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671. Designing conditionality in the supply of European public goods

Author:
Roel Beetsma and Marco Buti
Publication Date:
12-2024
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
The European Union will need in the coming years to invest a substantial amount of resources in European public goods (EPGs), including for the digital and climate transitions, and for defence and security. Funding for this could be provided in a centralised way at EU level, via either a fund or from the EU budget, but for this to be politically viable, and to create the necessary trust, national budgetary policies need to comply with the common EU fiscal rules. Setting adequate conditions for access to central financing is, however, not straightforward. The tightness of the conditionality needs to balance the desirability of a country pursuing sound fiscal policies with the need to deliver on the provision of EPGs that benefit several or all EU countries. The optimal tightness should reassure fiscally-conservative countries that EU money would not result in opportunistic behaviour that results in less discipline at national level. More fiscally fragile countries should be reassured that their fiscal retrenchment efforts will be duly rewarded.
Topic:
Governance, Budget, European Union, Finance, and Macroeconomics
Political Geography:
Europe

672. Long-term care policies in practice: a European perspective

Author:
Svend E. Hougaard Jensen, David Pinkus, and Nina Ruer
Publication Date:
12-2024
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
This paper offers a comprehensive study of the long-term care (LTC) systems in Germany, France, Slovenia, Italy and Denmark. In many EU countries, the demand for LTC services already exceeds supply. Without major reforms, this ‘care gap’ is likely to widen further because of population ageing. This paper highlights a number of recent reforms to reduce this care gap by affecting the demand for and supply of long-term care services. We find that most measures to increase the supply of formal LTC services focus on workforce attractiveness. By examining recent policy efforts and reforms, we aim to understand in which direction LTC policy is going, and to showcase measures to prepare for the future increase in demand for care.
Topic:
Health, Public Policy, Macroeconomics, and Aging
Political Geography:
Europe, France, Germany, Denmark, Italy, and Slovenia

673. The European Central Bank’s operational framework and what it is missing

Author:
Giulia Gotti and Francesco Papadia
Publication Date:
07-2024
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
In March 2024, the European Central Bank published the results of a review of its operational framework. After discussing how the ECB operational framework has changed since the Great Financial Crisis, we provide an assessment of the review, which we deem as premature and highlight some gaps it has not resolved. First, the choice of a hybrid system is attractive, but needs a precise specification. Second, the review did not specify the timing of the introduction of structural long-term refinancing operations and a structural portfolio of securities. We find that these measures should be implemented when the level of excess liquidity reaches between €1.3 trillion and €2 trillion, projected between mid-2026 and late 2027. Finally, as the introduction of a digital euro could impact bank liquidity, it is crucial to design a framework that can flexibly increase the supply of central bank liquidity.
Topic:
Monetary Policy, Governance, European Union, Macroeconomics, Fiscal Policy, European Central Bank, and Banking
Political Geography:
Europe

674. A trade policy framework for the European Union-United Kingdom reset

Author:
Ignacio Garcia Bercero
Publication Date:
11-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
A reset in the relationship between the United Kingdom and the European Union is underway, with agreement that leaders will meet in an EU-UK Summit in the first half of 2025. By that time it can be expected that there would be greater clarity about what the reset could imply for trade between the EU and the UK, which is governed currently by the EU-UK Trade and Cooperation Agreement (TCA). There is a common interest in improving trade relations between the EU and the UK, which remains the EU’s second largest trading partner. This Policy Brief recommends that the main elements of the reset in terms of trade should be: Reinforced cooperation on global trade and economic challenges through a new ministerial forum; The negotiation of three legally binding agreements that would complement the TCA: a veterinary agreement, an agreement to link emissions trading system, and an agreement on youth mobility and cultural facilitation; A new framework to reinforce regulatory cooperation. These recommendations aim primarily to introduce a new dynamic into the EU-UK trade relationship, focused on the achievement of mutual gains. The economic impact of the suggested legally binding agreements might be limited, but they would help to rebuild mutual trust and deliver some meaningful trade-facilitation steps and, ultimately, further trade-facilitating agreements. The reinforced regulatory cooperation framework, though not legally binding, could potentially have a greater economic impact if it leads to a genuine effort to maintain compatibility of regulatory regimes.
Topic:
Bilateral Relations, European Union, Economy, Trade, and Trade Policy
Political Geography:
United Kingdom and Europe

