally reconfigured” (Hyde-Price, 2014, 105). The war in Ukraine is already listed as such a turning point in history. ln addition to continuing efforts to support Ukraine and stabilize the situation on the battlefield, the time seems ripe for an in-depth assessment of Europe’s security regime. Many might argue that it makes little sense to discuss architecture while the house is burning. I answer that it is our responsibility to stress our preparedness and explore all opportunities. Just increasing military expenditures cannot be the only option. We need a ‘Code of Conduct’ for the 21st Century that would allow no more – real or perceived - ‘security vacuums’. This is in no way intended to accept the Russian narrative. Even during the Cold War, European countries were able to progress in building a common security architecture through dialogue and negotiations. It was less than a month after the brutal military suppression of the Prague Spring by the Warsaw Pact States, in 1968, that the Finnish Government initiated the process that ended up in the Helsinki Final Act.
Topic:
Security, NATO, European Union, and Russia-Ukraine War
Political Geography:
Europe

378. Western Balkans’ Horizon 2023 – New uncertainties in a changed geopolitical setting

Author:
Vedran Dzihic
Publication Date:
01-2023
Content Type:
Special Report
Institution:
Austrian Institute for International Affairs (OIIP)
Abstract:
“The age of uncertainty” has recently become the most used description for the time we live in. The aggression of Russia against Ukraine and the war approaching now its second year have changed the globe. Global uncertainties and huge geopolitical changes we witness are mirrored in European semiperipheral regions like the Western Balkans. The Western Balkans has been in a limbo for a while with no major progress towards the EU and democracy in general. Instead of steady democratization in the region we witnessed a gradual autocratization, most prominently in Serbia, and constant rise of crisis and tensions.
Topic:
European Union, Democracy, Geopolitics, Autocracy, and Russia-Ukraine War
Political Geography:
Russia, Europe, Ukraine, and Balkans

379. Continuities and Ruptures in the EU’s Border and Migration Control Regime

Author:
Clemens Binder
Publication Date:
01-2023
Content Type:
Special Report
Institution:
Austrian Institute for International Affairs (OIIP)
Abstract:
After years of decrease in the public salience of the issue, border security and migration control are back on top of the agenda in the European Union. Rows around issues such as the Schengen accession of Romania and Bulgaria, the ongoing debate about refugees from Ukraine and the deteriorating humanitarian situation in the Mediterranean have once again caused intense political debates in Brussels and the member states. While numerous topics (such as cooperation with third countries) arise in this context, this report will deal with three aspects – the further implementation of the EU Pact on Migration, the general technologization of border management and the operationalization of two new databases in the field of mobility control at the borders. These issues bear both political and academic significance and are thus major developments to observe in 2023.
Topic:
Security, Migration, European Union, and Borders
Political Geography:
Europe

380. The third EU-NATO joint declaration (10 January 2023): Was it worth the delay?

Author:
Loïc Simonet
Publication Date:
03-2023
Content Type:
Policy Brief
Institution:
Austrian Institute for International Affairs (OIIP)
Abstract:
Triggered by the war in Ukraine, the long-awaited third joint EU-NATO declaration was signed on 10 January 2023, after months of postponement. Neither a joint strategic concept nor a plan of actions, the document primarily sends a strong political message of transatlantic unity with regards to the gravest threat to Euro-Atlantic security in decades. Although it recognises the value of a stronger and more capable European defence, it marks the primacy of NATO as European security provider, therefore being seen as a defeat for EU’s strategic autonomy. China’s first ever mention in a joint EU-NATO declaration sparked a nervous reaction in Beijing.
Topic:
Security, NATO, European Union, Strategic Autonomy, and Russia-Ukraine War
Political Geography:
Russia, China, Europe, and Ukraine