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1. What should be done about Google’s quasi-monopoly in search? Mandatory data sharing versus AI-driven technological competition

Author:
Bertin Martens
Publication Date:
07-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
The first part of this paper focuses on competition between search engines that match user queries with webpages. User welfare, as measured by click-through rates on top-ranked pages, increases when network effects attract more users and generate economies of scale in data aggregation. However, network effects trigger welfare concerns when a search engine reaches a dominant market position. The EU Digital Markets Act (DMA) imposes asymmetric data sharing obligations on very large search engines to facilitate competition from smaller competitors. We conclude from the available empirical literature on search-engine efficiency that asymmetric data sharing may increase competition but may also reduce scale and user welfare, depending on the slope of the search-data learning curve. We propose policy recommendations to reduce tension between competition and welfare, including (a) symmetric data sharing between all search engines irrespective of size, and (b) facilitate user real-time search history and profile-data portability to competing search engines. The second part of the paper focuses on the impact of recent generative AI models, such as Large Language Models (LLMs), chatbots and answer engines, on competition in search markets. LLMs are pre-trained on very large text datasets, prior to usage. They do not depend on user-driven network effects. That avoids winner-takes-all markets. However, high fixed algorithmic learning costs and input markets bottlenecks (webpage indexes, copyright-protected data and hyperscale cloud infrastructure) make entry more difficult. LLMs produce semantic responses (rather than web pages) in response to a query. That reduces cognitive processing costs for users but may also increase ex-post uncertainty about the quality of the output. User responses to this trade-off will determine the degree of substitution or complementarity between search and chatbots. We conclude that, under certain conditions, a competitive chatbot markets could crowd out a monopolistic search engine market and may make DMA-style regulatory intervention in search engines redundant.
Topic:
Science and Technology, Governance, European Union, Digital Economy, Innovation, Artificial Intelligence, and Competition
Political Geography:
Europe

2. What would Europeans want a European defence union to look like?

Author:
Francesco Nicoli, Brian Burgoon, and David Van der Duin
Publication Date:
06-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
While the Russian invasion of Ukraine has created a new momentum for EU defence integration, the political feasibility of such integration remains disputed, as it may entail both additional financial costs and a loss of sovereignty. Furthermore, design of defence integration is inherently multidimensional, differing in terms of scope and level, governance and sources of financing, among other dimensions. To determine the extent of public support for European security cooperation, we conducted the first conjoint experiment ever fielded on public support for alternative defence union designs. We carried out a pre-registered, randomised conjoint experiment on a highly representative sample of the French, German, Italian, Dutch and Spanish populations in November 2022. This multidimensional conjoint experiment allows us to determine the causal link between policy features of potential defence pacts, and public support or opposition to such policy. Our results show that policy packages receiving the most support require joint EU-level governance, joint purchases of military equipment through joint procurement, and repurposing of existing national expenditure as the preferred form of financing. All in all, our results show not only that there is considerable cross-border support for defence integration in Western Europe, but also that citizens in different Western European countries have generally aligned preferences regarding the actual design of such policy, indicating that a compromise policy is feasible and publicly supported. Furthermore, our results support ongoing research on the nature of European solidarity at times of crisis, suggesting that European citizens are willing to support the creation of joint institutions and policies to face issues of common concern, and therefore indicating that major crises open important windows of opportunity to re-shape EU-level policies and institutions.
Topic:
Defense Policy, Governance, European Union, and Regional Security
Political Geography:
Europe

3. China’s quest for innovation: progress and bottlenecks

Author:
Alicia Garcia-Herrero and Robin Schindowski
Publication Date:
06-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
As the Chinese economy continues to decelerate, the central government is investing heavily in innovation, doubling down on research and development (R&D) spending and STEM-oriented human capital. In this paper, we assess China’s progress so far, looking at the inputs to innovation (R&D and human capital) as well as intermediate targets, such as scientific research and patents. We then evaluate how China has fared with respect to the ultimate goal of commercialising this progress, by looking at the value-added of Chinese exports and the overall productivity of the economy. We identify three potential bottlenecks that might be hindering the translation of China’s innovation efforts into productivity growth.
Topic:
Industrial Policy, European Union, Economic Growth, Innovation, and COVID-19
Political Geography:
China, Europe, and Asia

4. Antitrust issues raised by answer engines

Author:
Christophe Carugati
Publication Date:
06-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Rapid development of generative artificial intelligence chatbots like ChatGPT is leading search engine providers to move from search to answer engines. Unlike search engines, which provide search results in the form of blue links to content creators, answer engines generate personalised answers through a conversation with end users. This revolution impacts the internet ecosystem of content creators and the digital advertising market. This paper outlines some early antitrust issues related to answer engines, from the transition from search to answer engines (sections 2 and 3) and the response competition authorities should adopt (section 4). It finds that search and answer engines complement and compete with each other. While the answer-engine market is still at an early stage of development, it already raises some competition issues in relation to data scraping, vertical integration and unfair terms and conditions. Intervention by competition authorities is more likely than not to prevent market power in this new market. In this regard, competition authorities should act to preserve dynamic competition and minimise adverse effects on content creators. Finally, the paper concludes with several research questions for future research (section 5).
Topic:
Science and Technology, Governance, European Union, Digital Economy, Innovation, Artificial Intelligence, and Competition
Political Geography:
Europe

5. Global trends in countries‘ perceptions of the Belt and Road Initiative

Author:
Alicia Garcia-Herrero and Robin Schindowski
Publication Date:
04-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Drawing on global media reports, we conduct a sentiment analysis of the image of China’s Belt and Road Initiative (BRI) and the evolution of its image over time. Our main finding is that perceptions of the initiative deteriorated significantly in many geographies from 2017 to 2022. The notable exception is in sub-Saharan Africa where the BRI’s image remains positive, even if slightly less so than in the past. This is notwithstanding increases in debt levels with China, much of which now face potential restructuring. Furthermore, we find significant inter- and intra-regional differences in the average sentiment towards China’s landmark project, as well as a much worse image of the initiative in countries which, until today, are not part of the BRI. Finally, we focus on the European Union, Africa and China’s immediate neighbourhood to better understand the complexities behind the perceived benefits and challenges associated with China’s Belt and Road Initiative.
Topic:
Bilateral Relations, European Union, Geopolitics, Economy, and Trade
Political Geography:
China, Europe, and Asia

6. Pro- and anti-competitive provisions in the proposed European Union Data Act

Author:
Bertin Martens
Publication Date:
01-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
The proposed European Union Data Act gives users access and portability rights to the data generated by their use of tangible digital products and devices. This pro-competitive measure weakens the de-facto monopolistic control product manufacturers have over product data. However, the Data Act would also grant manufacturers a de-jure right to monopolistic pricing of data transfers to third-party service providers, restoring their control over data markets. Other anti-competitive provisions include restrictions on the use of data for competition purposes and a prohibition on transfering data to platforms identified as gatekeepers under the EU Digital Markets Act. Unnecessarily fuzzy definitions of products and data that fall under the Data Act would create uncertainty in implementation and incoherence with other EU data regulations. The Data Act should be simplified by dropping anti-competitive provisions and granting users and third-parties selected by users free access to all data generated by the use of a product or a service. This would increase competition in data-driven services and prevent users paying twice for their data. It would not disincentivise producers from investing in data-driven products and services. A further step could be the creation of a level playing field between producers and users in data-access rights. This can be achieved by introducing the principle of mutual exhaustion of data rights at point of sale. This would put all data co-generating parties in a position to generate economies of scale and scope in data aggregation, or data-driven externalities, to maximise innovation.
Topic:
Markets, Governance, European Union, and Digital Economy
Political Geography:
Europe

7. The EU can manage without Russian liquified natural gas

Author:
Ben McWilliams, Giovanni Sgaravatti, Simone Tagliapietra, and Georg Zachmann
Publication Date:
06-2023
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The European Union has committed to eliminate all Russian fossil-fuel imports by 2027. Progress has been made, with sanctions on oil and coal already introduced. The glaring exception is natural gas, on which the EU has so far refrained from imposing limitations, owing to greater dependence on Russia. Nevertheless, pipeline gas imports have fallen by four-fifths following Russia’s weaponisation of gas supplies. However, Russia’s exports of liquified natural gas (LNG) to the EU have increased since the invasion of Ukraine. The EU needs a coherent strategy for these LNG imports. Our analysis shows that the EU can manage without Russian LNG. Anticipated impacts are not comparable to those felt in 2022 as Russian pipeline gas dried up. The regional impact would be most significant for the Iberian Peninsula, which has the highest share of Russian LNG in total gas supply. Meanwhile, the global LNG market is tight, and we anticipate that Russia would find new buyers for cargos that no longer enter Europe. We discuss the options available to the EU. Wait-and-see implies delaying any action until 2027, while soft sanctions would discourage additional purchases but not break long-term contracts. We argue instead for an EU embargo on Russian LNG, to reduce exposure to an unreliable and adversarial entity, and to limit the extent to which EU consumers fund the Russian state. The embargo may be designed to allow purchases only if they are coordinated via the EU’s Energy Platform, with limited volumes and below market prices. This could be accompanied by the implementation of a price cap on Russian LNG cargos that use EU or G7 trans-shipment, insurance or shipping services.
Topic:
European Union, Gas, Energy, and Green Economy
Political Geography:
Russia and Europe

