Peter Becker: Geopolitical challenges for EU’s economic policy

For the year 2023 the European Commission’s autumn economic forecast predicted a light contraction of GDP of -0.3% for both the Eurozone and the EU-27. Although the European labour markets proved to be resilient, the Commission expects the unemployment rate to slightly increase and the inflation in the EU-27 and the Eurozone is expected to stay at a high level of 7%. Given the geographical proximity to the Ukraine, the impact of the Russian war against the Ukraine will remain the biggest challenge for economic policy in Europe. As a consequence, high energy and food prices, and still very high inflation rates and indebtedness of public budgets are expected to lead to declining investment rates and hence to low economic growth. The purchasing power of European households will shrink – European citizens will become poorer. 

The economy of the Baltic Sea region is directly affected by the Russian war of aggression in the Ukraine. The region is characterised by a high degree of interdependence and cooperation dating back to the late Middle Ages and the Hanseatic League. However, this long tradition of cooperation cannot be continued in the shadow of the Russian war. Rather, the division and the differences between the prosperous northern and western shores of the Baltic Sea and the less developed southern and eastern countries will continue to increase.

This might be the hour for European economic policy and a new attempt to improve it. However, the European Union is actually not allowed to pursue an independent economic policy; the European treaties do not provide for this. Instead, the member states can only coordinate their economic policies in the common European interest. The focus of this European economic policy is on the coordination of national policies by the European Commission. Hence, the EU has limited economic policy options and instruments at hand. 

The European Single Market is still and must remain the centrepiece of European economic policy. However, the economic power of the Single Market and the regulatory strength of the EU will only be effective and convincing in global competition if European economic policy respects the foundations and framework of its own economic constitution as an European social market economy - economic interdependence with open markets on a level playing field.

Another important instrument of European economic policy for the coordination of member states’ policies certainly is the European Semester: a framework with common objectives and targets for policy-making and steering with fixed deadlines for evaluation, recommendations, and implementation; it brings together and takes into account all economic, employment, social, and sustainability policy goals and strategies of the EU. Under the conditions laid down in the EU treaties, the European Semester is the only instrument that enables effective economic policy coordination of the member states: by focussing on common objectives and interests, through financial incentives from European funds and – under certain conditions – through sanctions in the event of non-compliance with the jointly agreed economic policy.

The most important means of this restricted European economic policy hence are providing incentives by the European Semester with the financial aid of European funds from the European budget, for example for the Baltic Sea macro-region. The funds, and in particular the new recovery and resilience fund (RRF) which has been created as part of the European response to the socio-economic consequences of the Covid 19-pandemic, are actually clearly focused on combating climate change and harnessing digitalisation. The focus on these future-oriented common economic policy objectives has to lead all efforts for closer cooperation. 

However, the necessary closer cooperation between the countries and regions cannot and will not include the warring parties, Russia and Belarus. Hence, the EU must develop ways of closer cooperation for the Baltic Sea region without these two outsiders - and it can use its familiar instruments to do this easier. The ambition of a real common European energy policy with a common purchasing policy, with mutual sharing and solidarity and close grid connections will certainly have to become a field of closer cooperation. The same applies to joint efforts, measures and mutual support in the fight against climate change. In addition, there are also the fields of closer cooperation in research and innovation policy and in the digitisation of administrations, national economies and societies. The Baltic Sea strategy of the European Union already developed these needs and the areas of closer cooperation and mutual trust, developed plans, programmes and projects. This approach of closer cooperation becomes even more urgent in the face of the Russian war of aggression. The exclusion of Russia and Belarus could even promote a strengthening of interdependence and cooperation in the region.