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681. The changing dynamics of the Western Balkans on the road to European Union membership: an update

Author:
Marek Dabrowski and Luca Léry Moffat
Publication Date:
07-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The slow pace of European Union enlargement to the Western Balkans can be attributed to EU member countries losing their political appetite for further enlargement in the 2010s and early 2020s, and to the fact that Western Balkan countries have failed to make visible progress in meeting the criteria for EU accession The income per capita convergence of Western Balkan countries towards the German level (as a proxy for the EU) has been rather slow, with some acceleration in the second half of the 2010s and early 2020s. However, Western Balkan countries continue to suffer from several socio-economic vulnerabilities, including high unemployment rates (especially of young people) and low rates of participation of women in the workforce. After the beginning of the war in Ukraine in 2022, the EU gave higher political priority to further enlargement. It opened a new eastern front of potential enlargement (Ukraine, Moldova and Georgia) and activated the stalled accession process in the Western Balkans. Bosnia and Herzegovina obtained candidate status in December 2022 and was approved for accession negotiations in March 2024. Accession negotiations with Albania and North Macedonia were started in July 2022. With the new government in Montenegro from the end of 2023, the accession negotiation with this most advanced candidate country moved forward. Overcoming the legacy of the tragic conflicts in the 1990s is another key geopolitical challenge in the region. This involves the normalisation of Serbia-Kosovo relations and the reconciliation process inside Bosnia and Herzegovina. In the economic sphere, speeding up income per capita convergence with the EU requires further domestic economic reforms, accelerating intra-regional economic integration and creating new EU initiatives to support growth and social cohesion in the Western Balkans. Accelerating EU accession negotiations with indicative target dates, at least for frontrunners, can reduce the perception of geopolitical and economic uncertainty and stimulate foreign direct investment inflows.
Topic:
Economics, Governance, Budget, European Union, Institutions, and Regional Politics
Political Geography:
Europe and Western Balkans

682. Joint public procurement as a tool for European Union industrial policy

Author:
Francesco Nicoli and Roel Beetsma
Publication Date:
07-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Joint procurement is an important tool that is currently under-exploited at European Union level. It can greatly enhance the effectiveness of public spending in Europe, achieving greater coherence between spending across different countries, exploiting monopsony power, producing economies of scale, reducing downward competition between public authorities, improving the single market and producing a degree of solidarity without resulting in redistribution between EU countries. The EU has already implemented several joint-procurement projects, including for COVID-19 vaccines, gas supplies and ammunition for Ukraine. These previous experiences can work both as a blueprint and as a pilot for larger-scale actions. Joint procurement could be particularly relevant in sectors with substantial economies-of-scale and industry-government ties, such as defence. Despite some degree of political opposition, experimental public opinion studies have shown consistently that joint procurement in such areas can strongly improve public support for EU-level action. Measures that could expand European joint procurement in a politically sustainable way include the use of framework contracts, which allow for ad-hoc commitments tailored to the needs of different EU countries; reporting by countries of their future large public procurement plans as a part of the European Semester so that the European Commission could propose coordinated actions if necessary; and the use of staggered contracting and multiple-award strategies, which can ensure a level playing field among companies of similar market power, promoting market-building and supporting the entry of new competitors.
Topic:
Industrial Policy, Governance, European Union, Macroeconomics, and Public Spending
Political Geography:
Europe

683. The three pillars of effective European Union competition policy

Author:
Fiona M. Scott Morton
Publication Date:
09-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Competitiveness is a region’s ability to achieve high productivity, attracting businesses, creating jobs and fostering innovation. It stems from efficiently using resources, is driven by competitive markets and is supported by three pillars: competition policy, procompetitive industrial policy and regulation. Competition enforcement keeps markets competitive by preventing harmful practices such as cartels, dominance abuse and anticompetitive mergers. While there is a push to relax European Union merger laws to promote European ‘champions’, this risks inefficiency and monopolisation. Instead, expanding the EU’s market size while maintaining competition is essential, especially in digital sectors. Procompetitive industrial policy addresses market failures and fosters well-functioning markets by targeting externalities such as worker training, R&D and infrastructure. Unlike outdated policies favouring national champions, this approach should focus on EU-level initiatives that promote competition and deepen the single market. This allows firms to achieve scale and drive innovation. Monopolised markets, whether state-created or naturally formed, need regulation to ensure competitive outcomes. The EU Digital Markets Act (DMA) aims to enhance competition and innovation on digital platforms by mandating data sharing, non-discriminatory access and interoperability. However, resistance to compliance on the part of tech giants poses enforcement challenges. Without effective and timely enforcement, trust in the law will erode, stalling innovation and reducing Europe’s global regulatory influence. When competition enforcement, procompetitive industrial policy and monopoly regulation work together, markets benefit consumers, firms and workers. Effective EU policy will refine competition enforcement, regulate monopolies where necessary and redesign state aid strategically to create welfare-enhancing markets. This comprehensive approach ensures an economy that serves its people and remains competitive.
Topic:
Industrial Policy, European Union, Microeconomics, and Economic Competition
Political Geography:
Europe

