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341. 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

342. 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

343. 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

344. 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

345. 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

346. 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

347. 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

348. 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

349. 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

350. 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