8. Rebooting the European Union’s Net Zero Industry Act

Author:
Simone Tagliapietra, Reinhilde Veugelers, and Jeromin Zettelmeyer
Publication Date:
06-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
In March 2023, the European Commission published a legislative proposal for an EU response to the US Inflation Reduction Act: the Net Zero Industry Act (NZIA). It is an unconvincing policy proposal, both for what is in it and for what is not in it. The proposal has five problematic aspects. First, it takes a top-down approach, in which specific technologies are selected for preferential treatment. Preferable would be a technology-neutral approach open to all current and future technologies that help tackle the net-zero challenge. Second, its blanket 40 percent self-sufficiency benchmark for EU domestic cleantech manufacturing by 2030 sends a protectionist signal, is poorly defined and does not reflect the differences in EU capacity in the cleantech sector. Third, it relies on the acceleration of permitting procedures as the main policy instrument, although this is not the main obstacle to cleantech investment in the EU. Fourth, it proposes more strategic use of public procurement. While this is an objective to be supported, the specific proposals are likely to be ineffective because of the way they are designed. Fifth and not least, the NZIA would lack a governance structure that would ensure effective implementation. In addition, the NZIA does not tackle three critical issues. It does not address investment obstacles related to failures of the single market. It does not tackle the coordination problem at the core of developing an EU green industrial policy. Finally, it does not develop an EU-level funding strategy, but rather relies on state aid, with the related risk of fragmentation. The European Parliament and EU countries in the Council of the EU should reboot the proposal and refocus its objectives, sharpening its limited instruments, improving its governance, and adding financial incentives to ensure implementation. In parallel, the EU should develop a broader green industrial policy strategy that leverages the single market in a credible manner, building a solid new governance framework and a new EU-level funding approach.
Topic:
Climate Change, Industrial Policy, Governance, European Union, Trade Policy, and Industry
Political Geography:
Europe

9. Can Chinese growth defy gravity?

Author:
Alicia Garcia-Herrero
Publication Date:
06-2023
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Chinese growth, astounding since the beginning of the reform era, has slowed in the last decade. We offer a baseline estimate (based on the current trend) of China’s medium-term growth rate, which we project to fall to 2.4 percent by 2035. Several factors create uncertainty around this baseline. China’s rapid aging is already incorporated into our long-term growth scenario, but its impact on growth will depend on how China’s remaining urbanisation process spreads over time, how the shrinking labour supply affects labour productivity and whether the decline in total factor productivity growth, reflecting the lack of reform during the last decade and possibly the rising role of the state, can be reversed. Investment in China, for decades the largest factor in China’s growth, is expected to contribute less to growth given the increasingly low return on assets, particularly on state-led investment. The rapid piling up of public debt is also becoming a heavy burden for the Chinese economy. Finally, the COVID-19 pandemic may have left significant scarring effects, such as structurally high youth unemployment and low investment confidence. On the upside for China, the rise in human capital and research and development expenditure may support innovation and growth, but the magnitude of this effect is uncertain, because it is unclear if higher innovation will translate into higher total factor productivity, and because of the United States’s push to contain China technologically.
Topic:
Industrial Policy, European Union, Economic Growth, and COVID-19
Political Geography:
China, Europe, and Asia

10. The rising cost of European Union borrowing and what to do about it

Author:
Gregory Claeys and Conor McCaffrey
Publication Date:
05-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Debt issuance by the European Commission on behalf of the European Union has increased massively. Of the approximately €400 billion in outstanding EU debt as of May 2023, 85 percent has arisen from borrowing since 2020. Large-scale borrowing is expected to continue until 2026 to fund the remainder of NextGenerationEU, and concessional loans to support Ukraine. When these programmes were launched, interest rates were at historic lows – even negative for maturities below 10 years. However, interest rates rose sharply in 2022. Beyond the widespread rise in euro-denominated interest rates due to monetary tightening by the European Central Bank in response to the inflation surge, the EU has also faced a widening of the spread between its yields and those of major European issuers, including France and Germany. This widening is driven by a combination of market features, circumstantial factors and institutional features. The EU cannot affect the overall cyclical movement of interest rates and will have to learn to live with it, like sovereigns do. However, the European Commission should continue to try to narrow the spread with major European sovereigns by further developing the relevant market infrastructure and improving its issuance strategy. The Commission will not be able to do this alone. Institutional developments, including progress on the development of new own resources and a long-term substantial presence in the bond market, will be necessary to fully reap the benefits of EU borrowing. A large share of EU borrowing (around €421 billion in total by the end of 2026, in current prices) is intended to finance unprecedented non-repayable support: Recovery and Resilience Fund grants and additional funding for existing EU programmes under the EU budget. The interest costs associated with this part of the debt lie with the EU budget. Our estimates suggest that, because of the high current and expected levels of interest rates, this cost could be twice as high as what was initially estimated at the start of the EU’s 2021-27 budget cycle. As a result, because interest costs for the borrowing of the non-repayable support are accounted for under the EU budget’s ‘expenditure ceiling’, this will exert further pressure on the funding of important EU programmes, which are already affected by inflation. The EU should thus quickly review how interest costs are accounted for in its budget and financial framework.
Topic:
Debt, Budget, European Union, and European Commission
Political Geography:
Europe

11. Adjusting to the energy shock: the right policies for European industry

Author:
Giovanni Sgaravatti, Simone Tagliapietra, and Georg Zachmann
Publication Date:
05-2023
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
In 2022, overall European Union industrial employment and output increased above 2021 levels, despite rocketing energy prices. However, output declined from energy-intensive industries including basic metals, chemicals, non-metallic minerals and paper, for which energy costs represent a much bigger share of production costs than for less energy-intensive manufacturing. Energy prices are likely to remain above historic levels for the foreseeable future. In its industrial strategy response to this context, the EU must ask first whether the energy-intensive parts of the value chain should be outsourced permanently. Conditional on the answer being no, the second question is how to reduce energy prices to ensure the competitiveness of the energy-intensive productions stages that remain in the EU. First, the EU could bridge the high energy price period with unconditional subsidies, which seems to be the preferred strategy currently. This will avoid irreversible large-scale relocation abroad but is expensive, does not help to drive down energy prices and poses risks of fragmentation within the EU. It will only succeed if internationally competitive energy supplies are made available quickly. Second, the EU could support decarbonised production processes built on large-scale deployment of domestic renewables, grid interconnectors and storage. This would accelerate the green transition and reduce clean-tech prices worldwide. However, EU taxpayers would bear the cost of new technologies, without any guarantee of solving the current cost-competitiveness issue. Third, the EU could facilitate imports of energy-intensive products, while helping EU industry move to higher value-added parts of the value chain. Subsidies could be given directly to industrial sectors that have not become structurally uncompetitive, while bringing down energy demand and thus energy prices. However, this strategy would result in temporarily higher unemployment and factory closures in energy-intensive industries, would need to accommodate concerns over excessive reliance on imports and would need to be engineered to address carbon leakage. Policymakers should implement a mix of these policies. The EU should subsidise existing energy-intensive industries only in clearly justified cases, while deciding which energy-intensive products can be left to international market forces. By choosing which decarbonisation investments should be supported in Europe, the EU can combine industrial competitiveness and environmental sustainability.
Topic:
Industrial Policy, European Union, Value Chains, Energy, and Green Economy
Political Geography:
Europe

12. The longer-term fiscal challenges facing the European Union

Author:
Jeromin Zettelmeyer, Gregory Claeys, Zsolt Darvas, Lennard Welslau, and Stavros Zenios
Publication Date:
04-2023
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The pandemic and subsequent price shocks triggered by Russia’s invasion of Ukraine, have increased longer-term fiscal pressures in the European Union through higher debt, higher expected real interest rates and higher public investment needs. This Policy Brief makes some simple quantitative assessments of those effects and discusses policy implications, with the following results. First, long-term increases in primary fiscal balances required to offset higher debt and higher expected real interest rates are in the range of 0.5 percent to 1.5 percent of GDP for most EU countries. However, because of pre-existing differences in fiscal space, not all countries will need to undertake that adjustment, while some countries may need to adjust by substantially more. Among the 21 EU countries for which we have data to undertake this analysis, 14 will need to adjust by more than they were planning to do by 2025. Second, the required additional fiscal adjustment looks manageable, although it is substantial in some cases. To achieve medium-term debt-reducing primary balances, several EU countries will need to raise primary balances by more than 2 percent of GDP above their 2025 target, but no country will need additional fiscal adjustment of more than 3 percent of GDP. Third, market data suggests that the future path of real interest rates is very uncertain. Compared to the period immediately preceding the pandemic, longer-term expected real interest rates have increased by about 2 percentage points but remain low on average, at about 1 percent in real terms. Future developments depend on whether the structural factors that led to low interest rates in the first place persist or unwind. While interest rates might decline again, fiscal policymakers should not make plans that assume such a decline. Fourth, public spending needs for additional defence and climate spending run well above 1 percent of GDP per year. These needs do not appear to have been incorporated into current fiscal baselines, and hence will come on top of the adjustment described above. To ensure that fiscal adjustment does not defeat its purpose by slowing growth, it is essential that it is conducted gradually. In countries that require such adjustment, it should start as soon as cyclical conditions allow.
Topic:
Governance, European Union, Finance, and Fiscal Policy
Political Geography:
Europe

13. The potential of sovereign sustainability-linked bonds in the drive for net-zero

Author:
Alexander Lehmann and Catarina Martins
Publication Date:
03-2023
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
European Union governments have for some years issued green bonds that raise funds for climate-related spending. These bonds have been received well in capital markets but because they promise a certain use of proceeds, they complicate budget management and may not match investors’ claims of having an impact on national climate policies. Public commitments made by major investors and asset owners suggest that limiting climate transition risks and the assessment of the alignment of sovereigns with net-zero targets will now become key determinants of portfolio allocation. Yield differentials in bond markets are already beginning to reflect transition risks that arise from the inadequate pursuit by issuers of climate targets. Unlike standard green bonds, sustainability-linked bonds (SLBs) create a link between performance (outcome) indicators and the financial terms of the bonds. SLBs have grown rapidly in importance in private markets and are now being assessed by sovereign issuers. We show that sovereign SLBs could help incentivise climate policies in EU countries, and accelerate emission reductions. They would be an effective tool for signalling commitment. A common EU framework for issuance by EU countries would enhance capital market integration and the transparency of national policies, and would limit climate transition risks in EU capital markets more broadly.
Topic:
Climate Change, European Union, Finance, Carbon Emissions, and Sovereign Bonds
Political Geography:
Europe

