April 19. 2024. 7:30

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March showdown: When EU fiscal rules meet industrial policy

When EU leaders meet in Brussels at the end of March, the conversation over how Europe should subsidise its green transition will clash with the discussion over the reform of the bloc’s fiscal rules, providing opportunities for a compromise deal.

EU leaders already discussed the European Commission’s “Green Deal Industrial Plan” last week in Brussels. However, they left the thorny issues over how exactly to find a balance between loosened state aid rules and the risks of fragmenting the single market for their meeting at the end of March.

In the meantime, the Commission should come forward with a more detailed proposal for the EU governments to discuss in the coming weeks.

At the same time, European governments are under pressure to agree on new fiscal rules.

EU governments have to prepare their 2024 budgets and a return to the old fiscal rules is unrealistic given the current debt levels, and even counterproductive in light of the investment needs for the green transition.

Also, the Commission is not willing to keep applying the general escape clause, so the new rules will have to crystallise from under the rhetoric of “fiscal prudence” and “encouraging investments” sooner rather than later.

Although EU economy ministers made little progress when they met in Brussels on Tuesday (14 February), the Commission’s Valdis Dombrovskis maintained that the discussion was “approaching crunch time”.

What he wants is clear guidance from the EU leaders during their meeting on 23-24 March, so that the Commission can table a specific legislative proposal at the end of March or in early April.

Everything is on the table

To Nils Redeker, deputy director of the Jacques Delors Centre in Berlin, this timing provides the opportunity for a package deal.

“The March European Council will be the one moment where everything is on the table,” he told EURACTIV.

For example, the push for more relaxed state aid rules that Germany supports is looked at very sceptically in many of the smaller EU states, but also in Spain and Italy.

These countries are not fundamentally opposed to state aid, but they fear being overpowered by a financially much more powerful Germany if the dams hemming in national subsidies are weakened.

In a non-paper circulated at the end of January, the Spanish government already put the eased state aid rules in the context of the reformed fiscal rules, arguing that more flexibility for national subsidies has to come hand in hand with more flexibility to invest under the EU’s fiscal rules.

“Germany now enters the debate on fiscal rules in a situation where it is itself asking for more legroom for national subsidies,” Redeker said, arguing that both issues were very likely to be linked.

However, he stressed that a compromise deal that would make both fiscal rules and state aid rules more flexible would not be enough.

“Even if all member states were allowed to spend more money, there are large differences in the fiscal space that is available to them,” he said.

To maintain the level playing field, a European solution to counter the fragmentation risks of the loosened state aid rules is therefore still necessary.

“EU leaders will have to give a clear signal in all three areas,” Redeker said.

Seen from the continent, the political and economic turmoil that has embroiled the United Kingdom has something tragicomic about it. From the specific perspective of Brussels, the bewilderment is even seasoned with some good old Schadenfreude.

But how would the UK have fared had it never left the European Union?

It’s impossible to say for sure as we cannot let history run twice, but John Springford of the Centre for European Reform is trying to come as close as possible to re-running history by using a ‘doppelgänger’ method.

For this, he lets an algorithm select countries whose economic performance closely matched the UK’s performance before Brexit. He then compares how this doppelgänger mix of countries that did not leave the EU fared after Brexit with the economic performance of the existing Brexit Britain.

Perhaps unsurprisingly from a Brussels perspective, the results do not look good for Brexit Britain. By the end of the second quarter of 2022, UK GDP is 5.5% lower than that of its Bremain doppelgänger.

Moreover, Springford’s study finds that investment is 11% lower and trade in goods is 7% lower, while trade in services has held up.

EU Commission readjusts economic outlook positively. On Monday (13 February), the Commission presented its winter 2023 economic forecast, saying that the EU and the euro area would grow by 0.8% and 0.9% respectively. This is 0.5 and 0.6 percentage points higher than the Commission had predicted in autumn 2022. The Commission also expects inflation to fall to 5.6% in the euro area this year, and to 2.5% in 2024. The inflation numbers for the entire EU are slightly higher, driven by high inflation in Hungary, Poland, and the Czech Republic.

