The current EU Parliament and Commission had just begun the work of their five-year agenda when it was derailed by Covid-19 and then the Ukraine war. As the institutions’ mandate enters a final phase, Real Economy gets the views of key players in Brussels on one of the EU’s most difficult chapters.

A five-year cycle of turmoil; from COVID-19 to the war in Ukraine and its consequent energy shock, and with soaring inflation thrown in for good measure Europe’s economy has been rocked by an unprecedented series of crises over the past half-decade. As the EU’s Economy Commissioner Paulo Gentiloni puts it: “Nobody would have predicted that we could have had two Black Swans in a row,” referring to the highly improbable sequencing of events such as the pandemic and Russia’s invasion of Ukraine.

As Europeans get ready to go to the ballot box in June’s parliamentary elections, Real Economy assesses the EU’s economic performance over this challenging period and the prospects for recovery in the next. How can the bloc boost growth and productivity, is the Green Deal still on track, and do trading relationships with countries like China need a reset? These are the big questions facing voters, as they prepare to give a new mandate to the EU’s institutions. 

Desperate times, desperate measures

With desperate times calling for desperate measures the EU’s response to the multiple crises ventured into the hitherto unthinkable; the huge €800 billion NextGenerationEU fund was a historic economic gesture. Deployed to accelerate the bloc’s post-pandemic recovery and green and digital transition, it saw member states issue joint debt for the first time.

But COVID also forced Brussels to abandon fiscal limits temporarily. Since then many member states have racked up record debt-to-GDP ratios, an issue the energy shock and high inflation of 2022 only exacerbated. Recently reformed spending rules aim to bring these gradually back under control. Post-pandemic funds are also due to end in 2026, and now the big question is, will Europe have the money it needs to invest and compete for the future?

EU Commission President Ursula von der Leyen expressed the scale of the challenge when she said “What started with a virus so small your eyes couldn’t see it, has become an economic crisis so big that you simply cannot miss it.”

A burden shared

The platform for tackling that crisis was the debt-sharing programme envisaged in the NextGenerationEU fund.  So four years on since its creation, how do MEPs view such a financial tool? Do they see it as a successful blueprint for the future or should it go back to being economic taboo?

“We would never have thought that in this war between the frugal and the Club Med countries, we could agree on, for the first time and this is historic, a joint indebtedness,” Stéphanie Yon-Courtin MEP Renew Europe Group told Real Economy.

For Philippe Lamberts MEP and co-president of the Green Group, the fund offers the prospect of future intercommunal cooperation: “I see NextGenEU as a prototype. And it’s important that the prototype flies well so that we can indeed make it permanent.”

His vision is shared by MEP Margarida Marques of the Socialists and Democrats Group, who sees the instrument’s potential to achieve Europe’s long-term goals: “A new investment mechanism must be created after NextGenerationEU to invest on climate transition, on digital transition, on the European Pillar of Social Rights, on defence.”

But figures on the right have a somewhat less utopian view: “Right now, if you have highly indebted countries, but they are able to tap into this new box of Pandora, which is European common debt, where they are able to tap into that, well it creates a whole new ballgame when it comes to finances, so we believe that it’s a mistake and we should not go down that road,” said MEP Michiel Hoogeveen of the European Conservatives and Reformists Group.

So what’s the EU Commission’s stance? Might it use such economic instruments again? Paolo Gentiloni, the European Commissioner for the Economy, thinks the fund is an expression of the EU’s core concept of ever-closer union: “How can we participate in the global race for clean technologies, to the challenges of competitiveness, without a single euro of common financing? I think this is honestly impossible.”

Tackle debt or borrow to invest?

However, debt, whether assumed jointly or not, always needs to be controlled. Recently revised fiscal rules aim to slash the debt built up during the pandemic. While this sees a return to the old thresholds of deficits at 3% and debt at 60% of annual GDP respectively, member states have been given more flexibility on how they go about debt reduction.