684. A European circular single market for economic security and competitiveness

Author:
Heather Grabbe and Luca Léry Moffat
Publication Date:
09-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
If the European Union is to achieve a sustainable net-zero economy, resources need to be used much more efficiently. Extraction from nature and processing of materials are the principal causes of biodiversity loss and are also major sources of pollution, water stress and greenhouse gas emissions. Resources are used inefficiently currently because market and government failures create a nexus of disincentives and barriers to firms and individuals, hindering them in making resource-efficient choices. The most prominent failure is the artificial cheapness of raw materials because the environmental and human costs of extraction are not including in their prices. A powerful way to improve resource efficiency is to increase circularity, so that fewer resources are used to meet the same level of human need. This can be done by extending the duration of use and reuse of materials, and by reducing resource demand from the start by designing products and systems for optimal efficiency. A circular single market would allow faster de-risking from toxic dependencies and economic coercion by authoritarian regimes. It would increase resilience in the context of fragile supply chains while reducing instability from volatile commodity prices. Firm competitiveness would also be enhanced, given that European companies operate on a continent that is poor in energy and natural resources, and are thus very exposed to future scarcity of resources when climate impacts will make water and land scarcer. If firms were to optimise production and consumption systems for efficiency now, they would be ahead of the curve. To develop the circular economy further, the EU will need to spur investment. Public policy that sets common standards and a predictable regulatory framework would accelerate the development of markets for inputs such as recyclates and services such as repair, both in the EU and in trade partners. The EU has established a legislative framework for the circular economy but it needs scaling up in the forthcoming Circular Economy Act.
Topic:
Climate Change, Environment, Markets, European Union, Economic Security, and Resources
Political Geography:
Europe

685. Financing European air defence through European Union debt

Author:
Armin Steinbach and Guntram B. Wolff
Publication Date:
09-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Europe is vulnerable to air attacks by both state and non-state actors. Russia has substantially increased its production of hypersonic missiles, missiles and drones, while European air defence capacities remain patchy with little improvement in coverage in recent years. Air defence is a classic European public good. No individual nation alone can provide it comprehensively, while air defence provided individual European Union countries can offer significant benefits to Europe as a whole. Joint EU funding for the build-up of greater air defence capabilities would be thus justified and help ensure rapid and sufficient provisioning. Debt funding would be economically justified as air defence systems, such as Patriot and IRIS-T, involve large upfront costs – debt would allow the cost of the investment to be smoothed over longer periods. Issuing EU debt, similarly to what was done with the NextGenerationEU post-pandemic recovery instrument, would be justified given the level of the air-attack threat. EU debt funding of air defence system is legally possible. Debt funding for air defence would respect the EU’s limited competence in defence and such a scheme would maintain the exceptional character of debt funding, with EU countries responding to a security threat in an act of solidarity. Joint debt issuance would not imply changing the command structure of air defence as foreseen under NATO and the European Sky Shield Initiative, but it would impact procurement processes. Procurement could be organised in the framework of the EU’s existing Permanent Structured Cooperation (PESCO) system. Additional EU debt would benefit the development of European industrial capacities in air defence, even if in the short term some funds were used to buy systems from the United States. Significant funds for research and the development of the domestic industrial base should be part of the initiative.
Topic:
Security, Defense Policy, Debt, European Union, Finance, Macroeconomics, and Russia-Ukraine War
Political Geography:
Europe and Ukraine

686. How demographic change will hit debt sustainability in European Union countries

Author:
Zsolt Darvas, Lennard Welslau, and Jeromin Zettelmeyer
Publication Date:
09-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Population ageing is putting pressure on the public debt-to-GDP ratios of European Union countries, both by raising net public expenditures and by lowering potential growth. To keep debt ratios under control and to comply with EU fiscal rules, EU countries will need to run sufficiently high structural primary balances – the difference between non-cyclical revenue and non-interest spending. Because the EU’s fiscal rules require countries to anticipate and offset the fiscal costs of ageing during the adjustment period and in the 10 years beyond, the impact of ageing on overall fiscal indicators, such as the structural primary balance, will be felt mostly during the initial four-to-seven-year adjustment period that begins in 2025. Thereafter, structural primary balances will not need to rise further in most countries. However, in countries in which fiscal ageing costs are rising – all EU countries except Bulgaria, Croatia, Finland, France, Italy, Latvia and Sweden – fiscal adjustment in the non-ageing portion of the budget needs to continue, even if the structural primary balance does not need to increase. Unless ageing cost can be brought under control, this would require the re-allocation of expenditure from non-ageing to ageing-related items, or further increases in taxation. This creates difficult adjustment choices for many EU countries. Demographic risk factors could add one percentage point of GDP or more to required primary balances, while policies that alleviate demographic pressures – increasing immigration, raising fertility levels and labour force participation, boosting productivity and reducing the cost of long-term care for the elderly – could reduce fiscal pressures by around half a point. The annual country-specific recommendations (CSRs) issued as part of the European Semester include many good ideas to raise labour force participation, reform pension and healthcare systems and raise productivity, but implementation of these recommendations by EU countries has been limited. Furthermore, CSRs contain almost no advice on immigration policy or fertility-enhancing policies, despite a rich academic literature on both. EU countries need to act on existing CSRs to alleviate demographic pressures, while the Commission and the Council should go further in their advice on tackling demographic challenges.
Topic:
Debt, Demographics, European Union, Regulation, and Sustainability
Political Geography:
Europe

