by Marco Buti and Marcello Messori
In two articles published in this newspaper at the end of 2022, we tried to define the challenges that the European Union (EU) will have to face in 2023 and the resulting economic policy initiatives that need to be implemented
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In two articles published in this newspaper at the end of 2022, we tried to define the challenges that the European Union (EU) will have to face in 2023 and the resulting economic policy initiatives that need to be implemented. There were at least four challenges. The main aim was to control the inflationary excesses triggered by supply-side constraints and to avoid a decline in aggregate demand that would lead to stagnation or recession. The second and third challenges required responding to the exogenous shocks, both geopolitical and economic, that emerged after the pandemic and implementing the ambitious “green” and technological transitions with the aim of strengthening Europe's advantages in terms of environmental impact and to strengthen Bridge the delays related to digitalization and artificial intelligence.
The fourth challenge, closely linked to the previous ones, was to overcome the fragmentation of unequal and poorly developed financial markets, to also mobilize private resources for the double transition and to avoid disrupting the European internal market by relaxing the rules for state ones aid is at risk. An effective economic policy response to these challenges would have required a temporal and quantitative strengthening of central fiscal capacity in the wake of Next Generation EU in order to: produce European public goods capable of offsetting, supplying and creating necessary fiscal bottlenecks positive external effects for “green” and digital transformation; Implement an EU industrial policy capable of reducing innovation gaps compared to the United States and China. Furthermore, the policy responses should have led to the completion of the banking union process and the effective functioning of the capital markets union. Ultimately, to enable the success of this ambitious package of measures, it would have been necessary to make progress in European governance, starting with the introduction of new fiscal rules and an expansion of the EU central budget.
Unfortunately, the events of 2023 have not confirmed these political indications of ours. The already dramatic international geopolitical context has further intensified. The ongoing war in Ukraine has coincided with the explosion of tragedy in the Middle East, which risks multiplying massacres of civilians and fueling a protracted conflict. The EU, which has proven incapable of taking independent initiatives to suppress the theaters of war on its doorstep, runs the risk of being threatened by the possible authoritarian tendency posed by the likely Republican candidate for the presidency of the United States (Donald). to become even more isolated (trump).
From an economic perspective, European financial markets have not become “fatter”; and the Italian Parliament's recent decision to prevent the introduction of the new statute of the European Stability Mechanism has weakened the already fragile European process for resolving banking crises and created further obstacles to the completion of the banking union. Furthermore, the German economy is in recession and as a result most other European economies are in stagnation. In such a difficult macroeconomic context, the push for a “green” transition has waned because many Member States feared the short- to medium-term economic and social costs. Technological delays in the EU have become even more acute as it has become clear that restoring competitiveness in international markets goes beyond national initiatives and would require a radical restructuring of the European production model, guided by centralized industrial policies; However, member states were unwilling to finance an increase in the EU budget necessary to finance this policy. It is therefore unsurprising that 2023 saw setbacks in Europe's economic policy outlook. The “driving force” of Next Generation-EU is increasingly running out. No progress has been made in the production of European public goods; and the only industrial policy initiatives have been implemented at national level to the extent that they endanger the smooth functioning of the European internal market. In fact, the Council of the EU rejected the moderate increase in the central budget proposed by the Commission as part of the mid-term review. The adoption of the new budget rules themselves, although undoubtedly a step forward compared to the old Stability and Growth Pact, came at the end of long negotiations that resulted in a compromise that alone was not enough to change the inertia of the European governance.
It follows that the challenges identified a year ago remain relevant for 2024 and are finding a growing consensus. In fact, with the decline in inflation rates, the priority of activating innovative avenues for sustainable growth is strengthened. This now widespread diagnosis should form the basis for overcoming the current decision-making paralysis. A centralized industrial policy based on the provision of European public goods would bring benefits to all Member States, but especially the weakest ones like Italy, and ensure the strengthening of the EU in the increasingly difficult international context.
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