In 2023, the EU’s economic policy agenda will likely focus on the bloc’s reaction to the US large-scale subsidy plan for green technologies, but fiscal rules, trade policy, the reconstruction of Ukraine, and financial stability will also be on the menu for EU policymakers.
The US Inflation Reduction Act caused anxiety all over the EU as the US bill, which took effect on 1 January, widely distributes subsidies for electric vehicles and for the production of other technologies necessary for the transition towards a greener industry.
Germany and France are particularly worried about the local content requirements that limit the subsidies to electric vehicles produced in the US. On 29 December, the US eased these requirements a little by conceding that the subsidies for commercial electric vehicles would also be available for vehicles produced in the EU.
Industrial policy and the level playing field
Still, the EU’s reaction to the US bill is likely to dominate the economic policy discussions at the start of this year. The European Commission announced both a relaxation of state aid rules as well as a very vaguely defined “European Sovereignty Fund” that should help finance the expansion of green industries.
The debate will pitch Germany against other countries that are less willing or financially less potent to dish out large subsidies to companies. Smaller countries fear that the single market’s level playing field is in jeopardy if large countries like Germany and France begin subsidising their industries on a large scale.
However, this would mean centralising more spending power in Brussels, which Germany’s liberal finance minister Christian Lindner has already rejected, and which might also meet with scepticism by small- to mid-sized member states that do not want to further increase the Commission’s power.
Most EU member states will agree on the need to find a more amicable solution with Washington. However, this might come at a cost.
The US drive for more autarchy in green and other technologies is fuelled by the wish to become more independent from China. Thus, the US might expect the EU to become more independent from China as well if it is to let EU companies benefit from its industrial policy push.
The geopolitics of supply chains
China is certain to play a role in other EU policy debates as well. Member states and the European Parliament are negotiating the anti-coercion instrument that would allow the EU to more effectively take countermeasures if a country tries to economically pressure an EU member state to do its bidding.
The Commission presented its proposal in December 2021 and both the Parliament and the member states have already found their negotiation positions. One of the key questions will be how much authority will be transferred to the Commission.
Another aspect of the more geopolitical trade environment is addressed by the Single Market Emergency Instrument (SMEI) that the Commission proposed last autumn.
It aims to secure the supply of strategically important goods by increasing control over critical supply chains. This year will see the negotiations both in Parliament and among member states on this file.
Some member states and industry representatives have criticised the amount of information companies would have to deliver, and the increased authority for the Commission.
The EU executive is expected to present in late March a “European critical raw materials act”, which intends to strengthen the security of supply over the most important raw materials for the European industry.
Another push for free trade
The push for more control over the most essential raw materials and products, meanwhile, might hamper one EU policy goal: the sustainability of supply chains.
Last February, the Commission presented its proposal for the corporate sustainability due diligence directive (CSDDD), also known as the due diligence law, to make companies active in the EU market liable for violations of human rights and environmental standards in their value chains.
Member states have agreed on a watered down version last December, and the European Parliament aims to reach a common text early this year. Industry associations and civil society organisations are on high alert, though, and are likely to fight a big lobbying battle over this file.
While recent years have seen a deteriorating trade environment due to the geopolitical tensions, the Commission is trying to put free trade agreements on the agenda again.
Having concluded negotiations with New Zealand and Chile in 2022, the Commission wants to score a big win this year by concluding a free trade agreement with South American trading bloc Mercosur in the second half of this year, under the Spanish presidency of the EU Council.
In support of this step, the Commission is expected to present a “new agenda for Latin America and the Caribbean” in April. At the same time, free trade discussions are ongoing with India, a potentially huge trading partner that has traditionally been very protectionist.
Too high prices, too few workers
On a macroeconomic level, there remains a lot of uncertainty. Fears of another recession have not yet materialised but might still come true if gas and energy shortages become realistic for the next winter.
A recession might be averted by a reopening of the Chinese economy, if Beijing sheds its zero-COVID policy. However, a restart of the Chinese economy might also give another boost to energy prices and thus fuel inflation – one of the great macroeconomic unknowns for this year.
Relatively weak labour unions suggest that a wage-price spiral is unlikely in the EU even if unemployment figures are currently at a record low.
The low unemployment goes hand-in-hand with the skills shortage experienced by many companies. The Commission has labelled 2023 the “EU year of skills” and is expected to present a digital skills and education package in February.
If inflation persists, however, the hawkish stance of the European Central Bank, which steadily increases its interest rates, might create headaches for highly indebted companies and member states who will have to refinance their debt at higher interest rates.
Fiscal rules and financial stability
This is where the debate on the fiscal rules is likely to become heated this year.
In late autumn, the Commission presented the guidelines for reforming the outdated fiscal rules for EU member states, seeking to give member states with a high debt to GDP ratio more flexibility and time to reduce their debt burden, thus allowing for more investments.
However, some member state governments oppose this approach and the Commission is yet to formally propose the changes. Any change of the fiscal rules will have to be finalised before member states determine their budgets for 2024, by September at the latest.
If the changes are not approved fast enough, the Commission might be pressured to deactivate the current fiscal rules by means of the general escape clause for a fifth consecutive year.
This pressure might grow even higher if member states feel forced to start providing more state aid for their companies in a subsidy race with the US or with France and Germany.
Next to the fiscal rules, the Commission might take another go at another eternal question of eurozone stability: the stability of the banking system. In March, the EU executive is expected to present a bank crisis management and deposit insurance package to plug the holes in the EU’s financial stability architecture.
Meanwhile, negotiations are ongoing between member states and the Parliament on capital requirements for banks and insurance companies. In both files an agreement can be expected in this year. Also in both files, civil society organisations demand stricter rules, especially regarding the financial stability risks of climate change, while many in the financial industry argue for more flexibility.
The EU budget under scrutiny
Budget issues plague national governments but also the EU budget itself.
2022 showed some promising signs that the rule of law conditionality mechanism of the EU budget might be a useful tool to force autocratic member states to implement some reforms. This year will show whether Hungary will actually reform in the face of withheld EU funds.
Moreover, the long-term EU budget, the so-called multi-annual financial framework (MFF), will also be ripe for a review in mid-year. After a series of crises and rising prices, the Commission and the Parliament assume that the available financial resources are no longer enough to face the challenges.
However, with member state budgets also under stress, it will be tough to secure fresh EU resources.
The question of common EU debt or other sources of EU own resources is likely to bubble up again, especially as two new potentially large financing needs have to be met somehow, the “European Sovereignty Fund” and the reconstruction of Ukraine that is likely to cost several hundred billion euros.
Approving a few billion euros of urgently needed macrofinancial aid for Ukraine by means of member state guarantees already proved very hard in 2022.
This year will see the discussion over much larger sums of money, either because the war will be over and reconstruction can begin on a large scale, or because the war is continuing and the EU must support the Ukrainian war economy.