14. Phased European Union electricity market reform

Author:
Georg Zachmann and Conall Heussaff
Publication Date:
03-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
In an environment of record-breaking electricity prices driven by a gas supply shock and below-average electricity generation, reforming the design of the European electricity market is seen as a means to delink consumer costs from volatility in short-term power markets. Electricity markets should meet three objectives: fairness, optimal investment and optimal operation. The current market design has achieved these objectives to varying degrees. Faced with the unprecedented shock, the electricity system has operated well, but electricity markets have struggled to achieve fair outcomes and investments have not been driven by market-based cashflows. Further complicating market reform, the power system is being changed radically by decarbonisation. The electricity system is becoming more decentralised and digitalised, with an active demand side. These transformations will have consequences for the optimal electricity market design in the later stages of the energy transition. Reform proposals have focused on increasing the share of long-term contracts in the remuneration of generation technologies. Different long-term contracting regimes have structural implications for the functioning of electricity markets, especially in relation to the roles of the state and the market, and the responsibilities of national governments and European Union institutions. A phased approach should be taken to EU electricity market design reform. In the near-term, reform should seek to protect consumers and drive investment. An assessment should also be made of what market design will best meet the fairness, investment and operational objectives in a decarbonised system, and what the conceptual role of electricity markets should be during the transition. This process should start as soon as possible so well thought-through proposals are available when the next European Commission takes office.
Topic:
Markets, Reform, European Union, Electricity, and Green Economy
Political Geography:
Europe

15. How Europe should answer the US Inflation Reduction Act

Author:
David Kleimann, Niclas Poitiers, André Sapir, Simone Tagliapietra, Nicolas Veron, Reinhilde Veugelers, and Jeromin Zettelmeyer
Publication Date:
02-2023
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The 2022 United States Inflation Reduction Act (IRA) is a significant and welcome climate law. It also includes trade-distortive subsidies, including local-content requirements prohibited under World Trade Organisation rules – the first time the US has done this and a blow to the international trading system that could trigger protectionism in other countries. The expected IRA green subsidies are of similar size to those available in the European Union, except in renewable energy production, where EU subsidies remain far larger. However, there are important qualitative differences. Some IRA subsidies discriminate against foreign producers while EU subsidies do not. IRA clean-tech subsidies are simpler and less fragmented, and they focus mainly on mass deployment of green technologies rather than innovation. The IRA will likely harm Europe through its competitiveness effect, while it will likely benefit climate transition in Europe and most of the rest of the world. However, the magnitude of both effects is very uncertain, partly because the IRA will induce substitution away from Chinese inputs. By forcing the reorganisation of supply chains, the IRA may make the EU and other economies more competitive relative to China. It may also initially slow the green transition. But in the longer run, this effect should be outweighed by the reduction in the cost of clean tech driven by the IRA. In responding to the IRA, the EU should not just seek to protect its competitiveness relative to the US but to pursue broader aims, including competitiveness in general, speedy decarbonisation and broad foreign policy and development policy goals. These aims imply that the EU should not impose local-content requirements of its own, should not loosen state-aid rules and should not mimic the IRA’s approach to manufacturing subsidies. Rather, it should focus on boosting its structural competitiveness, formulate a trade policy response that includes reform of the international subsidies regime, and develop an instrument for EU-level subsidies that focuses on early-stage development and increasing EU resilience to trade disruptions.
Topic:
Governance, European Union, Inflation, and Trade
Political Geography:
Europe

16. Decarbonisation of the energy system

Author:
Georg Zachmann, Alexander Roth, Ben McWilliams, Franziska Holz, Robin Sogalla, Frank Meissner, and Claudia Kemfert
Publication Date:
01-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Three quarters of the European Union’s greenhouse gas emissions stem from burning coal, oil and natural gas to produce energy services, including heating for buildings, transportation and operation of machinery. The transition to climate neutrality means these services must be provided without associated emissions. It is not possible today to determine tomorrow’s optimal clean energy system, largely because the cost, limitations and capability developments of competing technologies cannot be predicted. Energy systems with widely diverging shares of ‘green fuels’, in the form of electricity, hydrogen and synthetic hydrocarbons, remain conceivable. We find the overall cost of these systems to be of the same order of magnitude, but they involve larger investments at different stages of value chains. A large share of synthetic hydrocarbons would require more investment outside the EU, but less in domestic infrastructure and demand-side appliances, while electrification requires large investment in domestic infrastructure and appliances. Current projections show an overall cost advantage for direct electrification, but projections will evolve and critical players may push hard for alternative fuels. Policy will thus play a major role in shaping this balance. Political decisions should, first, push out carbon-emitting technology, primarily through carbon pricing. The more credible and predictable this strategy is over the coming decades, the smoother will be both divestment from brown technologies and investment in green technologies. Second, policy needs to help ensure that enough climate-neutral alternatives are available in time. Clear public support should be given to three system decisions about which we are sufficiently confident: the massive roll-out of renewable electricity generation; the electrification of significant shares of final energy consumption; and rapid phase-out of coal from electricity generation. For energy services where no dominant system has yet emerged, policy should forcefully explore different solutions by supporting technological and regulatory experimentation. Given the size and urgency of the transition, the current knowledge infrastructure in Europe is insufficient. Data on the current and projected state of the energy system remains inconsistent, either published in different places or not at all. This impedes the societal discussion. The transition to climate neutrality in Europe and elsewhere will be unnecessarily expensive without a knowledge infrastructure that allows society to learn which technologies, systems, and polices work best under which circumstances.
Topic:
Climate Change, European Union, Carbon Emissions, Decarbonization, and Energy
Political Geography:
Europe

17. Does Europe need a Health Union?

Author:
Anne Bucher
Publication Date:
02-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Health outcomes in the European Union are good by international standards, even compared to other developed economies, and improved continuously before COVID-19. This reflects the alignment of the objectives of improving health and wellbeing with the overall socio-economic objective of prosperity, and suggests that a radical overhaul of EU health policy is not needed. However, the EU could benefit from closer integration in some areas and be more effective in delivering a high level of health protection. Action could be taken in the following areas: The European Commission’s November 2020 Health Union package to increase resilience to cross-border health threats is ambitious, in particular with the establishment of the Health Emergency Response Authority, which extends the scope of cooperation in health emergencies. The EU should pursue further the Health Union approach to address cross-border externalities and enhance health security. It could, for instance, do more to tackle anti-microbial resistance, or define minimum requirements for the resilience of health systems. For non-communicable diseases, the EU should tap the economies of scale of research and knowledge organised at EU level, and put in place systems for the surveillance of non-communicable diseases and consolidation of scientific knowledge. This could be achieved through an extension to non-communicable diseases of the European Centre for Disease Prevention and Control mandate. The ‘Health in all Policies’ principle is a key channel to deliver good health outcomes at EU level. EU scientific agencies provide health risk assessments in a number of areas, but the EU should better organise, coordinate and consolidate the scientific knowledge that underpins health-protection measures in sectoral legislation, and should more systematically apply better regulation rules to the health impacts of EU policies. The EU should support the digital transformation of health systems and set high targets for the European Health Data Space initiative, which is a critical infrastructure for the future of health research, regulation and policymaking. Several non-health EU policy objectives (cohesion policies, European Pillar of Social rights, economic governance) are linked to the performance of health systems. A common understanding on how to measure this performance would inform these policies in a consistent way. Moreover favourable health outcomes in the EU have not reduced health inequalities, which remain high between and within EU countries. Monitoring of health inequalities, including those related to access to and quality of healthcare, should be improved as an initial step.
Topic:
Health, European Union, Regional Integration, and COVID-19
Political Geography:
Europe

18. Better pensions for the European Union’s self-employed

Author:
Rebecca Christie, Monika Grzegorczyk, and Diane Mulcahy
Publication Date:
03-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Self-employed workers are taking on a larger role in the European economy, particularly workers who operate as independent contractors rather than as small-business owners with their own workforce. Becoming self-employed offers flexibility and entrepreneurial potential, but can limit access to state-sponsored pension schemes. We assess the current state of pension policy across the European Union and take a more detailed look at five countries to see how independent workers are treated compared with their traditionally employed counterparts. We consider how policymakers might adjust or even overhaul their pension offerings to improve opportunities for the self-employed, while being mindful of the broader policy context in areas like innovation and overall tax burdens. In assessing policy options, it is useful to determine whether government, companies or individuals will be primarily responsible for paying for better pensions, and we structure our suggestions accordingly. Governments can make programmes more widely available, more consistent for all types of work and easier to understand and take part in. Companies can be encouraged to make pension contributions for all their workers, not just those they hire full-time. Individuals can be encouraged to set aside more for retirement with tax incentives, benefits flexibility and other policy measures. Access to pensions for low-income, more vulnerable self-employed workers should be considered separately from access for higher-paid workers. The current system does not facilitate this and indeed inhibits it in jurisdictions where a minimum income is required to join self-employment pension schemes.
Topic:
Labor Issues, European Union, Economy, and Self-Employment
Political Geography:
Europe