687. Europe’s 2040 climate target: four critical risks and how to manage them

Author:
Conall Heussaff, Johannes Emmerling, Gunnar Luderer, Robert Pietzcker, Severin Reissl, Renato Rodrigues, and Rupert Way
Publication Date:
10-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The European Commission has recommended that the European Union should cut greenhouse gas emissions by 90 percent by 2040 compared to 1990. Modelling shows that this target is feasible technically and is in line with social acceptability and global fairness objectives. Achieving it will require massive expansion of renewable electricity generation, drastic reductions in fossil-fuel use, energy efficiency measures and deep electrification of end-use sectors. Technological advances and strong policies have already enabled the EU to start this transformation and make substantial progress on parts of it. Most technologies required to achieve the emissions-reduction targets are market-proven, and in many cases are cost-competitive with or cheaper than fossil alternatives. After decades of successful innovation, clean-technology deployment is accelerating, with costs of key clean technologies continuing to drop rapidly. Nevertheless, economic, social and political risks threaten ambitious climate policies. The four main risk categories are: geoeconomic instability, technological progress, exacerbated inequality and policy credibility. A global economy with more trade disputes and greater risk of conflict endangers the massive capital investment needed for the transition, while the cost of clean technologies is a primary determinant of the economic viability of decarbonisation. Climate policies will affect people’s everyday lives in disruptive ways, meaning that regressive outcomes must be guarded against, balanced with a concrete commitment to the established climate policy pillars. To succeed, the 2040 climate and energy policy framework needs to be designed to be resilient to such risks. The EU should put distributional issues at the heart of its climate policy, develop an emissions-reduction strategy that monitors geoeconomic and technological risk factors, and put in place contingency plans to manage the impact of negative outcomes and to maximise the societal, economic and environmental co-benefits of the energy transition.
Topic:
Climate Change, Carbon Emissions, Green Deal, and European Commission
Political Geography:
Europe

688. 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

689. 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

690. What can central banks do to take the Paris Agreement seriously?

Author:
Dirk Schoenmaker and Hesse McKechnie
Publication Date:
10-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Since the Paris Agreement on climate change was signed in 2015, its 195 signatories have seen financial instability resulting from the climate transition increase by approximately one third, in the context of still-increasing global emissions. In the European Union, emissions have fallen but banks have not fully internalised the costs of transitioning to net-zero. Banks continue to finance the expansion of the fossil-fuel industry. At the systemic level, this is trading a pretence of financial stability now for a more disorderly transition scenario with greater financial instability later. Central banks are increasingly using microprudential supervisory tools to address climate-related financial risks. These tools include reviewing banks’ risk-management processes and giving warnings over shortcomings in banks’ risk models. This approach is helpful, but has so far failed to address the build-up of climate-transition-related imbalances in the financial system. This situation echoes the run-up to the 2007-2008 global financial crisis, when supervisors were busy reviewing the implementation of the latest Basel risk models by individual banks, while failing to see increased imbalances in the financial system caused by rising housing prices. This Policy Brief proposes that central banks should take a macro approach to managing system-wide risks stemming from the climate transition. It is necessary to treat climate as an endogenous, and in many jurisdictions legally-mandated, transition, rather than an exogenous risk. The policy aim for central banks, in their macroprudential supervision capacity, should be to minimise financial instability during that transition. This Policy Brief argues that, all other things being equal, the steadiest path towards net-zero offers the greatest amount of financial stability. Current proposals to impose systemic risk buffers for climaterelated concentration risk may fail to provide such a steady reduction. A guided transition is recommended for banks that have been reluctant to hive off profitable loans to high-emitting companies. A requirement for the financial sector to reduce financed emissions by four percentage points annually from 2025 to 2050 would deliver net-zero with the least amount of financial instability.
Topic:
Climate Change, Monetary Policy, European Central Bank, Paris Agreement, Banking, and Green Transition
Political Geography:
Europe