But will there be enough money to pay for things like the green transition, especially with post-pandemic funding ending in 2026? MEP Manfred Weber, President of the European People’s Party believes, while investment is needed, unlimited borrowing to achieve this is also not the answer: “On the debt side, you know, we are struggling a lot with this. Nobody knows at this moment in time how to pay the interest rates,” he says.

“That’s why debt means less opportunities for the next generation to invest. We need economic growth, that’s the power base of Europe, that we are economically strong and we have to restart the engine.”

According to Gentiloni, Europe’s debt burden shouldn’t distract from the critical need to invest: “As a whole, we can’t say that the problem of the EU and the euro area is that we have a too high debt, it’s a problem for single member states, we have to address it, we have common rules but at the same time we have to compete at global level.”

For the Green’s Philippe Lamberts, it’s much more fundamental to keep pace with the EU’s global competitors: “If you want the investments that are needed for the green transition, for digital, for defence and all the rest of it to happen, yes, we will need to borrow because not all of it will be able to be funded by cuts elsewhere or by new taxes, and indeed some of it should be national borrowing and some of it should be joint borrowing by the European Union.” 

Analyst Jeromin Zettelmeyer, Director of the Bruegel Economic think tank, believes that Brussels will retain debt-sharing as a tool to achieve primary targets. “The idea that you support public investment through the EU level, I think will plausibly stick around, because if not we can probably give up on the Green Deal.”

Dealing with China

As EU policymakers face an uncertain future, trade tensions with China are another hot topic. Brussels has accused Beijing of subsidising key sectors while restricting access to its own markets. For now, the European Commission’s policy has been to ‘derisk’ from China, but will it need to go further? Renew Europe Group MEP Stéphanie Yon-Courtin believes Beijing needs to be persuaded of the benefits of working with Europe: “It has to be a win-win-win situation,” she says. 

“Above all, the European Union must stop being naive. The relationship has to be one of trading partners, and of course, continue to work with partners as long as they accept our rules.” 

MEP Michiel Hoogeveen MEP, of the European Conservatives and Reformists Group, thinks cooperation with China should be explored: “Let’s go and try to talk to the Chinese, how we can really create [a level playing field], how we can make agreements, and we should also accept that one country may be more competitive in maybe building electric vehicles, maybe building solar panels, or wind turbines. Well, if the Chinese are willing to pay for our energy transition, by all means, then we can focus our resources on other areas,” Hoogeveen says. 

But the view on the left is more cautious. Margarida Marques, MEP of the Socialists and Democrats Group thinks Europe needs to get its own house in order before opening the door to China: “To compete with other economic areas we must be a bloc, an economic bloc, and for it, we must ensure that the internal market can work in this direction.”

“The first thing is, stop being naive,” insists Philippe Lamberts of the Greens. “I mean China is protectionist, the US is protectionist, and then we would say, ok well, we should not restrict access to our market because they will restrict access to theirs. They are restricting access to theirs!”

Manfred Weber MEP, President of the European People’s Party acknowledges future trade relations with China will most likely be complicated: “We have to keep the economic ties, so nobody wants to stop them, but we have to rebalance that and in such a strategic battle with the Chinese we should be ready to defend our markets.”

Hopes for stability and growth

Finally, given the huge challenges Europe has navigated recently, what’s the current economic picture?

“Inflation is coming down,” says Jeromin Zettelmeyer, Director of the Bruegel think tank. “The ECB is expecting to get back to target sooner and they are also expecting to loosen, sometime in the coming quarter. And so there is sort of a sense that there will be a turnaround in the summer, and the main driver here is that real incomes are recovering with inflation coming down, wages catching up.”

The future may be challenging, but Economy Commissioner Paolo Gentiloni believes Europe is on the right course. 

“Reaction to the pandemic was unprecedented – the SURE mechanism, NextGenerationEU. The reaction to the war was also unprecedented. The unity on sanctions, on the political reaction, on the decoupling from Russian gas. But if 2024 will see an acceleration of the activity, I think we will conclude that we were able to address these two black swans in the right way,” he says.

Indeed, we may all be forgiven for hoping the next electoral mandate is less tumultuous than this one.