19. Measuring the intangible economy to address policy challenges

Author:
Marie Le Mouel
Publication Date:
04-2022
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
European economies exhibit the so-called ‘productivity puzzle, whereby investments’ in digital technologies and intangible assets have not delivered the hoped-for productivity gains. Explanations for this puzzle lie in the unequal ability of companies to make use of these technologies, and resulting patterns of market concentration, productivity divergence and dampened business dynamism. Access to firm-level data is essential to properly understand these rich dynamics. The purpose of the first work package of the MICROPROD project was to improve the firm-level data infrastructure, expand the measurement of intangible assets and enable cross-country analyses of these productivity trends. The MICROPROD researchers developed the Micro Data Infrastructure (MDI), a centralised platform that harmonises access to the firm-level data gathered by national statistical institutes. The data infrastructure developed through this work package offers valuable insights into the evolution of productivity across the European Union and into the effects of digitalisation and globalisation. It can thus generate important evidence for designing policies to support the European Commission’s policy objectives, especially for achieving the digital and green transitions. In addition, the research enabled by this data infrastructure and carried out within the context of MICROPROD can provide valuable lessons about the response of European economies to the COVID-19 pandemic and its aftermath.
Topic:
Infrastructure, European Union, Digital Economy, Economy, and COVID-19
Political Geography:
Europe and Global Focus

20. Raising EU productivity through innovation

Author:
Reinhilde Veugelers and Frederic Warzynski
Publication Date:
06-2022
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Research and development is seen as a key contributor to growth because it generates knowledge, leading to new or improved products through product innovation, and makes firms more efficient at producing goods through process innovation. Firm level studies generally find evidence of strong positive productivity effects for firms that invest in R&D. In this context, digital systems could be an important driver of productivity growth, particularly in combination with investments in R&D. But there has been little hard evidence of a significant productivity boost from digital technologies. How the relationship between productivity growth, innovation and digital technology adoption plays out is particularly important for the European Union, where productivity growth has long been weak. Researchers from the MICROPROD project have assessed the effect of technology investment on productivity and performance. Combining recent unique firm-level data and state-of-the art research methodologies, MICROPROD research provides a better overview of which firms are most likely to adopt digital technologies and to innovate, and to turn these investments into productivity growth.
Topic:
European Union, Investment, Innovation, and Productivity
Political Geography:
Europe

21. How to make the EU Energy Platform an effective emergency tool

Author:
Walter Boltz, Klaus-Dieter Borchardt, and Thierry Deschuyteneer
Publication Date:
06-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Uncertainty about the supply of Russian natural gas is causing extremely high and volatile European gas and electricity prices. European Union countries may struggle to import sufficient volumes of natural gas at reasonable prices. During the summer, the imperatives are to fill storage sites sufficiently in a coordinated manner and to organise sufficient import volumes to replace a substantial share of gas that might no longer come from Russia. Coordination is essential to ensure that disruptions during difficult winter months do not lead to a break-up of the EU internal gas market with potentially serious political repercussions. One part of the EU response is establishment of an EU Energy Platform for the purchase of gas, LNG and hydrogen. This aims to pool demand to leverage the bloc’s economic clout, international outreach to reliable partners and efficient use of existing infrastructure. EU leaders have backed the plan but it has not yet been translated into a feasible scheme. The platform should be developed into an effective emergency tool to safeguard gas supply in case Russian flows stop. We detail two complementary proposals to achieve this. First, there should be EU-wide auctioning of remuneration for filling storage sites in specific regions. Companies would remain responsible for all stages of the value chain, benefitting from remuneration and in return offering the market operator some control over how this gas is released during winter months. Second, EU demand for additional LNG quantities, and the sourcing of this on international markets, should be coordinated through a platform, creating a transparent market for these volumes. These mechanisms would resolve the prevention paradox and prevent free-riding. If EU countries buy gas jointly, they will find it much easier to let markets allocate scarce volumes across borders in case of a complete stop to Russian supplies. . This would reduce the risk of energy market fragmentation, as well as the subsequent energy security, economic and political impacts of a shock that would hit member states very differently.
Topic:
Oil, European Union, Gas, and Energy
Political Geography:
Russia, Europe, and Ukraine

22. Legal options for a green golden rule in the European Union’s fiscal framework

Author:
Zsolt Darvas
Publication Date:
07-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Achieving the European Union’s climate goals and decoupling from Russian energy will require a massive increase in green public spending, which will be difficult when EU fiscal rules requiring fiscal consolidation are reinstated. The two major proposals to address the conflicting goals of fiscal consolidation and increased green public investment needs are a possible new European climate investment fund and a green golden rule. The latter would exclude any increase in net green public investment from the fiscal indicators used to measure compliance with fiscal rules, for countries with sound public finances. An EU climate fund and a well-designed green golden rule would be equivalent in terms of project selection, implementation and control procedures. If the climate fund does not involve redistribution across member states, then the treatment of related spending and consequent borrowing in national fiscal indicators and in the EU’s fiscal framework would be the same. New regulations would be needed to set up both the climate fund and the green golden rule. Special legislation would be needed to exempt the subsequent climate expenditures from EU fiscal rules in both cases. A climate fund financed by EU borrowing with redistributive effects across countries would likely result in the exclusion of the fund’s activities from national fiscal indicators and EU fiscal rules without any legislative changes. There are question marks about the desirability and political feasibility of redistribution across the EU for climate purposes. An EU climate fund, irrespective of whether or not it involves redistribution, would mainly benefit southern and eastern EU countries. An instrument is needed to foster green public investment in western and northern EU countries as well. The green golden rule would be such an instrument. While there are some pragmatic options to mimic a green golden rule in the current EU fiscal framework, such as amending the so-called ‘investment clause’ and adjusting the medium-term objective for the structural balance, ultimately, elements of the 2011 Six-Pack legislation and the 2012 Treaty on Stability, Coordination and Governance should be revised to include a green golden rules.
Topic:
Climate Change, Law, European Union, Fiscal Policy, and Energy
Political Geography:
Europe

23. You’ll never talk alone: what media narratives on European reforms reveal about a polity in the making

Author:
Emmanuel Mourion-Druol, Henrik Müller, Giuseppe Porcaro, and Tobias Schmidt
Publication Date:
12-2022
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
This paper analyses the discourse since 2001 in three leading national business newspapers about reforms in the European Union: Handelsblatt (Germany), Il Sole (Italy) and Les Echos (France). We collected and organised a large dataset of articles published in these three newspapers. We used topic modelling to identify latent topics across articles. Based on this database, we then addressed four research questions and found: a relative degree of synchronisation of reform debates across the three countries; comparable reporting patterns, especially around the main crises; a greater degree of direction of the debate towards European issues over national issues in Germany than in France and Italy; and the tentative emergence of a shared narrative about crises. Finally, we highlight that bringing conflict and contestation back into European discussions may help stimulate wider interest in European matters.
Topic:
Reform, European Union, Media, and News Analysis
Political Geography:
Europe

24. Don’t look only to Brussels to increase the supply of safe assets in the European Union

Author:
Francesco Papadia and Heliodoro Temprano Arroyo
Publication Date:
12-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
A sufficient supply of safe assets denominated in euros is critical if the European Union is to achieve full banking and capital markets union while fostering the euro’s international role. The European debate on developing the supply of safe assets has so far focused on the possible creation of a common safe asset. This has tended to underplay the potential contribution of sovereign assets. Expanding the supply of national safe assets, notably through the gradual implementation of fiscal and growth-oriented structural policies in euro-area countries, leading to upgrading of their sovereign ratings, provides a promising, and perhaps more feasible, option. An upgrade to triple A of those euro-area countries that are currently rated double A could produce substantially more safe assets than most common safe asset proposals, including those based on the development of ‘synthetic’ safe assets. There has been a remarkable increase in the share of supranational assets in the stock of euro-based safe assets since 2008, reflecting downgrades in sovereign ratings and the EU’s financial responses to the euro-area crisis and the pandemic. However, safe assets in euro remain dominated by those issued by euro-area governments. Although common safe assets have certain advantages over national safe assets, reflecting their built-in risk diversification properties, there is currently not much political appetite for such proposals. Meanwhile, sovereign safe assets already offer many of the advantages of common safe assets. Sound fiscal policies and growth-stimulating reforms, which are in any case desirable, should be implemented to improve the credit ratings of euro-area sovereigns. This might not be politically feasible in the short-term, given the difficult economic environment currently faced by the EU, but it should be a key component of the EU’s medium-term safe asset strategy. Should the political consensus be found to create a common safe asset, such an asset could be incorporated into the euro area’s existing safe asset system, reinforcing its positive effects.
Topic:
Debt, Markets, Monetary Policy, European Union, Regional Integration, European Monetary Union, and Banking
Political Geography:
Europe

25. A European policy mix to address food insecurity linked to Russia’s war

Author:
Georg Zachmann, Pauline Weil, and Stephan von Cramon-Taubadel
Publication Date:
12-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The Russian war against Ukraine has put at risk a significant share of global food exports, and has contributed significantly to strongly rising global food prices. This has made poor, food-import dependent countries more vulnerable, with potentially serious humanitarian consequences. The crisis also has negative security, migration and foreign policy repercussions for the European Union. The EU and its members have a number of policy levers to address the crisis. These include agricultural, trade, environment, aid, energy, fiscal and foreign policy. However, in the complex interplay of local and global, agricultural and non-agricultural markets, apparently simple solutions can have significant unintended consequences and policy trade-offs must be taken into account. While EU agricultural policy can address the crisis directly by adjusting production, energy policies also have an impact on food security through the complex relationship between the food and energy systems. Energy is an input to food production but also, as bioenergy, competes for agricultural commodities. Fiscal policy can discourage inefficient food consumption and food waste, while trade policy and aid can improve the allocation of agricultural production factors (eg fertilisers) and products. Increasing information sharing on food stocks and building trust are prerequisites for trade policy and diplomacy to limit export restrictions, thus alleviating some of the price pressures on international markets. The crisis highlights food-system fragilities when confronted with global conflicts, climate change and economic shocks. Policies should seek to increase shock-resilience, for example by reducing structural rigidities in production, trade and consumption patterns, and by encouraging sustainable production in import-dependent countries. This is especially important considering that most food production is locally consumed. Only 20 percent of the global cereals volume is traded, making the current shock significant in terms of globally traded volumes (Ukraine represents 10 percent of the global grain market), but not relative to overall volume (Ukraine represents 2 percent of global grain production).
Topic:
European Union, Food Security, Exports, Russia-Ukraine War, and Green Economy
Political Geography:
Russia, Europe, and Ukraine

