A New Era for Europe

Carlo Carraro, Benoît Cœuré, Otilia Dhand, Barry Eichengreen, Melinda Mills, Hélène Rey, André Sapir, Daniela Schwarzer 01 March 2022

a

A

The European Union has responded decisively to the COVID crisis, putting in place major new policy instruments, most notably NextGenerationEU. Nevertheless, the medium- to long-term impact of the pandemic on the economy and society remains to be seen. To stimulate the public discussion on these issues, the EU Commissioner for the Economy, Paolo Gentiloni, invited us to reflect on the main economic, social, and environmental challenges the European economy will face in the post-COVID environment. In the report summarised in this article, we present our main findings. To secure the best outcome for the EU, we make recommendations in five areas: enabling the triple green, digital, and social transition; fair and effective taxation; moving towards a Health Union; strengthening Europe’s role in the world; and making the governance of the Union fit for purpose.

The EU has been in a crisis-fighting mode for most of the past decade, withstanding the global financial crisis, the euro crisis, and the refugee crisis in the years leading up to the global pandemic. The COVID-19 pandemic devastated the European Union, yet it also spurred an unprecedented level of cooperation and, perhaps most importantly, a new way of acting together. 

In responding to the current crisis, the EU notably departed from its track record of incremental, intergovernmental moves that made it difficult to act quickly or secure centralised fiscal support. The EU and its Member States rallied to meet the challenges of the global health threat with a jointly procured vaccine, and a new-generation economic recovery package financed by joint public borrowing. As a result, two years later the economy has begun to recover. 

Now is the time to build on the EU's short-run success by turning attention to the medium term. Public trust will be essential for the EU to succeed. The best way to earn this trust is by maintaining the momentum moving forward. The sense of urgency fostered by the pandemic must not be allowed to slip away. The EU needs to manage a triple transition in the areas of climate change, digital transformation, and social evolution. 

The EU will have a chance to set a course along one of three main scenarios: ‘Business as Usual’, ‘Fragmentation and Conflict’, or a ‘New Era’. Under the first option, the EU does not adapt as needed to protect the environment or give its citizens the skills they need to survive in a digital world, and the EU falls further behind its international counterparts. In the second scenario, EU policies actively unravel the alliances and economic programmes that have taken so long to build, with corresponding threats to political and economic stability. But we also have a better option: pursuing policies that will lead to a New Era within the EU and around the world.

In our report (Carraro et al. 2022), we explore the financial, political, and environmental challenges ahead and put forth a series of recommendations to secure the best outcome for the EU in the future. We structure our recommendations in five areas: enabling the triple transition; fair and effective taxation; moving towards a Health Union; strengthening Europe’s role in the world; and making the governance of the EU fit for purpose. 

Moving forward, it is important to recall that the EU’s problem is not underinvestment in general, and certainly not a lack of available savings to invest. Rather, the EU needs to commit to the triple transition and follow through on its reform and investment goals. Channelling public and private finance to the right projects will be key to carrying out the many transitional steps needed. 

On the public side, the EU should build on the successful completion of the NextGenerationEU (NGEU) project and create a sufficiently strong joint capacity to invest in provisioning European and global public goods. Moreover, it should adjust its fiscal rules to allow for prudent budgeting practices that fully account for the long-term improvement in fiscal sustainability such investments bring about. On the private-sector side, the EU can spur investment by strengthening Banking Union, moving faster toward Capital Markets Union, and strengthening incentives to choose climate-friendly investments over legacy industries and technologies.

The Union would do well to preserve the public financing component of the NGEU programme, perhaps by separating public borrowing from the temporary funding transfers put in place to ease the acute economic challenge. We propose an NGEU 2.0 that would instead distribute money evenly across the Union for projects that met a jointly agreed definition of public interest. This would provide financing for worthy projects, ease the burden on national balance sheets, and also preserve the safe asset of euro-denominated debt that NGEU made possible. As a follow-on effect, making large-scale EU debt issuance permanent would strengthen the euro as a global currency by bolstering the common currency's stature on worldwide financial markets. We further suggest the EU adopt a Sustainability and Growth Pact (SGP) 2.0 to improve upon the current Stability and Growth Pact. The SGP 2.0 is a prudential fiscal approach, which will ensure that fiscal planning takes into account large and predictable risks such as climate change. Investing to put the EU on a net-zero emission path is likely to pay for itself in the longer term as it will prevent part of the large costs linked to climate change which would otherwise affect public finances in the future.

