First glance

Tough trade-offs: the big strategic issues for the next EU term

Three overarching economic policy trade-offs will set the context for the new Commission from the beginning of its mandate

Publishing date
12 June 2024

In the wake of last week’s elections, the European Union is entering a new phase. One of the first main tasks for the new European Parliament – with strengthened Eurosceptic political parties – will be to scrutinise candidates for the roles of European Commission president and commissioners. Three overarching economic policy trade-offs will set the context for the new Commission from the beginning of its mandate, and lawmakers should push nominees on how they will handle these.

The first is how to combine, at a macroeconomic level, support for growth and financial and fiscal stability. Second, the Commission must make progress on environmental sustainability without undermining the production potential and social cohesion. Third, decisions must be made on how to integrate the search for efficiency, which requires innovation and long value chains, and the search for security (including economic security), which is threatened by growing international conflicts.

The effective management of the macroeconomic trade-off requires credible application of the new EU fiscal rules that were agreed in April. On 19 June, the current Commission will start a procedure for excessive public deficits against a dozen EU countries with deficits in 2023 exceeding 3% of GDP. Two days later, it will issue to these countries, and those with public debt in excess of 60% of GDP, confidential reference trajectories for the adjustment of net primary expenditure within their fiscal-structural plans, to be implemented over four or seven years depending on the case.

There is no obligation to incorporate these suggested trajectories into national plans, but countries in breach of thresholds will need to ensure gradual debt reduction and improved quality (through reform and investment) of public finances. The outcome of the European elections has made credible enforcement of the new fiscal rules even more necessary, in particular for countries like France, where political uncertainty has not gone unnoticed by the markets. These adjustments will underpin the progressive easing of monetary policy and, by helping to restore a climate of mutual trust, might restart the debate on the creation of an EU central fiscal capacity.

Without a permanent central fiscal capacity, restrictions in national budgetary policies would transmit recessionary impulses to the EU economy, which would make the productive and social impacts of the green and digital transitions unmanageable. It would be a mistake to water down the European objectives of decarbonisation and innovation. It is instead essential to recognise that such radical changes require reform and investment to boost the adoption of new, green technologies, to invest in human capital and to protect social cohesion.

It follows that a permanent central fiscal capacity is also needed to finance new centralised industrial and social policies, in the context of the sustainability trade-off. The EU’s multi-annual budget will have to underpin the green, digital and social ‘triple transition’, while also providing European public goods for defence and security.

Addressing the third, allocative, trade-off requires the revitalisation of the European single market, along the lines of April’s Letta Report. It also requires a strong response to the threat of a protectionist spiral fuelled by measures taken by the United States against the enormous subsidies China grants to its companies. Should this escalation degenerate into outright trade war – likely if Donald Trump is re-elected to the White House – the European economy would be the prime victim, given its greater openness to international trade.

The EU therefore has an interest in implementing a de-risking rather than a decoupling strategy towards China. The principle of ‘made with Europe’ rather than ‘made in Europe’ should be made effective. The EU should guarantee accessible value chains and pursue two-way dependence on critical raw materials, energy and other production components. This presupposes common initiatives between European countries which, unfortunately, still appear to be a long way off.

The new Commission is required to present its initial proposals on the post-2027 EU budget as early as the end of June 2025. In these proposals, crucial decisions will have to be made about the implementation of the new fiscal rules, the supply of European public goods and industrial policy choices. Tackling effectively the macroeconomic, sustainability and allocation trade-offs will largely determine the economic success of the coming EU legislature.

During the European election campaigns, these issues were largely neglected. The new European Parliament must overcome inertia and push for ambitious proposals in this regard, despite the stronger weight of nationalist parties. The forthcoming Commission-nominee hearings before the European Parliament will be a crucial test.

About the authors

  • Marco Buti

    Marco Buti, holds the Tommaso Padoa-Schioppa Chair in economic and monetary integration at the European University Institute. Former Chief of Staff of the Commissioner for the economy, Paolo Gentiloni, and until 2019, Director-General for Economic and Financial Affairs at the European Commission (DG ECFIN). 

  • Marcello Messori

    Marcello Messori is a part-time Professor at the Robert Schuman Centre, European University Institute and former professor of economics at Luiss. 

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