26. How to implement the self-preferencing ban in the European Union’s Digital Markets Act

Author:
Christophe Carugati
Publication Date:
12-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Large online platforms are intermediaries between end-users and business users. They sometimes propose their own products and services alongside those of rivals. This can lead to platforms promoting their offers over those of competitors in so-called self-preferencing. The European Union Digital Markets Act (DMA) bans large online platforms under its scope from treating their own products and services more favourably that those of rivals when ranking, crawling and indexing. Platforms – or gatekeepers in the DMA definition – should apply transparent, fair and non-discriminatory conditions when ranking products and services. However, the identification, detection, compliance with and monitoring of self-preferencing is complex and resource-intensive. It requires a case-by-case approach and access to and analysis of platform data and algorithms. The DMA allows gatekeepers to promote their own products and services if rivals are subject to the same treatment. Nonetheless, the DMA neither defines equal treatment nor the main elements of self-preferencing, thus preventing platforms within the DMA’s scope from correctly applying the prohibition. To ease enforcement, the European Commission should issue guidance on what constitutes self-preferencing under the DMA, outlining two main principles. First, gatekeepers should use objective and unbiased parameters to determine ranking, indexing and crawling. Second, gatekeepers should demonstrate equal treatment. The guidance will make compliance easier. The Commission should then monitor compliance by appointing and ensuring sufficient rotation of external auditors to avoid capture by gatekeepers. The Commission should also work with competent national authorities that develop technological tools. When monitoring flags a risk of non-compliance, the Commission should then further specify the ban on self-preferencing on a case-by-case basis.
Topic:
European Union, Digital Economy, Economy, Innovation, and Digital Markets Act (DMA)
Political Geography:
Europe

27. Lessons for Europe from China’s quest for semiconductor self-reliance

Author:
Alicia Garcia-Herrero and Pauline Weil
Publication Date:
11-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Semiconductors are a critical input to production of information and communication technology and many other goods. The major economies want to be able to produce chips at home to avoid excessive dependence on supply chains in an increasingly unpredictable world, where trade is being compromised because of national security concerns. China was first in terms of timing and scale of funding to support its its semiconductor industry. Since 2015, China has spent $150 billion upgrading its semiconductor industry. Success, however, has been limited. China’s massive industrial policy effort has been most successful in increasing capacity for assembly of chips, though that is also the least value-added part of the semiconductor supply chain. Progress on chip design and fabrication in China remain underwhelming. The United States has also started implementing its $50 billion package to support the production of chips. The European Union, meanwhile, has not yet fully finalised its main semiconductor initiative, the European Chips Act. China’s experience offers a number of lessons. First, chip fabrication requires massive fixed asset investment and, therefore, large subsidies, but with no guarantee of success. Second, one reason for the underwhelming results of China’s semiconductor policy is US containment, through export controls and other measures. In this respect, the EU should find it easier than China to upgrade its chips industry but, given the costs, focusing on the highest-end part of the supply chain would be the best approach. Assembly and production of lower-end semiconductors already face overcapacity, given the financial resources already invested by China.
Topic:
International Relations, European Union, Economy, Trade Policy, and Semiconductors
Political Geography:
China and Europe

28. An assessment of Europe’s options for addressing the crisis in energy markets

Author:
Conall Heussaff, Simone Tagliapietra, Georg Zachmann, and Jeromin Zettelmeyer
Publication Date:
09-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Since Russia’s invasion of Ukraine, wholesale prices for electricity and gas in the European Union have risen five to fifteen-fold, with severe impacts for households and businesses. The crisis is also creating liquidity problems for energy companies, with contagion risks for the financial sector. In response, European governments have taken a range of actions. Some have introduced measures at retail level, while others have introduced windfall-profit taxes on energy companies. Some countries have provided emergency liquidity to energy companies facing soaring collateral costs. Some energy companies have even been nationalised. Emergency-intervention proposals should be evaluated against three principles. First, energy supply must meet demand at prices that do not cause major damage to the European economy. Second, the most vulnerable consumers must be protected. Third, measures should be consistent with the case for investment in a sustainable energy system, in order to safeguard Europe’s ability to decouple structurally from fossil-fuel imports. Gas price caps have been proposed as an emergency measure in different forms: a cap on Russian gas only, a cap on gas used in electricity generation, a cap on all wholesale gas. All entail significant risks. The first might lead to a full stop of Russian gas into the EU. The second might increase gas demand from the electricity sector. The third might raise gas demand and also undermine Europe’s ability to attract much-needed gas supplies. Instead of capping gas prices, the EU should engage collectively with external gas suppliers and negotiate new long-term contracts with provisions to limit price volatility. A September 2022 European Commission proposal involving electricity demand reduction, a revenue cap on inframarginal generation, solidarity payments from fossil-fuel companies and consumer support measures, is broadly positive, notably because it emphasises demand reduction. However, it is not sufficient. A more comprehensive plan needs to ensure that all countries bring forward every available supply-side flexibility, make real efforts to reduce gas and electricity demand, keep their energy markets open and pool demand to get a better deal from external gas suppliers. In the longer term, measures to split the markets for energy generated from renewables and fossil fuels should be examined.
Topic:
Markets, European Union, Energy Sector, and Green Economy
Political Geography:
Europe

29. Enlarging and deepening: giving substance to the European Political Community

Author:
Franz Mayer, Jean Pisani-Ferry, Daniela Schwarzer, and Shahin Vallée
Publication Date:
09-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
France’s President Emmanuel Macron and Germany’s Chancellor Olaf Scholz have stressed the geopolitical emergency of re-designing the European Union’s relationship with its neighbourhood. Both acknowledge that EU enlargement is necessary, but also emphasise that profound EU institutional reform is required beforehand, though deepening and widening the EU are complex processes that veto players could block. The geopolitical challenges mean it is in the critical interest of the EU to bring stability to its neighbourhood by ensuring geopolitical alignment with the EU, limiting the blackmailing power of external, authoritarian states, supporting more resilient democracies and strengthening the rule of law. Meanwhile, the EU’s neighbours are seeking a political space in which challenges to collective security and stability can be addressed and concrete policies decided. Given the urgency, it is not enough to rely on lengthy EU accession processes. A ‘European Political Community’ (EPC), which will have its first summit on 6 October 2022, could act both as a bridge to an eventual larger EU and as a framework for continental-scale partnership. Leaders should use the summit to start the building of a platform that can combine political dialogue with policy delivery in a quick and flexible way, and will thus structure more impactfully the relationship between the EU and its neighbourhood. The EPC could start as a soft law agreement between states and the EU. It would work with existing institutions as far as possible, while aiming at more effective decision-making than currently in the EU. For instance it could function without vetoes and could work in geopolitically relevant areas that are not yet EU competences. An ambitious EPC would provide financial resources for deeper cooperation on energy and climate, security and defence, and economic and social convergence. The EPC would not be, and should not be, regarded as a substitute for EU accession, but should be designed in such a way that it can work as an accelerator. For countries not seeking to join the EU, it would provide an ongoing framework that sustains structured cooperation with the EU.
Topic:
Security, Politics, Governance, and European Union
Political Geography:
Europe

30. A grand bargain to steer through the European Union’s energy crisis

Author:
Ben McWilliams, Giovanni Sgaravatti, Simone Tagliapietra, and Georg Zachmann
Publication Date:
09-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Europe’s energy system faces unprecedented physical and institutional stress. The policy response so far has been excessively nationally focussed and could undermine the goals of calming energy markets over the next 18 months and achieving ambitious decarbonisation targets. At the basis of the crisis is a post-COVID-19 global energy imbalance. While demand bounced back quickly as economies re-opened, supply did not. A particular challenge is that the reducing supply of fossil fuels in line with climate targets has not been matched by a commensurate reduction of fossil-fuel demand. Russian manipulation of European natural gas markets since summer 2021, exploiting its significant market power, has deepened the crisis. Finally, events including weak French nuclear output and the ongoing drought, which has cut hydropower generation, have further escalated the situation. In response to high and volatile prices and forced demand reduction, European governments have tended to opt for narrow and uncoordinated measures that prioritise national security of supply and affordability over an integrated European approach. Subsidising energy consumption instead of demand reduction has been a common and misguided approach. Governments run the risk that energy consumption subsidies become unsustainable, eroding trust in energy markets, slowing action in sanctioning Russia and increasing the cost of the net-zero transition. An integrated European approach and a coordinated plan is essential to address the crisis. European Union leaders must strike a grand energy bargain based on four broad principles: (i) all countries bringing forward every available supply-side flexibility, (ii) all countries making comprehensive efforts to reduce demand, (iii) a political committing to maintain energy markets and cross-border flows, (iv) compensation for the most vulnerable consumers. This grand bargain can be the first step on a new course towards united energy policy at EU level.
Topic:
Markets, European Union, Crisis Management, Energy, and Russia-Ukraine War
Political Geography:
Europe

31. The risks from climate change to sovereign debt in Europe

Author:
Stavros Zenios
Publication Date:
07-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The exposure of European Union sovereigns to climate risks can be acute, from extreme weather, or chronic, from the productivity effects of gradual temperature increase, increased sea levels and the transition to a low-carbon economy that results in repricing of assets. Climate-related innovations can also spur growth. These risks are priced by investors and can affect sovereign credit ratings. Governments and fiscal stability authorities have an interest in the sovereign-debt implications of climate change being transparent. To this end, we look at the exposure of EU sovereigns to climate risks, study international best practices, and describe the transmission channels from climate change to public finance. European union institutions and national fiscal authorities should mainstream climate risk analysis in public finance. Stress testing of debt dynamic requires a link between regional climate scenarios and country debt dynamics. We argue for the adoption of an architecture of narrative climate scenarios, to guide national policymaking. Narrative Scenarios can be generated using integrated assessment models. As an illustration, we apply two prominent models to generate rough bounds on the extent of the risk for Italian debt from climate change. This raises issues about the models used. Coordination by EU institutions to develop regional scenarios will ensure acceptability, raise ambitions in dealing with climate risks and encourage the fiscal authorities to think of solutions. A network for climate-proofing public finance will bring together EU and member-state institutions. We also recommend budgeting for climate expenditures and contingent liabilities, and using risk-sharing instruments, with disclosure of the risks to public finance from climate change.
Topic:
Climate Change, Government, European Union, Fiscal Policy, and Sovereign Debt
Political Geography:
Europe