The EU also needs to push for stronger public health measures at home and elsewhere, possibly using its influence to coordinate a global vaccine drive. The EU will need to be mindful of its global sway as well as its performance at home. If the EU’s climate protection efforts succeed, Europe will be well placed to offer worldwide leadership on the environment. If other countries sign on to New Era-style policies, these efforts will be more effective at limiting global warming as well as boosting the EU’s soft power. Furthermore, success on the world stage could reinforce political support for EU-level action within the Member States, combatting political polarisation. 

Trust will be essential for the EU to carry out its mission. The Union has seen a rise in inequality and economic divergence in recent years. Even before the pandemic, some countries and regions were lagging more and more behind the Single Market’s top performers. With the added strain of lockdowns and other public health measures, adverse effects have piled up for vulnerable groups like young adults, retirees, and women overall, who often have caregiving responsibilities and who may be more likely to work in fields that are not conducive to remote work and expose them directly to the virus.

EU policymakers, therefore, need to take a proactive approach toward supporting all levels of society and geographic regions. Keeping these social considerations in mind will be essential for the EU to make progress on its other goals of protecting the planet and succeeding in an increasingly digital world. Tax policy is one avenue for making society more equitable while also raising the funds necessary for public financing to do its part.

Geopolitical and geo-economic concerns should be paramount in guiding the EU’s approach to international affairs. We urge the EU to be mindful of relations with major world powers like the US, Russia, and China, and we recommend that global and EU-level policies be coordinated to complement and reinforce each other better. 

Finally, we recommend that the EU act now to strengthen its institutions. Local, national, and EU-level governments need to be more efficient, more transparent, and more accountable to their citizens. When some countries and regions have access to better public institutions than others, it makes it harder for economic growth to reach all corners of the EU equally.

The EU must do all it can to avoid an economic recovery where only some of its citizens benefit. Some segments of society are well positioned to make the most of digital opportunities and climate-friendly policies. These front-runners may find themselves on opposite ends of the political spectrum from communities that feel they have been left behind. Making EU institutions stronger and more accountable will counteract this trend and possibly act as a bulwark against populist movements.

Successful implementation of the triple transition is the only way to sustain sufficiently high growth that is environmentally and socially sustainable. Green transition is inevitable in the medium term. The later it starts and the longer it lasts, the higher the economic and social costs will be. However, without sufficient progress with digitalisation, and more broadly with promoting innovation, the macroeconomic costs of a more ambitious agenda for green transition could make such transition socially and thus ultimately politically untenable. The COVID crisis adds to this difficult trade-off because of the deep temporary decline it caused and the scars it may leave behind.

The EU now faces enormous challenges as well as a unique opportunity. We hope policymakers will make the most of the moment and set a course for a New Era of better days to come. 

References

Carraro, C, B Coeuré, O Dhand, B Eichengreen, M C Mills, H Rey, A Sapir and D Schwarzer (2022), A New Era for Europe. How the European Union can make the most of its pandemic recovery, pursue growth and prosperity for all, and establish global leadership, High-Level Group on post-COVID Economic and Social Challenges. 

a

A

Topics:  Covid-19 EU institutions EU policies

Tags:  NexGenerationEU, NGEU, European Union, Covid crisis

Professor of Environmental Economics, Ca' Foscari University of Venice and CEPR Research Fellow

President, French Competition Authority

Managing Director, Teneo

George C. Pardee & Helen N. Pardee Chair and Distinguished Professor of Economics and Political Science, University of California, Berkeley; and formerly Senior Policy Advisor at the International Monetary Fund. CEPR Research Fellow

Director, Leverhulme Centre for Demographic Science, University of Oxford and Nuffield College

Lord Bagri Professor of Economics, London Business School and CEPR Vice President and Research Fellow

Professor, Universite Libre de Bruxelles; Senior Fellow, Bruegel; Research Fellow, CEPR

Executive Director for Europ­­­­e and Eurasia, Open Society Foundations

Blogs&Reviews

Vox eBooks

CEPR Policy Research