Dear readers, please note this is our last Econ Brief before the Summer break – We’ll be back in time to smoothen your way back into Brussels talks in September!
Before Ursula Von der Leyen was confirmed for a second mandate at the Commission’s helm in Strasbourg on Thursday, her pre-vote speech indeed doled out many promises of “special purpose” funds, measures, and Commission capacity to be set up over the next four years, appeasing a wide range of political groups and sectorial interests.
However, these extensive pledges raised one overarching and cumbersome question: Where will the money come from?
As Brussels stakeholders will indeed be very keen to get answers from September onward, we’ve taken another look at the other big questions hanging over policymakers once they return to their offices – because these also are all about money.
Competitiveness buzzword
No doubt the long-awaited competitiveness report by former ECB President Mario Draghi will be top of the list on everyone’s September agenda – with the Hungarian EU Council presidency having scheduled two competitiveness councils in September and December to discuss the report and draft a Council position on the topic by the end of the year.
While what the report will look like remains to be seen, efforts by both the policymaker as well as the business communities over the last few months to turn the word Competitiveness into the undisputed motto of the upcoming legislative agenda have been extremely successful.
To the point that different stakeholders have started using it as a buzzword that can be filled with very different meanings depending on their specific interests: One just needs to take a look at two rather diverging industry reactions to von der Leyen’s pledges as a case in point.
Europe Unlock, an umbrella group of various European business and sector associations “committed to making the case for a renewed focus on competitiveness in the Single Market under the next Commission”, said von der Leyen’s speech marked a clear step in the right direction
“Putting competitiveness and prosperity front and centre of her policy platform is hugely reassuring for business,” said Kieran O’Keeffe, the group’s executive director.
“However, we have to acknowledge that the biggest barrier to private investment in Europe is the business environment. To tackle this, we need a relentless focus on reducing complexity and cost to make investment attractive for business.”
“A new Commission vice president to oversee burden reduction across the single market sets the right tone,” he added.
However, commenting on von der Leyen’s mention of a review of competition rules, he noted that policymakers “should avoid adapting competition rules to create European champions.” The best way to boost competitiveness, he added, “is ensuring open and competitive markets that can incubate high-performing firms to then go global”.
But the competitiveness implications of von der Leyen’s vows were interpreted differently by Italy’s main industry lobby group, Confidustria, with President Emanuele Orsini warning against the negative ramifications of her reference to green policy targets.
“[Her] policy guidelines […] not only reaffirm the Green Deal, but also introduce a new target to cut CO2 emissions by 90% by 2040: this adds additional concerns to the already existing ones.”
“Right now, Europe suffers from a lack of competitiveness compared to the other global players. Decarbonisation will cost €1.1 trillion over the next 10 years.”
“Introducing additional climate measures means, again, increasing costs for our companies, in a context where ETS alone risks putting many of them out of business by 2030′.”
One sure thing is that von der Leyen’s commitment to creating a new European Competitiveness Fund will face contrasting views on what this new facility should target and, primarily, on where the underlying money should come from.
‘Mountains ahead of us’
The announced Fund in fact sat alongside a spate of other references in her speech that re-ignite a thorny dilemma about whether the next EU budget should be reformed.
“To unleash private investment, we also need public funding,” the Commission chief told MEPs on Thursday.
“Yes, we have the resources in NextGenerationEU and the current budget. But this will come to an end within the next few years. While our investment needs will not,” she said, adding: ” We need more investment capacity. Our new budget will be reinforced.”
This mirrors similar warnings by outgoing Economy Commissioner Paolo Gentiloni ahead of the Eurogroup meeting last week.
“It is now very clear that investment needs are mountains ahead of us,” Gentiloni said.
While most of this should come from private investments, he said, “of course it is also time to start the discussion on how to imagine possible new common tools for common goals.”
And the debate started immediately after he left the doorstep area, with German Finance Minister Christian Lindner (FDP/Renew) saying he expects a “sporty debate” on this topic but stressing that “Germany is clearly positioned” against new EU debt.