32. A new direction for the European Union’s half-hearted semiconductor strategy

Author:
Niclas Poitiers and Pauline Weil
Publication Date:
07-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
A basic component in electronic devices, semiconductors are essential to the production of many products, from smartphones to cars. Securing reliable supplies of semiconductors to safeguard the production lines of a range of industries has thus become an important policy goal, especially in the context of an increasingly confrontational international environment in which high-technology leadership is also associated with military power and geopolitical reach. The semiconductor sector is highly concentrated, capital- and R&D-intensive, and particularly exposed to bottlenecks and political risks. High-end chip fabrication is centred in Asia, dominated by the duopoly of Taiwan’s TSMC and South Korea’s Samsung. In other parts of the supply chain, companies in the United States and Europe hold relative monopolies that have been leveraged for trade sanctions. The United States has taken steps to block the supply of chips and components to emerging tech giants in China, and to contain China’s ambitions of building its own cutting-edge chip production capacities. Heavy United states and Chinese investment poses a challenge to the European Union, which in response has set the goal of increasing European production beyond domestic demand. To increase its presence in this strategic and thriving sector, the EU needs a more targeted strategy that builds on its existing strengths while accommodating its relatively low domestic needs. Instead of investing public funds in a subsidy war over fabrication capacity, the EU should focus on inputs and chip design. However, no economy can hope to fully achieve independence in the sector and ensuring sustainable supply through diplomatic means should therefore also be a priority. Lastly, Europe’s small role in global semiconductor production is symptomatic of shortcomings in the European environment for high-tech innovation. These shortcomings should be addressed.
Topic:
Science and Technology, European Union, Economy, and Semiconductors
Political Geography:
China, Europe, and United States of America

33. A green fiscal pact: climate investment in times of budget consolidation

Author:
Zsolt Darvas and Guntram Wolff
Publication Date:
09-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The additional public investment need required to meet the European Union’s climate goals is between 0.5 percent and 1 percent of GDP annually during this decade. Increasing green public investment while consolidating deficits will be a major challenge. While our simulations show that budget consolidation can be done at a moderate pace in line with EU rules if those rules are interpreted flexibly, past consolidation episodes resulted in major public investment cuts. This time, there is a need for a major increase in investment. A ‘green golden rule’ (excluding net green investment from the fiscal indicators used to measure fiscal rule compliance) is the most promising option to address this tension. Relaxing the strictness of the EU fiscal framework beyond its existing flexibility and the proposed green golden rule does not appear necessary in the next few years. The uncertain growth impact of green public spending and the risks to growth from climate change create difficult trade offs in fiscally weaker countries. In any case, better regulatory policy and a higher price on emissions should incentivise private green investment and reduce public costs. These ingredients should be combined to form a ‘green fiscal pact’.
Topic:
Climate Change, Budget, European Union, and Public Investment
Political Geography:
Europe

34. COVID-19 financial aid and productivity: has support been well spent?

Author:
Carlo Altomonte, Lionel Fontagné, Maria Demertzis, and Steffen Müller
Publication Date:
11-2021
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Most European Union countries have made good progress with vaccinating their populations against COVID-19 and are now seeing a rebound in economic activity. While the scarring effects of the crisis and the long-term implications of the pandemic are only partially understood, the effects of support given to firms can be evaluated in order to help plan the removal of crisis support. European regions and countries that depend heavily on services requiring physical proximity have been hit hardest by COVID-19-related measures. But these services sectors tend also to be the smallest and least-productive in any economy, implying that, coming into the crisis, the highest shares of zombie firms were in these sectors. Reliance on physical proximity and the higher incidence of zombies to start with have combined to make those services-dependent economies particularly vulnerable to any attempt to remove the support put in place during the pandemic. The evidence shows that the main goal of the provision of support during the COVID-19 crisis, namely to protect employment, has been achieved. However, the evidence is varied on how efficiently this was done, in terms of helping firms that have a good chance of surviving, while not supporting those that will in any case exit. An analysis of France, Germany and Italy shows the potential for ‘cleansing effects’ in that it was the least-productive firms that have been affected most by the crisis. While support was generally not targeted at protecting good firms only, financial support went by and large to those with the capacity to survive and succeed. Labour schemes have been effective in protecting employment.
Topic:
European Union, COVID-19, and Financial Aid
Political Geography:
Europe, France, Germany, and Italy

35. Biometric technologies at work: a proposed use-based taxonomy

Author:
Mario Mariniello and Mia Hoffmann
Publication Date:
11-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Biometric technologies have in principle the potential to significantly improve worker productivity, security and safety. However, they are also a source of new risks, including exposure to potential personal data abuse or the psychological distress caused by permanent monitoring. The European Union lacks a coherent regulatory framework on the mitigation of risks arising from the use of biometric technologies in the workplace. We propose a taxonomy to underpin the use of artificial intelligence-powered biometric technologies in the workplace. Technologies can be classified into four broad categories based on their main function: (1) security, (2) recruitment, (3) monitoring, (4) safety and well-being. We identify the benefits and risks linked to each category. To be more effective, EU regulation of artificial intelligence (AI) in the workplace should integrate more detail on technology use. It should also address the current scarcity of granular data by sourcing information from users of AI technologies, not only providers. There is an untapped potential for technology to address workplace health hazards. Policymakers should design incentive mechanisms to encourage adoption of the technologies with the greatest potential to benefit workers. Artificial intelligence users, in particular bigger companies, should be required to assess the effect of AI adoption on work processes, with the active participation of their workforces.
Topic:
Science and Technology, European Union, Artificial Intelligence, and Biometrics
Political Geography:
Europe and Global Focus

36. What is holding back artificial intelligence adoption in Europe?

Author:
Mia Hoffmann and Laura Nurski
Publication Date:
11-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Artificial intelligence (AI) is considered a key driver of future economic development, expected to increase labour productivity and economic growth worldwide. To realise these gains, AI technologies need to be adopted by companies and integrated into their operations. However, it is unclear what the current level of AI adoption by European firms actually is. Estimates vary widely because of uneven data collection and lack of a standard definition and taxonomy of AI. What is clear is that AI adoption in Europe is low and likely running behind other parts of the world. Discussions on the barriers to AI advancement often mix up different stages of innovation – research, development and adoption. Each stage is constrained by the availability of skills, data and financing in the European market, but there are nuances in how these barriers arise in each of the three stages. This policy contribution focuses on the final stage, AI adoption. We discuss theoretical and empirical evidence of the drivers of AI adoption. We outline the relevant barriers to adoption for European firms in terms of human capital, data availability and funding, and make international comparisons where possible. To accelerate the roll-out of AI technology across the European Union, policymakers should alleviate constraints to adoption faced by firms, both in the environmental context – labour market, financial market and regulation – and in the technological context – data availability, basic digitisation of businesses and technological uncertainty.
Topic:
Science and Technology, European Union, Economic Development, and Artificial Intelligence
Political Geography:
Europe

37. Europe should not neglect its capital markets union

Author:
Maria Demertzis, Marta Dominguez-Jimenez, and Lionel Guetta-Jeanrenaud
Publication Date:
06-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The European Union’s capital markets remain very underdeveloped compared to the United States. The market for equity, as measured as the size of the total market capitalisation of listed domestic firms relative to GDP, is much larger in the US and in Japan than in Europe.
Topic:
European Union, GDP, and Capital Flows
Political Geography:
Japan, Europe, and United States of America

38. Blending the physical and virtual: a hybrid model for the future of work

Author:
Monika Grzegorczyk, Mario Mariniello, Laura Nurski, and Tom Schraepen
Publication Date:
06-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The pandemic has shown that many workers can efficiently work remotely, with benefits for wellbeing and even productivity. The European Union should develop a framework to facilitate hybrid work.
Topic:
European Union, Work Culture, Innovation, Strategic Competition, Pandemic, and COVID-19
Political Geography:
Europe and Global Focus

39. The great COVID-19 divergence: managing a sustainable and equitable recovery in the European Union

Author:
Gregory Claeys, Zsolt Darvas, Maria Demertzis, and Guntram B. Wolff
Publication Date:
05-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The COVID-19 pandemic has led to the biggest global recession since the Second World War. Forecasts show the European Union underperforming economically relative to the United States and China during 2019-2023. Southern European countries have been particularly strongly affected. While the ICT sector has benefitted from the COVID-19 crisis, tourism, travel and services have suffered. Business insolvencies have, paradoxically, fallen. While total employment has almost recovered, the young and those with low-level qualifications have suffered employment losses. Inequality could rise. The pandemic may lead to medium to long-term changes in the economy, with more teleworking, possibly higher productivity growth and changed consumer behaviour. Policymakers must act to prevent lasting divergence within the EU and to prevent scarring from the fallout from the pandemic. The first priority is tackling the global health emergency. Second, we warn against premature fiscal tightening and recommend instead additional short-term support from national budgets. Over the medium term, fiscal policymakers will need to gradually move away from supporting companies through subsidies, towards tax incentives for corporate investment. A review of the European fiscal framework is needed to achieve the EU’s green goals more rapidly. The quality of public finances, how policymakers spend resources and the associated reforms are of central importance to prevent scarring. Improving the efficiency of insolvency procedures will be crucial for speedy and effective recovery. Targeted labour market policies for the young and less-qualified are needed. As teleworking becomes a more permanent feature of the EU’s labour markets, it will be crucial to adapt social security and taxation systems in the context of the single market for labour. The EU should resist protectionist calls in the wake of the pandemic. Rigorous competition policy enforcement and an integrated EU market have been beneficial for European convergence and growth. Capital markets have an important role to play in a speedy recovery.
Topic:
Governance, European Union, Inequality, and COVID-19
Political Geography:
Europe