EU finance ministers edit tax haven blacklist. On Tuesday (14 February), EU member state finance ministers updated the “list of non-cooperative tax jurisdictions”, adding Costa Rica, Russia, the Marshall Islands, and the British Virgin Islands, so that the blacklist, as it’s more commonly known, now features 16 countries. Oxfam, however, criticised the list for not including tax havens like Bermuda and the Cayman Islands, or EU tax havens like Luxembourg. Green MEP Rasmus Andresen welcomed the listing of Russia but criticised the failure to include Qatar.

Commission starts “regulatory sandbox” for blockchain applications. Distributed Ledger Technologies (DLT) have had a rough 2022, as important players in the crypto space turned out to be fraudulent speculation schemes. Now the EU Commission wants to give the underlying technology another chance by establishing a “sandbox” that would allow DLT projects to develop in dialogue with the regulators. Funded by the Digital Europe programme, the sandbox is running from 2023 to 2026.

EU launches “European Tech Champions Initiative” to keep European ownership of scale-ups. With an initial money pot of €3.75 billion, contributed by Spain, France, Germany, Italy, Belgium, and the European Investment Bank, the EU started a fund-of-funds to invest in European large-scale venture capital funds. The idea is to prevent the EU’s most promising high-tech companies from being bought out by foreign investors once they become successful. Read more.

The French pension reform, decoded. Wonder what exactly the French government is planning that has triggered multiple mass protests in France? Our colleague Davide Basso from EURACTIV France has you covered with this comprehensive overview.

Bulgaria has not sanctioned Russians since 2014. Bulgaria has not imposed sanctions against Russian citizens or companies featured on the EU sanctions list since they were first imposed after the annexation of Crimea in 2014, according to answers provided by the national tax agency in response to an access to information inquiry filed by EURACTIV and Mediapool.bg. Read more.

France one of the worst EU countries for company taxation, survey finds. A new Europe-wide survey found France has one of the most burdensome fiscal frameworks for companies, where taxes other than corporate tax represent 3.8% of the country’s GDP in 2021, compared to a 2.5% EU average. Read more.

Spanish government to increase minimum wage. Spain has decided to increase the minimum wage by 8% for 2023, meaning about 2.5 million low-salary workers will receive €1,080 gross per month in 14 payment installations, the government said on Tuesday. Read more.

Slovakia sees new EU funds blocked as it lacks crucial strategy. Slovakia does not fulfil the basic criteria for the absorption of EU funds targeting social inclusion and poverty from the new programming period, meaning it will not be eligible for reimbursement, according to the European Commission, EURACTIV Slovakia reports. Read more.

The Economic Resilience Index: Assessing the ability of EU economies to thrive in times of change: This report by the ZOE Institute for Future-fit Economies builds an index to measure the economic resilience of EU member states. One of the goals is to measure economic progress in a more differentiated way than GDP figures usually can, respecting planetary boundaries and social goals. Sweden currently scores the best.

Understanding Italy’s Stagnation: It’s a catastrophe. Over the past 20 years, the Italian economy has not grown. Max Krahé of the German fiscal think tank Dezernat Zukunft analyses three explanations that are often given. He finds that none of them can explain the stagnation on their own. He writes that Italy appears to have adopted “a doubly incoherent mix of structural reforms and austerity, and then stuck to it after its ineffectiveness had become apparent”.

Mariana Mazzucato against private consultants: The push for a green transition will increase the role of the state. But how can the state deliver this? Professor and economist Mariana Mazzucato argues that the state should not rely on private consultancies that aim to infantilise the state and make it dependent on them. Instead, the bureaucracy should develop more capacities in-house.

The impact of geopolitical conflicts on trade, growth, and innovation: as everybody is talking of re-shoring, de-coupling and other forms of geopolitical turmoil that will influence trade patterns, it is worth also having a look at what the politically diminished guardian of the current trade order, the World Trade Organisation, says of these prospects. This WTO working paper finds high costs of de-coupling, especially for countries of the global South.