Instead of additional resources, Lindner stressed the need to reshuffle existing EU spending, which he later specified by suggesting that the EU’s regional funds – known as cohesion policy, making up a third of EU spending – might be “overfunded”, (which immediately put him head-to-head with outgoing Cohesion Commissioner Elisa Ferreira).
Overall, the core issue in the EU funds debate pivots around two main camps.
One camp supports an expansion of the available budget beyond the current 1% of the combined 27-member states GDP, to avoid seeing priorities such as defence and competitiveness eat into funding that is traditionally allocated to cohesion and agricultural policy.
The other camp supports a reform of the budget in a direction that would most likely downsize those two areas, with a view of re-allocating existing funds “more efficiently” rather than increasing them – an option that reflects the German stance in particular, but that also speaks to a wider shift in narrative in the policymaking community.
The EU’s overall policy rhetoric has in fact clearly transitioned away from the post-pandemic era’s focus on boosting the common EU fiscal capacity to tackle the bloc’s mounting economic challenges – towards a markedly more pro-business approach to those challenges, hinging on fostering Europe’s private markets.
Which brings us to the next three magic words that dominated the EU’s economic discussions in recent months: the Capital Market Union (CMU).
The golden portal of the CMU
A major point of focus over the next mandate, the CMU was recently rechristened the “Savings and Investments Union” by former Italian prime minister Enrico Letta in his recently published report on the EU single market.
The rebranding effort – which was taken up by von der Leyen in her plenary speech – comes as the bloc’s original CMU framework failed to take off during its 10-year long legislative journey.
It is now pitched by the Brussels community as the main gateway to all the funding Europe needs to tackle its core priorities – including the green and the digital transitions and a ramped-up defence capacity.
According to the Commission, deepening Europe’s single market for capital could potentially unlock up to €470 billion in private funds.
“If we are to fund the new industrial revolution of our times, we must mobilise Europe’s private capital,” von der Leyen said earlier this year. “And now is the time to turn political will into action.”
Von der Leyen’s remarks come amid EU leaders’ growing emphasis on the need for private, rather than public, funds to finance key investments.
In a special European Council Summit focused on competitiveness held in April, Council President Charles Michel said that a fully integrated CMU “is the best European IRA that we can develop” – referring to the 2022 US Inflation Reduction Act, which aims to stimulate green manufacturing in the US through massive state subsidies and tax breaks.
Earlier this week, however, Finance Watch, a Brussels-based NGO that monitors the EU policy’s implications for the wider public, published a detailed report concluding that, in a “best case” scenario, the CMU could raise between €300 and €600 billion – which means it will ultimately be able to fund at most one-third of Europe’s total investment needs.
The report pointed out that the Commission itself estimates that the green transition alone will cost an additional €620 billion per year until 2030, while mitigating the impact of climate change could cost an additional €200 billion annually.
“Achieving the CMU makes a lot of sense, but you’re still not footing the total bill when it comes to Europe’s investment needs,” Thierry Philipponnat, the NGO’s chief economist, told Euractiv.
“If you take the whole list, this includes climate change mitigation, climate change adaptation, defence spending, support for strategic industries, and the digital transition.”
Philipponnat noted that the root cause of the problem is the fact that many green projects – for instance, building walls to protect countries against rising sea levels – are insufficiently profitable for the private sector to want to invest.
“We need to think very hard about which part in particular of the green transition can be financed by private capital,” he said. And this, in turn, will hinge on one key preliminary question, he argued: “Is the yield going to be sufficient at the end of the day?”
[Edited by Anna Brunetti/Zoran Radosavljevic]
Economy News Weekly Roundup
Von der Leyen wants new EU budget to be ‘reinforced’ but details remain vague. Ursula von der Leyen walked a fine line in her speech to the European Parliament plenary on Thursday (18 July), signalling support for an enlarged EU budget and looser competition rules whilst remaining vague enough to appease both sides of the political spectrum. “We need more investment capacity,” von der Leyen said, adding: “Our new budget will be reinforced.” On competition policy, she emphasised the need to “support companies to scale up”—echoing a Franco-German push to enable the emergence of “European champions” that can compete with global peers. Read more.