40. How difficult is China’s business environment for European and American companies?

Author:
Uri Dadush and Pauline Weil
Publication Date:
05-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Despite tensions over China’s discriminatory business practices, China’s trade continues to thrive, and the country has taken over from the United States as the first destination for foreign investment. American and European businesses continue to be engaged in China’s large and growing market, even amid a trade war between China and the United States. Drawing on surveys of companies and international comparisons, we show that – contrary to the prevailing narrative – China’s business practices have improved significantly in recent years. China’s business environment is today generally more favourable than that in other large countries at similar levels of development and, in some though certainly not all aspects, is in line with the Organisation for Economic Co-operation and Development average. Differences over geopolitics and human rights must be addressed, but it is clear that trade and investment agreements conditioned on accelerated reforms in China would yield substantial dividends. The benefits of such deals would accrue not only to foreign investors in China and exporters to China, but also to consumers and importers in the European Union and, especially, in the US, where punitive tariffs on China remain in effect. Critical aspects in the negotiations would include better access for American and European investors to China’s market for services and improved enforcement of rules and regulations in China. As in many middle-income countries, uneven enforcement of the law (rather than the law itself) remains a critical problem in China.
Topic:
Development, Bilateral Relations, European Union, Business, and Investment
Political Geography:
China, Europe, Asia, North America, and United States of America

41. Accounting for climate policies in Europe’s sovereign debt market

Author:
Marta Dominguez-Jimenez and Alexander Lehmann
Publication Date:
05-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
International debt investors increasingly demand assets that are aligned with environmental, social and governance objectives. Sovereign debt is being belatedly swept up in this change. This huge asset class represents a uniquely long-term claim and funds a wide range of public expenditure, both brown and green. Public capital expenditures will be a central part of the roughly €3 trillion investment budget needed to pay for the European Green Deal. European Union countries have so far met investor appetite for climate-aligned assets through sovereign green bonds, the issuance of which has rapidly grown since 2017. The EU itself will also issue green bonds in large volumes. However, because of some inherent flaws in such instruments and as their still-weak frameworks, these bonds are unlikely to meet the environmental criteria demanded by investors, and will complicate established principles in sovereign debt management. Much more comprehensive information is needed on the climate related aspects of the public budgets of EU countries. Greater transparency in this respect would support stability and improve the functioning of capital markets, given that sovereign debt plays a pivotal role in all investor portfolios and also in regulatory and monetary policy. Adoption by sovereign issuers of green budgeting principles, based on a common taxonomy of sustainable activities, would enhance transparency. It could also be driven by investors who, under new EU rules, must disclose the climate-related aspects of all financial instruments offered in the capital market.
Topic:
Climate Change, Debt, Markets, Sovereignty, European Union, Finance, and Sustainability
Political Geography:
Europe

42. Navigating through hydrogen

Author:
Ben McWilliams and Georg Zachmann
Publication Date:
04-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Hydrogen is seen as a means to decarbonise sectors with greenhouse gas emissions that are hard to reduce, as a medium for energy storage, and as a fallback in case halted fossil-fuel imports lead to energy shortages. Hydrogen is likely to play at least some role in the European Union’s achievement by 2050 of a net-zero greenhouse gas emissions target. However, production of hydrogen in the EU is currently emissions intensive. Hydrogen supply could be decarbonised if produced via electrolysis based on electricity from renewable sources, or produced from natural gas with carbon, capture, and storage. The theoretical production potential of low-carbon hydrogen is virtually unlimited and production volumes will thus depend only on demand and supply cost. Estimates of final hydrogen demand in 2050 range from levels similar to today’s in a low-demand scenario, to ten times today’s level in a high-demand scenario. Hydrogen is used as either a chemical feedstock or an energy source. A base level of 2050 demand can be derived from looking at sectors that already consume hydrogen and others that are likely to adopt hydrogen. The use of hydrogen in many sectors has been demonstrated. Whether use will increase depends on the complex interplay between competing energy supplies, public policy, technological and systems innovation, and consumer preferences. Policymakers must address the need to displace carbon-intensive hydrogen with low-carbon hydrogen, and incentivise the uptake of hydrogen as a means to decarbonise sectors with hard-to-reduce emissions. Certain key principles can be followed without regret: driving down supply costs of low-carbon hydrogen production; accelerating initial deployment with public support to test the economic viability and enable learning; and continued strengthening of climate policies such as the EU emissions trading system to stimulate the growth of hydrogen-based solutions in the areas for which hydrogen is most suitable.
Topic:
Climate Change, Energy Policy, European Union, Carbon Emissions, Decarbonization, and Hydrogen
Political Geography:
Europe and Global Focus

43. Is the European Union’s investment agreement with China underrated?

Author:
Uri Dadush and André Sapir
Publication Date:
04-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The European Union is very open to foreign direct investment. By comparison, despite considerable liberalisation in the past two decades, foreign investors in China’s markets still face significant restrictions, especially in services sectors. Given this imbalance, the EU has long sought to improve the situation for its companies operating or wanting to operate in China. After eight years of negotiations, the EU and China concluded in December 2020 a bilateral Comprehensive Agreement on Investment (CAI). The text awaiting ratification aims to give foreign investors greater market access, enforceable via state-to-state dispute settlement. It does not yet, however, cover investor protection (such as against expropriation). Meanwhile, investor protection is covered by bilateral investment treaties between EU countries and China, which remain in force. The CAI has been met in some quarters with scepticism on economic and geopolitical grounds. The main criticism is that it provides little new market access in China, and that this small economic gain for the EU comes at the price of breaking ranks with its main political ally, the United States. Our assessment, which focuses on the economic implications, is different. It is true the CAI provides only modest new market access in China, but this is because China has already made progress in recent years in liberalising its foreign investment regulations unilaterally. The CAI binds this progress under an international treaty, marking an improvement for EU firms insofar as their market access rights can be effectively enforced. Most important, the CAI includes new rules on subsidies, state-owned enterprises, technology transfer and transparency, which will improve effective market access for EU firms operating in China. These bilateral new rules could also pave the way for reform of the multilateral rules under the World Trade Organisation, with the aim of better integrating China into the international trading and investment system – a goal shared by the EU, the United States and other like-minded countries. From an economic viewpoint therefore, the CAI is an important agreement, and one worth having. However, its ratification by the European Parliament is unlikely while China continues to apply sanctions against some members of the European Parliament and other critics of China’s human rights record.
Topic:
Science and Technology, Bilateral Relations, European Union, Investment, and Liberalization
Political Geography:
China and Europe

44. Talking about Europe: exploring 70 years of news archives

Author:
Enrico Bergamini and Emmanuel Mourlon-Druol
Publication Date:
03-2021
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
This paper quantitatively explores news coverage on the subject of ‘Europe’ in three different countries and three newspapers: France (Le Monde), Italy (La Stampa) and Germany (Der Spiegel). We collected and organised large web-scraped datasets covering the period 1945 to 2019. After ensuring the quality of the archives, we identified articles referring to ‘European’ news while leaving aside national and other non-European news, based on a mix of keyword matching, large-scale natural language processing and topic identification on the full text of news articles. Once articles were classified and datasets labelled, we performed a time-series analysis, detecting salient events in European history, across France, Germany and Italy. We analysed these events in light of the evolution of European cooperation and integration since 1945. We found that the most important events in post-war European history are easily identifiable in the archives and that European issues have gathered substantially greater attention since the early 1990s.
Topic:
Governance, Public Opinion, European Union, Media, Populism, and Data
Political Geography:
Europe

45. A whole-economy carbon price for Europe and how to get there

Author:
Ottmar Edenhofer, Mirjam Kosch, Michael Pahle, and Georg Zachmann
Publication Date:
03-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Putting carbon pricing at the centre of the EU climate policy architecture would provide major benefits. Obtaining these benefits requires a uniform, credible and durable carbon price – the economic first-best solution, however, several preconditions required to attain this solution are not yet met. This paper proposes a sequenced approach to ensure convergence of the policy mix on the first-best in the long run.
Topic:
Climate Change, Energy Policy, European Union, Carbon Tax, and Carbon Emissions
Political Geography:
Europe

46. Low interest rates in Europe and the US: one trend, two stories

Author:
Maria Demertzis and Nicola Viegi
Publication Date:
03-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
In both Europe and the United States, interest rates have been declining for more than fifteen years. For much of this period, real interest rates have been negative and they are expected to remain negative for at least another decade. The literature associates this decline in interest rates with a similarly protracted decline in productivity. But the decline in productivity appears paradoxical given major technological advances. The decline in the price of capital is underpinned by the factors that have caused a decline in demand for capital, as well as a relative increase in its supply. On the supply side, aging and an increase in overall macroeconomic risk since the financial crisis have both led to increased savings. On the demand side, the increase in the importance of intangible capital in production has reduced the demand for physical capital. Nevertheless, for the US, the literature has identified the increase in market concentration as the biggest factor responsible for the reduction in the overall demand for capital. Digital innovation has led to the creation of champion firms that have captured big market shares and have been able to prevent others from entering not only the US market, but markets globally. This has dampened investment. Europe is affected by US digital dominance, but other factors, including aging and increased risk, are more prominent in sustaining the downward pressure on interest rates. In particular, the lack of risk capital, in the context of capital markets, contributes to this downward pressure in the EU. As the knowledge economy relies increasingly on intangible capital, a bank-based system that requires collateral is not well suited to finance investments. A lack of suitable finance will remain an important factor in the downward pressure on interest rates. The structural factors behind the downward pressure on interest rates imply that macroeconomic policy will have a reduced role in managing aggregate demand. Monetary policy in the euro area will be more about preventing financial fragmentation and less about stimulating demand. Equally, fiscal policy will have more of a supporting rather than stimulating role. Tackling the structural decline in market dynamism and therefore in real rates will require structural policies to reduce market power globally and ensure the creation of capital markets in the EU.
Topic:
Monetary Policy, Governance, European Union, Finance, and Macroeconomics
Political Geography:
Europe, North America, and United States of America