675. An investment strategy to keep the European Green Deal on track

Author:
Jean Pisani-Ferry and Simone Tagliapietra
Publication Date:
12-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Fostering investment in clean energy and transport systems is essential if the European Union is to achieve the 2030 climate goal of a 55 percent emissions reduction relative to 1990. However, getting to the required levels of investment during 2025-2030 is likely to be exceptionally difficult. Clean electricity generation and electricity transmission systems need to be expanded rapidly, while industrial decarbonisation must be boosted and the green transformation of buildings and transport accelerated sharply. But policymakers face growing constraints on the public sector’s ability to support the necessary investments. At EU level, potential obstacles include the end of the NextGenerationEU post-pandemic recovery instrument, the lack of a green carve-out in the reformed EU fiscal framework, the increasingly difficult trade-offs between decarbonisation, competitiveness and security, and the spreading false narratives on climate policy promoted by populist nationalist parties. The latter two challenges are set to be further exacerbated by the return of President Trump in the United States. The upshot is that Europe is not on track to reach its climate targets. It is at a juncture where political resistance to decarbonisation is mounting and where budgetary means to buy off consent are becoming scarce, at both EU level (because the main source of financing is drying up) and national level (because the fiscal rules leave little room for green investment). In this Policy Brief, we assess the investment needed to achieve the 2030 climate goal and climate neutrality by 2050, and discuss why current estimates might be either over- or underestimated. Second, we discuss the roles of the private and public sectors in making these investments happen. Third, we analyse the obstacles to reaching the desired investment levels during 2025-2030, especially for the public sector. Finally we propose measures to overcome or circumvent these obstacles. The business strand consists of innovations destined to ensuring credibility and the full mobilisation of savings. The public strand aims to maximise the firepower of limited fiscal resources.
Topic:
Climate Change, European Union, Investment, Green Deal, and Energy
Political Geography:
Europe

676. Decarbonising for competitiveness: four ways to reduce European energy prices

Author:
Conall Heussaff
Publication Date:
12-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Energy prices are higher in the European Union than in most other industrialised economies, presenting a fundamental competitiveness challenge. The price disparity stems from the EU’s reliance on imported fossil fuels, contrasting with the United States, which is a net exporter of energy. In 2024, EU gas wholesale prices were on average nearly five times those in the US. Average EU industrial electricity prices were roughly two and a half times higher than in the US. The transition to clean, domestically generated energy is therefore essential to reduce European energy costs. Despite rapid decarbonisation of the power sector, fossil fuels remain vital for electricity generation and continue to significantly influence final consumer costs. Additional factors influencing final prices include the fixed costs of supporting renewables and maintaining and expanding the energy networks, and consumption taxes and levies. However, the ongoing energy transition is reshaping cost dynamics. Renewables, with fixed capital costs and no fuel requirements, are increasingly transforming the electricity sector. The electrification of heating, transport and other energy services further reduces fossil-fuel demand, shifting overall energy costs from variable fuel expenses to fixed capital investments. As the energy transition progresses, EU energy costs can be expected to fall, but how far they fall and how they are shared will depend on policy choices in four main areas. In the short term, policymakers must allocate system costs fairly across energy consumers. Medium-term policies should encourage demand flexibility in electricity to improve system efficiency. In the long-term, coordinated investment at EU level and deeper cross-border interconnection will drive down final costs for all consumers.
Topic:
Climate Change, European Union, Economy, Industrialization, Decarbonization, Energy, and Competition
Political Geography:
Europe

677. How the European Union should respond to Trump’s tariffs

Author:
Ignacio Garcia Bercero, Petros C. Mavroidis, and André Sapir
Publication Date:
12-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
President-elect Trump has threatened to increase United States tariffs to 60 percent on imports from China and 10 percent to 20 percent on imports from other trading partners, including the European Union. In doing so the US would be ignoring its World Trade Organisation commitments and would also rollback the substantial liberalisation that has taken place during the past 80 years, with a potentially major negative impact on the world economy. In response to this threat, the EU should pursue a three-pronged strategy. First, the EU should engage bilaterally with the US to seek to avoid the imposition of tariffs. This could include an offer to consider measures on facilitation of bilateral trade and on economic security cooperation, while making clear that any trade measures adopted by the EU will be consistent with WTO rules. This offer should be backed up with a credible threat of retaliation that could be implemented if the US decides to impose tariffs on EU exports. Retaliation could take the form of a negative list – the EU would increase its tariffs on all US exports to the same level as the US tariffs, except for products imported from the US identified as crucial for the EU. Second, the EU should act to preserve a functioning rules-based multilateral trading system, including on dispute settlement, and should continue to pursue WTO reform. To this end, the EU should build a coalition of countries including key players from the Global North and the Global South ready to lead in this endeavour. Third, the EU should expand its network of bilateral and regional preferential trade agreements. The priority should be the ratification of the agreement with Mercosur, but the EU should also aim to improve trade relations with the United Kingdom and Switzerland and to further strengthen partnerships in the Indo-Pacific region, and with Africa.
Topic:
European Union, Tariffs, Trade Policy, and Donald Trump
Political Geography:
Europe and United States of America