German industry expects marginal benefits from new government growth package. German industry association BDI expects only “marginal” growth effects from an economic package adopted by the country’s coalition government on Wednesday (17 July), including tax incentives to encourage foreign workers, bureaucracy reduction, trade deals plans and tweaks to existing EU measures. A total of 49 measures were adopted, ranging from tax incentives for private investments and skilled foreign workers to bureaucracy reduction and plans to build back-up capacity for fluctuating renewable energy. While Economy Minister Robert Habeck (Greens) said this should lead to a “strong impetus for growth,” BDI expects this to boost the country’s sluggish growth only “moderately”.
Reason for concern or premature obituary? Analysts divided on German economy. As the German economy navigates its second year of near-recession and fears about permanent deindustrialisation persist, bank analysts are split on whether gloomy insolvency numbers should be cause for further concern. On Friday (12 July), data released from the German statistics office showed hefty increases in the number of companies filing for insolvency in April and May this year – corporate claims were as much as 33.5% and 25.9% higher than a year earlier, respectively. Deutsche Bank’s global head of research called for “a more nuanced” and optimistic view, “which will help to attract foreign investors into the country.” Read more.
King’s Speech: UK vows to rekindle trade and investment ties with Europe. Hopes that Keir Starmer’s new Labour government will seek to rebuild closer ties with the EU gained momentum on Wednesday (17 July) as King Charles presented the incoming administration’s priorities at the House of Lords, with a focus on “resetting relations”. While succinct, the language on restoring the country’s cooperation with Europe provided strong reassurance to those industries hoping to benefit from improved business terms between the two sides, after more than five years of post-Brexit tensions and regulatory divergence. Read more.
Commissioner Ferreira, Germany’s Lindner go head-to-head on the future of the bloc’s cohesion policy after the German liberal Finance Minister suggested that cohesion policy might be “overfunded” due to its “sluggish” absorption rate. “It is a sad fact that cohesion policy is notorious for its absorption problems,” Lindner said, adding that these issues would have been “worsened by the parallel existence of cohesion policy and Next Generation EU.” Ferreira responded by stressing that cohesion policy is “more relevant today than ever”, adding that the EU “will not be able to win the global competition against China and the United States without mobilising the strength of every region.” At the heart of the conflict, the question of what cohesion policy should actually achieve is not solved. Read more.
New EU fiscal rules may require deeper-than-expected spending cuts in 2025, Eurogroup signals. Eurozone countries may have to cut net government spending by more than previously anticipated next year to comply with new EU fiscal rules, finance ministers from the 20-member states group said on Monday (15 July). In a statement published in the evening after the Eurogroup meeting in Brussels, the ministers said applying the bloc’s revised governance framework will “lead to a contractionary fiscal stance for the euro area as a whole in 2025”, subtly different from a previous Eurogroup statement published in March, which spoke of the need for a “slightly contractionary fiscal stance”. Read more.
German CSU warns against cohesion funds cuts ahead of Lindner visit, EU finance chiefs summit. Ahead of a discussion on the future of cohesion policy with German Finance Minister Christian Lindner (FDP/Renew) in Brussels on Monday (15 July), the centre-right Bavarian party CSU (EPP) has warned against centralising the funds – as considered by the European Commission – or cutting them – as wanted by Berlin. The CSU’s warnings were well-timed, as the bloc’s finance ministers arrived in Brussels on Monday for two days of discussions around thorny budgetary issues. Read more.
More private investment needed for Ukraine’s ‘enormous’ reconstruction effort, top EU official warns. European governments must step up efforts to incentivise the private sector to invest in Ukraine to fund the war-torn country’s significant recovery and reconstruction needs, a senior EU official said on Tuesday (16 July). Pierre-Arnaud Proux, deputy head of the inter-institutional unit coordinating Ukraine’s relief and reconstruction at the European Commission, noted that the €50 billion in funds pledged by the EU under the bloc’s Ukraine Facility to support Kyiv’s reconstruction falls well short of the country’s estimated investment needs, which hover right below the $500 billion mark. Read more.