47. Interest in European matters: a glass three-quarters full?

Author:
Francesco Papadia, Enrico Bergamini, Emmanuel Mourlon-Druol, and Giuseppe Porcaro
Publication Date:
03-2021
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
A disconnect between European Union integration and the level of interest of EU citizens in European matters is a potential weakness in the EU’s democratic foundations. The existence and possible size of this disconnect is a critical issue in assessing the potential for further integration of the EU and the risks to its stability. To move beyond qualitative assessments of this disconnect, we use three indicators to measure EU citizens’ interest in Europe: turnout in European Parliament elections relative to national elections, Eurobarometer surveys of interest in Europe, and the presence of European news in national newspapers, relative to all published news. We interpret our empirical results using three frameworks: Putnam’s social capital concept, the agenda-setting hypothesis and the no-demos hypothesis. All three indicators point to an increased interest in European matters, especially since the 1990s and the creation of the euro. However, this result does not settle the issue of whether the increased level of interest matches the actual state of integration of the EU’s member countries. Our results indicate the European construction maintains a technocratic character.
Topic:
Governance, European Union, Media, Populism, and Macroeconomics
Political Geography:
Europe

48. The unequal inequality impact of the COVID-19 pandemic

Author:
Zsolt Darvas
Publication Date:
03-2021
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
GDP contractions are typically associated with within-country income inequality increases. While official income inequality data for 2020 will not be available for about two years, the already available employment data for 2020 shows that the difference between highly-educated and low-educated people in terms of job losses is correlated with the economic shock from the COVID-19 pandemic, suggesting that the depth of the economic recession is related to the increase in within-country income inequality in 2020. Scenarios based on historical patterns of recessions and within-country income inequality increases suggest relatively small increases in global income inequality in 2020. Factors mitigating global inequality increases in 2020 include larger GDP per-capita declines in richer advanced countries than in poorer emerging and developing countries, and the positive GDP growth of China, which suggests that within-country inequality in the world’s most populous country might have not changed much in 2020. In contrast, it is quite likely there was a significant increase in European Union income inequality in 2020, partly reversing the decline during the previous decades.
Topic:
Poverty, European Union, Employment, Inequality, and COVID-19
Political Geography:
Europe

49. The geopolitics of the European Green Deal

Author:
Mark Leonard, Jeremy Shapiro, Jean Pisani-Ferry, Simone Tagliapietra, and Guntram B. Wolff
Publication Date:
02-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The European Green Deal is a plan to decarbonise the EU economy by 2050, revolutionise the EU’s energy system, profoundly transform the economy and inspire efforts to combat climate change. But the plan will also have profound geopolitical repercussions. The Green Deal will affect geopolitics through its impact on the EU energy balance and global markets; on oil and gas-producing countries in the EU neighbourhood; on European energy security; and on global trade patterns, notably via the carbon border adjustment mechanism. At least some of these changes are likely to impact partner countries adversely. The EU needs to wake up to the consequences abroad of its domestic decisions. It should prepare to help manage the geopolitical aspects of the European Green Deal. Relationships with important neighbourhood countries such as Russia and Algeria, and with global players including the United States, China and Saudi Arabia, are central to this effort, which can be structured around seven actions: Help neighbouring oil and gas-exporting countries manage the repercussions of the European Green Deal. The EU should engage with these countries to foster their economic diversification, including into renewable energy and green hydrogen that could in the future be exported to Europe. Improve the security of critical raw materials supply and limit dependence, first and foremost on China. Essential measures include greater supply diversification, increased recycling volumes and substitution of critical materials. Work with the US and other partners to establish a ‘climate club’ whose members will apply similar carbon border adjustment measures. All countries, including China, would be welcome to join if they commit to abide by the club’s objectives and rules. Become a global standard-setter for the energy transition, particularly in hydrogen and green bonds. Requiring compliance with strict environmental regulations as a condition to access the EU market will be strong encouragement to go green for all countries. Internationalise the European Green Deal by mobilising the EU budget, the EU Recovery and Resilience Fund, and EU development policy. Promote global coalitions for climate change mitigation, for example through a global coalition for the permafrost, which would fund measures to contain the permafrost thaw. Promote a global platform on the new economics of climate action to share lessons learned and best practices.
Topic:
Climate Change, Energy Policy, European Union, and Geopolitics
Political Geography:
Europe

50. European Union cohesion project characteristics and regional economic growth

Author:
Zsolt Darvas, Jan Mazza, and Catarina Midoes
Publication Date:
02-2021
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Due to problems with existing methodologies that aim to identify the causal impact of European Union cohesion policy on economic growth, we adopted a novel methodology. We first estimated ‘unexplained economic growth’ by controlling for the influence of various region-specific factors, and then analysed its relationship with about two dozen characteristics specific to projects carried out in various regions in the context of EU cohesion policy. We found that the best-performing regions have on average projects with longer durations, more inter-regional focus, lower national co-financing, more national (as opposed to regional and local) management, higher proportions of private or non-profit participants among the beneficiaries (as opposed to public-sector beneficiaries) and higher levels of funding from the Cohesion Fund. No clear patterns emerged concerning the sector of intervention.
Topic:
European Union, Finance, Economic Growth, and Regional Integration
Political Geography:
Europe

51. The productivity paradox: policy lessons from MICROPROD

Author:
Gregory Claeys and Maria Demertzis
Publication Date:
01-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Productivity growth in Europe has been on a downward trend for several decades. Given that productivity growth is a crucial source of output growth, particularly in an aging society like the European Union, it is crucial to understand what is driving this slowdown and what the potential consequences are for our economic model and for citizens’ welfare. Some explanations for this trend are global in nature, but there are also significant differences in country structures in Europe that have led to different outcomes and that need to be accounted for before policy prescriptions can be made. The objective of MICROPROD, an EU-wide research project that runs until the end of 2021, is to contribute to this research strand by using data from various European countries to study the microeconomic mechanisms behind this macroeconomic phenomenon. In particular, the aim is to understand the challenges posed to Europe by the fourth industrial revolution and its impact on productivity in the context of globalisation and digitalisation, and to recommend policies to address these challenges. MICROPROD researchers have so far delivered 20 papers on four broad issues relevant for today’s policy debates: the measurement and effects of intangible capital on productivity; the impact of globalisation, international trade and the integration of global value chains (GVCs) on productivity; factor allocation and allocative efficiency; and finally the social consequences of the two structural shocks Europe has faced in the last two decades: globalisation and technological progress. This Policy Contribution reviews the main conclusions of these 20 MICROPROD papers and how they inform policy debates. However, the mid-point of the three-year MICROPROD project also coincided with the start of the COVID-19 crisis, which might have accelerated some trends or possibly reversed others. We therefore discuss how some of the messages of MICROPROD research may contribute to our understanding of the current crisis and its aftermath.
Topic:
Globalization, Governance, European Union, Macroeconomics, Productivity, and Digitalization
Political Geography:
Europe

52. Economic crisis in the Middle East and North Africa

Author:
Marek Dabrowski and Marta Dominguez-Jimenez
Publication Date:
01-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
In the 2010s, the economic situation in the Middle East and North Africa (MENA) deteriorated as a result of lower oil and other commodity prices, a new round of domestic political instability, continuous intra-regional conflicts, stalled economic and governance reforms and, finally, the COVID-19 pandemic. The growth of real GDP, which slowed after the global financial crisis of 2008-2009, further decelerated in the second half of the 2010s and became negative in 2020 as result of the COVID-19 shock. Fiscal balances have deteriorated, even in the oil-exporting countries, and public debt has grown rapidly. MENA countries continue to face numerous long-term socio-economic and institutional challenges including high unemployment (especially youth unemployment), low female labour-market participation rates, the poor quality of education, costly and ineffective public sectors, high military and security spending, high energy subsidies and trade protectionism. Only comprehensive long-term reform programmes can address these challenges. The European Union is MENA’s second largest trading partner after the region itself, and is one of two main sources of foreign direct investment and a major aid donor. However, given the critical importance of the MENA region to its own security and stability, the EU’s engagement in conflict resolution and in supporting economic and political transformation of the region is insufficient and should be intensified. The EU should also update and upgrade its existing association agreements with the countries of the Southern and Eastern Mediterranean, including their free trade provisions.
Topic:
International Trade and Finance, Governance, European Union, Trade, COVID-19, and Economic Crisis
Political Geography:
Europe, Middle East, and North Africa

53. The nonsense of Next Generation EU net balance calculations

Author:
Zsolt Darvas
Publication Date:
01-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The estimation of payments from the European Union’s COVID-19 economic recovery fund, Next Generation EU (NGEU), to each EU country in 2021-2026 involves uncertainties, yet the overall magnitudes can be estimated with a reasonable degree of precision. In contrast, estimating member states’ contributions to the repayment of EU debt (which will be issued to finance NGEU spending) is burdened with enormous difficulties, primarily related to the uncertainty of gross national income projections up to 2058. Some numerical scenarios can be put forward to illustrate the difficulties in estimating the amounts of such future contributions.
Topic:
Economics, Governance, European Union, Macroeconomics, and COVID-19
Political Geography:
Europe