Will the EU Change Its Focus and Reshape Its Budget?

by Professor Enrico Colombatto

Over the past few years, the image of the European Union has deteriorated. The economic activism practiced by the Juncker Commission and the European Central Bank has a disappointing record. The euro has not increased European competitiveness, given European companies easier access to world markets nor enhanced consumers’ purchasing power.

In fact, rather than injecting new verve into European firms’ activity, the EU’s centralized monetary policy has disrupted financial markets, disappointed millions of prudent savers and suffocated the banking system with waves of regulatory requirements. Fiscal discipline and common sense have been replaced with political necessity. Last but not least, the EU has not increased its geopolitical clout. Few would deny that the major technological or military players these days are the United States, China and Russia, not Europe.

Until recently, political tensions within the EU were on the rise, and dissent had become louder in many countries. Some leaders wanted to loosen their ties with Brussels. Others wanted to take some power away from the European Commission or even replace it with an undefined mix of national alliances, the composition of which would presumably vary following the circumstances and issues at hand.

The May 2019 elections to the European Parliament, however, were a turning point. New scenarios have come to light. What happened? And what can we expect?

Popular discontent

In May 2019, the anti-EU parties made substantial gains. With few exceptions, the anti-EU parties were successful not because of their anti-EU position, but rather in spite of it. They rode a wave of popular discontent against the traditional parties. Most voters were inclined to let the EU keep its influence and dictate at least some of the rules. The general opinion seems to have been that EU constraints, albeit sometimes less than desirable, would still be preferable to erratic domestic policy in the hands of new and undependable leaders.

This new strength of the EU – a reflection of domestic weakness in many key member states – has affected the behavior of a number of once vitriolic opponents of Brussels. A clear example is the repositioning of Italy’s Lega, whose recent attempts to acquire friends among the old parties and gain credibility in Europe are paying off at home.

The upshot is that the EU is currently going through one of its darkest moments – the bickering over the new Commission was startling – but few seem to care. The same applies to the old continent’s economic outlook. The ECB has all but run out of monetary ammunition, growth in major countries is suffering, technological champions are moving away and yet hardly anybody is seriously questioning the economic strategy – interest-rate manipulation, regulation and harmonization – that has characterized the EU project over the past 20 years.

Surveys can perhaps shed light on what happened and what people expect of Brussels, and possibly Frankfurt. Apparently, two key concerns define European public opinion: immigration (by far the most salient) and climate change (as a distinct phenomenon from the environment in general). Unemployment is way down the list, whereas social security (pensions) and taxation are at the very bottom. Support for the euro is strong, despite occasional and vociferous dissent.

Hence, the message is clear and may not reflect merely transitory anxieties. Since most Europeans do not seem overly worried about the economy and believe that national solutions are unlikely to effectively address the top two concerns, it is understandable that European residents pin their faith on some kind of multinational structure.

The EU is the obvious answer, which is both good and bad news.

Poorly equipped

The bad news is that the European project was not framed to meet these challenges, and EU authorities have a rather poor record on both accounts. Brussels and Frankfurt seem ill-equipped to meet people’s expectations. The good news is that the very existence of the EU is no longer in doubt, at least for the time being, and that EU authorities might give European companies a break after decades of relentless interventionism. In the longer run, one would also hope that success in these new areas – immigration and climate change – might give EU authorities the strength and legitimacy to bring about much-needed economic reforms inspired by free-market principles (deregulation and lighter taxation).

Will the EU meet these relatively new challenges? It depends on leadership, cohesion and cooperation within and among the EU bodies and agencies. In particular, it will depend on how Brussels interact with the member states and with the major non-European players.

Immigration is particularly difficult, especially because it is not necessarily a supranational problem. It becomes a supranational problem when a country fails to have a clear and consistent strategy and hopes that somebody else will come up with one. Some countries simply refuse to accept immigrants, some compensate other countries for keeping migrants in place, and some countries let almost everybody in as long as they move on somewhere else shortly afterward. Until now, the EU has done very little, other than providing a meeting room where some member states have tried to reach fragile understandings. Will the EU be able to do more?

Scenarios

The answer depends on whether the EC can enforce swift, thorough reforms of the labor market, judicial and educational systems in several member states. If not, then Brussels will need to strike satisfactory deals with Libya and Turkey, and let each member country or groups of countries develop their own strategies for dealing with migrants. Is this feasible? Probably, if the new EU High Representative of the Union for Foreign Affairs and Security Policy Josep Borrell has the charisma, energy and the resources to make his role effective and if he enjoys the full support of the newly appointed Commission.

Of course, this would require that Brussels rethink its expenditures, which is easier said than done, but not impossible. The 2019 EU budget currently amounts to some 166 billion euros, 39 percent of which goes to “sustainable growth and natural resources” (including agriculture), 6 percent to “administration” and only 2 percent to “security and citizenship.” Turkey is allegedly being paid some 6 billion euros to host 3 million refugees.

Dealing with the issues raised by climate change is problematic, but in this case, the EU’s task is easier. Brussels might not fulfill the expectations of those who believe that regulations, punitive taxation and “sustainable” (i.e. negative) growth is the only solution. Yet, the new Commission will certainly make sure its voice is heard loud and clear, and probably lead the way in a dangerous competition that will also include privileges for supposedly virtuous companies. The ECB has already announced its active engagement in this direction, and the banking system has obviously taken due notice.

To sum up, despite the many problems that plague the old continent, most Europeans do not seem overly worried about the economy. This gives the EU respite and might encourage the new Commission to follow people’s sentiments and play defensively when it comes to economic matters while trying to rebrand itself by upholding immigration and climate change as its new priorities. Will that happen? The answer is likely to be “yes” with climate change and “possibly” with regard to migration, especially if those flows diminish for reasons that have little to do with the European Union.

Enrico Colombatto is a professor of economics at the University of Turin, Italy. He is also director of research at the Institut de Recherches Economiques et Fiscales (IREF) in Paris.

Source: GIS Reports