It is the time when EU political and economic analysts look at their crystal balls to see what we should expect in the year ahead in the Union. The way that the COVID pandemic will evolve remains a mystery despite a range of forecasts from the wildly optimistic to the mildly pessimistic. The EU’s economic challenges predate COVID and will not go away until they are addressed.
The political backdrop to how the Union will manage these challenges remains somewhat complex. The post-Merkel Germany is likely to be less influential in determining what gets done in the Union. New alliances are being forged. It remains to be seen whether new German Chancellor Olaf Scholz will command his predecessor’s same kind of authority.
The first big challenge for the European Commission and Council will be redrawing the fiscal rules that bind all member states. The EU’s budget rules known as the Stability and Growth Pact was suspended when the pandemic crisis broke out. There seems to be general agreement that the rules needed changing even before COVID struck a mighty blow to European economies.
Italian prime minister and former ECB president Mario Draghi argues that the EU’s fiscal rules reform is “inevitable”. In a press conference in Rome, he said: “Today the revision of the rules is inevitable, not only because of the very high cost of the pandemic in economic and social terms but also because of the future challenges of the EU, from the fight against climate change to new technologies, to the gigantic investments in semiconductors. We need to correct our past and design our future.”
Draghi’s clear thinking may dissipate due to political developments in Italy beyond his control. Despite a relatively calm political phase in Italian politics, the instability clouds are already on the horizon.
Soon the Italian parliament has to decide on the election of a new president of the republic. The Machiavellian manoeuvring for which Italian politics is renowned has started. Elements in the fractious centre-right want Draghi to be kicked upstairs and appointed president. Elections would then be held.
Others in the same political grouping wish to nominate the notorious octogenarian Silvio Berlusconi as president to enable Draghi to continue his mandate until 2023. The centre-left so far seems to have no clear strategy on the issue of who should be the next president.
The economic challenges of 2022 will be more complex if geopolitical tensions on the Union’s eastern borders continue to grow
The Stability and Growth Pact reforms will also greatly depend on how the new German coalition fiscal strategy will evolve. The coalition has agreed on some high-level strategies to introduce schemes for raising funds without violating the ‘debt brake’ – Germany’s constitutional cap on new borrowing.
The competing priorities in the German coalition that includes the Social Democrats, the Greens, and the liberal Free Democrats might not be easy to reconcile.
The Greens want to relax the debt brake and invest €50 billion a year over the next 10 years to modernise Germany and make it carbon neutral. The Free Democrats say they would block any attempt to raise taxes or make any changes to the debt brake introduced in 2009 after the global financial crisis.
We will likely see some ‘pragmatic’ solutions in the form of creative accounting of public finances to keep the coalition in place while leaving it for future administrations to deal with any fiscal collateral damage.
There is no easy solution to reconcile the EU’s conflicting economic and fiscal priorities. The ambitious plans to revive the member states’ economies through massive investment in infrastructure and green initiatives cannot be financed effectively except through enormous borrowing. At the same time, while the present fiscal rules are too inflexible, the risk of throwing caution to the wind in fiscal management is a real one.
The economic challenges of 2022 will be more complex if geopolitical tensions on the Union’s eastern borders continue to grow.
Should Russia invade Ukraine, political sanctions and the future of the Nord Stream 2 gas pipeline may add a new element of uncertainty.
Other likely political developments could include a surge in migration from the south and the east of the Union’s borders. One would have to permanently wear rose-tinted glasses to avoid fretting about the political and socio-economic risks that the EU will face in 2022.
Still, the most significant risk could well be the absence of strong political leadership that looks beyond the national interest of individual member states.
Europe badly needs strong political leadership that instils credibility in the EU governance in the eyes of European citizens.