678. It’s time for the European Union to rethink personal social networking

Author:
Fiona Scott Morton
Publication Date:
12-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The European Union’s Digital Markets Act (DMA) includes interoperability requirements for messaging services but not for personal social networking platforms. These gatekeeper platforms have seen little increase in competition under the DMA. Interoperability requirements – meaning different services should be able to communicate with one another – should be expanded to cover social networks, enabling entry by overcoming the single-homing tendencies of strong network effects. Interoperability could be vertical and horizontal. Vertical interoperability would require incumbent platforms to maintain network infrastructure while allowing third-party curators to create their own networks ‘on top’ of the platform. Horizontal interoperability would enable social networks that run their own infrastructure to connect to existing networks through standardised application programming interfaces (APIs). Both designs entail some shared requirements, including APIs that enable basic content sharing, systems for verifying the identities of users communicating across networks and ways of ensuring safety and security. Government systems for licensing entrants and credentialing users would provide baseline support for interoperability. While vertical interoperability lowers barriers to entry by using the dominant firm’s platform as the basis for interoperability, it gives that firm greater leeway to discriminate against rivals running on the platform. It also creates long-term questions about the price of access to the network, since its costs are borne by the gatekeeper. Horizontal interoperability requires each firm to maintain its own platform independently, but comes with the increased risk that the gatekeeper will discriminate against external traffic. Increasing interoperability – either through horizontal or vertical methods – would encourage competition on content algorithms, customisation, locality and monetisation. By expanding the scope of interoperability requirements, the DMA could significantly reduce the market power of gatekeepers, provide users with more choice and create opportunities for new social networks – and models for social networking – to emerge. As messaging and social networking platforms continue to converge, extending interoperability standards will best support the continued development of competition in these sectors.
Topic:
European Union, Digital Economy, Social Media, Microeconomics, and Digital Markets Act (DMA)
Political Geography:
Europe

679. Finance for nature: how to improve funding for the protection of biodiversity

Author:
Heather Grabbe and Luca Léry Moffat
Publication Date:
12-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The economics of biodiversity are still little understood and the loss of nature, which provides pollination, clean water and other ecosystem services, is often considered to have primarily local economic impact. But nature has an intrinsic value and also has extrinsic value to many parts of the economy. Destruction of nature has global costs because nature loss accelerates climate change by releasing greenhouse gases into the atmosphere, causes water stress and crop failures that reduce food exports, and can force people to move. Some of the consequences are systemic. Others are long term, because potential solutions to human problems contained in intact ecosystems, such as medicines and bio-technologies, are lost to future generations. The benefits from nature – and particularly biodiversity – do not result in revenue flows that would protect natural capital assets from degradation. The costs of ecosystem destruction are still largely unaccounted for. Finance for biodiversity is very small relative to what is required for its maintenance. Most of the sources are state or public funds, or from private philanthropy. Because biodiversity is complex and has largely been ignored as an economic issue, market mechanisms are still at an early stage of development. Nature still does not appear on many balance sheets, and nor is it integrated into risk assessments across the public and private sectors. This policy brief summarises the options and outlines the main considerations in finding better ways to value nature. We explain why financial tools are important for biodiversity, give an overview of the range of tools developed to finance ecosystems and assess which would be most suitable to pursue at European Union level. The focus in developing existing and new tools should be on whether they can deliver reliable revenue streams over a long period to maintain the value of natural assets. In the EU, the most impactful immediate means of using financing to protect and restore nature is to defund the damage caused to biodiversity by eliminating nature-harming subsidies, starting with reform of the common agricultural policy.
Topic:
Climate Change, Climate Finance, Biodiversity, and Energy
Political Geography:
Europe

680. Why artificial intelligence is creating fundamental challenges for competition policy

Author:
Bertin Martens
Publication Date:
07-2024
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
The rapidly evolving market for artificial-intelligence services is apparently thriving and very competitive, with a growing number of AI start-ups and ever larger and more capable AI models. Investors are pouring large amounts of money into start-ups and into a few big tech firms that have the large financial resources and computing capacity that constitute key inputs to the production and running of AI-driven services. However, exponentially growing AI model training costs create a market entry barrier for AI start-ups, forcing them to cooperate with big tech firms to get access to computing infrastructure and end users. At the same time, their AI models compete with those of the big tech firms. Competition authorities investigate these co-opetition agreements, looking for market-distorting clauses. Beyond computing costs, other competition choke points in the AI supply chain include access to dedicated AI processor chips and training data. Strict enforcement of copyright on data may further tighten an already scarce supply of affordable training data. Policymakers have few, if any, effective tools to deal with these potential competition bottlenecks in AI industries. Co-opetition agreements are necessary to enable AI start-ups to access hyperscale and costly computing infrastructure. At the same time, the agreements give big tech privileged access to the latest AI models. Competition authorities can try to minimise market-distorting provisions in these agreements but there are technical and economic limits to the extent of fragmentation in the AI value chain that can be meaningfully imposed on big tech firms. Licensing fees for copyright-protected data further tighten the already scarce supply of affordable data. It is hard to implement a fair market-clearing mechanism for dedicated AI processors. If model training costs continue to grow exponentially, as appears to be the case for the foreseeable future, the entire competition policy setting for AI industries may need a revision, with collaboration, including between big tech firms, dominating competition to keep the pace of AI innovation going.
Topic:
Science and Technology, Governance, European Union, Microeconomics, and Artificial Intelligence
Political Geography:
Europe